The Future of Carbon Offset Marketplaces: Opportunities and Key Drivers

Following a wave of global youth climate strikes, an alarming United Nations report showing that the best-case scenario for climate change is slipping out of reach (we may have as little as 12 years to act on climate change), and a wave of devastating climate-linked disasters from Brazil to Australia, there’s been a spike in interest in carbon offsets from consumers and businesses alike. 

In 2016, 63.4 million metric tons of carbon dioxide were offset in the voluntary market at a value of $191.3 million. Just two years later, according to Ecosystem Marketplace, the market for voluntary offsets grew to $300 million and traded almost 100 million metric tons of carbon dioxide equivalent in 2018. Estimates of the size of the global carbon compliance offset market range between $40 billion and $120 billion. Assuming a 10% - 20% take rate, a carbon offset marketplace with full market share today could only make $30 million - $60 million in ARR, but the volume of carbon traded is likely to grow even more rapidly. 

Spurred by demand from customers and pressure from their own employees, more than 170 companies to date have pledged to become carbon-neutral by the middle of the century, if not sooner. The impact that just one of these companies has is significant - Shell pledged to spend $300 million on carbon offset emissions, effectively doubling the market just on its own. Recently, Microsoft took things a step further by pledging to become carbon-negative by 2030, and aims to remove all the carbon the company has emitted since being founded in 1975 by 2050. These companies join 77 countries — the United Kingdom, the Marshall Islands, Costa Rica, Sweden — and more than 100 cities that have set similar climate goals. If just the entire US transportation sector had its carbon emissions offset, that would amount to 1.9 billion tons of carbon dioxide (20x the volume that is being traded globally today). 

Carbon Offset Problems

1. Research shows that the effectiveness of existing offsetting programs in reducing emissions is limited. 

Lisa Song from ProPublica looked at carbon offset projects over the past 20 years spanning the globe and found that carbon credits hadn’t offset the amount of pollution they were supposed to, or they brought gains which were quickly reversed or couldn’t be accurately measured to begin with. As a poignant example, she used satellite imagery analysis to see how much of the forest remained in a preservation project that started selling credits in 2013, and four years later only half the project areas were forested. An earlier report published by the European Commission found that 85% of offset projects used by the EU failed to reduce emissions. 

2. Verifying & auditing projects is difficult to scale

Current methods for verification are outdated and inefficient. Springwise reports that the current method for forest projects requires hiking into the forest with a measuring tape and laser to establish a tree’s width and height. It is also necessary to manually count the number of trees in the plot. Other projects require partnerships with 3rd parties for verification and audit which can prove costly.

3. Carbon offset marketplaces lack transparency

The process of purchasing carbon offsets is confusing as consumers and enterprises lack information around what project they should choose, calculating how much carbon they need to offset, and determining how much of their payment is actually contributed to the project. Due to various middlemen involved in the process, approximately 30% of the amount being paid for carbon offsets are actually spent on the project itself. The remainder is typically split between brokers that assist with procurement, resellers, verification agencies, 3rd-party auditors, and planning software. 

The Future of Carbon Offset Marketplaces: Opportunities and Key Drivers

(Source: USDA Office of Environmental Markets)

Key Considerations for Solutions

To be most effective, carbon offset marketplaces should be designed with additionality, permanence, double-counting, leakage, quantifiability and verification in mind. 

Additionality

Essentially, additionality is a counterfactual: Does buying this specific offset lead to a reduction of greenhouse gas emissions that would not have happened otherwise?

If you pay someone who is already building a wind farm to displace a coal power plant, for instance, you may be helping them build a better business case for the project. But that chunk of renewable energy would have been built without your input anyway. That means your purchase didn’t result in any additional reductions in greenhouse gases. On the other hand, if someone is about to clear a section of rainforest and you pay them not to, you have reduced the greenhouse gas emissions associated with deforestation.

Determining whether a project is “additional” requires rigorous and transparent accounting, but that’s difficult to do, which is why so many offsets fail to deliver.

Permanence

To limit climate change, greenhouse gas emissions have to be kept out of the air pretty much forever, and that may not be the case with some offset projects. Recently, tree planting has received a lot more attention. Even President Trump, during his State of the Union address (without mentioning climate change directly), highlighted that the US will join an initiative to plant 1 trillion trees around the world, in part to soak up carbon dioxide.

