What cleantech leaders need to know about generating carbon offsets

Voluntary carbon markets are growing quickly. But before taking the leap, startups need to do their homework.

The pressure is on for countries and corporations to slash greenhouse gas (GHG) emissions. Earlier this month, the World Meteorological Organization reported that weather-related disasters have increased fivefold over the last 50 years. The recent flooding in Pakistan, record temperatures in Britain and forest fires in California have shown what’s at stake. Action on the climate has never been more urgent.

In a bid to reduce emissions and achieve net zero by 2050, many companies are purchasing carbon credits in the voluntary carbon market — effectively paying someone else to offset emissions on their behalf. For cleantech firms, this presents a business opportunity.

Voluntary carbon markets are nascent but are showing strong growth — transactions last year were three times the previous year, surpassing U.S.$1 billion. Halifax-based CarbonCure, which landed a U.S.$30-million agreement with Invert and Ripple last April, was one of the highlights. However, the markets are also quite volatile, and there’s much work being done to build in more rigour and integrity into a process that has sometimes been questionable.

“Carbon offsets are not uncontroversial,” says Seth Baruch, CEO of California-based Carbonomics. “More and more companies are really concerned about quality and where there’s concern about quality, there are business opportunities for organizations to become like the S&P or the Moody’s of carbon offset projects — third-party independent ratings. I think we’re going to see more of that, partly in response to what has happened in the past.”

For startups considering generating carbon offsets, be prepared to do your homework. It’s a process that is time-consuming, detail-heavy and expensive, says Baruch, whose company develops carbon offset projects and helps companies bring their innovations to the marketplace. But for the right company with the right ideas, producing and selling carbon offsets can be extremely lucrative and can have social and environmental co-benefits that reach far beyond GHG reductions.

Here, Baruch walks through the points business leaders should know before taking that leap into carbon markets:

First off, what exactly is a carbon credit?

Essentially, a carbon credit is a permit that cancels out a tonne of carbon dioxide or the equivalent of another GHG, such as nitrous oxide or methane. The company that issues the credit then removes carbon dioxide from the air or prevents its emission. This might involve nature-based solutions, such as planting trees or restoring mangroves, or it could involve an industrial mechanism. CarbonCure, for instance, developed a way to remove carbon dioxide and inject it into concrete, where it mineralizes, sequestering the carbon even if the concrete is broken down. Other companies can buy its credits as a way of offsetting their own emissions.

Choose the right carbon offset methodology

At its core, a carbon offset methodology is a set of guidelines. It’s a common language “between you as a project developer and the rest of the world that needs to make sure your claims of reducing emissions are true and valid,” Baruch explains.

There are already close to 200 methodologies covering a wide array of technologies and they reside in such carbon-credit registries as  Verra, Gold Standard and American Carbon Registry. These registries administer and enforce the standards of the carbon market, covering not just carbon dioxide, but a host of industrial gases that often have a much greater impact on climate change. (The refrigerant sulfur hexafluoride, for example, has a global warming potential 23,000 times more powerful than carbon dioxide.)

Categories run the gamut of GHG reduction activities — renewable energy, forestry, transport, construction, mining, solvents, waste handling, fugitive emissions from fuels, among many others — so the first step is for a company to check for a methodology that covers what it is planning. “Most likely, anything that is being done to reduce greenhouse gas emissions is going to be in one of these categories,” Baruch says.

Ensure your product has a positive impact

B.C.-based Carbon Engineering, a Climate Champion in the Mission from MaRS program, has made headlines with its direct air capture, a process by which carbon dioxide is removed from the atmosphere — up to a million tonnes annually. The carbon is then compressed and stored underground or reused.

“You have to make a useful product,” says Baruch. Next, you need to be able to demonstrate that to a verifier, an accredited third-party validator. A verifier may require corrective actions or clarifications. “It’s a back-and-forth iterative process with the auditors,” he adds.

Then there’s something called functional equivalence. In CarbonCure’s case, by injecting carbon dioxide into concrete, not only is it sequestering carbon, it’s also making stronger concrete, which reduces the amount of cement required. Reducing the need for cement is also climate positive as cement generates about seven percent of global carbon dioxide emissions every year. Equivalence means that the end product has to be equal in quality — for instance, the concrete that is sequestering carbon is just as good if not better than regular concrete.

