How should companies and individuals fund climate action?

If you had $2 billion to spend on solving climate change, what would you do?

I spent about ~18 months working on a carbon offsetting startup. In the process, I learned a lot about the voluntary carbon market and its limitations. The experience has completely changed the way I think about the responsibility of companies and individuals in the climate crisis. The good news is this: if you're a company or individual with money to contribute, you can have a much bigger impact on climate change than the bad news about carbon markets might suggest.

Two years ago, I thought carbon offsets could play a big role in climate change mitigation. Now, I'd like to argue the following:

• The voluntary carbon market, as it exists now, is an ineffective mechanism for funding meaningful, long-term decarbonization.

• There are 10-1000x better ways for companies and individuals to spend their money on climate mitigation

To be clear: in this post I'm critiquing the voluntary carbon market as it exists now. My criticisms don't apply to a potential future market where high-quality, permanent carbon removal becomes the norm.

Problems with offsetting

You've probably heard the bad press about carbon offsets. A recent exposé found that over 90% of voluntary offsets (mostly avoided deforestation) did not have the impact they claimed. Companies like South Pole sold offsets from projects they knew to be fraudulent and/or sold more credits than they knew their projects to be worth. In less than a decade, California has literally burned through 20% of its forest carbon buffer pool, which was meant to act as insurance for 100 years.

Many of these problems stem from poor incentives. Carbon registries, which set standards and approve projects, get paid by the suppliers. The more credits they approve, the more money the registry makes, and even nonprofits want more program revenue. Furthermore, registries make it very difficult to judge the relative quality of projects: all projects receive a binary pass/fail rather than a quality rating, and the carbon accounting is buried in hundreds of pages of boilerplate documentation. There is both too little and too much governance at the same time; registries aren't policing project quality (they outsource that to environmental consultants), but impose significant delays and third-party verification overhead costs on projects¹.

Carbon registries promise that carbon credits are equivalent in the sense that they each neatly represent 1 ton of carbon dioxide equivalent emissions. By marketing carbon credits as undifferentiated commodities, buyers are incentivized to buy the cheapest possible credits to meet their carbon neutral commitments. This has somewhat changed recently, as buyers have been forced to vet their purchases more carefully due to the threat of greenwashing backlash or litigation². Suppliers aren't rewarded for quality and must remain price-competitive, so they're incentivized to cut corners at worst, and do the minimum to meet the registry standard, at best. In hindsight, this “race-to-the-bottom” caused by downward pressure on quality and prices seems inevitable.

It's important to keep in mind that junk offsets don't just accomplish nothing, they can increase emissions. If a company buys 1 offset to justify 1 ton of continued CO₂ emissions, but then that offset turns out to be worthless, emissions have counterfactually gone up by 1 ton.

Offsetting gives companies and individuals a (deceptively) easy way to help

In my view, the voluntary carbon market did accomplish one good thing: getting more companies and individuals to contribute money to climate change (mitigation). Carbon neutrality was an easy and attractive claim to make (before 2023), bringing many brands into the market who might have otherwise been bystanders. It also brought thousands of individuals onto offsetting platforms like Wren and The Commons.

I'll use the Climate Neutral label as an example of getting brands involved in climate. As of September, 2023, there were 325 brands certified under the Climate Neutral label, meaning that they had inventoried their emissions, committed to a plan of action, and purchased offsets to neutralize ongoing emissions. Most of these companies are consumer retail brands that reach a lot of people, and I think it's awesome that Climate Neutral got them to take a visible stance on climate.

The problem with the “first-generation” wave of carbon neutrality claims is that they set the bar too low. I scraped the offset purchases data from Climate Neutral and include the results below to illustrate this.

The median Climate Neutral company paid $10/ton to offset their emissions, with many companies below $5/ton (looking at you, REI and Athletic Greens).

In an FAQ that really didn't age well, Climate Neutral³ says:

“People are often surprised to learn that some carbon credits can be purchased for as little as $7 USD per metric ton… Considering the magnitude of the climate challenge and the confusion many people feel about what to do about it, it's refreshing to know that something meaningful can be done about it for so little.”

