Tracking Carbon Emissions: The Next Billion Dollar Industry

As the world increasingly feels the impact of the global climate crisis, the only path forward is clear: there needs to be a significant reduction of emissions.

From late 2019 to September 2020, the number of net-zero emissions commitments from governments and businesses grew exponentially.

In fact, regions with net-zero targets have a combined carbon footprint of over 6.5 gigatons of emissions per year, while companies with net-zero goals have a combined revenue of over $11.4 trillion.

The challenge at hand

One of the biggest challenges these governments and businesses face? Tracking emissions.

Historically, tracking emissions has been incredibly complicated, due in large part to a lack of mandatory reporting requirements and standardized metrics. In fact, most companies who measured their carbon footprints 20 to 30 years ago did so using Excel spreadsheets.

Since carbon footprint has become of the most important key performance indicators of climate impact mitigation, at least in recent history, this begs the question: why not use the best technology that we have in place, in order to tackle the climate crisis?

Dismantling the system

Let’s just be frank here: carbon accounting is going to become a critical aspect of any company. But since it has been critically lacking or missing over the past several decades, now is the time to compensate.

Many cleantech startups like Berlin-based Plan A and Planetly specialize in carbon tracking, reporting and management. Mobile applications like Klima now also allow individuals to purchase carbon offsets to eliminate their individual footprints.

That’s not to say that the brunt of the heavy lifting needs to be done by individuals: in order for meaningful climate mitigation, we need institutions to play ball, and we need systems to fundamentally change.

Systems, at the end of the day, are made up of individual people who make individual choices. In a way, systemic change and individual change are not actually mutually exclusive. Rather, they can be mutually reinforcing.

The net zero shift

Toward the end of 2019, about 500 companies worldwide targeted net-zero emissions in their long-term action plans. Amid the pandemic, this figure ballooned to over 1,500 and includes commitments from industry heavy-hitters, like Apple, BP, Ford, Walmart and FedEx.

When companies of this size and with level of influence set net-zero goals, it could mean that they are reducing their direct and indirect use of fossil fuels.

It could also mean that they're operating regularly, and offsetting their emissions by funding environmental projects like tree planting or solar installations, which remove or prevent emissions elsewhere.

The catch? There are a lot of poorly vetted offset projects that are not nearly as effective as they claim to be, and we can only really solve the climate crisis by substantially decarbonizing.

However, the shift away from fossil fuels is a decades-long process and is an incredibly nuanced conversation. Well, what does that mean then? Well, while reduction is always best, achieving net-zero today means that there must almost always be some amount of offsetting,

Data availability

Another challenge with corporate pledges is the lack of an accurate way to measure progress: companies are all over the place with regards to how they calculate their carbon footprints.

In fact, in the United States corporate sustainability reporting remains largely voluntary, with no audit requirements.

For those that do opt to track emissions, many exclude indirect emissions, also known as Scope 3 emissions, which often make up the bulk of a company's footprint. Scope 3 emissions can be as much as 70 to 90% of a company’s emissions, involving the supply chain, suppliers, logistics and external services provided by the company.

As an example, nearly all of Apple's emissions are Scope Three, coming from the company's largely China-based manufacturing centers and the use of their products, which includes charging an iPhone or browsing the internet. In another case, if a bank were to loan money to an oil company, the subsequent drilling activity would count towards the bank's Scope Three emissions.

You can see where this can make things complicated. Even if a company wants to disclose their Scope Three emissions, if their suppliers or investees don’t report emissions data, the original company can't accurately calculate their footprint either.

In North America where reporting standards are much more fluid, data availability is expected to be a major problem for carbon accounting for the next 5 to 10 years, at least.

However, in Europe, companies already face stricter standards. Currently, public companies with at least 500 employees are required to produce sustainability reports: this includes upwards of 11,600 companies!

Even more, the recently adopted Corporate Sustainability Reporting Directive will expand the number of companies that must report emissions data to about 49,000, while also requiring more detailed disclosures and the inclusion of forward-looking information, like emissions targets. Audits will be mandatory.

An emerging industry

In Europe, companies used to be able to choose whatever standards they saw fit. Now, standards should be mandated and prepared by EFRAG, the European Financial Reporting Advisory Group.

“It is going to become a standard for everyone to have to start measuring their climate risk, their carbon accounting and their ESG performance, as we are moving toward a world where there's an analysis of this environmental layer of our economy that has been missing historically,” says Lubomila Jordanova, the co-founder and CEO of Berlin-based cleantech start-up, Plan A.

Many experts agree with Jordanova's assessment, as the carbon management systems market is set to boom. Valued at $10.9 billion in 2020, this industry is projected to grow to $19.8 billion by 2026.

Plan A and Planetly are far from the only players in this space. Other emissions tracking software companies include American-based Watershed and Persefoni. As well as European-based Emitwise.

Generally, these companies work like this. First, companies enter emissions data for a number of different categories. For Planetly, these categories include building emissions, customer activities, employee activities and procurement. Users can also upload utility bills to the platform.

After the data entry stage, companies can view a breakdown of their emissions and track them over time. Certain software systems like Planetly also allow users to see how they compare to other companies in their industry and get a deep look into their Scope Three emissions.

Many applications also allow companies to set reduction targets and deadlines. Jordanova says that what sets Plan A apart is her large team of technical and scientific experts, who can help fill in the data gaps with well-informed estimates.

Companies who use services like Plan A and Planetly are expected to increase not just because of reporting requirements, but because investors, consumers and employees are demanding it. Surveys have shown that employees express a desire to stay longer in a company when the company is taking climate action, which is really important in a world where talent is scarce.

Offsets: the way forward

Plan A, Planetly and a host of other services such as Klima also give companies or individuals the opportunity to offset their emissions. Historically, this been a controversial approach due to the abundance of low-quality offsets and a difficulty verifying which offsets are truly effective.

While advocates claim that verification has improved in recent years, others are also worried that offsets give polluters permission to continue with “business as usual”, when what the world really needs is a systemic level change for deep decarbonization.

Markus Gilles founded Klima, a carbon offset application for individuals, knowing that offsets were not the proverbial silver bullet to climate change. In the short term, he sees highly vetted offset projects as key players in short-term climate change management.  

“Let’s say you and me are sitting in a boat and the boat has a hole in it,” says Gilles, to illustrate his point. “Our number one task is to seal that hole. While you are scrambling for materials and trying to seal the hole, I might as well start scooping water out. And this is not the solution, the solution is to fix the hole. But meanwhile, scooping out the water might present a difference between staying afloat or not.”

Klima launched in late 2020 and now boasts over 5,000 users, who have collectively taken out 20,000 metric tons of CO2 equivalent out of the atmosphere.

In any case, one thing is clear: reduction is the only long-term solution.

As carbon management platforms like Plan A and Planetly become universal, the eventual goal is for them to integrate with financial accounting platforms, making all of this data visible to users through a single tool.

Essentially, these services need to become a sort of data processing company. The endgame? For companies to develop an inexplicable link between financial and sustainability reporting, taken together as a singular picture of corporate impact reporting.  

In today's reality, climate risk is actually financial risk. People that don't embrace this today will have challenges in preparing themselves for the future, which would inevitably mean challenges to their bottom line.

The future will only have space for sustainable companies, so there’s no sugar-coating it: there’s no alternative to scaling fast.