The voluntary carbon markets will not sanction carbon offsets for things that a company is already doing and would be doing anyway, or if a project is required by law. But if a company is proposing a project and can demonstrate that it’s rarely done in a particular sector or country and that it brings important social or environmental co-benefits, then it may demonstrate what’s known as additionality. “What I tell my clients is really only engage in the carbon market if it’s going to make a difference,” says Baruch.

Determine a baseline

“One of the key things you have to do with any methodology is figure out what would the universe look like if you weren’t doing your project,” Baruch explains. That’s an emissions baseline. In the simplest terms, a company calculates the changes in emissions that would occur because of its project — so, for example, how replacing internal combustion engine cars with electric vehicles might impact overall emissions of carbon dioxide. Different projects require different ways of calculating baseline emissions (companies like Carbonomics can help with that) but they are an essential part of the methodology and will be verified before the offsets are put on a registry.

Monitor and measure

Every methodology is prescriptive about what needs to be monitored in a project, and project developers must be able to demonstrate that they will follow the requirements around monitoring closely. Given the varied technologies in the carbon markets, there can be many ways of measuring impact — from a before-and-after comparison using historical data to more complicated measurements of baseline emissions versus emissions generated with the project. “It’s up to the developer to determine and to convince a verifier that not only do they have ways of measuring but are doing so in a way that is robust,” says Baruch, “where if there are errors, those errors can be identified quickly, that there are certain quality control procedures in place, and so on.”

While a company can almost certainly find a methodology to fit their project, minor tweaks are typically allowed by the carbon markets, but foundational changes can add up to a year to the process. When a project is establishing new precedents with new innovations or technologies and there’s no methodology that will work, then a new one will have to be written. It’s a last resort, Baruch adds, “because it is the most time-consuming and costly, and the chances of success are not certain.”

For CarbonCure, because it was developing a novel technology, creating a new methodology took four years, with Baruch’s help. But, as CEO Rob Niven notes, the rigorous process is essential. “Going the extra mile to develop a robust methodology and working with credible partners are critically important to safeguarding confidence in the carbon market.”

Make room in the budget

Creating and selling good carbon offsets can be extremely lucrative for a company. But entering the markets is a capital cost. Certifying a project will cost about $15,000. That involves hiring an auditor who will make sure the methodology is being followed faithfully or, if there is a minor deviation, that it is clearly defined. Once the project is certified, it can be put on a registry. A one-time verification by an auditor costs about $8,000 to ensure the number of credits generated is accurate. Certification and verification are essential to prove to the carbon market and to potential investors that a project truly offsets greenhouse gases.

On top of that are miscellaneous registry fees, plus consulting fees if a company requires help developing the project.

Considering all the costs a company will incur, generating a minimum of 10,000 offset credits makes the most sense. (There are off-registry credits, but volumes are much smaller.)

“If you are generating fewer than 10,000 credits a year, you should have a very clear pathway to getting above that,” Baruch adds. “If you’re going to be in the big leagues, you’re generating a lot of credits, you’re really scaling. You just need to know if it’s basically worth your while.”

Have a good story to share

Investors want to feel good about what they’re putting money into, and their investment has to be justified to internal and external stakeholders. So, it’s important to have a good story. CarbonCure’s goal, for example, is to remove 500 million tonnes of carbon emissions annually by 2030 — the equivalent of taking 100 million cars off the road every year.

Offset buyers are often drawn to investing in clean cookstoves, which replace traditional coal- and wood-burning methods in poorer parts of the world. So, what would normally be out of reach for the average family in a place like Africa becomes affordable thanks to offset buyers, who could reduce cookstove costs by as much as 60 percent. And that means a reduction in charcoal and wood consumption — strong additionality and high quality.

“Carbon offset buyers want to be able to show their bosses that they’re investing in projects that are really making a difference,” says Baruch. “You want buyers of your offsets to feel proud about what they’re doing.”

To learn more about entering the carbon markets, contact us at mfm@marsdd.com.