We should be buying more carbon offsets
The carbon offset market has grown in recent years, as major companies have announced their intention to go net carbon neutral. But, with that growth, there have come more questions about the efficacy of carbon offsets. So, let’s take a bit to learn more about the carbon offset market — its growth, its challenges, and some companies that are trying to help!
Why do we need carbon offsets?
In 2018, humans emitted 36 billion tons of CO2 global. And, this is not an improving trend. As you can see from the chart below, despite improvements in our energy mix and increased public consciousness on emissions reduction, carbon emissions continue to grow.
So, while carbon offsets should not function as an excuse to avoid actions to reduce emissions, in the short term they will need to play a part. As CarbonFund.org, a nonprofit in this space, says: “Reduce what you can, offset what you can’t”.
So, who is buying carbon offsets today?
There are two main groups buying carbon offsets today — those that have to, and those that don’t. Or, put in industry terms, the “regulated carbon market” and the “voluntary carbon market”.
The Regulated Market
There are countries or states that put caps on emissions by companies — for example, the European Union and California. If a company is below its cap, it can then trade this value to companies who are not below their cap — hence the name for this system, “cap and trade”. Although these markets often allow purchasing offsets to meet targets as well, offsets make up a minority of market volume. For example, in California, approved carbon offsets are capped at 8% of the compliance obligation.
The Voluntary Market
The voluntary market is just what you would expect — companies (and individuals) buying carbon offsets out of choice, not regulation. This market has grown over the last few years, from 64 million tons in 2016 to 98 million tons in 2018 (2019 data is not yet available). While the voluntary market is much smaller than the regulated market, it is likely that when you hear news stories about companies going “carbon neutral”, the story is referencing the voluntary market.
Within the voluntary market, market participants estimate 70–75% of the volume comes from businesses, with the rest from individuals. And, some notable companies have recently gone carbon neutral!
How much do carbon offsets cost?
The price of a carbon offset varies widely based on geography, certification standard, and project type. In the table above, I used ~$3 / ton when calculating the cost to each company, which was the average market price of the voluntary market in 2018. Today, at least to me, the voluntary market is shockingly cheap. To put this in context, the average American could offset his or her carbon footprint (from driving, flying, heating) for under $100 / year. So, first, you should consider doing that.
But, second, why are carbon offsets so cheap? Well, two reasons. First, there are some quality issues in the offset market (we will discuss this more below). But, second, at this point in our planet’s journey toward sustainability, supply of carbon offsets outstrips demand. And, we live in a carbon filled world. There are many pretty cheap and easy ways to offset carbon — “quick wins”, if you will. Consider the “abatement cost curve” of different options for offsetting emissions below. This curve estimates the “cost” (in euros per ton of CO2) of various investments that would reduce emissions.
Everything that is negative are actions that we should be (and are) taking regardless of any emissions effect, because they make economic sense. These are things like switching to LED lights. The middle of this graph is the current sweet spot for CO2 offsets. And, as you can see, there are a lot of relatively cheap options in here!
As demand for offsets increases, and easy wins run out, we should expect the price of carbon offsets to rise. But, many of the solutions on the right of this graph will continue to drop in cost, as technology improves — and, that improvement can partially be funded by people buying carbon offsets!
So how does someone make a carbon offset?
So, companies and people want to buy carbon offsets, but where are they coming from? There are a few primary “project types” that typically generate carbon offsets.
1) Forestry and Land Use — 52% of voluntary market
The largest category, forestry is probably also what most people associate with carbon offsets. This typically comprises one of two types of projects — either planting new forests or avoiding cutting down existing forests. Although a lot of factors (climate, type of tree, age of tree) drive its carbon sequestration potential, a mature tee absorbs CO2 at a rate of ~48 lbs / year. This means that about 40 trees can offset a ton of CO2. Many of these credits are generated in Central and South America.
2) Renewable Energy — 24% of voluntary market
Carbon offsets can also be generated by renewable energy projects, if that energy is replacing a dirtier energy source. However, not every project will qualify to create offsets. The key test here is additionality — would the project have made business sense without also selling its carbon offsets. We will talk more about additionality when we get to the “challenges” of carbon offsets.
3) Household Devices — 6% of voluntary market
These are typically created by providing devices in developing countries that reduce the need to burn wood and biomass to create heat, such as cleaner burning stoves or water purification devices.
4) Waste Disposal — 5% of voluntary market
Offsets are created by reducing methane emissions from landfills or wastewater, often by capturing it converting it to usable fuel.
Although these methods account for the bulk of the volume in the carbon market, there are other methods that you might have heard of that are getting a lot of buzz. One of these is direct air capture, or DAC. DAC is exactly what is sounds like — pulling CO2 out of the air. However, the cost of these projects are currently very high, at more than $500 / ton.
A more immediately promising application is CO2 capture from high purity sources, e.g. from the smokestack at an industrial plant. This CO2 can be captured much more cheaply, at under $50 / ton. Then, these projects can drive further financial viability by finding places to use this carbon, for example in the production of cement or in carbonating beverages. There are startups today working on both halves of this value equation.
What are some of the challenges with offsets?
