I recently had the opportunity to manage MVP development for a startup in the carbon offsetting domain named Clever Offsets. This experience inspired me to research the current state of the carbon offsetting market and its current trends.
I believe we will see more startups entering this domain in the near future because, despite potential fluctuations, the market is expected to grow. So, if you work in tech, you might want to familiarize yourself with how the carbon offsetting world operates.
What is carbon offsetting?
In simple terms, carbon offsetting involves compensating for greenhouse gas emissions using carbon credits or offsets. These credits/offsets represent the quantity of greenhouse gases removed from the atmosphere.
Various entities can purchase carbon credits/offsets if they wish to pursue sustainability or if they are required to reduce their emissions by law.
The introduction of carbon credits represents an effort to "economize ecology" and combat climate change within the framework of market principles. This idea is relatively recent, as is the carbon credits trading market.
The first legally binding international introduction of the carbon credits concept occurred with the Kyoto Protocol in 1997. Since then, the market has evolved at a promising pace.
Key terms to understand the carbon market
GHGs — Greenhouse gases such as carbon dioxide, methane, nitrous oxide, etc.
The terms 'Carbon Offsets' and 'Carbon Credits' are often used interchangeably, but they have slightly different meanings. 'Carbon Offset' refers to the removal of CO2 or CO2e (the equivalent amount of other GHGs) from the atmosphere, whereas 'Carbon Credit' denotes a reduction in the amount of CO2 or CO2e released into the atmosphere.
One Carbon Offset/Credit (which can take the form of a certificate, blockchain token, government allowance document, etc.) equals one tonne of CO2 or CO2e.
For the sake of simplicity in this material, I will also use these terms interchangeably.
Compliance Carbon Market (CCM) — carbon credits trading systems regulated by government policies and based on the cap-and-trade concept.
The idea behind the cap-and-trade concept is that a government sets emissions limits for certain industries (typically car manufacturers, airlines, oil companies, etc.) and issues a specific number of emission allowances (credits) that can be traded within that limit.
The CCM was established as a result of international treaties, such as the Kyoto Protocol. This market is closed, with a predetermined number of companies, defined by the government, trading their surplus credits with each other to comply with legal requirements.
The largest current compliance market is the European Union's Emissions Trading System (EU ETS).
Fun fact: For a significant period, Tesla generated a large portion of its revenue by selling carbon credits within the American state compliance markets.
Voluntary Carbon Market (VCM) — non-centralized trading systems driven by the voluntary commitment of businesses, NGOs, and individuals to offset their GHG emissions or sell their carbon offset credits outside the compliance carbon market.
On the supply side, thousands of projects are emerging worldwide to produce and sell carbon offsets/credits —such as waste recycling factories, hydro plants, reforestation projects, etc. On the demand side, various entities aiming to achieve their sustainability goals — Microsoft, Google, Uber, Disney, Shell etc.
Unlike the CCM, the VCM does not impose limits on the quantity of carbon credits produced and traded. The carbon credits traded in the VCM are not issued by the government but are generated by various green projects and issued through multiple typically non-governmental verification bodies.
Trends in the Voluntary Carbon Market
The Voluntary Carbon Market is of greater interest to the tech community because it is regulated by the market rather than the government, and it is where most startups emerge. Thanks to this market, many popular tech companies claim to be carbon neutral.
I identified two promising startup trends in this domain while researching the market: blockchain and aggregation platforms.
These trends become clearer when you learn more about the nature of carbon credit production and trading within the VCM.
Starting the carbon offset process
Let's go through a simplified carbon credit cycle in the Voluntary Market. When a developer initiates a project that can reduce or remove GHG emissions, there is always a time lag before the project can "produce" and certify its carbon credits or offsets.
This period varies. For instance:
- it can take decades for a forest plantation to grow and capture enough CO2 to register its first carbon offsets.
- projects capturing methane from landfills or wastewater can generate carbon offsets relatively quickly.
Once a project reaches the point where registering carbon offsets/credits becomes possible, the developer contacts a third party of their choice to analyze whether the project is removing/reducing GHGs, to what extent, and at what rate.
Third parties that verify carbon credits/offsets are known as registries. They also track and store information on projects and their verified carbon offsets available for trade. There are multiple registries, including Verra (VCS), American Carbon Registry (ACR), Climate Action Reserve (CAR), Gold Standard, and more.
Distributing carbon credits
This is where aggregation platforms come in handy. They consolidate and integrate data from all major registries and provide analytics to simplify the market navigation for companies interested in purchasing carbon offsets/credits.
By the way, this is what the startup Clever Offsets, where I have been working, specializes in.
After verification, carbon credits/offsets are sold by a project developer either directly to the buyer or through a broker. These carbon credits/offsets can be further traded and transferred across multiple accounts until they become retired — “used” or “redeemed” by the buyer to offset their emissions.
Retired carbon credits/offsets cannot be traded any longer and are removed from the market. This characteristic of carbon credits, among many others, contributes to the idea of shifting the carbon credits trading to blockchain technology.
This shift could enhance overall transparency and traceability of carbon credits, reduce instances of fraud and double-counting, lower transaction costs, and make them faster.
Challenges
As an environmental activist I could not leave this section out.
While the concept of carbon credits appears to be a clever idea that uses market mechanisms to its advantage, it comes with a set of challenges. If these issues are not addressed, they can undermine the entire purpose of carbon offsetting.
According to allegations raised in multiple independent studies (such as a recent study from The Guardian), carbon offsetting within the VCM may not function as intended.
Here are the most common allegations:
- The majority of the analyzed projects selling their carbon credits do not actually reduce emissions to the extent they claim, thereby exaggerating the actual climate benefits.
- Some methodologies employed by carbon credit verification bodies can facilitate fraud. However, registries claim that they are improving their methodologies and incorporate new academic research.
- The complexity of the VCM makes it challenging to assess the effectiveness of carbon offsetting. Projects like Clever Offsets may add structure and transparency to what is now an opaque process, making the analysis easier for both critics and proponents alike.
- Indigenous people are being disregarded and displaced from their lands by carbon offsetting firms seeking to profit from their territory.
- The way carbon offsetting currently works is viewed by some as an example of neocolonialism, in which the Global North exploits the Global South for its own gains.
Looking forward
Despite these challenges, I believe that the formation and presence of the VCM itself manifests the current trend toward sustainability and social responsibility. It is no longer solely a matter of reputation but a market necessity for every startup aiming for success.
Nonetheless, it is essential to create new mechanisms and address the challenges of existing ones to provide companies with improved solutions for achieving their sustainability goals—solutions that genuinely yield environmental benefits.
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