High-quality emission reduction-based carbon credits are essential to carbon markets and the path to a net-zero economy if used responsibly. Part of doing so is better defining what qualifies as a ‘high quality’ emission reduction credit.
The private sector is increasingly accepting carbon markets as a critical tool to mitigate climate change. Yet, trust is strikingly low: a recent study found that while 89% of businesses surveyed believed carbon credits are an important part of decarbonization efforts, 44% are concerned about greenwashing, 44% are concerned about carbon credit quality, and 38% are concerned about the lack of market regulation and transparency.
Case-in-point is the recent Guardian article making the rounds, highlighting several studies that found nearly 90% of Verra’s tropical REDD+ projects have weak additionality claims. My last post also poked at the weak additionality claims of the second most common source of carbon credits today: grid-connected renewable energy projects. Considering that these two sources of emission reduction credits make up over 85% of carbon credits on the market today, it’s warranted for people to be outright cynical.
If carbon markets can serve as a tool to drive capital to high-quality climate solutions efficiently, we don’t have the luxury of writing them off so quickly. Carbon markets can help allocate capital to climate solutions that either wouldn’t have a means of generating revenue (e.g., engineered removal, avoided deforestation, reforestation/restoration) or still need to drive down their green premium to become a business-as-usual part of the decarbonized future economy (i.e., the cost reductions of wind and solar).
For carbon markets to fulfill their potential, we must better define high-quality credits and be picky about where we are allocating capital to be as efficient as possible with limited resources.
Building on my last post, I want to dig further into technology-based emission reduction credits to highlight an important scaling opportunity for climate tech ventures.
A race against time: emission reductions and the time value of carbon
The time value of carbon is an important concept that underpins the importance of emission reduction credits. Simply put, the time value of carbon places a time-based preference on emission reductions and removals––a ton of carbon reduced or removed today is more valuable to climate change mitigation than a ton of carbon reduced or removed tomorrow.
Limiting warming to 1.5ºC is increasingly difficult, Carbon Brief
The chart above demonstrates the importance of the time value of carbon. The longer it takes society to halt and reduce its emissions, the more aggressively emissions reductions must drop to hit 2050 targets, given the shorter time period to achieve the same objective. More emissions into the atmosphere now will lead to higher atmospheric concentrations of greenhouse gases, increasing the severity of climate change. The clock is ticking.
In one of my previous posts, I wrote about The Oxford Principles for Net Zero Aligned Carbon Offsetting and the shift from emission reductions to removals over time. I think it’s important to note an important driver of this shift that perhaps isn’t quite apparent, which is the expected adoption of emission reduction technologies into a business-as-usual net-zero economy. I anticipate that a significant contributor to the decrease in emission reduction credits over time as 2050 approaches is precisely what happened to grid-connected renewable energy projects: over time, they became financially attractive as costs plummeted and adoption rates grew substantially with scale.
The goal of high-quality technology-based emission reduction credits should be to provide catalytic capital to innovations expected to become essential parts of a decarbonized economy.
While urgent emission reductions are necessary, the carbon markets must balance this urgency with responsible uses of capital.
Emission reduction credits from technological solutions lie on a quality spectrum based on efficient uses of capital
The IC-VCM’s draft Core Carbon Principles Assessment Framework goes into extensive detail on additionality, governance, removals, permanence, governance, double-counting, and safeguards as crucial attributes of quality carbon credits, yet only one page of the entire Assessment Framework mentions the need to align with a transition to net-zero emissions. I think a seriously overlooked attribute of a high-quality emission reduction credit is whether that credit catalyzes the decoupling of the economy from fossil fuels or land-use change. In other words, is this capital being used to build a decarbonized future economy?
In my last post, I wrote about one of the two major sources of emission reduction credits today: grid-connected renewable energy projects, and why they are now considered low-quality. It boils down to how additionality can diminish over time as technologies scale. While in the past, the use of carbon credits to fund these projects fit with the parameters of being catalytic to decoupling from fossil fuels, as the cost of wind and solar projects dropped, it didn’t make sense to bolster their financial attractiveness through carbon offsets. Wind and solar have become so financially attractive that renewables are now setting installation records worldwide––this is huge!
While using carbon credits as catalytic capital for grid-connected renewable projects no longer makes sense, this case can offer a pathway to success that other climate tech innovations to follow. Just as carbon credits helped drive down the cost of wind and solar projects, a new wave of high-quality emission reduction credits can do this for other industries.
In contrast, many emission reduction credit project types do not meet high-quality criteria. Take clean cookstove projects as an example. In theory, using clean cookstoves in many low-income communities in developing countries is supposed to reduce the amount of timber required for cooking, resulting in lower deforestation rates. This methodology typically uses adoption barrier analysis to prove its additionality and has come under constant criticism for over-crediting due to underwhelming adoption rates.
If these projects can overcome these challenges, I still wouldn’t consider these credits to be of the same caliber as an emission-reduction credit that fully decouples from fossil fuels and deforestation. I’m not saying these credits should be entirely wiped off the market; they can be helpful when appropriately implemented with demonstrable adoption rates. Instead, I’d argue that market demand should shift toward valuing higher-quality emission reduction credits. In the same way negative emission technologies lie on a spectrum of durability, with permanent removals increasingly being accepted as a gold standard, the same perspective can be applied to the quality of emission reduction solutions.
Looking at carbon offsets in this way can open up opportunities for carbon markets to drive decarbonization in real and impactful ways. Breakthrough climate tech innovations that exist today have enormous potential to deliver a net zero economy in ways that were hardly imaginable even a decade ago.
