How to jumpstart a market for a product that doesn’t yet exist

How to jumpstart a market for a product that doesn’t yet exist

An economic tool that brought the world life-saving vaccines could now unlock billions for carbon removal.

By Mark Harris

Let the best of Anthropocene come to you.

Almost ten years since the Paris Agreement was adopted, the world finds itself in a deep carbon hole. Even if we manage the gargantuan feat of replacing all fossil fuels with renewable energy, there’s another problem ahead.

To have any chance of not busting through 2°C of global warming, we need to remove from the atmosphere much of the carbon that we already put in. Planting trees—the current strategy to suck up excess carbon—is a good idea for many reasons, but it fails the permanency test.

In 2019, Stripe, one of the tech companies that processes your credit card payments online, took a swing at the problem. But when it went looking for ways to buy carbon dioxide removal (CDR) and long-term storage, it found the toolshed bare. There were only a handful of CDR technologies available, and none operating at scale.

Carbon removal is a classic market failure, says Leah Rosenzweig, an economics professor and director of the Market Shaping Accelerator at the University of Chicago. “You don’t get a lot of private benefit from removing carbon from the atmosphere.”

In the classic environmental market failure, we fail to force companies to pay for the societal costs of the pollution—so they continue to spew emissions. Rosenzweig is looking at the flip side of the coin. We also get a market failure when we choose not to pay companies for the societal benefits they produce. That’s why Stripe found so few companies in the carbon removal business.

Stripe eventually did manage to spend $1 million on a mix of projects including direct air capture, rock weathering, mineralization, and underground storage. But the amount of carbon they removed was minuscule, just 6,500 tons. To have a serious climate impact, that would need to increase a million-fold.

To reach across such a massive gap, Nan Ransohoff, Stripe’s Head of Climate, has a bold assist in mind. She and a small band of world-class economists (including a Nobel Prize winner) have persuaded some of the world’s biggest tech companies to place a $1 billion bet on a deceptively simple funding mechanism called an advance market commitment (AMC). Their inspiration was an AMC that had been used years before for another product that should have existed but didn’t: a vaccine for some of the world’s poorest children.

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At the turn of the millennium, pneumococcal infections (bacterial pneumonia) were killing about 1 million children a year in the developing world. Effective vaccines were available in richer countries, but no one was targeting the bacterial strains prevalent in low income nations. Sadly, there was little financial incentive to develop medicines that would be truly affordable to all.

That got husband-and-wife economists Rachel Glennerster and Michael Kremer thinking. Governments and NGOs had typically used a “supply push” approach—funding medical researchers in advance to work on new vaccines. But what if they switched to a “demand pull” mechanism instead, focused on the multinationals that were actually making and selling vaccines?

Kremer and Glennerster proposed a new financial mechanism called an advance market commitment: a legally binding promise to buy millions of vaccine doses at a low but fair price that would be paid only when shots actually went into people’s arms.

In 2007, a non-profit coalition called Gavi, led by the Gates Foundation and five countries, took up the economists’ cause. The group set up a $1.5 billion AMC that it hoped would give pharmaceutical companies the confidence to invest in research to develop and manufacture affordable pneumococcal vaccines at scale.

It worked, spectacularly. Within four years, two companies had low-cost pneumococcal vaccines on the market. In the decade since, the AMC is credited with preventing over 700,000 childhood deaths and slashing the free market price of those vaccines by 40%. Gavi deployed AMCs again in 2020, this time to encourage multiple pharmaceutical companies to each develop their own vaccines. Guaranteed payments meant that even though one company would get there first (Pfizer, as it turned out), all the successful firms would still get paid. The overall effect was that the world would have more vaccines to choose from, and many more doses to deploy.

While a world in lockdown was eager-ly awaiting those medicines, Ransohoff’s team was brainstorming concepts to take its nascent CDR efforts to the next level. “We killed a bunch of ideas, and one of the ideas that we couldn’t kill was this idea of an advance market commitment,” she says. “So I cold-emailed Michael Kremer and Rachel Glennerster.”

Were there any parallels, Ransohoff wondered, between vaccines and carbon removal tech?

How to jumpstart a market for a product that doesnt yet exist

Source: Frontier, using data and modelling from Global Carbon Project, IPCC, and CICERO.

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Kremer now had a Nobel Prize for other work in development economics, and Glennerster had taken a role with the UK government. But the economists, and Glennerster in particular, were intrigued and began workshopping the idea with Ransohoff.

In 2022, Frontier Climate was spun out as a public benefit subsidiary of Stripe, backed by nearly a billion dollars in funding from the likes of Alphabet, Meta, McKinsey, Shopify, and of course Stripe. Frontier would be the first organization to create an AMC to pay companies to permanently remove carbon from the air.

