By Vic Pascucci III, Managing General Partner and James O’Connor, Summer Analyst
COP26, the 2021 United Nations Climate Change Conference, concluded at the end of last year with the Glasgow Climate Pact being signed and the Paris Agreement’s Rulebook being agreed to among participating countries. The major goals set by COP26 include net zero emissions by 2050 and a maximum of a 1.5-degree Celsius temperature rise above pre-industrial levels. To achieve both goals, carbon dioxide emissions must be dramatically reduced. However, businesses are realizing that the technology to completely eliminate emissions is not yet possible and that it is not yet economically viable to do so. In effect, a source of “negative emissions” is required to balance any greenhouse gases they emit moving forward. Consequently, many firms are looking to take advantage of carbon offsets, an emerging marketplace-like solution for providing a source of negative emissions to achieve their net zero goals.
The carbon offset marketplace can be divided into two distinct markets: the voluntary market and the compliance market. The compliance market, where firms seek carbon credits to meet government regulations regarding their net carbon output, is especially prevalent in European countries and California. The voluntary market, where firms seek carbon credits to prove their “good citizen” status, has been pushed to extreme levels by the recent burgeoning of ESG commitments among businesses. So much so that McKinsey & Company estimates that overall demand for carbon offset credits could grow by a factor of 15 or more by 2030 and by a factor of up to 100 by 2050. The growth in demand for credits seen thus far, as well as the growth that is expected in the coming decades, values the carbon offset market at upwards of $50 billion dollars in 2030. Many of these businesses are attempting to get ahead of mandated compliance with voluntary mitigation.
As the demand for carbon credits has grown, supply has been unable to keep pace. McKinsey estimates that demand for carbon credits in 2030 could reach 2 gigatons of carbon dioxide, and up to 13 gigatons by 2050. Meanwhile, the supply for carbon credits ranges between 1 and 5 gigatons worth of carbon dioxide. To match the growth in demand for carbon offsets to the year 2050, the global carbon marketplace requires climate tech innovation in four key areas:
I. Nature-based avoidance projects
Carbon emission avoidance projects are the most immediate of the four key offset areas. The technology to successfully complete these projects is readily available today. Examples of nature loss avoidance projects include reducing forestry loss (e.g. preventing deforestation due to agricultural expansion) and preserving existing biomass (e.g. preserving peatlands in Scotland and Africa that are excellent carbon sinks but are also used as fuel sources). In both cases, emissions are reduced but existing CO2 is left untouched. A major concern regarding forestry loss is the danger posed by wildfires to the atmosphere. Just in 2021 alone, wildfires emitted 1.76 billion tons of carbon globally, equivalent to double Germany’s annual CO2 emissions. With the threat that wildfires pose to climate change, companies are taking advantage of the opportunity to limit wildfire caused deforestation by offering carbon avoidance credits. One such startup developing technology to prevent wildfires is Gridware, a company creating a grid monitoring system that uses microphones and other sensors to report anomalies that may cause fires. Other startups working to create liquidity in the nature-based avoidance project market are Pachama. To verify that the validity of nature-based avoidance projects, companies like Kayrros use satellite data imaging and analytics to provide continuous monitoring of the areas claimed to be preserved by the offset, and can offer early warnings of land-use changes, deforestation, or other activities
II. Nature-based removal projects
Unlike nature-based avoidance, nature-based sequestration projects remove and store existing CO2 from the atmosphere. However, the fundamental issue with projects in this area are their extended timelines. Reforestation, the most common example of a nature-based carbon sequestration project, does not remove meaningful amounts of CO2 from the atmosphere until upwards of 10 years after replanting. One company working to sequester carbon dioxide more efficiently and effectively by reforestation is Dendra Systems. A developer of drone technology, Dendra works to survey land and plant trees at a scale that would be impossible to achieve by human labor alone. The technology is especially useful in determining suitable replanting locations that humans would have difficulty doing on their own, such as the side of a steep embankment.
