The first carbon offset dates back almost 35 years. The first companies and products to use carbon offsets to render themselves carbon or climate neutral date back some 25 years. Today, a still expanding industry exists to promote the idea of individuals and organizations easily becoming climate neutral by automatically calculating and offsetting their carbon footprint. Swipe your credit card, your purchase is offset at no apparent cost to you. Check a box, spend a few cents, and get climate neutral deliveries. And coming soon to a supplier near you, climate neutral oil and climate neutral natural gas.
Most of the climate neutrality industry is premised on the availability of very low-cost offsets that can be bundled into product offerings at very little, or even zero, incremental cost to the end-consumer. A model that works at $2-3 dollars per ton, however, probably doesn’t at higher prices. A $30 offset would add 30 cents to the cost of a gallon of gasoline, posing a very different communications challenge compared to simply reducing your profit margin to account for the $2 cost of a cheap offset.
It’s worth noting that a lot of the offsets being used in this way today probably aren’t worth the climate change mitigation paper they’re printed on, but that's not today’s topic.
Today’s topic is that carbon markets are changing in ways that could quickly lead to the collapse of the climate neutrality industry.
The first thing that changed, after the Intergovernmental Panel on Climate Change announced that the world would have to reach net zero greenhouse gas emissions by 2050 to avoid triggering potentially catastrophic climate change, was that net zero became the new buzzword for corporate climate commitments. Hundreds of companies have adopted net zero commitments, and the only way they will be able to live up to those commitments is by purchasing billions of tons of carbon offsets.
Billions of tons of carbon offsets being bought and sold every year would represent a 10-100 fold increase in market size, leading many observers to assume that carbon offset price will rise dramatically. Don’t be surprised if you start getting cold calls urging you to put your retirement savings into carbon offsets to make a killing. The last time you might have received such a call was around 2008, when there was another “buy low-sell high” market mania around carbon offsets. Just before, coincidentally, offset markets collapsed.
But something else is happening that could entirely change how carbon offset markets work, and that is what’s called carbon offset tokenization. Tokenizing carbon offsets is intended to effectively turn offsets into a cryptocurrency that anyone can buy and sell. That makes several things much easier, including speculating on future carbon offset prices.
Let’s look at one of the new players in this space, Klima DAO. DAO stands for Distributed Autonomous Organization, in effect a virtual organization governed collectively by all its members. Through Klima DAO, thousands of individuals have come together to make a lot of money while saving the planet. How? With carbon offsets. Here’s the basic idea:
- Klima DAO members start purchasing all the carbon offsets they can find, tokenizing them along the way, and rapidly driving prices to more than $100/ton. Klima DAO members are being told they can make huge profits by simply buying and holding tokenized carbon offsets.
- By driving up carbon offset prices, Klima DAO expects that big companies with net zero emissions commitments will choose to reduce their own emissions, no matter the cost, instead of buying carbon offsets. In effect, Klima DAO is suggesting that high offset prices can also dramatically accelerate global progress towards net zero.
There are huge questions associated with whether Klima DAO will make people rich or actually have any impact on climate change. Carbon offsets are not a conventional commodity. The potential volume of low quality and even counterfeit offsets is virtually infinite, so it’s not at all clear that anyone can “corner” the offset market in order to radically increase carbon offset prices. But that’s not today’s topic either.
What’s clear, however, is that initiatives like Klima DAO pose a potentially existential threat to the climate neutrality industry. The industry might not survive $20 offsets, much less $100-200 offsets.
So where does climate neutrality go? I see several options.
First, the industry could simply take advantage of the nearly infinite supply of low quality and counterfeit offsets to keep costs low, albeit at substantial brand risk.
Second, the industry could switch from promising climate neutral products and services to promising climate friendlier products and services. A 20% footprint reduction, for example, as opposed to climate neutrality. Obviously a weaker pitch, but a plausible one.
Third, the industry could embrace the idea of “carbon contribution claims.” Instead of saying, “we are delivering a climate neutral service through carbon offsets,” for example, the claim becomes, “in coordination with our service we have contributed to a climate friendly project or initiative.” Again, a weaker pitch to be sure, but a plausible one.
Fourth, the industry could find some other way or ways to deliver climate-related value in connection with their product or service. Such as providing real-time and granular advice on how individual customers could have the biggest impact on climate change through their choices and activities. Again, a very different pitch and business model, but one that might have a much greater impact on climate change than peddling climate neutrality with low-cost and low-quality offsets.
One way or another, however, the ground is shifting when it comes to climate neutral products and services. We may not have seen a sinkhole open up under the industry just yet, but it’s clearly a growing risk.
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