Their first hurdle was to reinvent AMCs for the much larger problem of global climate change. The world has been making vaccines for decades. What multinational pharma companies lacked was the profit motive to develop them quickly and specifically for poor people. In contrast, most carbon removal companies are tiny, scrappy start-ups, relying on technology that is barely proven. For a start, Ransohoff and Glennerster, now an advisor to Frontier, realized that companies would need to prove that their technology really worked. To that end, Frontier has made 29 up-front grants of a few hundred thousand dollars each, called pre-purchase agreements, to companies that have promising approaches. So far, so much like traditional government R&D.

If a start-up clears that hurdle, Frontier switches to an AMC, signing an off-take agreement that triggers payments only when carbon is actually removed. But unlike the pneumococcal vaccine, there isn’t one fixed price for CDR. Frontier instead tailors everything to the individual company’s needs and abilities. So Vaulted Deep, a company sequestering biosolids from sewage underground, will get $382 for every ton it can remove by 2030. Meanwhile, Lithos, a company using enhanced rock weathering to lock CO₂ into agricultural fields, will receive only $370. And a direct air capture system from Heirloom, using limestone, will earn a whopping $989 per ton when it begins operations, possibly next year.

“We’re evaluating companies on how cheap we think they can be in the future, not based on where they are today,” explains Ransohoff. If Frontier were to fund only the cheapest technologies now, that could kill off a suite of promising approaches that are expensive simply because they are not as far down the development curve. From solar panels to EVs, most technologies start off expensive and get cheaper as they scale.

A billion dollars was the smallest big number we could come up with that would send a loud demand signal to pull entrepreneurs into the carbon removal space.

Another reason to spread Frontier’s money around is that the world will need a full suite of technologies when it gets serious about drawing down gigatons of CO₂—just like the COVID-19 vaccine AMC. “We could easily spend a billion dollars on a single company,” says Ransohoff. “But our hope is that our funds can catalyze a diverse portfolio of carbon removal companies.”

So far, Frontier has signed AMC off-take agreements with five companies for nearly 500,000 tons of CDR between now and 2030. They have delivered just a few thousand tons to date, but if all hit their targets, Frontier will distribute a total of around $215 million. That’s over twice what Elon Musk has promised to pay out in 2025 to the winners of the Carbon Removal XPRIZE.

Although prizes like Musk’s can be useful, Rosenzweig believes that AMCs can be more efficient. “Prizes need to be massive because of the costs that firms need to invest to make it worth their while,” she says. Their trump card is certainty—which solves problems for multiple players. If a founder doesn’t have the prospect of revenue, why would they start the company? If an investor has no prospect of a return, why would they invest?

Note: Figures in recent years are subject to a time lag; submitted patents may not yet be reflected in the data. Source: Our World in Data/IRENA-INSPIRE Platform (2022)

That strikes a chord with Harris Cohn, head of sales of Charm Industrial, a start-up injecting bio-oil made from agricultural waste underground. “Having a very clear off-take agreement that spans seven years allows us to build our technology and build our scale in a significant way,” he says. Over 70% of founders working with Frontier credited its AMC program with a role in their decision to start a carbon removal company.

As more and more pre-purchase agreements graduate to off-take agreements, Frontier’s billion dollars will eventually start to run out. “A billion dollars was the smallest big number we could come up with that would send a loud demand signal to pull entrepreneurs into the carbon removal space,” says Ransohoff. “It is also nowhere near enough to actually solve the problem.”

Rosenzweig has similar concerns. “It’s miraculous that they were able to raise a billion dollars from companies to purchase carbon because the companies get very little personal benefit from engaging,” she says. “The bigger question is how we get governments more engaged at the level that we need them to.”

To hit an IPCC’s CDR target of 5 billion tons a year by 2050 would mean an annual cost of half a trillion dollars, even at a low price of $100 per ton. “There’s no way the voluntary markets are going to scale up to that,” says Ransohoff. “In the end, this market is going to have to be largely policy driven.”

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Some legislators are paying attention. In California, state senator Nancy Skinner introduced a bill that would allow the state’s agencies, including the Department of Transport, to enter into AMC-like agreements for low-carbon concrete and cement for roads and other infrastructure. “You’re sending confidence to academics and startups and investors that there is going to be a market for this, so hurry up and develop it,” she says.

Canada and Denmark are considering similar rules, and an initiative launched by the World Economic Forum called the First Movers Coalition aims to do the same from industry. There, almost 100 corporations have signed around the same number of off-take agreements to procure low- and zero-carbon products and services in areas ranging from shipping, trucking, and aviation to aluminum, steel, and cement by 2030.

For its part, Stripe has set up a lobbying organization called the Carbon Removal Alliance to influence policy and is funding a number of so-called Climate Fellows to brainstorm future initiatives.

As with vaccine rollouts, speed counts for CDR. Our carbon hole isn’t getting any smaller. But at last we have now a tool that might allow us to start digging ourselves out.