Building the future with high-quality emission reduction credits
At the end of my last post, I mentioned two of the few climate tech companies that have successfully developed their own methodologies for the voluntary carbon markets. CarbonCure, a sustainable concrete company, and Mootral, a methane reduction solution for the cattle industry, are two startups that can now generate carbon credits.
In both cases, I think an interesting common thread between the two methodologies that is important to highlight is their use of Activity Penetration as their additionality assessment tool. The use of Activity Penetration as an additionality rationale can open up considerable opportunities to increase the supply of high-quality emission reduction credits and help more high-potential climate tech startups reach mass market adoption.
The Activity Penetration assessment tool states:
“The term activity penetration is chosen because it is referring to the level of penetration of the specific project activity…It is also important to specify that activity penetration should be determined in relation to the maximum adoption potential, as opposed to the technological potential, to ensure we are using a metric where the project activity can feasibly achieve 100 percent penetration. Determining activity penetration based upon the maximum adoption potential thus ensures the five percent threshold is a reasonable and consistent marker…Five percent is chosen as a sufficiently conservative threshold and also follows what is considered a useful precedent established under the CDM.”
This 5% market penetration threshold is quite significant. 5% market adoption is typically considered to be a critical tipping point toward exponential market growth for many disruptive technologies. In 2022, US electric vehicle adoption rates finally hit 5%, leading many experts to predict that the US EV industry has reached a market inflection tipping point that may lead to exponential scale.
If this is the case, imagine how helpful this catalytic capital could be for the many climate tech startups battling their way to 5% market penetration. While CarbonCure and Mootral are two companies that have begun to take advantage of this opportunity, plenty more can benefit as well. For example, C16 Biosciences reduces deforestation by decoupling palm oil production from land use change by creating synthetic oils. Solugen is decoupling the chemicals industry from the use of fossil fuel feedstocks. Electra is making decarbonized steel without a premium. Nobell Foods is creating animal-free cheeses with the same taste, texture, and meltable qualities as animal-based cheeses.
A Duke University study that examined the life cycle assessment (LCA) and potential for carbon offsets for cultured milk found that its most environmentally friendly scenario of cultured milk production emitted 0.89 kg of CO2e emissions compared to conventional cow milk’s emissions that range between 72 - 146.5 kg of CO2e per kg of protein produced. In a hypothetical cultured milk production scenario, the researchers determined that the project “could generate between 84,304 and 479,262 carbon credits, which are valued between $253,000 and $13.4 million USD, dependent on the GHG differential and credit sale price used.” The researchers also mentioned the opportunity to generate additional carbon credits through potential reforestation projects as land-use change reduces due to lower livestock requirements. However, they did not delve into this analysis in great detail.
The study concluded that “there is enough of an expected difference in the environmental impact of cultured protein versus traditional milk protein that ...suggest the potential for lucrative carbon credit generation…based on rough calculations and a very conservative approach, a food-aid project that replaces traditional milk protein with cultured milk protein could result in income ranging from $253,000 to $13.4 million through carbon credit sales.”
Until proven terribly wrong, I see this as an exciting pathway to bolster the supply of high-quality emission reduction credits that can significantly benefit the climate tech startup community and ultimately help build the future decarbonized economy.
Why aren’t more climate tech startups tapping into the carbon markets?
Why has only a handful of startups started to take advantage of this opportunity? Here are a few reasons to consider:
1. New technologies will have to establish entirely new standards and MRV processes to comply with quasi-regulatory bodies. The study above noted that while promising, their results were preliminary, and many uncertainties around the production process at scale remain. Standards for this approach to generating carbon credits are yet to be established today; increasing confidence in emission reduction calculations to prevent over-crediting, identifying and preventing leakage scenarios, and establishing verification methods will be necessary to bring this opportunity to the carbon markets. Incumbent quasi-regulators such as Verra are notorious for the painful bottlenecks in the carbon markets today. With limited related methodologies and standards to lean on and deviate from, startups will likely have to build their processes from scratch.
2. New climate tech innovations are still moving out of R&D labs and into pilots. Many of these exciting climate tech innovations are hardly past their pilot stages––even getting to the point that a climate tech venture can confidently determine that it has a clear path to scale is highly time and capital-intensive. As someone deeply plugged into the climate tech innovation ecosystem at MIT, I have worked with plenty of climate tech ventures facing incredibly challenging barriers to scale that will require a lot of capital, creativity, and hard work to overcome––it is really tough. With limited bandwidth and plenty of burning fires to put out daily (figuratively…and sometimes literally), dealing with a confusing, bureaucratic, and arduous process to get a methodology approved can seem far from a top priority.
3. More peer-reviewed studies will be required to provide clear empirical evidence of the efficacy of these new technologies. For emission reduction and removals alike, the availability of peer-reviewed studies that can help validate and improve the accuracy of avoidance and sequestration models is still low. Academia and the scientific community can provide a great deal of support to climate tech innovators by generating more peer-reviewed research that can help to decrease the uncertainty of many of these newly emerging climate solutions and approaches to reductions and removals.
Just as permanence has become an essential determinant of what makes a high-quality removal-based carbon credit, we need to be far more choosy about what a high-quality emission reduction credit is. Though time is of the essence, we should be discerning about using carbon markets to catalyze scale for emission-reduction solutions that will define a 2050 decarbonized economy.
Some good reads:
The Time Value of Carbon, Generation Investment Management
Venture Capital and Cleantech: The Wrong Model for Clean Energy Innovation, MIT Energy Initiative