Entrepreneurs, your next billion-dollar startup should be in Climate Tech
Anyone with an entrepreneurial or business mindset is always looking for the next business opportunity. When I started looking for a business idea to research, I considered cybersecurity, software engineering solutions, fintech, Web3, and others — but I found the most intriguing area to be climate tech.
Climate tech can be defined as the field of providing technological solutions for coping with and reining in climate change. Much of it revolves around measuring and reducing greenhouse gasses (GHG) emissions.
In order to understand the huge opportunity that this field holds, we must first dive briefly into some historical facts that have created the opportunities and examine the challenges they pose.
Global Warming
In the past 120 years, the average global temperature has risen by over 1ºC. Researchers from around the globe have reached the conclusion that this rise in temperature is due to the burning of fossil fuels, which produces heat-trapping gasses.
Global warming is increasingly affecting the weather, sea levels, and wildlife, which in turn will eventually cause turmoil and instability in almost every nation and impact the economy as well as our personal lives and wellbeing.
Committing to Change
In December 1997, the Kyoto Protocol, which states that global warming is occurring due to human-made carbon dioxide and commits to the reduction of greenhouse gas emissions, was adopted by 37 developed countries. It took effect in February 2005.
Eighteen years later, in December 2015, 196 parties (countries and unions) at the UN Climate Change Conference (COP21) signed The Paris Agreement, which superseded the Kyoto Protocol.
The Paris Agreement has set the following long-term goals:
- substantially reduce global GHG emissions to limit the global temperature increase in this century to 2 degrees Celsius while pursuing efforts to limit the increase even further to 1.5 degrees;
- review countries’ commitments every five years;
- provide financing to developing countries to mitigate climate change, strengthen resilience, and enhance their ability to adapt to climate impacts.
Although some might find this arguable, the agreement is a legally binding international treaty. It entered into force on the 4th of November 2016.
Implementing Change
There are several possible approaches to reducing GHG emissions and dependency on fossil fuels.
Education — educating on greener consumption to reduce individual carbon footprints. This includes reducing consumption of products that emit methane, advocating for minimalism, which may reduce factory output and in turn reduce carbon emissions, reducing consumption of meat, reducing household electricity consumption, etc. All of these are good and can somewhat reduce GHG emissions, but unfortunately, there are some drawbacks: we cannot know the carbon footprint of products in order to make wise choices; we do not always have less-polluting alternatives, andsome developing countries have no alternatives at all. (For example, in a modern country one might have a solar cell powering an AC for heating; on the other extreme, in a developing country one’s only option for heating might be burning wood logs.) Education is critical, but education alone will not be able to change things at the pace required to mitigate the effects of GHG emissions.
Technology — developing and embracing new technologies and solutions for green energy production, lowering carbon footprint, and capturing GHG. New climate-tech startups are sprouting almost every day — human innovation never ceases to amaze.
As an engineer, I am captivated by new technologies, and engineers all around the world are suggesting amazing ideas to address this issue; the problem is that some engineering solutions, regardless of how effective they may be, cannot come to life without a sustainable economic model. Sadly, that’s just how things work in our world.
Regulations — enforcing policies that limit the GHG emissions created by businesses. This is perhaps the most impactful approach as it coerces businesses to change. For example, the Regional Greenhouse Gas Initiative (RGGI) is a cooperative effort among eastern US states to cap and reduce power sector CO2 emissions by regulating the level of allowed CO2 emission from electric power plants.
Regulation creates many obstacles for businesses, but over the years, I have realized that if you want to see industries change fast, regulations are the method to bet on.
GHG Regulation Methods
Two common regulation methods have been devised, each with its own advantages and disadvantages:
- Carbon Tax — The regulator sets a price that emitters must pay for each ton of GHG emission. This comes in two forms: emissions tax, which is applied to GHG that has been directly emitted while producing goods, and tax on goods or services that were sold and resulted in indirect GHG emission (such as selling gasoline for later consumption in cars).
- Cap and Trade (a.k.a. Cap and Invest) — As the name hints, this method enforces a cap on a business’s permitted emissions. Companies may buy and sell allowances and the market forces establish the emissions price. Companies that reduce their emissions at a lower cost may sell excess allowance to companies with higher costs.
Both methods force companies to lower their GHG emissions.
Carbon taxation is relatively easier for the regulator to implement yet requires the regulator to carefully choose the tax price otherwise some companies may suffer from high losses before they can integrate solutions to reduce their GHG emissions.
