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Direct Disruption: Carbon Direct is quietly leading the market rally for quality
Their move to "build a platform" has the potential to disrupt the carbon market in positive, exciting ways
Last week I wrote about the latest market intelligence on the voluntary carbon market and why the data shows that we may be repeating our past mistakes through selling poor quality emissions credits. If we do repeat those mistakes, the markets will unleash more harm than good, delaying real climate action as we waste our collective decarbonization budgets on low rigor, low quality, arguably counterproductive carbon credits.
But I also wrote about my optimism, which springs from the remarkable work being done by a small, smart and well-funded “constituency for quality.” If carbon markets are going to be a force for good, we need each carbon credit to represent real, rigorous, scientifically-sound climate impact.
Yesterday, Carbon Direct — one of the most notable members of the “constituency for quality” — made an eye-catching announcement. It’s a tad long (you can read the full announcement here), so I’ll summarize the main points:
Their mission is to bring “high quality carbon management solutions to market at scale”
From their success to date, they learned: “(1) demand for carbon management is accelerating far faster than markets anticipated, and will continue to do so, and (2) the services requested by our clients, and the proprietary tools and methodologies Carbon Direct is developing to address them, will soon be required by countless other companies going through their own decarbonization journeys”
So they are adding two software (product and engineering) leaders to the team to “lead the development of our platform”
Carbon Direct has been instrumental in major corporate RFPs, like Microsoft’s and Shopify’s. One of the roles they have played is determining what constitutes a ‘real carbon removal credit’. They have taken the high ground when it comes to quality, which is a big competitive advantage. Carbon Direct’s announcement tells us they have built some powerful tools and frameworks, and they are ready to productize them to scale more efficiently. On the face of it, this is good news for the climate, but it’s not what I’m most interested in.
What sparked my imagination is how disruptive this could be to the rapidly evolving carbon market ecosystem. And if I’m wrong and that’s not what’s going on, someone else will likely come along and execute on the plan I’m imagining here.
Potential disruption #1: carbon registries
Today, the quality carbon cops are the carbon registries (e.g., Verra, ACR, Gold Standard, Climate Action Reserve). Carbon Direct has shown that there is appetite among large corporate buyers for a new, radically redefined definition of “quality carbon.”
Question for readers: What if the stamp of approval from Carbon Direct becomes more valuable than Verra’s, ACR’s, or Gold Standard’s? Has it already?
Potential disruption #2: carbon marketplaces
There are a slew of players trying to build large carbon transaction platforms. The goal is to standardize the product, attract massive liquidity, and charge a small toll on every transaction (e.g., Air Carbon Exchange, the Chicago Mercantile Exchange, Xpansiv, just to name a few).
With their growing list of large corporate buyers, Carbon Direct will swing more and more demand. The difficulty with establishing any two-sided marketplace is balancing supply and demand. But where there is significant demand, the supply tends to follow.
It’s interesting to note that Carbon Direct’s new hires are from Booking.com, a company focused on travel, particularly boutique hotels. Boutique hotels require careful merchandising to communicate their uniqueness, which feels a lot like a carbon offset. Each carbon project is defined by its unique science and story, and it should be merchandised accordingly.
Question for readers: Is Carbon Direct trying to become the NYSE or Booking.com of carbon?
Potential disruption #3: broker-dealers
Today, broker-dealers (e.g., South Pole, Natural Capital Partners, 3 Degrees) advise corporates on their carbon management solutions and often sell them the offsets to meet their climate targets. These brokers-dealers occupy a tenuous middle ground because they typically construct portfolios of offsets that are a mix of high-quality, charismatic offsets and low-price offsets. The high quality offsets are featured in the ESG report, but the low-price offsets keep the weighted average cost per credit low.
The broker-dealers themselves seem skeptical of the work they do. I am still puzzled that the CEO of South Pole, who sold $600K worth of carbon offsets to TotalEnergies so they could build a “carbon neutral tanker of LNG”, said of the transaction: “‘It’s such obvious nonsense,’ says Renat Heuberger, co-founder of South Pole. ‘Even my 9-year-old daughter will understand that’s not the case. You’re burning fossil fuels and creating CO₂ emissions.’”
Question for readers: Will today’s broker-dealers be displaced by an easy-to-use Carbon Direct transaction platform that only sells unambiguously high-quality carbon offsets?
Potential disruption #4: the Taskforce on Scaling Voluntary Carbon Markets (TSVCM)
(Personal note: I find this one the most interesting.)
The TSVCM, sponsored by Mark Carney and Bill Winters, has been a who’s who of corporates, NGO’s, and carbon players. It focused on being a big tent effort, welcoming any and all to participate in the consultation period (which is a respectable approach!).
In building a big tent, many (often conflicting) voices made tangible progress difficult and slow. As a result, they kicked the can down the road on defining their “Core Carbon Principles” (i.e. what counts as quality carbon). While the TSVCM has publicly and transparently conducted their effort, Carbon Direct quietly assembled a world-class scientific team, took a science-based stand on what makes quality carbon, and built a portfolio of the most compelling corporate carbon customers.
Question for readers: Will Carbon Direct’s first-mover advantage and tech platform make the TSVCM’s governance irrelevant?
I’m reading a fair amount into an admittedly sparse announcement from one company, and as you can see I have more questions than answers. So forgive my conjecture, but I’m excited to see the emergence of companies with a plan to build tech platforms to scale quality carbon solutions. Carbon Direct has been doing some of the most interesting work in carbon for a while, and they seem utterly focused on one thing: high quality, unassailable climate action. Now they’re investing for scale.
Quality at scale is the only North Star goal that will let carbon markets live up to their potential. Bring on the disruption.
See Bloomberg article How to Sell ‘Carbon Neutral’ Fossil Fuel That Doesn’t Exist.