Friday, August 24, 2007

Carbon Credit Business Model

It was only a matter of time before enterprising business men and women found another angle on carbon credits. Planktos, Inc. (PLKT: OTC/BB0) is a self-styled “ecorestoration company” based in San Francisco. The company is in the business of creating and selling carbon credits. That’s right the carbon credit will be its sole revenue generating product!

Just to make certain we are on the same page. Carbon credits are essentially permits to generate carbon emissions. One carbon credit is equal to one ton of carbon dioxide. Environmental legislation around the world -
European Union Allowance (EUA) or the U.S. Clean Air Act - has given rise to allowances for carbon emissions. (Some countries are responding to quotas set by the Kyoto Treaty.) In order to exceed those allowances business and industries can buy carbon credits from other entities that have not used up their allowance or others which have created carbon credits. Carbon credits can arise from the generation of non-polluting energy or carbon dioxide reducing mechanisms, i.e. “carbon dioxide sinks.”

Here is where the good folks at Planktos jumped on the wagon. What better mechanism for reducing carbon emissions than the ocean through its most populous and simplest form of life - plankton. The ocean is already the largest “carbon sink” on the planet and is taking in about a third of carbon emissions. However, the ocean absorption capacity is limited by the level of plankton growth.

Planktos proposes to help Mother Nature by promoting plankton “blooms.” The Company is taking to the high seas to spread of one of the little sea creatures’ favorite snacks - iron ore dust. Planktos has already completed tests and was successful in fostering a commercial-sized plankton bloom in the Eastern Tropical Pacific. The six-month time frame of the test also suggests time-to-market could be fairly rapid.

Planktos has both sea and land legs. Through a subsidiary, KlimaFA, the Company has struck a bargain with the Hungarian National Park System to restore 100,000 hectares of park land to native mixed forests. KlimaFa will foot the bill for the trees and planting and the Park System will provide the land and security. KlimaFa will own any carbon credits generated.

Of course, any land area with vegetation can be a “carbon sink” where plants use photosynthesis to remove carbon from the atmosphere. However, parks provide the best location for generating carbon credits because they are secure and less vulnerable to vandalism or the capricious activities of land owners who might be tempted to sell the trees to loggers. KlimaFa expects to put agreements into place with other European parks that otherwise have to rely on government funding or donations to restore forest areas.

Planktos is confident its business proposition can create value for its shareholders. Initial cost estimates are $1.00 per credit for plankton propagation and $4.00 per credit for reforestation. The Company has been working with the
European Climate Exchange to get its carbon credits certified. The Chicago Climate Exchange is also in the carbon credit trading business but is further behind in development. Carbon credit trading is in the early stages, much of it taking place in private transactions rather than on the formal exchanges. Prices range widely from $5.00 to $25.00 per credit.

Planktos is already in the midst of negotiating a very high profile trade with the Vatican. Vatican officials are keen on being the first carbon neutral sovereign state and are interested in buying credits from Planktos reforestation project in Europe.

The business model is intriguing even though there are some questions about its viability. Clearly, the value proposition is compelling. However, the carbon credit is dependent upon national regulations and tangentially upon the Kyoto Protocol or some successor treaty. Planktos’ business would come to a complete halt if carbon credits were no longer viable.

Then there is the threat of competition. The barriers to entry appear to be very low. Anyone can go out and plant a tree or spread some iron ore dust on the ocean. Nonetheless, we doubt there will be a rush to the high seas or a run on shovels. Planktos indicates they have had to undertake some trial and error to acquire a knack of spreading the iron ore dust. The open ocean operation also requires some a capital outlay. Tree planting may require no particular skill sets, but we expect park officials to be selective in who comes onto their land. Planktos' experience with the private carbon credit market, the climate exchanges and certifying agents put it in a leading position.

One look at the Planktos balance sheet and income statement reveals the chinks and gaps typical of early stage companies. The Company has yet to produce revenue and has a cumulative net loss of $3.8 million since its inception in 1998. Current operations are using approximately $465,000 in cash per quarter ($930,000 in the six months ending June 30, 2007). Planktos has no debt, but at the end of June it had little cash either. The 2006 financial statements carried a going concern note from auditors.

A shoestring budget has not dampened the enthusiasm of management. The team is heavy on environmental science and economics experience. The exception is the CFO, Michael Chinn who has extensive experience in technology ventures and start-ups. Chinn has his work cut out for him to capitalize Planktos for the commercial stage. The CEO, Russ George, has a diverse background as a naturalist and businessman, but Planktos appears to be his first stint at the helm of a public company. Indeed, there does not appear to be anyone with public company experience among senior officers and board members.

The Company just announced that its Weatherbird II research ship is now scheduled to set out in September for the Equatorial Pacific to begin the first of six planned pilot projects. Watch for news of plankton growth in the Pacific. A successful bloom could mean Planktos is one step closer to commercial operations and the first viable “carbon credit business model.”

In the meantime, investors can do a little math. The carbon credit yield of the proposed six pilot “blooms” is estimated at 24 million to 30 million tons. At $5.00 per ton could generat $120 million to $150 million in gross revenue. Planktos has a $70-plus million market cap ($0.85 per share, 83.7 million shares outstanding). Thus it appears the market is already giving Planktos a generous valuation of 0.5 times future sales.



Neither the author of the Small Cap Copy
web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.


5 comments:

Raiyees said...

This information has helped me to understand the concept of carbon credit. At this stage where whole world is suffereing with global warming, concepts like this will help us to go green again, We can nurture this industry, but we need a correct & common platform where we can join hands, it is always never too late for good this to do.

RYS Manzoor

nageshsidhanti said...

Very helpful information. What I don't understand however is how to start this business? Can anyone help? What are the various levels of opportunities a small business can get?

Thanking you in anticipation.
email : nageshsidhanti@gmail.com

chang said...

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Anonymous said...

I want to get in on this carbon scam before the "marks" get wise. I figure that I can sell the credits cheaply because I will just sail my boat a few km off shore and dump some cheap iron oxide (rust) in the ocean. Funny, I always thought that dumping junk in the ocean was bad, but hey turns out its environmentally friendly!!! I can even make my own rust using old car parts.
This is even better than a ponzi scam. Its the first scam that is backed by the government since the housing loan scam that caused the global economic meltdown!

Surendra M said...

surendra,
hai,
very useful information.
I could not understand how to start this good business?
Can any one can be help me as Iam
having land in village with my SmallScale Iundustry.

With best wishes,for hope to have further guidence.

email:-
surendramchoudhary@yahoo.co.in