Cap and trade on the other hand creates an open market for cap trading and lets the market determine the cost of allowances, but requires a lot of regulatory work to define a feasible cap and especially to track the traded caps.
There has been some criticism that such regulations and caps might push GHG emitting factories in developed countries to relocate to other (developing) countries where emission caps are not enforced. Governments have already started planning ways to prevent this cross-border carbon leakage.
Carbon Offsetting
Reducing GHG emissions cannot happen overnight, especially in enterprise businesses therefore a need arose to allow companies some flexibility to gradually change while still adhering to the reduction target on a global scale — Enter Carbon Offsetting.
A GHG offset represents a reduction, avoidance, destruction, or sequestration of GHG emissions from a source not covered by an emission reduction requirement.
This is usually achieved by investing in offsetting projects such as renewable energy projects, planting trees, methane reduction projects, etc.
The elimination of GHG emissions can be converted into tradeable offset credits, and cap-and-trade programs can be designed to permit firms to use these credits to meet their compliance obligations. For example, a company that forecasts that it will not be able to meet the imposed cap may trade their carbon emissions by investing in other companies or projects that reduce GHG emissions.
Some companies act as offsetting brokers that connect companies wanting to offset GHG emissions with projects that invest in renewable energy and carbon capture.
Carbon offsetting enables emission reductions to occur where costs are lower (such as in developing countries), leading to greater economic efficiency where emissions are regulated.
The Challenges of Carbon Offsetting
Carbon offsetting may sound like an elegant solution, but it presents quite a few challenges:
- The efficiency of carbon offsetting may be low since not all carbon credit funds can be applied directly toward carbon reduction/capturing — project brokers and shareholders take a significant cut, which can sometimes reach up to 50% of the funds.
- Fraud and false claims of GHG reduction projects are a concern. There have been cases of existing forest conservations being claimed as new carbon offset projects when in fact the forest was declared a conservation reserve years prior.
- Effective setup/development of the carbon offset project is challenging. How much GHG emissions will be produced by the project itself?
- Measuring the GHG reduction/capturing from the project is also difficult. How objective is the entity supervising the project and measuring the offset?
- Can the project truly capture carbon forever? For example, new forests, which capture carbon over time, may release the captured carbon in the future due to wildfires.
- How can we be sure that the project reaches completion on a reasonable schedule? Or worse, what if the project goes bankrupt?
Coping with these challenges adds an overhead and layers of bureaucracy, which introduces inefficiencies and means that more funds will be required.
Opportunities
Clearly, all three potential solutions — carbon taxing, cap and trade and carbon offsetting — have their challenges.
If we can find a solution to the above challenges then reaching net-zero (creating a balance between the amount of GHG produced and the amount that is removed) will be easier and less costly to achieve.
While most people see these challenges as difficulties, good entrepreneurs see them as business opportunities.
Each of these challenges may have multiple solutions. Here are some emerging ones:
- Tracking carbon offsetting: Earthbanc, Pathzero
- Tracking green energy sources: FlexiDAO
- Tracking emissions: Sensorfact, METRON, Turntide Technologies, Sympower, Sweep
- Turning captured CO2 to rock: 44.01, High Hopes Labs
- Reducing business GHG emissions: Enerbrain, Connecterra, Solcold, Sowillo Energy
- Digitizing Markets: Xpansiv, Finite Carbon, Sylvera
There are dozens of other companies that offer solutions to the above-mentioned challenges which I have not mentioned here and hundreds of other companies that are developing solutions to help our planet become greener and GHG-free.
The value of globally traded CO2 has reached a record $851 billion, and investments in climate tech are constantly growing and have surpassed $80 billion a year (as of mid-2021). The business opportunity is huge, as GHG-emitting companies will be forced to acquire direct or indirect GHG-reducing solutions.
Time to Innovate
The climate problem is not going away. Most nations have already committed to change (and will gradually introduce regulations and taxation), and the caps and taxes will be tougher for companies to meet as the years go by. This means that funds and incentives for solving these challenges will keep flowing and enterprises will be looking for solutions.
Although the kickoff for fighting climate change was in 1997, regulations have been introduced quite slowly, and it’s only in the last few years that we have started to see more startups emerging in these fields because more nations will soon be introducing stricter regulations on GHG emissions. The time for climate tech innovation is now.
Coming up next: How does blockchain actually work? What are NFTs and what’s Web3? What are the business opportunities Web3 offers?
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