Net zero by 2050. It’s a common pledge echoed by large companies around the world these days — one made by fossil fuel, manufacturing, and tech industries to cut down on their carbon emissions for the sake of our planet. But the reality for these corporations is that they aren’t going to meet their goals without investment in the voluntary carbon market, say proponents of the space. While industries are encouraged to decarbonize to reach net-zero emissions, many opt to purchase carbon credits, where every offset purchased is equivalent to one ton of carbon dioxide sequestered and registered onto a publicly available platform.

The early days of the voluntary carbon market are what allowed Google to claim to be the first company to achieve carbon neutrality in 2007, by paying to offset as much CO2 as it measured in emissions. But the market has seen a flood of new entrants — companies that are prospective buyers of carbon credits, pressured by global calls to commit to climate action.

These buyers are scrambling over a constrained supply of credits. It’s an emergent space that could hit $3 trillion dollars traded by 2037 within a $50 billion market opportunity. From the fintech needed to start locking up carbon to the software tracking project lifecycles, these are a few of the Vancouver players in the global voluntary carbon market.

From carbon offsets to carbon credits

Carbon offsets are perhaps one of the earliest iterations of the voluntary carbon market.

Here, clients first measure their carbon emissions, and then try to lower them as much as possible. The emissions that cannot be reduced are then offset by investments into emission-reductions projects elsewhere, such as in the operations of cleantech companies.

One of Vancouver’s early pioneers in the space is James Tansey, who co-founded the carbon offset company Offsetters (now Ostrom) in 2005. The venture is perhaps best known for turning the Vancouver Olympics carbon neutral in 2010, along with the travel and activities of subsequent Canadian Olympic teams.

“The idea was — in the absence of government action — how do we bring opportunities to consumers and businesses to take action on climate change?” said Tansey. “That market sort of petered out around 2012 to 2013. It became harder and harder to work in and was over-supplied.”

Tansey eventually stepped away from direct operations in the space to serve on the company’s board, alongside fulfilling his existing role as an associate professor at UBC’s Sauder School of Business. But in recent years, Tansey noticed more and more “net zero by 2050” commitments popping up from large enterprises.

“What net zero means is you either reduce your emissions to zero or you offset a portion of those into carbon credits,” said Tansey. “For most large, growing companies, their emissions reductions could be 10 or 15 percent over a few years, but it's pretty difficult for them to reduce core emissions [to zero]. So when you calculate the size of the carbon credit demand that's coming out of those commitments — $68 trillion of financial institutions AUM [assets under management] committed to net zero — that's a huge number.”

In 2021, seeing the gap in carbon credit supply, Tansey resigned from the board of his former company and founded Klimat X: a carbon exploration and development company. Modelled after the oil and gas sector, Klimat X first teams up with local governments as a revenue-sharing partner and takes on the exploration and development risks to find suitable carbon projects.

“We only really work in countries where we’ve got people on the ground,” said Tansey. “We're not parachuting into countries and saying, ‘Hey, we've come to Bolivia to save your rainforest!’ We work in places where we've got — in Sierra Leone [for example] — 15 years of experience on the ground in actually working in the country and doing things.”

Once a carbon project is identified, Klimat X finds buyers for the project who commit to purchasing the credits that will be produced. Tansey lists the world’s largest trading houses — Macquarie and Trafiguera, for instance — alongside corporates in mining, oil and gas, and tech as the end-buyers of their credits.

How carbon projects are developed

For Kahlil Baker, co-founder and CEO of Taking Root, it was his early experiences as a tree planter and travels throughout Latin America that set the foundations for a future career of developing carbon projects, although he didn’t necessarily know it at the time. Upon pursuing a PhD in smallholder economics at UBC, he came to understand the main drivers behind deforestation, and subsequently founded Taking Root to enable smallholder farmers to grow trees.

“Everything we do at Taking Root is geared around changing land-use dynamics so that growing trees becomes the obvious choice for people in order to improve their livelihoods,” said Will Sheldon, commercial director at the company. “The reason why trees get cut down is because it's more worthwhile to cut them down than to grow them. So how can we change that as an organization?”

Taking Root acts as a project developer in the carbon market. The company develops forestry programs with smallholder farmers, which eventually generates credits to sell in the market. The farmers receive revenues of 60 percent from the credits sold, in the form of cash payments and materials to conduct the enterprise.

“We design projects around land stewards — what they need and what their objectives are — so that the trees benefit them for the long term,” said Sheldon. “This isn't a case simply of saying, ‘Oh, let's give you some money for the trees.’ It's about making sure that their vision for a forest is something which aligns with their vision for what they want in the future.”

Financing carbon projects

For Taking Root and Klimat X, the upfront capital needed to pay farmers for their carbon projects is modelled in a similar way to a forward contract in the finance industry. An interested buyer, such as a carbon credit reseller, can approach either company with funds in exchange for future carbon credits. This enables the ventures to give money to its implementation partners.

“We will restore as much land as we get paid to restore, so we can be very confident that if we weren't paid, that land would not be restored,” said Sheldon. “This is really highly capital-intensive work, so bringing that upfront finance is critical if it's going to happen.”

