Don Carlson - Former Visiting Professor of Economics thinks that “pairing the collateral of transferable tax credits with a backstop guaranty could be just the solution needed to fill in the missing middle put that technology to work saving the planet.”
Jamestown, Rhode Island, United States, 3rd Mar 2024 - Some of the most innovative clean energy startups are dying. Not because of poor market fit or faulty technology, but because of limited access to credit. Investment capital exists at the research and pilot stages, but once these companies try to commercialize capital dries up. Seasoned energy investor, Don Carlson, calls this the “missing middle.”
Most growth stage energy companies aren’t profitable & lack assets to use as collateral, so most banks and lenders won’t even consider lending to them. This makes it almost impossible for clean energy startups to commercialize their technology at a time when we need them to ramp up their efforts. The situation has gotten worse as venture capital investment has frozen up in the past 2 years.
With his investing and legal background, Don Carlson proposes a solution to this problem. According to Carlson “as of January 1st of this year renewable energy investments & production are able to generate tax credits which can be transferred to other tax payers.” This means that suddenly energy startups are able to create tax credits which can be bought up by major companies like Apple or Pepsi. Climate tech companies can sell the credits directly to raise growth capital or boost their balance sheets, or the tax credits now and in the future can serve as collateral for project finance loans.
Some entrepreneurs like Alfred Johnson, of Crux Climate, are working to create marketplaces where these tax credits can be easily bought and sold. The next step though is to make the same credits available to startups that displace high carbon activities – like Sublime Systems, led by the brilliant chemist Dr. Leah Ellis, who has pioneered low-carbon cement production.
Forward thinking philanthropists are already contemplating how they can use their resources to catalyze larger volumes of private for-profit capital deployment. Carlson suggests that these philanthropic dollars could be devoted to a revolving guaranty fund that would “backstop” venture loans. According to Carlson that sort of guaranty would “de-risk those loans and potentially get oceans of credit flowing to worthy climate tech companies desperate for credit to fund their growth. Guaranties are the perfect form of catalytic capital.”
Based on his experience as an energy investor Don Carlson thinks that “pairing the collateral of transferable tax credits with a backstop guaranty could be just the solution needed to fill in the missing middle put that technology to work saving the planet.”
Like all new financial innovations, tax credit transferability will start out as a clunky, complicated, lawyer-intensive process that feels risky or exotic to most players in the market. But Aon is already inventing insurance products to de-risk the transfers; the law firm Norton Rose Fulbright is helping educate investors through its Currents podcast; and over time transactions will get standardized and streamlined so that tax credits trade as fluidly on the Crux exchange as futures and derivatives do on other exchanges today.
About Don Carlson:
- Founder and managing member of Boulder Ventures LLC
- Former Visiting Professor of Economics
- Former Executive Director of the Tsai Leadership Program at Yale Law School
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