The idea is that trees and other plants take in carbon dioxide from the air as they grow and store it in their biomass. But as we’ve seen recently with major forest fires in Brazil and Australia, the carbon stored in these forests can suddenly get pumped back into the air. That means trees can be a risky bet for permanent carbon storage, demanding monitoring and protection indefinitely. That’s why some companies and scientists are investigating permanent, geological storage of carbon dioxide, like sequestering carbon dioxide from power plants underground or turning it into rock. 

Double Counting

Once someone purchases an offset, the underlying emissions reduction shouldn’t be sold again or left on someone else’s balance sheet. This principle is especially important for international offsets. The EDF conducted a study to assess the overall share of the world’s emissions that are at risk of double counting—and they found it could be over a third of the world’s total emissions. That’s about as many emissions as from China and the US put together. The tables below illustrate the assessed risk profile of double counting based on different assumptions ranging from optimistic to conservative. 

Carbon Offset Marketplaces

(Source: EDF)

Leakage

Environmental rules can sometimes drive people to avoid them. For instance, if a country or a state implements a cap and trade scheme for greenhouse gas emissions, there is a chance that the sources of those emissions — factories, power plants, farms — would relocate to a place without a cap. In the case of offsets, leakage can occur when an area of forest is designated for protection and leads to increased deforestation in unprotected areas. As with additionality, controlling leakage demands rigorous accounting. And leakage isn’t just about carbon. An offsetting program also has to make sure that it doesn’t make another environmental or social problem worse. A protected nature preserve shouldn’t violate the rights of local or indigenous communities who live there, for example. 

An article titled "How big is leakage from forestry carbon credits? Estimates from a global model" and published in IOPscience estimated that leakage from forestry carbon offset projects ranges from 10% to 90% per project. They found that the scale of the leakage depends on the productivity of the forestry or agricultural activities that are being displaced. For example, reducing deforestation in low value agricultural regions leads to less leakage since land used for livestock grazing tends to be lower valued land. Further, the authors report that the largest effects of leakage are within the region, however, global leakage also emerges as an important factor to consider. 

Quantifiable

Carbon offsets must be quantifiable to work successfully. A consumer or enterprise must be able to calculate their carbon footprint and understand the carbon impact of the project(s) they support. United Airlines calculates its carbon footprint on the fuel consumption of its entire fleet and factored in elements that were specific to its business: routes, plane cargo, passenger weight, etc. These specific calculations gave them their carbon footprint, an essential factor in determining their carbon offset goal. Terrapass, the EPA, and a host of other organizations offer calculators online.

Verification

Verification and measurement ensure that emissions reductions have truly occurred as the result of a discrete project, and that the volume of that reduction is matched appropriately to the issued offsets. Today, verification is conducted by third parties that ensure GHG reduction programs are additional and result in real, permanent and enforceable reductions. A good example is Green-e’s Endorsed Programs standards & certifications including the Verified Carbon Standard. The projects supported by Green-e include livestock methane capture, abandoned coal mine methane capture, and industrial gas destruction. 

Carbon Offset Marketplace Opportunities

Opportunities for innovation and differentiation in this space include access to projects that score well across the aforementioned factors, automating verification to avoid middlemen, and increasing transparency. 

Provide Access to Unique Projects

While the most popular offsets involve nature-based solutions such as Kenya Reforestation and Cool Effect’s wetland and forest restoration projects, there are more effective ways of reducing emissions. In fact, one of the best projects involves industrial gas destruction wherein companies capture waste gas from an industrial process, whether it’s HFCs or N2O (nitric acid), where there is no other revenue stream or benefit. These projects are exciting because HFCs and N2O are powerful heat trappers - N2O is roughly 300x more effective at warming the atmosphere than carbon dioxide. Because the gases come from industrial sources, they are easier to quantify and when the gases are captured or destroyed, the emissions reductions are permanent. The additionality is also clear with those projects as there are no other benefits to them, unlike planting trees which offers many side benefits that come with preserving nature. Startups that develop partnerships with industrial gas companies and find effective ways to market them to the public have an edge over those that focus on reforestation and other projects where additionality, permanence and leakage are significant concerns. 

