Hacking Capitalism with Advance Market Commitments

When the free market fails, can advance market commitments help?

This week, we’ll take a quick look at a solution that could be used to solve problems through business action faster and at scale by sort of hacking capitalism.

In April, Stripe and a host of other big companies (incl. Google, Shopify, Meta and McKinsey) introduced Frontier, an advance market commitment to buy an initial $925M of permanent carbon removal between 2022 and 2030.

What Are AMCs?

An Advance Market Commitment (AMC) is a concept that stems from vaccine development and was piloted a decade ago for the development of pneumococcal vaccines for low-income countries, saving an estimated 700,000 lives. And it has also been used during the COVID pandemic, and for accelerating self-driving car infrastructure, and quantum computing, amongst others.

The AMC tackles two main economic market failures. Namely boosting investment when there is…

1. uncertainty about long-term demand and

2. an unproven technology at play.

“In an AMC, donors commit funds to guarantee the price of vaccines once they have been developed.

These financial commitments provide vaccine manufacturers with the incentive they need to invest in vaccine research and development, and to expand manufacturing capacity. In exchange, companies sign a legally-binding commitment to provide the vaccines at a price affordable to developing countries in the long term.” via The World Bank

“[An AMC] guarantees a market rather than subsidizing assets.]” via Bloomberg

I think of AMCs as a sort of B2B or G2B Kickstarter where a market guarantee is given not to one specific company but rather to any kind of company working on a specific technology or topic.

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In the case of Stripe’s Frontier, the platform acts as a sort of facilitator and expert that aggregates annual future carbon removal commitments from buyers - i.e. Stripe’s high profile partners like Google or Shopify but also other companies that use Stripe Climate, Stripe’s carbon removal program - and then vets suppliers - i.e. carbon removal companies - to identify the most promising and scalable technologies and facilitate the purchase between buyers and suppliers.

The overall idea is to set the perfect conditions for carbon removal companies to start building and improving their tech, while Frontier will in the process try to filter out and support the best, most scalable, and low-cost carbon removal solutions.

“[…] [Companies] essentially [turn] ambiguous net-zero commitments into net-zero contracts to buy carbon removal.” via Politico

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Stripe Frontier is an interesting project as it shows that AMCs can not only be established and run by governments or NGOs but also provide an alternative way of technology advancement for companies eager to build a better world.

With an overload of company pledges out there and rising uncertainty about future markets, I wonder in which other fields AMCs could be used to transform specific climate or social justice commitments into binding contracts that, at the same time, provide strong market demand guarantees…

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That’s it for this week!

Thomas