Unpacking Carbon Offsets for Climate Startups and SMBs

Selling carbon offsets can be a great source of revenue for climate startups and small businesses. Unfortunately, given the complexities of voluntary and compliance markets for carbon, many struggle to understand if their efforts are a fit, how to approach the process, and what tools are necessary for success.

We sat down with Olya Irzak to discuss some key considerations for founders as they consider participating in carbon markets. Olya is the Founder and CEO of Frost Methane Labs, and has over a decade of experience in climate tech.

Are carbon offset markets a fit for your startup?

Not every climate startup or small business can play in carbon markets. To understand if your business or organization could generate offsets, start by asking yourself:

• Do you have a direct impact on the reduction or removal of emissions? Carbon offsets are generated when an entity (‘the “developer”) directly changes the trajectory of emissions against a business-as-usual scenario, either through abatement (i.e. by reducing emissions from an existing source) or removal (by taking emissions out of the atmosphere). If you don’t directly abate or remove carbon, but just enable these activities, you probably won’t qualify to generate offsets from your operations (although your customers might).
• Can you prove additionality? If you can directly impact emissions through abatement or removal, next you must prove that without participation in the carbon offset market, your project wouldn’t exist. This concept is called “additionality”, and is one of the fundamental barriers to getting certified. To make the case, you’ll need to clearly communicate how the sale of potential carbon offsets impacts your business; for example, offset sales may enable profitability where otherwise there would be none, or maybe they unlock a larger customer base by reducing upfront costs and therefore barriers to entry. Proving additionality is particularly important for companies that earn revenue from multiple streams where profitability can be achieved without offsets. Regardless, strong documentation of additionality will be key to getting verified.
• Can you prove permanence? If your actions are reversible by someone, can you prove that the emissions you reduce will not get re-released later? This is a trivial issue when you can destroy a gas such as Methane, Nitrous Oxide and/or HFCs, but much more complicated when your project has a risk of eventual destruction or consumption - such as a tree or carbon soil storage. Through 100 year contracts or otherwise, can you guarantee that the GHGs impact you show now isn’t reversible?
• Is there risk of leakage? Is there a chance that as a result of your project the emissions get pushed somewhere else in equivalent amounts? If so, how can you safeguard against it?
• Could you net better results elsewhere? There are plenty of other environmental markets with similar credit structures, if you find that carbon markets aren’t the right fit for you. For example, in addition to the California cap-and-trade, the state also has the Low Carbon Fuel Standard (LCFS). If you qualify for that (or another such program), it could be a better option for your startup. It’s well worth your time to examine many different environmental credit products in the market. As you look, keep in mind that the programs available to you may vary by country, state, or jurisdiction.

It ain’t easy

Participating in offset markets takes a lot of effort, and entrepreneurs should do their homework before starting down this path.

First and foremost, to be able to sell offsets in either voluntary or compliance markets, you need to go through a verification process with a registry like Gold Standard, Verra, the ACR, or Climate Action Reserve. This is generally done with either (a) an established methodology for your business model or (b) by creating a new methodology to evaluate the impact, additionality, and permanence of your offsets. If an existing methodology exists that your business can align to, the verification process can be relatively quick (as little as 1-2 months). If you need to modify an existing methodology, you should expect the process to take 12-18 months. However, if there isn’t an existing methodology that’s a fit, and a new one needs to be created from scratch, you should expect 2+ years before you’ll see any offset revenue.

Even in voluntary markets, the generation of measurable offsets almost always involves complex compliance with local, state, and federal regulations. This can include getting permits, navigating zoning, reporting and operating requirements, etc. Be prepared for delays here, and also additional costs from sourcing consultants and advisors to help you navigate these challenges.

Writing a new methodology

What do you do if there isn’t a verification methodology in place for the offsets you want to generate? First, recognize that the whole process will take a while – it can be a lot of work proving additionality, permanence, and all the other criteria involved. Some tactics that can make your process smoother:

• Find an independent third party to support your claims. Validation from an independent, ideally academic, source can go a long way in establishing baseline emissions, the impact of your solution, and the overall quality of the offsets that you plan to generate. For some registries, multiple third party verifiers/validators are required.
• Find a partner who’s written one before. Offset methodologies are complex documents that need to fit very specific parameters to be accepted by certifiers like Gold Standard or Verra. If you don’t have experience drafting one, hire someone who does. It will make the process go 1000x smoother.
• Don’t reinvent the wheel. You can build your new methodology off previously adopted ones, and make the relevant changes needed to apply it to your specific climate impact. Using existing methodologies from related areas can also be an opportunity to learn more about your competitors, how they’re thinking about their impact, and where they may be cutting corners.
• Think about gaming the competition. As you develop your methodology, think about how it might be abused by bad actors. Does your baseline analysis allow others to overcount their emissions reductions? Can others apply your methodology in unintended ways? Is the methodology drafted in such a way as to avoid misuse.

In the meantime, you still want your startup to be collecting revenue in some other way. There are some markets, companies, and platforms that are willing to buy offsets that the buyer verifies by themselves (removal and abatement).

Costs

The cost of getting your project listed on a registry will vary, but it’s usually more straightforward if there’s already a pre-defined methodology. With that already in place, the extra costs will usually be related to verification (which you’ll have some control over).

The process begins with finding a third party verifier to assess your project between 6-24 months after registration and installation. Keep in mind that many factors can drive pricing for effective verification: project type, complexity, geographic distribution, timing, travel costs, etc. For example, a project with a single/centralized location of impact will be more straightforward and therefore cheaper, but a more distributed project may require greater labor and cost to verify.

Make sure the costs of verification are sensible. If your project stands to earn $100K in offsets, it would make sense for your validation to cost around $5k. If your verification is costing you more than your project stands to earn, your methodology is likely not the best fit for the project and may need adjustment.

If you need to develop a new methodology, you should expect that it will cost you between $150k-$200k – this includes registry fees, hiring third party validators, etc. And don’t forget, you also need to prove to the target registry that your project is worth the methodology you define– as in, there will be enough similar projects developed over time to justify the registry’s efforts.

Olya Irzak is the founder and CEO of Frost Methane Labs, a project to detect, characterize and mitigate concentrated methane releases from coal mines and natural sources such as arctic permafrost thaw. She is also Instigator and Co-Founder of Diamond List and Board Member of Terraformation Inc. Olya previously worked for Zola Electric, Google, and Microsoft. She holds a Bachelor’s degree in Computer Science and Optimization from University of Waterloo and a Master’s in Computer Science from University of Toronto.