Notes and disclosures: This post is also available in Notion, if you’d like to comment. My job is Head of New Markets at UNDO. The post below reflects my personal views and may not reflect those of my employer.
“In a world…”
For the sake of argument: Let’s imagine a world where carbon is bad, and the more of it you emit, the more you’re responsible for climate change. Public opinion and policy organize to establish corporate liability for operating in carbon intensive industries, pushing companies to reduce their footprints. Given the opportunity to externalize or offset emissions in their supply chain, companies pay to do so.
Sounds like us, yeah?
Now, let’s imagine a very different world where carbon is good, and the more of it you capture, the more you fight climate change and the more money you make. Public opinion and policy organize to generate increasing benefits to capturing carbon from industrial and agricultural processes. Given the opportunity to internalize potential carbon revenue in their supply chain, companies jump at the chance to incorporate carbon, adding revenue and profit.
This also sounds like us?!?
Why insetting > offsetting in the boardroom
Offsetting is the default way of dealing with your carbonshed: You can’t deal with your emissions so you have to pay someone else to deal with them. But, offsetting isn’t ideal for the climate community. The implied cost of offsetting means any corporate climate commitment is dependent on a company’s continued financial performance. This setup makes everyone thinking about the climate rightly uncomfortable.
Offsetting isn’t amazing for corporations either. While it’s historically been relatively cheap, offsetting doesn’t produce a lot of value: you’re sending money out of the company, away from your immediate stakeholders. You get compensation back in the form of 1) progress towards your climate goals and 2) good PR. (Though in recent months, the “good PR” is looking a bit more elusive.) But what if there was a way to get good PR and hit climate goals, while also returning your money to your stakeholders?
How might insetting be more appealing to corporations than offsetting?
Control costs and manage risk: If you’re buying carbon removals or offsets on the open market, you don’t control the price. If I were a CFO, I would be desperate to remove that uncertainty and potential liability from our books. If I can control our company’s demand for carbon removals, that’s good. But, if I can control our company’s ability to supply carbon removals, that’s great.
Make money: Buying carbon removals or offsets costs money. Which means it’s never going to be something the team gets excited about. If you could take your offsetting budget, and turn it into an insetting investment fund which generates returns, that’s something the CFO, the board and the sustainability teams can all get excited about.
Drive value back into the supply chain: While the above — reduce cost and increase income — aren’t exactly new ideas, they’re the floor for the insetting argument. The next level up is ensuring that new opportunities created by the carbon market, that the company can’t monetize directly remain close to the business, so that immediate stakeholders benefit.
Well known brands and B2C companies: Given that a large ag or fertilizer company may not be able to directly generate all the carbon it wishes to buy on farms it owns, it would much prefer to buy carbon from farms that use its products than from farms that don’t. A shoe company might want to buy commodity renewable energy credits (RECs), but it might prefer to finance the installation of solar panels on a partner’s factory to reduce energy consumption and grid reliance.
Unknown brands and B2B companies: You might think that without pressure from end customers, unknown companies that sell B2B might be less likely to change quickly. And yet, happy downstream buyers benefit directly from climate action in the form of lower carbon intensity, and reduced scope three emissions. Tesco is currently pressuring farmers to adopt regenerative practices as part of their supplier agreements. It would be more compelling if they bought the credits that were generated.
Diversify product offering: For the sake of avoiding a 15,000 word blog post, lastly: companies produce goods to sell. The narrower the range of products they produce, the less resilient they can be as prices, taste, and cost of inputs fluctuate. If, say, a plywood manufacturer can produce both plywood and biochar, they can better tailor what they make to market demand and prices. We’re seeing this already with Charm’s push to produce green steel. There is an opportunity for companies that have large, physical operations, especially those with waste biomass, to produce removals in addition to their existing product line. And, this opportunity will grow in breadth and depth, each year welcoming new processes and verticals.
Why now?
So, it’s all well and good that insetting would be better. And, a year ago, I would have said, eh, carbon is a liability, and while it’s a nice idea to inset, you’re not going to build a CDR company, so you gotta offset. But the insetting revolution appears to be happening sooner than I thought it might, for the following reasons.
Better, more applicable solutions: Two years ago, the options for insetting were slim. Without a concentrated source of CO₂ in flue gas, there probably wasn’t much you could do. You can now: 1) make biochar, 2) capture CO₂ off your trucks as they drive around, 3) prevent methane from developing at your hydro project, 4) capture carbon in farmers fields, etc. While the scale-up portion of the game hasn’t started yet, the we-can-play portion of the game definitely has. And, there are not just more solutions, the existing solutions are starting to scale up, making them easier to integrate and more likely to be available where you operate.
