To limit global warming to 1.5˚C, total net emissions of carbon dioxide from 2018 onwards cannot exceed 570 gigatons. Currently, we will have hit that limit by 2031. Carbon trading is therefore vital to our target of carbon neutrality. In this article, we focus on the start-ups working to make carbon markets an effective means of emissions reduction.
“We are on a highway to climate hell,” the UN chief declared at COP27, “with our foot still on the accelerator.” After twenty-seven conferences stressing the need to cut emissions and decarbonise our economies, it is clear governments alone cannot achieve this. Innovation and efficiency are now required – which is where the fast-growing FinTech sector gets involved. Start-ups are deploying a wide range of technologies, including AI, blockchain and cloud computing, to make payments, banking, investing and other financial services more sustainable, bringing us closer to net zero.
A growing number of FinTech developments have helped businesses use carbon trading as a means to neutralise their carbon footprints. Carbon trading, though often called a “stopgap” measure to buy time for the transition to clean energy, is nonetheless a vital tool to regulate emissions. Carbon markets fall into two categories: compliance and voluntary. So how have start-ups been operating in these two markets? And how do flaws in the market designs limit efforts to keep pollution under control?
FinTech and voluntary carbon markets: Pachama
Voluntary markets feature offsets that can be purchased or traded between companies – businesses that either avoid emissions or remove a unit of carbon from the atmosphere can sell an offset to another company that wants to counterbalance its footprint. These markets are self-governed, border-free and accessible to every sector – their total size was $400 million in 2020 though carbon markets in general are expected to grow rapidly in the coming years.
Pachama is one start-up that helps businesses offset their emissions by making offsetting schemes more effective while aiming to provide more “integrity and accountability to forest carbon markets.”
Quality not quantity
Tree-planting and forest preservation are some of the most popular carbon offsetting projects. CO2 can be absorbed from the atmosphere as trees grow, while conserving biodiversity. Unfortunately, they also highlight the two biggest problems with offsetting: the quality of projects and the quantity of carbon sequestered.
Pachama addresses the first issue by using remote sensing and satellite imagery to accurately determine the amount of carbon removed and stored by forests. In general, offsetting projects are evaluated and certified based on additionality, leakage and permanence, judging whether the project actually sequesters carbon that would not have left the atmosphere otherwise and if the effects last long enough to be truly beneficial. To improve the assessment of forestry projects, Pachama introduces a “dynamic baseline”: according to one of their scientists, “if someone’s already started conserving the forest area 10-20 years ago, and then you give them a credit, you’re not actually going to be compensating for the buyer’s emissions”. A baseline that factors this in can better judge the effectiveness of a project.
Is offsetting enough?
Project quality, however, is just one problem – the other is that offsetting itself is insufficient. To offset a mere fraction of global emissions, a colossal number of trees would need to be planted, and even then, when they die, the carbon sequestered is re-released, an issue exacerbated by the risk of wildfires, disease and drought, ironically made worse by climate change. Planting trees gives us “more time to reduce CO2, but that's the best you can hope for,” says Michel Gelobter, the CEO of Cooler. Addressing this issue, Gelobter’s start-up favours compliance over voluntary markets as a way to eliminate businesses’ carbon footprints.
FinTech and compliance carbon markets: Cooler
Unlike Pachama, Cooler helps businesses reach carbon neutrality by operating within the compliance market. First, Cooler calculates the carbon footprint of any product or service sold by the company. This is done almost instantly using software. Second, it buys permits from already regulated markets and permanently retires them.
In compliance markets, governments or regulators issue carbon emission allowances (or credits) which can be purchased according to businesses’ needs. These credits define how much industrial polluters are permitted to pollute. Thus, they will purchase as many permits as they need to cover the emissions that they struggle to cut. Cooler creates an opportunity for the voluntary participation of unregulated businesses in the regulated compliance market.
Squeezing the cap
But what makes Cooler particularly innovative? It targets carbon emissions directly at the source. Since credits can only be used only once, their retirement means that they are out of the market: industrial polluters cannot purchase them. Contributing to squeezing the overall cap, Cooler forces polluters to cut emissions due to the reduced permit availability.
Badly designed compliance markets
Voluntary participation in compliance markets is dependent on the efficiency of the design of such schemes. Starting in the 1980s, worldwide emissions trading schemes have shown that bad designs have serious economic consequences, produce limited environmental results and cause political controversy. Research on incentive-based regulation shows that an overly generous distribution of permits or a cap level set too high will prevent a significant reduction in overall emissions by polluters. These systems also require effective emissions monitoring, as well as significant fines for noncompliance. Squeezing the cap through permits' retirement will have a limited impact if the cap is set too high in the first place or if major polluters do not comply.
Who should bear the responsibility: businesses or consumers?
Both startups enable businesses to choose whether they will neutralise their emissions through a share of what they sell or ask consumers to opt in. But should the consumer be the one responsible for the payment to offset the carbon emission, or should that be the company selling the product?
On one hand, the extra optional price that consumers see at checkout makes sustainability “accessible to the consumer,” according to Archana Veerabahu, the marketing director of Cloverly. Since consumers are faced with the environmental costs of their purchase, this system is educational. Moreover, Gelobter recognises that offsetting for many low-margin industries may be unfeasible as the cost of offsetting products may equal the entire profit margin. Hence, asking consumers to opt in may be the only financially possible option. On the other hand, many consumers may not want to contribute, especially when it comes to expensive purchases. For instance, in 2021, only 1% of Ryanair passengers chose to pay extra to offset the emissions of their flight.
We argue that including consumers in the neutralisation of businesses’ carbon footprint is a step that - at a large scale - will yield considerable positive changes. At the end of the day, consumers are responsible for the market demand for carbon-intensive products. Facing the price of their market choices is likely to incentivise changes in day-to-day choices. However, getting consumers on board should not distract us from what is more desperately needed: large-scale corporate action.