Automate Verification

Current methods of carbon offset verification are difficult to scale or expensive, and identifying novel methods to perform verification at scale is a huge advantage. Take Pachama, a carbon offset marketplace startup, which uses machine learning, satellite and LIDAR technology to track and monitor forestry projects.

Increase Transparency

Providing consumers and enterprises more information around the impact different projects have, calculating how much carbon to offset, and identifying how much of the amount that has been paid actually goes to the project are key areas of opportunity for emerging carbon offset marketplaces. 

Existing Players

Nonprofits

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Cool Effect - Founded in 2016 as a 5013c3 nonprofit, Cool Effect offers a crowdfunding platform enabling individuals and corporations to assess their carbon footprint and fund carbon-reducing projects. Cool Effect ended 2018 with $5.9 million in ARR. Cool Effect provides a wide variety of projects including sustainable cookstoves, preserving black rhino habitat, methane capture, and more. 

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Stand for Trees - An initiative of the nonprofit Code REDD, Stand for Trees is a campaign enabling individuals to fund campaigns reducing emissions from deforestation Stand For Trees empowers everyday citizens – all of us – to take direct action to protect threatened forests and reduce the impacts of climate change. Stand for Trees also offers a carbon footprint calculator and a variety of projects related to conservation of forests and animal habitat. 

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Carbon Fund - Founded in 2003, the Carbon Fund is a not for profit that provides carbon offsetting and greenhouse gas reduction options to individuals, businesses and organizations. Projects offered range from energy efficiency such as providing efficient cook stoves to forest conservation. 

Startups

There are several early-stage startups that are addressing the aforementioned issues in different ways. 

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TerraPass - Founded in 2004 and funded by Maveron, provides a marketplace connecting consumers and businesses with a variety of projects including landfill gas capture, animal waste methane capture, clean energy from wind power, and abandoned coal mine methane capture. TerraPass claims to support carbon offset standards requiring offsets to be additional, permanent, quantifiable, and verified. 

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Pachama - Founded in 2018 and funded by Lowercase Capital, GFC and others, has established a marketplace for high quality reforestation projects for enterprises to offset carbon emissions. The company uses machine learning on a combination of satellite, drone, and lidar images to calculate the size and volume of trees, and then estimates how much carbon those trees store. In a current pilot in the Amazon in Peru, Pachama is working with the nonprofit CaminoVerde and scientists to compare its measurements with traditional methods. 

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Cloverly - Founded in 2018, Cloverly operates a marketplace that enables both consumers & enterprises to offset emissions. Cloverly provides an API to calculate the carbon footprint of common activities for things like e-commerce shipments, vehicle fleets, deliveries and more, and provides transparency around how much of the payment is actually contributed toward the project. Cloverly has strong integrations including one with e-commerce site Shopify wherein customers have the option to pay an additional fee to make their purchase carbon neutral. 

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Wren - Founded in 2019 and funded by Union Square Ventures, Wren has developed a web app that calculates consumers carbon footprint and provides several projects including tech-enabled Amazon Rainforest protection and clean cooking fuel for Ugandan refugees. As of March 2020, Wren reports offsetting 20,857 tons of carbon dioxide by its members. Wren offers a subscription instead of a per project business model and recently offered a calculator for emissions from flights. 

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Nori - Founded in 2017 and funded by Techstars, Nori offers a carbon offset marketplace for enterprises and offers an API to enable their customers to pay for carbon removal at checkout. Unlike other startups, Nori raises money through sales of its token which represents one ton of carbon dioxide removed. With a cap on the number of tokens, Nori expects investors to gain a reward through appreciation of the underlying asset. 

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Puro - Founded in 2018 and spun out from Fortum, a leading clean energy company in the Nordics, offers an enterprise-focused carbon offset marketplace that turns carbon dioxide negative projects such as biochar and carbonated building production into carbon dioxide removal certificates (CORCs). Unlike other startups, Puro offers an auction mechanism to enable buyers to optimize the price for their transaction. As of December 2019, the weighted average price in the auction was 17.49 euros per CORC. Customers include S Group, Tieto and Choose. 

According to the World Bank, greater international cooperation through carbon trading could reduce the cost of climate change mitigation 32% by 2030. Bringing effective carbon offset projects to market is a huge opportunity from both an impact and business perspective.