Increasing costs of offsetting: With high margin, low emissions companies defining the shape of what’s “right” the carbon market, the cost of removing emissions is going up. We’re moving from a low-cost, low-certainty, low–quality market to a higher-cost, higher-certainty, higher-quality market. This is great for the planet, but hard on the bottom line. Want to be green circa 1995? It’s gonna cost $3 a ton. In 2023? More like $100 a ton. This 33x increase in price turns it from someone else’s problem to every company’s problem.
Less benefit derived from offsetting: Add to increasing costs the fact that the benefits from carbon offsetting can be described briefly as 1) PR and 2) practical progress toward your climate goals. The more people that take climate action, the more dilute the PR benefit from doing so.
Opportunities to unlock policy teams: Let’s say you’re a big producer of a commodity good, or another major corporation. You probably already have a lobbyist, policy team, and are well connected at state and federal levels. If you can figure out how to wring more government funding from your existing relationships, you definitely want to do that. For an example of what that looks like, check out the IRA’s lean towards CDR that works for existing oil and gas companies.
Nearly there
So, what’s holding the insetting revolution back?
Lack of credible monitoring, reporting, and verification: If you’re planning on insetting, it’s important that people to believe you have removed a certain number of tons of carbon from the atmosphere. And why should they? Trust in the voluntary carbon market is low, incentives structures such that insetters might push the envelope, and CDR tech is new. For insetting to scale, credible, auditable, third-party MRV is a requirement. Unfortunately, I don’t think we’re super close to that yet, meaning that the first really credible insetting projects are likely to be issued on metered solutions like DAC where MRV is straightforward.
High interest rates: Nearly all climate work is in the realm of atoms, not bits, and consequently costs lots of money, and usually, a lot of it up front. The FED handing out ~5.0% means that it’s way harder to deliver returns than it was a year ago when the interest rate was at 0.33%. When interest rates next fall, we’ll likely see more investment here as the ROI math gets easier.
Not core to operations: Companies might well resist the idea of building a carbon department with expertise outside of their core skillset. So, scaling up insetting in most cases means calling a guy who can convert on the opportunity for you. There aren’t that many guys right now, and they might not be ready for you if you do call. The good news: with each passing day, there are more guys (and gals, obviously).
No fear of missing out: For a large corporate entity with product market fit, it seems obvious that they’re not dying to add complexity to chase a perhaps risky prospective opportunity. Until their competitors do it, they may not move.
Unclear how to price and sell credits once you have them: Now, if you’re a company with a huge carbon footprint, and you’re going to use all your insetting credits to offset your own emissions, then great, credible MRV gets you to where you need to go. However, if you can produce more tons of carbon removals than you emit, then you have to sell those tons somewhere. While early days in this market will surely take place as bilateral forward contracts, true scale will require fully liquid trading markets (like those all commodities have).
If you look at the list above, I would say we’re making substantive progress on three, or maybe four, of five (interest rates 😔 ). With incentives piling up, and action becoming easier, I think that we’re close (6-18 months) to a turning point, where companies begin to compete on the value of the carbon in their carbonshed. And, if carbonsheds start generating assets, not liabilities, then suddenly the incentives we’ve been focused on don’t make any sense, and everything has to change. It’s for this reason that I think the next phase of the carbon market will be characterized not by corporate sustainability desks buying ever more offsets, but instead by corporations producing more insets.
What does this mean for the carbon market and for CDR companies?
I don’t have a lot of evidence to back this up, but here are some predictions of what an insetting revolution would look like (I believe we’re three to five years away):
Carbon as a service: Climate companies will naturally reorient away from operations and towards X-as-a-service. The path of a climate startup looks to become 1) nail product-market fit, 2) establish methods for reliable MRV, and 3) prove commercial viability, 4) become a X-as-a-service company for the largest companies in the world.
New top scores for heavy industry: As climate tech companies being to move from production to enablement, the list of high scores on cdr.fyi will feature the world’s largest companies in heavy industry. DAC from industrial heat and power (via Noya) trucking (via Remora) and construction (via CarbonCure), OAE from shipping (via Running Tide), ERW from aggregate and fertilizer companies (via UNDO - disclaimer, I work here and you should too).
Declining PR values and more regulatory dependence: The halo so critical in standing up the CDR market will fade as more companies participate and the prestige of the cutting edge fades. If this proves to be the case, the regulatory market (not aspirational PR) will hold more sway in both pricing and demand, and MRV.
Regulatory MRV: If big companies are going to do it, and the PR benefit declines, then the government is going to get involved, and instead of providing companies with the stamp of approval of their choice, MRV will be tasked with hitting a regulatory standard.
So what happens now?
For a little while, probably not much. But in boardrooms across the world the question will start to creep in: “Can’t we do better than sending our money to someone pumping CO₂ into the ground in a place we’ve never been?” And once that happens, it won’t be long before the insetters are at the gates, ready to turn carbon into an asset. Prepare your carbonsheds.