8 Dec 2023

Journal

Aligning incentives

8 Dec 2023

Journal

Aligning incentives

Lukas May

Head of Expansion and Policy

Trust is central to Isometric’s business

Isometric was founded two years ago, with the aim of bringing much-needed trust to the carbon markets. We invested time building in-house scientific expertise and now have over a dozen scientists working here, contributing their expertise across multiple carbon removal disciplines. And we’ve built a world-class piece of software—our carbon removal registry—with a radical level of transparency at its core. Through this combination of rigor and transparency, we can ensure that every credit on the Isometric Registry truly represents a tonne of carbon permanently removed from the atmosphere. 

And there’s another major difference between Isometric and how the traditional registries operate—our business model. How we get paid, and by whom. Financial incentives matter because they affect the way individuals and organizations make decisions. This is clear in incumbent models that create misaligned incentives. We never want to be financially motivated to compromise on our core principles of rigor and transparency. That’s why the Isometric model is different.

Our business model aligns incentives to ensure we only issue credits for high quality, durable carbon dioxide removal. Buyers pay a flat fee to get credits they know they can trust. 

This is an improvement on incumbent models in three key ways.

1. Buyers pay

Registries verify carbon removal activities carried out by project developers. There is a clear conflict of interest if a registry gets paid by the developer it is scrutinizing. So we decided from the outset that we will only be paid by our buyers. Buyers carry the reputational risk if removal activities are later shown to have been ineffective. So buyers have the clearest incentive to push for a rigorous process that ensures any credits issued genuinely represent carbon dioxide removed from the atmosphere. Isometric works for buyers—our responsibility is to ensure they only receive credits of the highest possible integrity.

There are two common counter-arguments to this position. Firstly, that auditors are paid by the clients they are auditing. But this analogy does not apply to the voluntary carbon market (VCM) because the audit sector is heavily regulated, and the VCM is not at all (for now). The second is to assert that who pays doesn’t matter—the supplier will pass through costs to the buyer anyway, so it all works out the same. This theoretical argument ignores the real world, as well as decades of evidence that show the behavior of human beings is affected by their financial incentives. This cannot be wished away. 

2. No percentages

Many incumbent registries structure their fee as a percentage of the per-tonne cost of carbon removal. As every sales rep knows, this kind of commission is a powerful incentive to sell more, and at a higher price. Registries should not have this kind of incentive–a decision to issue a credit should only be based on the real-world climate impact of the activity, and not its potential for generating revenue. Our fees vary by pathway, reflecting the fact that some pathways have higher verification complexity than others. That fee is set totally independently of the price-per-tonne agreed between the buyer and the project developer. 

3. Fees for verification, not credits

Our buyers pay us an agreed flat fee, regardless of how many credits they receive. This is important because it breaks any possible trade-off between our bottom line and our scientific integrity. If we find that a given project developer’s estimates for the total of carbon removed are not being borne out by the evidence, we will issue fewer credits than projected. But if we were paid on the basis of how many credits we issue, then we would have a financial incentive to turn a blind eye. 

With this incentive properly aligned, it presents a really good deal for buyers. It might seem counterintuitive, in that buyers have to pay us regardless of how many credits they receive. But this actually works out as really valuable insurance for buyers. In an offtake agreement, the buyer only pays on delivery of the credits. Our registry fee is a lot less than the price of a credit. So if there is an issue with the carbon removal activity, a buyer can save millions of dollars by avoiding purchasing credits that are later found out to be worthless. As well as the significant financial benefit, this avoids the large reputational costs that buyers would otherwise take if their credits are later revealed in the media not to have achieved the stated climate impact.

Change is hard. So this was not the easiest path we could have taken. But we are convinced it is the right one. And we’re grateful to the companies—both buyers and project developers—who have been the first to support this new model. We hope that with time, this will become the norm in the industry. Only then can registries fulfill their potential value in the carbon removal industry—to create trust.

Cover image by Matt Benson

Isometric is a carbon removal standard and registry built to ensure the transition to carbon removal happens responsibly and fast. Founded in 2022, Isometric is based in London and New York.

Press enquiries
press@isometric.com

© Isometric 2023

Isometric is a carbon removal registry and science platform built to ensure the transition to carbon removal happens responsibly and fast. Founded in 2022, Isometric is based in London and New York.

Press enquiries
press@isometric.com

© Isometric 2023

Isometric is a carbon removal registry
and science platform built to ensure the transition to carbon removal happens responsibly and fast. Founded in 2022, Isometric is based in London and New York.

Press enquiries
press@isometric.com

© Isometric 2023