Will carbon offsetting boom after COVID-19?
Carbon offsets have gained corporate momentum since 2017, sparking a new wave of startups trying to capitalize on our growing environmental awareness. In this article, we look at what offsetting is and our expectations for the future of this industry, including:
- How offsetting works aka “Why can I offset my flight for 5 bucks?”
- Why COVID-19 may drive climate change leadership.
- Where founders and investors should look at to find winners in this market: B2B startups who offer offsetting as a feature, not a product.
(Note: this is the TL;DR of our latest market scan. If you’d like to read our research, the full-version with data sources is here)
Carbon what?
The term ‘carbon offset’ was first used exactly thirty years ago (yes, 1990 was thirty years ago — we can hold hands and cry together) to describe “an action or activity that compensates for the emission of carbon dioxide or other greenhouse gases to the atmosphere”.
Carbon offsetting allows companies and regular folks to mitigate or neutralize carbon footprints by buying carbon credits generated from carbon-negative projects such as reforestation or renewable energy that prevent or reduce greenhouse gas (GHG) emissions — typically in developing countries.
One credit represents one metric tonne of greenhouse gas emissions prevented or removed from the atmosphere.
How offsetting really works
When an airline offers you the chance to offset your flight ticket, they probably partnered with one of these guys: American Carbon Registry, Climate Action Reserve, Gold Standard, Plan Vivo or Verra. Verra and Gold Standard alone audit and accredit about 80% of the market.
This concentration is good because certified offsets bring much-needed trust to a new market where price and emissions differ by project type and chosen time horizon.
What consumers don’t know is that those prices change according to how fast you want to mitigate the emissions of your flight:
- A one-way trip between Lisbon-Barcelona takes ~2 hours and emits about ~110kg of CO2 per passenger.
- In Europe, each kWh generates an average of 0.45 kg of CO2.
- Therefore, if we buy 244kWh of clean energy we “neutralize” the CO2 released by our flight since we are sponsoring clean energy and broadly reducing demand for dirty energy such as coal.
- Buying this amount of renewable energy costs not a couple of bucks, but close to 90€. Offsetting it on the airline’s website costs about 3€.
- Why? Here’s where time comes into play: renewable energy projects typically have a guaranteed horizon of 25 years.
Say you want to buy solar panels to generate a target amount of energy. Since panels generate an average amount every year, how long you’re willing to wait to reach your target dictates how many panels you’ll need to buy today.
If your flight offset funds the purchase of renewable energy assets, and those assets are guaranteed to stay active for 25 years, we can pay up to 25x less what it takes to neutralize our flights in a year — but it will take us 25 years to fully mitigate the damage of these emissions.
While a low price point drives adoption, consumers, not providers, should be able to pick a target time horizon and make informed offsetting decisions while seeing the true cost of running a carbon economy.
Where we see the market heading into a new decade
Offsetting is an increasingly commoditized market making the transition from early adoption to its growth stage — consumers are now aware of its existence and any company can sell certified carbon credits through credible providers such as Gold Standard. The million-dollar question is how big that growth will be since total offsets from the last decade only amount to 1% of the 37 billion tons of CO2 released in 2019.
Is the market opportunity interesting for investors?
Yes, but probably not from offsetting alone.
Worth a few millions of dollars in 2005, the offsetting market was valued at over $500m in 2019, adding in $300m since 2017 thanks to a strong stream of public offsetting commitments from airlines, FMCG giants, energy players and ride-sharing companies. This is not surprising since according to the PR firm ConeComm, as of 2017 the green consumer is as strong as ever:
“87% of Americans will purchase a product because a company advocated for an issue they cared about.”
“92% will be more likely to trust a company that supports social or environmental issues”.
Since climate change isn’t disappearing anytime in the near future, we expect further growth and innovation in a small market that offers convenience to consumers and companies looking to be greener. It’s up to startups to design new products and business models capable of attracting and retaining green clients — offsetting alone won’t cut it because there is no differentiation.
How are founders innovating?
Bundling services in an attempt to boost B2B conversion and market size.
B2B is driving 75% of all growth since 2017.
Climate change won’t be solved anytime soon, so neither will the consumer pressure that is shaping corporate behaviour. As media spotlights show that the global warming clock is ticking, this pressure is only expected to go up.
We expect to see more startups focusing on B2B and bundling offsetting as a feature, not a product. This feature will sit on top of their core value proposition. This allows founders to satisfy customers from more than one “green market”, creating a larger baseline TAM from day 1.
How will COVID-19 disrupt this market?
Negatively in the short-term, positively in the medium-to-long-term.
Short-term shock: a long economic downturn cannot be overlooked. The real question is how companies will ‘play the green game’ during a recession:
- During the last Global Financial Crisis, millennials were graduating college and Gen Z was watching after-school cartoons.
- Climate change was 10 years further away.
- In this new decade, both millennials and Gen Z will see an increase in purchasing power while staying loyal to the ‘fight against climate change’.
Will companies risk alienating these key demographics once balance sheets stabilize to save negligible amounts? Probably not.
Long-term shock:
The global climate change debate just got a great example of why no investment is too expensive when compared to the cost of not taking action. Several nations underestimated the virus and only started nation-wide lock-downs when disaster struck home.
The numbers speak for themselves — preventive action worked to minimize infections and loss of human life. We expect consumers and companies to increasingly accept their fair share of responsability and seek ways to lower their footprint. At least for now, offsetting is one of the most scalable and frictionless.
That’s all folks
Startups looking to ride the green wave can play one of two strategies: a) focusing on ‘transformative impact’, or b) focusing on ‘frictionless impact’.
The first is likely to require strong sector expertise, R&D and long sales cycles — losing its appeal to most VCs but unlocking higher gross margins as well as first-mover advantages to the companies that find ways to forever change how incumbents operate.
The second will require building a ‘green stack’ of scalable GHG-related services that allow companies to promote environmental claims across sectors at low price points, requiring a larger customer base and an efficient go-to market strategy. Moderate VC activity will be expected in this space, as founders try to create “the next offsetting”.
Thank you guys
The following founders provided valuable insight and discussion while we were looking into this market:
Oliver Bolton from Almond.
Cameron Epstein from Inhabit.
Lubomila Jordanova from Plan A.
Nuno Brito Jorge from Go Parity — thanks for the great and detailed pricing breakdown.
Photos taken by:
