Peter Olivier, April 2023

(disclosure, I’m the Head of New Markets at UNDO)

For more of my writing, check out my blog here

“In a world…”

For the sake of argument: Let’s imagine a world where carbon is bad, and the more of it you emit, the more you’re responsible for climate change. Public opinion and policy organize to establish corporate liability for operating in carbon intensive industries, pushing companies to reduce their footprints. Given the opportunity to externalize or offset emissions in their supply chain, companies pay to do so.

Sounds like us, yeah?

Now, let’s imagine a very different world where carbon is good, and the more of it you capture, the more you fight climate change and the more money you make. Public opinion and policy organize to generate increasing benefits to capturing carbon from industrial and agricultural processes. Given the opportunity to internalize potential carbon revenue in their supply chain, companies jump at the chance to incorporate carbon, adding revenue and profit.

This also sounds like us?!?

This comparison has obvious flaws: emissions are bad and removals are good, etc. But there is an interesting kernel here, especially for corporations working in carbon intensive industries: Is the CO2 in your supply chain a liability or a potential asset? What if we thought about the carbon that touches your business flowing downhill towards your company - like a watershed, but for carbon? As a CEO, do you want to maximize your “carbonshed” or minimize it? What if, instead of thinking of carbon in terms of a cost, we thought about carbon as a reservoir that can either be disposed of or used. A cost or an opportunity.

Why insetting > offsetting in the boardroom

Offsetting is the default way of dealing with your carbonshed: You can’t deal with your emissions so you have to pay someone else to deal with them. But, offsetting isn’t ideal for the climate community. The implied cost of offsetting means any corporate climate commitment is dependent on a company’s continued financial performance. This setup makes everyone thinking about the climate rightly uncomfortable.

Offsetting isn’t amazing for corporations either. While it’s historically been relatively cheap, offsetting doesn’t produce a lot of value: you’re sending money out of the company, away from your immediate stakeholders. You get compensation back in the form of 1) progress towards your climate goals and 2) good PR. (Though in recent months, the “good PR” is looking a bit more elusive.) But what if there was a way to get good PR and hit climate goals, while also returning your money to your stakeholders?

How might insetting be more appealing to corporations than offsetting?

1. Control costs and manage risk: If you’re buying carbon removals or offsets on the open market, you don’t control the price. If I were a CFO, I would be desperate to remove that uncertainty and potential liability from our books. If I can control our company’s demand for carbon removals, that’s good. But, if I can control our company’s ability to supply carbon removals, that’s great.
2. Make money: Buying carbon removals or offsets costs money. Which means it’s never going to be something the team gets excited about. If you could take your offsetting budget, and turn it into an insetting investment fund which generates returns, that’s something the CFO, the board and the sustainability teams can all get excited about.
3. Drive value back into the supply chain: While the above — reduce cost and increase income — aren’t exactly new ideas, they’re the floor for the insetting argument. The next level up is ensuring that new opportunities created by the carbon market, that the company can’t monetize directly remain close to the business, so that immediate stakeholders benefit.
   1. Well known brands and B2C companies: Given that Bayer may not be able to directly generate all the carbon it wishes to buy on farms it owns, it would much prefer to buy carbon from farms that use Bayer products than from farms that don’t. Nike might want to buy commodity renewable energy credits (RECs), but it might prefer to finance the installation of solar panels on a partner’s factory to reduce energy consumption and grid reliance in Nike’s factory.
   2. Unknown brands and B2B companies: You might think that without pressure from end customers, unknown companies that sell B2B might be less likely to change quickly. And yet, happy downstream buyers benefit directly from climate action in the form of lower carbon intensity, and reduced scope three emissions. Tesco is currently pressuring farmers to adopt regenerative practices as part of their supplier agreements. It would be more compelling if they bought the credits that were generated.
4. Diversify product offering: For the sake of avoiding a 15,000 word blog post, lastly: companies produce goods to sell. The narrower the range of products they produce, the less resilient they can be as prices, taste, and cost of inputs fluctuate. If, say, a plywood manufacturer can produce both plywood and biochar, they can better tailor what they make to market demand and prices. We’re seeing this already with Charm’s push to produce green steel. There is an opportunity for companies that have large, physical operations, especially those with waste biomass, to produce removals in addition to their existing product line. This opportunity will grow in breadth and depth