At a glance, most of the offsets purchased are REDD+ or renewable energy. I don't have the serial numbers, so I can't say whether these offsets were implicated in any scandals. But in the words of Nan Ransohoff⁴:

“We've trained ourselves to think that we can solve climate change at $2 a ton or $10 a ton. And if that were true, we would have done it by now.”

Prioritize emission reductions

I think this point is obvious, so I'll keep it short. The world needs to get to net zero, and there's no other way than for all sectors of society to stop producing emissions. Trading emissions in the form of credits and contracts can be helpful in some cases (e.g., 24/7 clean energy), but can be a distracting bookkeeping exercise for others. Companies must make credible net zero commitments and follow through on them, which is what the Science Based Targets Initiative (SBTi) was set up for.

I think we all agree that reducing emissions is priority #1, but for many companies, full decarbonization isn't possible. If your emissions are mostly Scope 3 (meaning upstream or downstream) they could simply be out of your control. Furthermore, many “hard-to-abate” industries may not have access to zero carbon technology yet. Things like green cement and sustainable aviation fuel are on their way, but not widely available yet. In a report, the IEA found that half of the world's emission reductions will come from technologies that aren't commercially available yet. Many companies may hit a practical limit on emission reductions, but still have money they want to spend on avoiding a climate catastrophe. What should they do with that money?

Is offsetting the best way to fund climate action?

Let's assume, for a moment, that voluntary carbon market's quality issues are truly solved and that each credit represents 1 ton of avoided or removed CO₂-eq emissions⁵. Is purchasing offsets really the best way to spend money on climate mitigation? Or could the ~$2B spent on offsets each year be leveraged in more impactful ways? I think so.

Catalytic climate solutions

If you had $2 billion to spend on solving climate change, what would you do? This is the question companies should be asking.

There are a vast number of ways to spend or invest the money. And if you rank-ordered them from most effective to least effective, I'd argue that the best investments have astronomically higher climate-ROI than the worst.

Here are a few options to consider:

• You could purchase 40M high-quality reforestation credits at $50/ton, causing 40M tons of CO2 to be removed from the atmosphere as the trees grow.

• You could donate $20M each to 100 nonprofits advocating for better climate policy around the world.

• You could establish climate research centers at a few universities (and get the buildings named after you). Or you could pay for the Ivy league education of ~6,200 new students going into clean tech.⁶

• You could loan the money to renewable energy developers, building about 1.3 GW of solar or wind capacity, avoiding roughly 1-2M tons of CO₂ each year, and getting your money back⁷.

• You could start an advance market commitment for carbon removal, creating an entirely new market and causing dozens of new startups to develop novel solutions for pulling CO₂ out of the air. This is what Frontier did with only $925M.

• You could invest all the money in a nuclear fusion company such as Commonwealth Fusion Systems, which has raised around $2B so far. While I can only speculate about the likelihood of fusion succeeding, the mitigation potential is obviously huge and in the 10s of gigatons of CO₂ each year.

The list could go on and on, and that's the point. There are so many creative and useful ways to make an impact, and offsets only fund a narrow band of activities where carbon can be neatly measured, verified, and attributed. It would be a mistake to limit your climate spending to just those solutions.

Many actions, like donating, investing, or voting, have such a high impact because their returns are nonlinear and hard to predict ahead of time. A nonprofit could be the reason an important public policy is enacted, and a company might grow exponentially and disrupt an entire polluting industry. In contrast, carbon offsets have a quite linear effect. You put in X$ and get Y tons of CO₂ out.

How should companies and individuals choose where to give?

If there are much better climate investments than offsets, how do you identify them?
The point of this blog is not to make my own recommendations. In general, though, I believe that funding should go to things with leverage, like policy, R&D, technology, prizes, startups, and nonprofits. In other words, things that change the trajectory of climate change, not just briefly perturb it.

As a starting point, I'd encourage you to check out Giving Green, which does a lot of research on effective climate giving and makes recommendations. As of January 2024, they're recommending The Good Food Institute, Industrious Labs, Good Energy Collective, Project Innerspace, Opportunity Green, and the Clean Air Task Force.

