Over the past year, it has become increasingly apparent that the carbon credits market needs a major overhaul.
Just last month, a new carbon finance platform called the Energy Transition Accelerator was unveiled at COP28. Backed by the U.S. Department of State, the Bezos Earth Fund and The Rockefeller Foundation, the official announcement stated an aim of uniting governments and private stakeholders to deliver faster, deeper greenhouse gas reductions through ‘high integrity carbon credits.’
Yet for such initiatives to succeed, there is a need for the market to find ways of rebuilding trust, which has previously been eroded by accusations of fraud and greenwashing, particularly relating to carbon offsets purchased by major corporations.
Last August, a study in the journal Science, conducted by an international team of scientists and economists, concluded that the majority of carbon offset schemes significantly overestimate how much deforestation they are preventing. Most notably, out of a potential 89 million credits, the study concluded that just 5.4 million were actually linked to additional carbon reductions through tree conservation.
These calculations represented the latest of a series of accusations levied at a market which was valued at $2 billion at the end of 2022. A nine-month investigation carried out by journalists at the Guardian, Die Zeit and SourceMaterial claimed that Verra, the world’s leading offsets certifier, had approved rainforest carbon offsets that were mostly worthless, and might instead be accelerating the climate crisis.
The authors of the Science study went on to compare the burgeoning trade in carbon credits to a form of “lemons market,” where the fuzzy and qualitative nature of practices underlying carbon offsets has resulted in sellers flooding the market with poor products and overblown claims. They warned that this could ultimately lead to total market collapse. In November, a leading investors service warned that purchasing inadequately vetted offsets as part of corporate carbon transition strategies could pose both financial and reputational risks.
As a result, many industry insiders feel there is a need for a more functional new market based around openness in data collection, and scientifically verified measurements. Dr. Aditya Ranade, a long-time climate tech professional who advises public and private sector organizations in transitioning to cleaner energy as a director for Guidehouse, suggests that the future could be a more tiered system for carbon credits.
“There are different kinds of carbon credits,” says Ranade. “Offsets, credits for using zero carbon electricity, credits for using carbon dioxide as a raw material, and credits for carbon sequestration. They all offer different levels of benefit for climate mitigation, and that needs to be priced in.”
Permanently Removing Carbon
In particular, Ranade believes that greater value needs to be placed on credits associated with longer-term carbon removals. He highlights companies such as Novomer and LanzaTech which have made progress in capturing carbon and transforming it into plastic. “If you’re taking CO2 and using it as an input for making polymers or cement or concrete, or forms of geological sequestration such as forestry and soil carbon, these are more permanent removals,” he says. “If done right, they can offer lots of benefits, but there’s a need for good data collection to establish additionality and benefits.”
Many emerging companies in the removals sector are already taking extra steps to try and ensure greater transparency, particularly when it comes to the complex field of nature-based removals. California-based startup Andes, which my team at Leaps has invested in, identified microorganisms that grow with plant roots and convert CO2 into a stable inorganic carbon form, otherwise known as minerals called carbonates. In addition to boosting the nutrient content of the soil, this method represents a way of sequestering carbon for thousands of years.
Andes is partnering with farmers across the United States by offering their microbial solution free of charge. Credits are created based on the amount of carbon stored in their fields at the end of the season, as measured by an independent laboratory. According to Gonzalo Fuenzalida, co-founder and CEO of Andes, the company partnered with 45 farmers in 2023, resulting in 50,000 acres of land across the Midwest being treated with their microbes. Their goal is now to scale up to one million acres within the next two years.
While this approach has attracted considerable interest from investors including Leaps, the company is taking steps to ensure that it has the backing of leading scientists in the field.
“We’re working with our scientists from University of Texas, Yale, University of Colorado, and we recently announced a partnership with Lawrence Livermore National Laboratory,” says Fuenzalida. “We’re publishing a paper in the coming months basically showcasing all the data we’ve generated for the past three years. We feel that’s the way to build reputation and reduce risk towards customers who buy our credits.”
Treating the soil is just one approach to removing carbon at scale. The startup Graphyte, which is backed by Bill Gates’ Breakthrough Energy Ventures fund, is collecting waste byproducts such as rice husks or discarded wood, which have already captured significant amounts of CO2 from the atmosphere. This is then dried, condensed into dense carbon blocks which are wrapped in an environmentally safe polymer and stored underground in a specially engineered site. In November, the company signed its first carbon removal purchase agreement with American Airlines.
Other companies are looking to use various marine species as a way of soaking up CO2 from the ocean. The Climate Foundation is among a number of start-ups cultivating floating, solar-powered kelp farms with the aim of regenerating marine ecosystems which have been impacted the consequences of excess CO2, such as ocean acidification.
More Accurate Carbon Measurements
While nature-based carbon removals have already shown promise, these companies still have to provide ample data to show that carbon is genuinely being locked away for the long term, and that their method of sequestering it does not incur significant additional carbon footprint.
“One of the challenges for a company like Graphyte is going to be, ‘Okay, you’re using polymers to store the carbon, but what about the carbon footprint of those polymers?’” says Ranade. “Most polymers are made as a byproduct of petroleum drilling, they’re made from petrochemicals.”
Right now, one of the hurdles for removals start-ups looking to roll out their technology at scale, is the time and cost involved in verifying their carbon credits. However, there are also companies emerging which are developing innovative new ways of making that process cheaper and more efficient, particularly for methods of soil carbon capture.
Companies such as Montreal-based ChrysaLabs and Cambridge, Massachusetts, based Yard Stick are leading the way in developing next-generation soil sampling probes that use spectroscopy to provide cheap, rapid insights on soil carbon levels. Last year, ChrysaLabs announced an $11 million funding round, which Leaps participated in, for their sampling probe. It combines spectroscopy with artificial intelligence and machine learning to provide carbon readings, along with up to 40 different soil parameters, within just 30 seconds.
While there are still many issues to solve within the carbon credits market as a whole, the rise of new innovations for storing and measuring carbon inspires me to believe that we will have more effective ways of removing carbon over the next 10 to 15 years.
Ranade is also optimistic because the hard-to-decarbonize sectors like aviation and industrial manufacturing need scientifically accurate solutions. “Those sectors have made pledges towards net zero by 2050 or earlier,” Ranade says, “so that’s going to provide a big impetus towards carbon removals. If the removals market can provide some kind of segmentation and different price levels based on the benefits and volume that they offer, I think it has great potential.”
Thank you to David Cox for additional research and reporting for this article.