Pre-Internet Innovation Theory Meets Carbon Offsetting – #4a
Disrupting the Voluntary Carbon Markets
The Innovator’s Dilemma was written just prior to the internet. The timing gives it a unique perspective – it’s exclusively focused on hardware. Specifically, it describes how new hardware can disrupt a market. For modern climatetech startups, especially those building carbon removal (CDR) hardware, the insights are incredibly relevant.
Following observations from The Innovator’s Dilemma, we’ll explore the disruptive potential of high-quality CDR.
By leveraging success in the voluntary carbon market, high-quality offsets, including many types of CDR, will be able to break into larger, regulated carbon markets.
Voluntary corporate actions, such as setting science-based net-zero targets and CDR credit purchases, provide evidence that science-based net-negative targets will emerge, leading to dedicated CDR markets, voluntary or regulated, that intensify global decarbonization efforts.
This post illuminates a pathway to success for carbon offsets, CDR and, by extension, clarifies their role in mitigating climate change1. This is post #4a. Post #4b will use hypotheses and conclusions derived here to create a transparent framework to quantitatively compare carbon offsets with the goal of providing actionable information to offset buyers. Know someone who’s Anticarbon and building CDR hardware?
Intro to The Innovator’s Dilemma
The basic principle introduced in The Innovator’s Dilemma is the ability of emergent technology to disrupt established incumbents (Figure 1). The figure below briefly explains how this occurs. Innovation (research, discovery, and development, deployment) improves technology performance over time. Technology tends to improve at a pace that exceeds the demands from the market. New technology that cannot compete in an incumbent market can still succeed by leveraging a beachhead market. As the new tech develops, it eventually catches up to market performance demands and begins competing in the larger, existing market2.
Another observation from The Innovator’s Dilemma is that product performance evolves, but functionality is not strictly performance-based (Figure 2). Since market performance demand may not increase as quickly as innovation improves the technology’s performance, products start distinguishing their functionality with other metrics, such as reliability, convenience, and price.
For each level of market performance demanded, value chains grow around the technology. Tech providers have 3 options: 1) Product performance can stagnate and its other market functionality demands can be improved. 2) Technology innovation can move the product upmarket to access customers with stricter performance demands. 3) The product’s performance can redefine functionality and enter/create a new type of market that’s inaccessible to former competitors.
Redefining Carbon Offset Performance
A major problem (in hindsight) with the voluntary carbon market is that it was originally intended to spread the cost of reducing emissions, reducing the burden on individual entities, theoretically improving the economic tolerability. This implies the market’s chosen performance metric was price3. Price is an important measure of functionality in a healthy market, but not a physical performance metric4. Efforts to refactor carbon offset marketplaces may improve convenience and reliability, but they largely seem to fail to improve the underlying asset’s physical performance.
Carbon offsets must be measured by some performance metric, other than a [voluntary] donation receipt. Bodies that certify offsets tend to use additionality and efficacy as performance gauges. Unfortunately, these standards tend to employ Yes/No, checkbox exercises relegating them as qualitative measures of quality. Therein lies the answer: Carbon offset performance needs a quantitative metric by which to define Quality.
The underlying goal of carbon offsets is to deliver unquestionable climate change mitigation. Real, tangible climate impact means you directly prevent greenhouse gas emissions that otherwise exacerbate radiative forcing and global warming. That’s the bar against which carbon offsets must be compared. That sets the upper bound where Quality = 100%. For physical, institutional, and economic reasons, it follows that all forms of carbon offsetting have less climate impact – Quality < 100%.
***The next Anticarbon post will establish a general framework (version 1.0) for quantitatively comparing carbon offsets by quality. Subscribe if you’re interested in fixing the carbon offset market.***
High-Quality Offsets Can “Disrupt” Decarbonization
Putting this in context with The Innovator’s Dilemma, carbon offsets can leverage the voluntary carbon markets to improve Quality enough to be accepted into regulated carbon markets (Figure 3). High-quality offsets provide the only clear pathway to bridging the voluntary and regulated, compliance carbon markets. In other words, massive (gigaton-scale) market opportunities only exist for high-quality carbon offsets. Carbon removal technologies tend to be well-positioned to disrupt carbon offset markets because they offer credits with improved Quality.