III. Technology-based avoidance projects
Like nature-based avoidance projects, technology-based avoidance projects are more viable than removal projects. This key area comes down to utilizing technology to reduce emissions without decelerating production. Like much of the technology behind nature-based avoidance projects, the efficacy of the technology behind technology-based avoidance projects is well established, so many of the companies leading efforts in this area are well established as well. For example, Fluor (which partners with ECV portfolio company Cemvita) and Chiyoda are both publicly traded companies with solvent technologies that chemically absorb carbon dioxide from flue gas systems. So, as emissions are produced in factory settings, chemical solvents remove carbon dioxide from gas stacks. Startups like Carbon Clean, Carbon Quest and several others keep innovating with better solvents and innovative designs and / or applications that reduce both the CAPEX and OPEX required to operate carbon capture facilities. However, a major issue with this technology arises in determining what to do with the removed CO2, especially considering the high costs associated with storing it.
Energy Capital Ventures’ portfolio company Cemvita Factory has developed synthetic biology technology that solves this issue in a carbon negative manner. Cemvita Factory’s microbe technology absorbs CO2 from industrial emissions and turn it into valuable organic chemicals that can be used as new revenue streams. This includes technology for bio-ethylene, biomethane, Sustainable Aviation Fuel (SAF), “Gold Hydrogen,” bio mining and numerous other carbon neutral solutions.
IV. Technology-based removal projects
This key area involves removing and sequestering carbon dioxide that is already in the atmosphere. Unlike the longer-term nature-based removal projects, technology-based projects, such as Direct Air Capture (DAC) plants, are immediate. However, DAC technology is new and underdeveloped as only the first pilot-scale plant was switched on in 2021. Climeworks, the DAC industry leader, was founded in 2009 and recently raised $650 million to scale up its technology. Their recently announced “Mammoth” facility is on track to be completed by the end of 2023 and will sequester 36,000 tons of CO2 from the atmosphere each year, permanently storing the sequestered CO2 through a mineralization process deep in geological formations.
As these four areas continue to be developed to supply the growing demand for carbon offsets, the credibility of those offsets continues to be of question. How can corporations with net zero ambitions be sure of the credibility of the carbon offsets they are purchasing? A new set of solutions has emerged to answer this question, the carbon offset ratings verifiers. New arrivals to the market, BeZero Carbon and Sylvera are startups that monitor carbon offset projects and report their success. These firms examine and analyze projects in the above four categories and create ratings for each one to determine their credibility. By doing so, companies can reduce reputational risks associated with purchasing ineffective carbon offsets and ensure their progress towards net zero emissions.
As businesses begin their endeavors toward net zero emissions by utilizing carbon offset markets, the carbon accounting industry will become increasingly important. Companies will be required to keep track of their emissions, how much they are reducing their carbon output, and how many credits worth of carbon offsets, in addition to their own internal initiatives to reduce emissions, are required to achieve net zero. Adding to the rising importance of carbon accounting is the recent SEC rule proposal regarding public companies’ disclosure of their greenhouse gas emissions (See Everything Corporations, Investors, Utilities and Entrepreneurs need to know about the proposed SEC Climate Disclosure Rule by our own Julie Greco). However, the carbon accounting industry is not yet prepared to manage the multibillion-dollar industry that the carbon offset marketplace offers. Assigning carbon intensities to business transactions in a verifiable, auditable manner will require a lot of additional data collection and supply chain transparency, things that sometimes go counter with the more “reserved” business practices of corporations.
Investment in climate tech to address needed innovation in the carbon accounting and carbon offset supply industries offers tremendous opportunities. At Energy Capital Ventures, we look forward to optimizing these opportunities by partnering with the entrepreneurs who seek to fill the vacuum that is the future of carbon offset marketplaces. We leverage our deep industry integration to accelerate these solutions for the benefit of the environment. If you are innovating or investing in the carbon offset space, please reach out to us!
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