A similar financing mechanism is applied by local project investment firm Vida Carbon. Co-founder and executive chairman Jamie Keech, a mining engineer, spent most of his career working in the industry ensuring compliance with environmental regulations. But he didn’t feel satisfied about his impact and quit in pursuit of a new role investing in carbon credits, drawing on the topic of his Master’s thesis from years prior. He ended up co-founding Vida Carbon with Veljko Brcic, who left a career in private equity to take on the position of CEO.

“Our role is providing the capital to create really high quality carbon-credit projects,” said Keech. “Many of the developers, I would say, don't have the financial sophistication to go out and get capital easily, or the desire or relationships to do that. We work with a lot of local developers in developing countries, and our proposition to them is, ‘Let us do the part of the work that you're not experienced doing, that we're experienced doing.’ So we provide the capital to incubate, launch, and grow carbon credit projects.”

However, in contrast to Taking Root and Klimat X, instead of a buyer completing a forward purchase of carbon credits, Vida Carbon provides the capital directly as an investor in exchange for a percentage of the carbon credits generated. It’s a mechanism known as royalties, or streaming, in Keech’s former industry of mining and natural resources.

“If you buy a royalty or a stream in a gold mine, you get a percentage of the gold that is mined,” said Keech. “In this case, we're providing the money, [so] we get a percentage of the carbon credits.”

As a result, Vida Carbon also functions as a seller of carbon credits, which could then resell to final buyers, such as Taking Root and Klimat X.

Monitoring projects

While buyers or investors may provide upfront capital for a future carbon credit, there’s still a long way to go between the planting of a tree and the carbon that is sequestered and sold as a credit to a buyer. That’s where monitoring, measurement, and evaluation come in, to assure the quality of the project.

Although carbon project developers rely on publicly available registries such as Verra or Gold Standard to track ownership of credits, monitoring of projects for long-term carbon sequestration is still a challenge. While tools exist, doing so at scale can be difficult, particularly when projects vary in size and type. Enforcement of quality — particularly in a voluntary market — can be fragmented, but buyers can be held accountable for the public stories they tell about the credits they purchase.

All three companies monitor their projects. Taking Root in particular has developed software for its on-the-ground implementation partners to track the performance of its planted trees, and ensure that carbon is being locked up.

“We use that technology and the data we gather to verify the outcomes of the project and the forests that have been grown,” said Sheldon. “So we’re automating out the reporting required to demonstrate the impact that’s taken place over time. It gives you a kind of verifiable proof of the carbon that has been sequestered.”

Tansey emphasizes that much of this monitoring at Klimat X relies on ground-based measurement, including soil and sediment sampling. It’s a labour-intensive process that includes taking hundreds of specimens of soil, and returning to the lab to process results. But monitoring technologies are evolving.

“The ground-based measurement now is being supplemented by drone measurements by satellite data,” said Tansey, who is also vice-president of carbon analytics at satellite company EarthDaily Analytics. “When you start looking at areas of 50 or 100,000 hectares, particularly from the monitoring side, it's very difficult to monitor that kind of physical area on a daily basis. Whereas a satellite with good change-detection algorithms can spot as soon as somebody builds an illegal road, for instance.”

Selling credits, supporting livelihoods

What all three companies have in common is investment in people-powered, nature-based solutions. For many developing countries, revenues from the sale of carbon credits are financing projects that have never before held value in a globalized capitalist economy.

“In terms of development outcomes, employment creation, and revenue- sharing opportunities, we work with farmers in Africa who live on less than $1 a day,” said Tansey. “We're giving them a lease for the land, and we're giving them employment, and we'll spend hundreds of millions of dollars in Sierra Leone, mostly going into creating employment and opportunities for people to get value out of the land that they own. So that's really important to us as well, because those people are also the most vulnerable to climate change.”

Although these solutions empower livelihoods, critics argue that nature-based fixes are not the most effective way to sequester carbon, given their dynamic nature. If a wildfire were to take place, for example, the carbon previously sequestered by forests or soil could be quickly reversed as emissions.

Emergent engineered solutions which promise carbon removal, such as direct air capture followed by permanent carbon storage deep underground, offer an alternative to nature-based solutions. However, the high cost of these options means that they aren’t feasible for most companies to invest in as carbon credits.

“If a lot of the biggest companies in the world — the manufacturing companies, the clothing companies, the energy companies — are forced to buy $200 credits, those companies won't exist anymore,” said Keech. “It is not economical for their business model. And at this point, we don't live in a world where we don't need oil and gas, where we don't need manufacturing, or we don't need clothing. So until the technology develops where the price of [engineered carbon removal credits] goes down, it's important that we're investing in it, but it's not a solution in itself.”

The three ventures are mission-driven — they are in the business of solving climate change. But just as much as each company is committed to investment in climate solutions, they are dedicated to delivering value to their buyers and investors.

“In the end, the reason all of us started these businesses is because we care about doing something at scale,” said Tansey. “I was talking to a colleague who runs a competitor, although we're all collaborators in many ways. And we look at the scale of the problem, and we think, ‘Yeah, financial markets can solve a lot of problems that governments have.’ [...] We're in this because it’s what we're passionate about. And I’m excited to speak to investors and followers and critics.”