What is a “fair” contribution?

How much should a company pay towards mitigating climate change? At what point should we applaud their efforts? There are 3 main approaches for determining what a “fair” contribution should be:

• Ton-for-ton: For every ton you emit, fund one ton of mitigation. This is the principle behind offsetting. Unfortunately, ton-for-ton limits your contributions to solutions where the carbon accounting is easy.

• Money-for-money: Set aside a percentage of profits (or personal income) to contribute to climate change. This is how 1% for the Planet works, although they do not set many guidelines around effectiveness. Most critics of “money-for-money” point out that it doesn't penalize companies based on their pollution, which feels unfair.

• Money-for-ton: Set a carbon price (e.g $100/ton), and tax yourself that much per ton that you emit. Then contribute the money to climate mitigation. The problem here is setting the carbon price, since some companies have way higher profits per ton than others. A tech company can easily afford to pay $100/ton, while this carbon price would bankrupt an airline. The workaround is to set a different carbon price for different industries or Scope 1/2/3, but then you've effectively created a money-for-money approach with more steps⁸.

In my opinion, money-for-money is the best approach. It's simple to implement, and simple for a consumer to understand. While money-for-money does not have the “polluter-pays” principle, in practice this is taken care of by net zero commitments like SBTi, where companies have to get their own emissions as close to zero as possible. I'm not sure what percentage of profits should go to climate, but 1% would be an incredible place to start. The Fortune 500 had $2.9 trillion in profits in FY2023, so 1% of that would be $29B, or ~15X the size of the voluntary carbon market today.

A new climate label

I'd like to propose an idea that I think should exist.

There should be a new climate label for companies that are investing money (e.g 1% of their profits) into transformative climate solutions. The Science Based Targets Initiative encourages companies to contribute to “beyond value chain mitigation” (BVCM), but this is not a requirement and guidance is forthcoming. Companies who reduce their emissions in line with net zero and contribute to climate mitigation elsewhere should get extra credit, in my opinion.

This is quite similar to 1% for the Planet, but should involve more rigor in how solutions are selected. This is also not a carbon neutral label: it's about spending a meaningful amount of profits on a public good, rather than spending a paltry sum on a climate marketing expense.

Acknowledgements

Special thanks to Sebastian Quaade for his ongoing collaboration and feedback on this post.

1. I can speak from experience here. When our team submitted a new methodology for sustainable food procurement to a leading carbon registry, we were told that it could take 2-3 years to get it approved. We were also told that these kinds of wait times are typical of new methodologies. The governance process within registries is agonizingly slow, yet does not seem to produce methodologies or projects that can stand the scrutiny of time.

2. For example, Delta airlines was sued for its carbon neutrality claims.

3. Climate Neutral has changed their name to Change Climate, though the label bears the same name. I can only imagine that the backlash against indefensible neutrality claims is the reason for this

4. See The Economics of Carbon Removal on the a16z podcast, around 9 minutes.

5. Many players are working to improve quality standards and make carbon markets work as promised: the Integrity Council, ratings companies like Sylvera, tech-enabled verification platforms like Pachama.

6. The MIT Schwarzman College of Computing cost about $1B total. I'm assuming that an undergrad tuition in the US costs $80k/year with housing and other expenses included.

7. Based on this EIA article, I'm assuming that solar and wind cost roughly ~$1,500/kWh to build. Avoided emissions depend on what fossil fuel sources you're displaying, and the IEA reports estimates here. Conservatively, if you're only displacing natural gas (and not coal) you'd avoid 0.7-1.6M tCO₂ per 1 GW renewables. So avoided emissions would be around 0.8-2.1M tCO₂ per year.

8. This is a slight oversimplification. Industry-specific carbon prices (e.g., $200/ton for fintech) would create an incentive for companies to improve their profitability per ton of emissions. For example, if you are way more carbon intensive than your competitor, a larger share of your profits would be carbon-taxed, so you'd be at a disadvantage. But then again, the climate contribution model I'm describing is voluntary, so a heavy polluter might just not participate if the rules put them at a disadvantage. Also, some companies might not fit neatly into the industry definitions you choose.