Investors and utilities are seeding carbon markets with new startups

While most of the world agrees that carbon dioxide emissions from human activity are creating a climate crisis, there’s little consensus regarding how to address it.

One of the solutions that’s both the most obvious and, seemingly, the most difficult for the international community to agree on is establishing a market that would put a price on carbon emissions. Making the cost of emissions palpable for industries would encourage companies to curb their polluting activities or pay to offset them.

The holy grail of a global carbon market — or a collection of regional ones — has been on the agenda for climate activists and regulators since the Kyoto Protocols were ratified in 1997, but enacting the policy has proven elusive.

Now, as the results of climate inaction become more apparent, there appears to be some movement on the regulatory front and concurrent activity from early-stage technology investors to make carbon offsets more of a reality.

It’s still early days, but startups like Project Wren, Pachama and Cloverly prove that investors and utilities are willing to take a flyer on companies that are trying to enable carbon offsets for consumers and corporations alike.

These small bets for investors are complemented by the potential for outsized returns given the size and scope that’s possible should these markets actually develop.

After years of languishing in relative obscurity, global carbon markets rebounded with vigor in 2017 and into 2018, according to data from the World Bank.

Countries raised about $44 billion in revenues from carbon pricing in 2018, an increase of $11 billion, with more than half coming from carbon taxes. In 2017, the $33 billion raised by governments from carbon pricing was an increase of 50% over 2016 numbers.

However large that number may seem, it’s dwarfed by the figure required to make any real changes in industry emissions, according to the World Bank. The current pricing schemes that exist cover a small percentage of global emissions at a cost that’s consistent with achieving the goals of the Paris Agreement, the latest international treaty around climate change and greenhouse gas emissions. Prices need to rise to between $40 per ton of carbon dioxide and $80 per ton by 2020 and between $50 per ton and $100 per ton by 2030.

For companies like Cloverly, a Birmingham, Alabama-based startup financed by regional utility Alabama Power Company, the possibility of a real price on carbon — and some initiatives that are already underway in various logistics and transportation businesses — represent an opportunity too good to ignore.

“We’re building a tool that’s easy for developers to use for carbon offsets… all of those companies are interested in using us as an API,” says Dave Folk, a former senior marketing strategist for Alabama Power and the co-founder of Cloverly. “Part of the issue in the carbon offset space was how easy it was to procure offsets and how long it takes to go through the process… We want to get to the point where it is as easy as an API call to go about procuring those [offsets].”

The success of a business like Cloverly’s will depend in part on an ability for companies like Pachama and Project Wren to finance and develop enough carbon offset projects that companies like Cloverly will facilitate financing around.

For Pachama’s chief executive and founder, Diego Paez, the solution to climate change has to involve a larger degree of reforestation and reclamation offset projects. That’s what his company, Pachama, has devoted itself to accomplishing.

Only two percent of the money that goes to carbon markets goes to forests,” says Paez. “That’s because it’s it’s expensive and slow and difficult to certify.”

Pachama addresses those issues by providing not just a marketplace where companies can buy forest offsets, but also uses machine learning and satellite imaging to verify that projects are performing as anticipated and that they’re actually preserving the land that needs protecting or reforesting previously denuded geographies.

“We’re working with certification bodies [and] expanding the supply and expanding the number of projects that are out there,” says Paez. “There are only 500 forest projects that are certified… We need tens of thousands. There’s one billion hectares on the planet is available for reforestation without competing with agriculture.”

While Paez’s ideal scenario would be for the company’s projects to exclusively work with the restoration of native forests, the company is working with industrial companies that are looking to develop tree plantations as well. Both solutions are necessary, Paez says, because “we are destroying the standing forests at an astounding rate.”

If Pachama sits at the industrial or corporate side of the offset equation, and Cloverly straddles the divide between consumer-facing offsets and industrial offsets, Project Wren falls squarely into the consumer camp.

The company, launched in Y Combinator’s summer 2019 cohort, offers a subscription service for consumers who want to reduce their carbon footprint. The company calculates an individual’s carbon emissions and then charges them a monthly fee to pay for offset projects that support renewable energy development, forest preservation, reforestation and other carbon reduction schemes.

Customers who buy offsets will support projects that would not have been done without the support of organizations like Wren. Once these offsets are purchased, Project Wren retires them from circulation so they can’t be traded on any exchange after their creation.

The company makes money by taking a 20% commission above the price of the project for operating expenses and marketing.

“We felt like the mission of making companies a better place to work was important, but not urgent,” Project Wren’s chief executive Landon Brand wrote in an email. “Climate change is urgent. It’s the biggest challenge humanity has ever faced.”