In order to reach net-zero by 2050 we need to transition to a low-carbon economy fast.
A robust and efficient carbon market has a major role to play in enabling this transition by putting a price on carbon.
But carbon markets need information infrastructure to scale and incentivise investment to flow into climate positive activities.
BeZero is providing just that. They are a global carbon ratings agency, building the data and analytics platform to scale the market for carbon and ecosystem assets.
We are incredibly proud to join Tommy Ricketts and Sebastien Cross on their journey.
Building the Low Carbon Economy
It should be safe to assume that by now it is widely understood that in order to avoid the most catastrophic consequences of climate change, we need to limit global warming to between 1.5 and 2 C above pre-industrial averages¹. This is only achievable through drastic decarbonisation by transitioning to a low-carbon economy; an economy that causes low levels of greenhouse gas emissions compared to today’s carbon-intensive economy. Net-zero is achievable in a low-carbon economy (rather than no-carbon), through the use of carbon removal technologies and nature-based solutions, which remove excess carbon dioxide from the atmosphere and eliminate any overshoot in emissions to limit long-term warming².
The billion dollar question then of course is how do we get there, as fast as possible? How do we incentivise corporations to invest in low-carbon technologies, individuals to change their behaviour, scientists to invent and entrepreneurs to build and scale the technologies that we need in order to decarbonise our economies? While stakeholder pressure is invaluable, it requires more than relying on individuals to do the right thing. In a market-based economy, the single most effective tool in our toolbox is a pricing mechanism. We need to price carbon effectively. Thereby we can capture the external cost of emitting carbon via liabilities and assign a positive value to assets that remove carbon.
Through a combination of stakeholder pressure to adopt net-zero targets, effective regulation and the threat of further regulatory action, companies have already started to adopt internal carbon prices. This has catalysed the transition to a low-carbon economy as companies are incentivised to decarbonise their operations, for example by investing in an EV fleet or switching to renewable energy, as long as the marginal cost of doing so is below the price of carbon. For the remainder, allowances can be purchased. However, only a fraction of global greenhouse gas emissions are covered by established, compliance pricing mechanisms, such as the EU Emissions Trading System and California’s Cap-And-Trade Program³. To cover the remainder of the world’s emissions and strengthen existing pricing mechanisms, we need to scale the Voluntary Carbon Market (VCM).
Scaling the Voluntary Carbon Market
In the VCM companies voluntarily purchase credits to offset the emissions that they either cannot eliminate (as the technology might not be available yet) or that are too costly to eliminate. These credits are certificates issued to entities that remove or avoid emissions elsewhere, have been independently verified, and are sold in the market. The VCM has a major role to play in enabling the transition to net zero. By assigning a positive value to carbon removal and avoidance, it funnels private capital towards climate-projects that would not otherwise be feasible and supports investment into innovative carbon removal technologies by creating revenue streams for them.
Demand for carbon credits has increased significantly in recent years and we expect this growth to accelerate as we approach 2050. According to McKinsey estimates, relative to 2020 levels demand could increase 15x or more by 2030 and 100x or more by 2050, towards 7-13 gigatonnes per year. To put this number into context, we currently emit ~52 gigatonnes of CO2 per year. This will create a new market worth more than $50 billion over the next decade⁴. This market will be a key building block of the low-carbon economy.
However, the VCM currently lacks transparency and data availability. Both are necessary for the market to reach its potential. Information needs to be accessible to allow market participants to allocate and manage risk, and enable capital to flow into new technologies and the environment to deliver climate action. In order to scale, carbon markets need information rails that provide risk management and analytical tools.
This is why we invested in BeZero Carbon.
BeZero Carbon is a global carbon ratings agency, building the world’s leading data and analytics platform to scale the Voluntary Carbon Market. They provide ratings and risk analytics based on a probabilistic framework that fuses financial, scientific, and policy-based analysis. BeZero is fully independent and their ratings are 100% transparent. BeZero are creating a universal language of risk that will help carbon markets to scale and investment to flow into climate positive activities. As of April 2022, they have provided more than 230 (and growing) ratings data points, across all sectors and major accreditors, representing more than 50% of all current credits outstanding globally. With the BeZero Carbon Rating and associated tools, market participants can assess the likelihood that a given credit achieves a tonne of CO2e avoided or removed. This gives them a risk reference point for more than one in every two credits circulating in the VCM. Full details on ratings are available here.
BeZero is led by Tommy Ricketts and Sebastien Cross, two inspiring yet humble entrepreneurs that bring financial market rigour and deep research expertise to the VCM. They share our conviction on the importance of carbon markets to reach net-zero and we couldn’t be more aligned on the vision to get there. Tommy and Seb have wasted no time in hiring a world-class team to support them, including peer reviewed academics and published researchers, as well as leaders from the credit ratings industry, exchanges, private equity, research institutes and government. We could not imagine a more skillful team to deliver on their mission. We are joined on our journey by top climate tech and fintech investors – Molten Ventures, Norrsken VC, Illuminate Financial and Contrarian Ventures.
At Extantia we aspire to invest in Gigacorns, meaning companies that have the potential to reach unicorn status whilst enabling emission reductions of a gigatonne of CO2 per year. We find that in general it is harder for software companies to pass the latter threshold, which is why we predominantly invest in deep tech innovations. However, we have strong conviction that an efficient carbon market is essential to decarbonise our economies and that BeZero has a critical role to play in scaling this market. We think it is worthwhile to quantify the impact that we believe BeZero can have.
The status quo in the carbon market is that each one tonne credit achieves one tonne of CO2e avoided or removed. However, this is rarely the case. A reforestation removal credit could in fact be low quality if the project is at risk of over-crediting due to unrealistic baseline assumptions and low additionality (i.e. if reforestation in one area leads to deforestation in an adjacent area). Such a project would receive a rating that indicates a low probability that one tonne of credit equals one tonne of CO2e removed. Likewise a carbon avoidance credit that protects grassland from conversion to cultivated cropland may carry a high likelihood of achieving one tonne of CO2e avoidance for every carbon credit issued due to strong additionality, conservative baseline assumptions and low leakage risks. Market participants lack the tools to gain these insights and are thus purchasing suboptimal offset portfolios or not participating at all.
Based on current ratings distributions we estimate that buyers of offsets are currently under-purchasing offsets at a rate as high as ~48%. Increased data availability and transparency will drive a flight to higher-quality projects, incentivising developers to allocate fresh capital to the development of high quality projects, and cause holders of lower-quality credits to prop up their portfolios with additional purchases (i.e. two tonnes of an offset for every tonne of actual emissions) in order to ensure that they are truly offsetting their emissions. If we attribute just 30% of this change in market dynamics to BeZero, we believe the impact could be anywhere between 0.47 and 2 gigatonnes at scale, depending on the overall size of the market by 2050. We also believe that the information rails that BeZero are building are critical to creating trust and enabling the VCM to reach the higher ends of growth assumptions. We therefore believe that BeZero is a significant enabling technology on our path to net-zero. This, together with the world-class team and their product vision, is why we invested in BeZero.
If you would like to hear more about BeZero’s mission to scale carbon markets, we invite you to read Tommy’s excellent post here.