We Need a Carbon Market to Boost Green Energy Startups

(Bloomberg Opinion) -- We are arriving at the juncture of crisis and opportunity in building our energy future. The war in Ukraine is underscoring the world's need for alternatives to oil and natural gas; scientists are telling us climate change will be worse than we had feared, and the Securities and Exchange Commission is calling for more corporate disclosure on carbon emissions. The prospect of additional legislation on climate spending is uncertain at best. To make any meaningful change, the business community needs to apply market-based solutions to an accelerating problem.

Thousands of companies have committed in the last year alone to reducing their carbon footprint by buying their electricity from renewable sources, installing solar and wind power where possible, and reducing water and resource usage. But to reach their ultimate target of net-zero emissions they often need to supplement those efforts by purchasing "carbon offsets."

Today, offsets are mostly nature-based solutions — such as planting trees or protecting forests — that correlate to carbon reduction. But there aren’t nearly enough of those to meet demand from all the companies now racing toward net zero. And based on the recent International Panel on Climate Change, the problems will be worse than previously imagined. The pace of current efforts is insufficient to address the trajectory of climate change. We have the capacity to do much more. We need to build a new carbon market that broadens the definition of offsets to accelerate innovation in green technology at the same time it helps companies decarbonize faster.

Thus far, decarbonization efforts have been powered by a collection of nonprofit, private sector, and state and federal initiatives. There is no nationally recognized price for carbon in the U.S., so non-government organizations and small environmental specialty firms have largely shouldered the burden of helping companies audit their carbon footprint, develop remediation plans and buy and track offsets.

The world heard repeatedly at last year’s United Nations Climate Change Conference, COP26, that achieving carbon neutrality and net zero will require 4 to 5 trillion dollars in annual investment  — for decades. Governments, NGOs and philanthropy aren't capable of meeting this demand for funding; they cannot raise or invest capital at the scale necessary to make meaningful change. The business community and capital markets, though, with the cooperation of governments, could accelerate the pace and scale of financing decarbonization solutions. How? By allowing investments in new, green technologies to count as credit for offsets. The change would unleash billions of dollars to flow into research and development aimed at reducing carbon in the atmosphere and creating meaningful funding for the expansion of renewable energy.

Carbon offsets aren't federally regulated, so expanding the definition — with an explicit guarantee of transparency and disclosure — seems possible. To pursue what more could be done at scale the Taskforce on Scaling Voluntary Carbon Markets was formed in 2021 to explore creating consistent, market-based solutions for the buying and selling of carbon credits.

Reimagining carbon offsets means treating them as a catalyst; not just to grow trees, but to grow new technologies in areas such as green hydrogen, carbon sequestration and batteries through funds or direct investments. Further, innovative solutions could scale up more quickly if capital for offset credits is focused on early-stage efforts — often the hardest investment to come by because profit isn't guaranteed. That investment risk would be mitigated by the value of the offset credit.

The International Energy Agency warns that half the needed reductions in carbon emissions must come from energy technologies that haven't yet reached commercial markets.

A market for this new category of offsets could catalyze tens, possibly hundreds of billions of dollars into green technology for the next 10 years. It would make the business community a true partner to governments, which could continue to focus on providing tax incentives and ensuring transparency. Such partnerships have proven critical in other historic successes, from manufacturing armaments for the Allied forces in World War II to the research, development and distribution of Covid-19 vaccines.

The market appetite is there. In the first eight months of 2021, voluntary carbon markets increased nearly 60% over 2020. But the biggest demand is yet to come. More than 450 financial firms from 45 countries representing more than $130 trillion in assets have committed to the decarbonization of the world economy. By the end of COP26, 136 countries, 115 regions and 235 cities had committed to net zero by mid-century; the United Nations tracks 5,235 businesses with similar pledges. Add it all up and these entities represent 90% of global GDP.

So carbon offsets must grow, and the market needs its own innovative solution to ensure we accelerate decarbonization with legitimate and disclosable efforts.

Broadening our understanding and definition of carbon offsets would drive dollars where they aren’t going today. Nature-based offsets once met an unfilled need, but they aren’t nearly enough. Deploying private capital to develop clean energy in exchange for offsets could be transformative. Based on a voluntarily established price of carbon, companies could calculate the annual capital contribution they need to make to close the gap between their decarbonization efforts and their climate goals. Each company would get “carbon credits” for the capital it invests to catalyze clean energy projects.

Transparency, disclosure and consistency are critical. They’re also all but assured through European Union and SEC laws and regulations. Competition for investments and attracting employees will further incentivize the marketplace to be both accountable and transformative.

The flip side of innovation is risk. Many of the experimental technologies of this energy transformation will end up being bad bets. But the flood of new capital available to startups would increase their odds of success and bring them to scale faster, potentially reducing a generation of fossil fuel dependency.

Let’s grow clean energy, not just trees.

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Anne Finucane is a former vice chair of Bank of America, where she oversaw the company’s efforts on ESG, public policy and strategy, and co-chaired its sustainable finance committee. She serves as chair of the board of Bank of America Europe.

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