If you google carbon offsets, as I did recently you will get a variety of results. First, you will get companies offering to sell you carbon offsets. Second, you will see articles explaining how they work. But, third, you will find articles asking “are carbon offsets a scam”. What are some of the challenges that make buying and selling carbon credits difficult?
1) Challenge #1: Defining a Carbon Offset
There are a few criteria that a project must meet to generate a carbon offset.
The first is additionality. Basically, you must prove that this project would not have happened if not for the payment you are making for the offset. So, in our example of capturing CO2 from an industrial plant, let’s say I could capture the CO2 for $30 / ton. Then, I could sell it for $10 / ton. Obviously, this is a pretty bad business, so I may not invest in this project. But, if someone will pay me $20 / ton for the carbon I offset, suddenly, the project looks a lot more promising — so, I invest in the project, and all these tons of CO2 are now not entering the atmosphere. That is additionality. A project that would not have happened, happened, due to my payment.
The second criterium is permanence. There must be some guarantee that this project will have positive effects for a long timeframe (for example, California requires that forest offsets have an expectation of lasting for 100 years). Obviously, an offset is not very useful if I plant a tree this year, then cut it down a year late.
The third criterium is a lack of leakage. Basically, if I was planning on cutting down Forest 1, and you pay me not to, but that means I just go and cut down Forest 2 instead, that is leakage — your payment generated no net carbon benefit.
So, as you can see — defining a carbon project is not easy! So, there are quite a few non-profits out there to certify these projects, including Gold Standard, Green-e, and CarbonFund.
2) Challenge #2: Transacting
This brings us to challenge number two — transacting. In this market, there are sellers of carbon offsets, who are project developers, often in developing countries. On the other side, you have buyers of carbon offsets, that are often consumers or businesses in the developed world. Bringing these two together to do business, in a seamless way, is not trivial. Carbon offset marketplaces deliver value by verifying the projects on their platforms (often by partnering with one of the certification players above) and allowing the buyer to transact easily, potentially buying fractions of projects.
There are an array of companies working on this problem, including Terrapass, 3Degrees, and Patch. Terrapass and 3Degrees primarily build programs for business trying to achieve net neutrality, while Patch is building a cool platform that allows easy purchasing of carbon offsets through an API.
3) Challenge #3: Monitoring
Finally, we have challenge number three — monitoring. After a carbon offset has been purchased, someone must check in to make sure it is delivering results. Propublica did a famous audit in 2019 in which they found that a forest that was supposed to have been protected was gone! The group had sold carbon offsets, and then chopped the forest down anyway.
Solutions to these issues include satellite imagery (Overstory, Planet, Pachama) or drone imagery (Dendra) for tracking compliance.
Alright, so let’s say I have solved all these problems. I have a carbon offset that is verified, additional, and monitored — it is certifiably reducing carbon in the world. Does everyone agree that this is a good idea now?
Well, no, and the argument is one of allowing consumers and companies “the easy way out.” For example, after Lyft’s announcement of their net carbon neutrality, some observers posited that consumers would now abandon their bikes in favor of Lyft rides, because they didn’t feel environmental guilt. Pending evidence, this argument seems rooted in idealism, not realism. Most people don’t change their habits due to environmental issues (or we would be in a way better place than we are with regards to climate change!) So, did a few people maybe decide to store their bike and start taking Lyfts? Sure, but that number is dwarfed by the number of people who were taking Lyfts before, will continue to take them after, but now are causing fewer net emissions by doing so.
Companies (and we) should be doing way more of this
At current carbon prices, very few companies have an excuse to not build a plan to be net zero in the near term. Not only out of moral obligation, but I think the return on investment exists.
Again, consider Lyft. Lyft is a transportation company — they should have one of the most difficult paths to becoming carbon neutral. But I think the investment Lyft made in carbon offsets makes a lot of sense, for any of the below reasons:
Talent: 83% of Gen Z considers a company’s purpose when deciding where to work. And, it is not just at point of hire. Forbes reported two years ago that employees at mission-driven companies are more likely to stay and grow into high performers.
Marketing: 72% of Gen Z factor in a company’s purpose when shopping. And, if you want harder numbers — from 2015–2017, Lyft appeared in news articles about climate changes ~50 times per year. In 2018, when they went carbon neutral, they appeared 300 times. So, more than 250 additional news articles written about Lyft, one per workday, and I am willing to bet the tone was a lot more positive. That’s a lot of brand value created!
Additionally, Lyft has spent an average of almost $300M annually on advertising over the last three years. Going carbon neutral (estimated cost, $6M) is a drop in the bucket of their overall marketing budget.
Competitive Landscape: Lyft makes ~$70 a year in GM per active user, at IPO. So, to payback its estimated $6M cost of carbon offsets, it would have to attract about 85K new users. Well, Lyft has ~21M users, while Uber has 42M. Might 0.2% of Uber’s users transfer over to Lyft each year given this purpose driven commitment? Well, given 2/3 of Americans think that we are currently doing too little to combat climate change, that seems reasonable!
Anyway, all this to say — if you are a company who is not yet carbon neutral, look into it! I bet it is cheaper, easier, and more beneficial than you think.