Expanding The Innovator’s Dilemma’s market disruption concept further, high-quality CDR’s performance will allow it to move upmarket. Seismic shifts in offset market sentiment have been instigated by the Paris Agreement, the IPCC 1.5°C Report, the Science-Based Targets Initiative, and general awareness around the global “net-zero by 2050” target. Today’s growing emphasis on offset quality is already redefining offset market performance demand (Figure 4). High-quality CDR is supply-limited and largely bypassing the [Tier 1] traditional voluntary carbon market (where price instead of quality is the apparent performance metric). This redefined performance metric is the foundation for the [Tier 2] high-quality offsetting markets which includes the Frontier AMC, NextGen, First Movers, and net-zero SBTi members.
If you’ll allow some extrapolation… it’s possible/likely the high-quality offset market will bifurcate over the coming years. The highest-quality offsets (most comparable to direct decarbonization, where quality approaches 100%) will move upmarket once again, and be allowed to compete in some [Tier 3] regulated carbon reduction markets5. Some less-comparable, though still sufficiently efficacious, offsets will still exist in the [Tier 2] voluntary high-quality offset market. Sub-par offsets will die off or pivot when the [Tier 1] traditional voluntary market shifts focus (likely to a hard-to-measure SDG, such as biodiversity preservation).
CDR Redefines Market Demand to Ensure Complete Decarbonization
There will come a day when high-quality carbon offsets compete with hard-to-abate sector decarbonization technologies6. As hard-to-abate decarbonization technologies improve, their Quality will generally exceed that of high-quality offsets. While offsets may be more convenient or less expensive, implementing decarbonation technology fundamentally offers greater climate benefits. If the fundamental goal of carbon offsets is to mitigate climate change, they must not prevent decarbonization efforts.
This brings us to the [final] stage of carbon offset markets where high-quality CDR enables market demand for climate change mitigation functionality to be redefined (Figure 4). A new [Tier 4] voluntary or regulated carbon removal market emerges. Much as voluntary corporate demand is establishing the [Tier 2] high-quality offsetting market because of science-based net-zero targets, [Tier 4] high-quality CDR offset demand will emerge because of science-based net-negative targets. Moving CDR offsets out of net-zero frameworks and into dedicated markets will further intensify global decarbonization efforts and start reducing cumulative emissions. Microsoft’s efforts to achieve historical carbon neutrality provided the first evidence for a Tier 4 market. The Frontier AMC may also land in Tier 4 if credits are retired toward historical or cumulative emissions, and not toward offsetting annual emissions.
In summary: This post explores Quality as the critical performance metric in the carbon offset market. CDR is already disrupting the voluntary carbon offset market. Refocusing carbon offset demand on quality will allow offsets to function properly and scale effectively. Eventually, dedicated CDR markets will emerge to deliver net-negative emissions and ensure continued decarbonization technology proliferation.
Next time, bring your calculators! Anticarbon is delivering a quantitative carbon offset quality comparison framework, currently dubbed C-FADE. Tune in to fade out carbon!
Some conclusions made herein may be unsurprising to those familiar with CDR and the carbon offset market. I’ve attempted to dispel confirmation bias, but please let me know if you stumble across anything.
More specifically, the emergent tech tends to offer an advantage the incumbent tech cannot which enables success in the beachhead market.
The Innovator’s Dilemma does something no one in CDR (or broader carbon offsetting market) would dare to do: it never uses price as the chosen performance metric. The rationale is largely based on the theory that innovative companies fail to disrupt because they chase margins and revenues higher, so rarely step into lower-margin opportunities. If costs are reduced, margins will grow, but entering a lower-margin market doesn’t achieve incumbents’ goals. For good reason too: innovating on price creates a race to the bottom on margins, or race to the bottom on performance – which one do you think suffers?
Determining a carbon offsetting metric that is most important to voluntary carbon market demand is non-trivial; price seems like the clear choice since there are dozens of ways to create carbon offsets and the buyer’s delivered product is essentially a [voluntary] donation receipt. Even in the more nascent carbon removal industry, cost reductions seem to be everyone’s number one priority. Billions of dollars are now allocated to carbon removal; advanced market commitments are designed to remove the barriers to scale-up and cost-downs. Costs matter. However, attempts to become cost-competitive with traditional carbon reduction offsets seems to be the wrong approach.
I’ve long held that once cost-effective supply of high-quality carbon removal is sufficient to achieve net-zero emissions, CDR will become a public utility, setting regional/global carbon prices, continuing to get cheaper over time.
However, until carbon offset quality improves (and approaches a “100% Quality score”), they are a distraction from real climate action. When carbon offset quality improves, they will become an effective pathway to mitigating climate change – not before.