Couting and offsetting carbon
As I’ve been following the carbon accouting and offsetting sector in the last 2 years, I decided to write a quick deep dive to review the market and understand better where things are going.
As net zero trajectories have become top of the agenda for businesses and policymakers, understanding one’s carbon footprint has become a must-have. Software can play a key role in that, notably for scope 3 emissions, to automate carbon accounting, embed it into any enterprise workflows or product and help customers understand how they can reach net zero trajectories.
As the space becomes competitive and incumbents are entering the market, it is likely to consolidate in the next years while new players are differentiating through better accuracy and verticalization.
On the carbon offset market, the boom in demand creates a bottleneck in the supply of new projects. A large number of new players are trying to accelerate the certification process or to completely bypass traditional certification agencies to create their own standard and scale the long tail of new offset projects to own a strong position on the market.
If you’re already knowledgable with carbon market developments and flaws, you can skip this part and go directly to the mapping.
Commitments to net zero trajectories have become widespread even though many companies are not yet taking action
Since 2020, the direction taken by the market have become clearer:
- Pledge of corporates to reach net-zero emissions in the next 20–30 years have become widespread — in governments’ economic development plans, corporate strategies and investors’ portfolio targets. But not all companies mean the same thing when they speak of reaching “net zero” and, more important, most of these companies don’t really know what they committed to, considering that they’re using outdated or very approximate methods to estimate their carbon footprint, leading most of them to underestimate their current emissions.
- Regulations are kicking in : in the EU, companies with 500+ employees must report their current and foreseeable impacts on the environment, use of renewable and non-renewable energy, GHG emissions, water use and air pollution. In the US, the SEC proposed in March rule changes that would require companies to include certain climate-related disclosures in their registration statements and periodic reports.
- Customers — especially young generations — public opinions and investors are becoming highly sensitive to the topic and expect companies to commit to sustainability. This trend becomes the center of a differentiated value proposition for many brands.
Net zero pledges have created a spike in the voluntary carbon market, which despite all its flaws, is here to stay
To respect their commitments, corporates have turned to the voluntary carbon market to offset their emissions. Offsetting projects can either be emission reduction activities (eg funding clean cookstoves), emission avoidance (eg forest preservation) or removal of CO2 from the atmosphere (eg planting more trees, investing into new carbon removal technologies). Because this is not a regulated market, the price for a ton of carbon may vary and depends on its nature (removal is more expensive than avoidance) and geography (cheaper in developing countries).
If offset may play an important role in addressing emissions that cannot be cut by any other means, they suffer of many criticisms: risk of discouraging real carbon emission reductions, time lag issues (one ton of carbon is emitted today while it may take several years to be offsetted). The carbon market is also highly dysfunctional: it is very hard to verify the reality of a project (how much carbon it really offsets) and demonstrate its additionality (would the project still exist without carbon credits?), permanence (is there a risk of destruction or carbon be released on the atmosphere?) or of double usage (a ton of carbon credit being bought and then sold to someone else but counted as two tons of offsets). The real quality of projects can be quite low, leading corporates to perform greenwashing by buying cheap credits whereas the reality of these offsets is not clear.
The best projects are verified by non profit such as Vera and Gold Standard, but the process to obtain these verifications is manual, costly and difficult. The paperwork in this process takes more than two years and hundreds of thousands of dollars. So it’s much easier to just cut down the trees and grow crops rather than get funded for carbon credits. This is why only projects reaching a certain scale are verified, leading all buyers to focus on the same projects and creating a bottleneck in the supply of high-quality carbon offsets.
Mapping of carbon accouting & offsetting players
Accounting platforms
B2B SaaS
A first wave of company have applied the traditional B2B SaaS model to tackle this problem, providing a platform where corporates can input data about their processes and activities, automate the computation of carbon footprint through an emission factor database, follow their net zero trajectory and offset their emissions if they want to. European companies are particularly advanced here in terms of product development and accuracy of carbon automation, such as Sweep, Plan A or Normative. They face here the challenging go-to-market and data integration of enterprise sales, but offer very sticky products. Beyond accounting for carbon, making sense of the data to help customers draw credible action plan will also be key for them to succeed.
Large incumbents from the enterprise software have also launched their own offer : Salesforce with its Net Zero Cloud while other players from the sustainability world such as Ecovadis are also making it a logical part of their product roadmap. Expect acquisitions by incumbents in the sector, as shown by Planetly’s early acquisition by OneTrust
Some players are also trying to differentiate by verticalizing on specific sectors such as Tanso on industrial customers, Clarity AI on financial services and Deepki on real estate.
A new set of companies, mainly in France where “bilan carbone” is a quite well-known methodology, are specializing on SMEs and providing a product quite cheap and easy to use.
B2B API
Another set of companies such as Pledge or Climatiq tend to think the B2B SaaS is not scalable and will lean towards tech-enhanced consulting. Their vision is to embed carbon intelligence into any kind of software, business processes or customer journey. These companies aim to build defensability over a superior and more accurate product: they build a database of carbon emission factors from a large variety of sources to be called via API at any point in time, in any kind of sectors, in any geography, updated all the time.
Some companies also want to use API to provide lifecycle analysis of a product for consumer brands such as Carbonfact while others such as Lune or Patch provide API to be used by customer as an offset-as-a-service to enable every customer to offfset their transaction.
B2C
Some companies are directly targeting individuals willing to pay to offset their carbon footprint, through monthly subscription (Wren), gamification (Ecologi). Most of them are calculating carbon footprint using spending from banking account as a proxy, which is not the most accurate method but probably good enough for individuals willing to do something about their environmental footprint.
Market enablers
Another set of companies have been trying to deal with the flaws of the carbon offsetting market. This market is estimated at $1 to $5 billion worth of transactions and could be worth upward of $50 billion in 2030. These companies aim to bring more trust on these markets to push corporates to engage into offfsetting.
Sylvera for instance gathers data on projects, tracks them through sattelite data, assess their additionality, compare their performance and develop their own rating methodology. The end game would be to bypass Verra and Gold Standard and impose a rating standard that would give buyers enough trust to buy any kind of offsets, whether they’re certified or not, . However, automating these processes is quite challenging: remote sensing alone is likely to be insufficient, particularly for estimating carbon absorption, as these tools struggle to distinguish between tree species or soils — an important factor in estimating the amount of carbon a tree has sequestered.
Pachama — one of the pioneer in the space — is also using technology and satellite data to build a data-enhanced marketplace for third-party verified credits. It aims to be a data layer between registries and project developers to facilitate the issuance of carbon credits and tracks projects over time. The long-term bet of the compay is however to originate new projects and automate the issuance of credits through technology, without bypassing the traditional certification agencies. However, certification organisms are slow to evolve: they may accept to use remote tools to automate parts of the process but this will take time.
Web3 players suchas Klima DAO have also entered the space and try to generate collective action by retiring big volumes of credits on the market to increase prices of carbon credits and foster the deveopment of new, better financed, projects.
Carbon credits suppliers
Since 2020, the market for carbon offsets has boomed to reach $1bn and is expected to reach $30–50bn in 2030 through a rise both in volumes and prices. Because the supply of certified project does not scale fast enough as projects take years to be certified, the inventory of carbon offsets is however decreasing at a fast rate.
A couple of players have been building B2B marketplace to match buyers and suppliers such as Puro Earth.
However, as the supply of carbon offsets is getting scarce, companies that can reduce the barriers to entry to new projects and control a qualified, vetted and scalable supply of projects will build a strong position. These new players are trying to bypass Vera by dealing with the long tail of small projects for which the traditional certification is too long or costly. They’re building their own certification methodology and hope that combined with technology, it will be robust enough to be trusted by buyers. Some companies such as Agreena or Rize foster the transition of agricultors towards regenerative farming in exchange of carbon credits, while NCX and Pina Earth are working with forest landowners to provide them with new income streams in exchange of more sustainable forest management practices. These platforms need to demonstrate a strong business case to convince their customers to change practices, which is possible considering these high-quality credits may be sold at $50–70 per ton. Go-to-market in sectors such as agriculture or forest management is however quite challenging.
Other deep tech startups such as Climeworks ($650m raised!) are also working on new industrial processes to perform direct carbon removals. These companies need massive investments from industrial players or subsidies to scale their facilities but have been recently supported by financing initiatives led by Stripe and Microsoft.
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Beyond counting and offsetting carbon, let’s not forget there are also many companies directly providing solutions to fight climate change in all sectors of the economy. We, at Eurazeo, have been quite active supporting “climate tech” companies fostering the transition to electric mobility, the integration of renewable energy into the grid, providing alternatives to insectisides or bringing new solutions for energy efficiency in buildings… and will continue to do so in the next years. If you’re building a company in these sectors, feel free to reach out at rcattan@eurazeo.com !
Sources:
https://eciu.net/analysis/reports/2021/taking-stock-assessment-net-zero-targets
https://www.ft.com/content/29565f44-ba71-4a44-8e84-d1e421ddb958