Carbon Removal Projects and Carbon Credits. Uncovering the Financing Behind Nature-Based Solutions
Our aim in this article is to bring as much transparency and clarity on how financing a carbon removal project can generate a return on investment (Profit or Cost Avoidance) over several years.
To make it more concrete, we will explain how it’s done through Carbonable.
And beyond our reading, we strongly recommend that you do your own research (DYOR) to form your own opinion.
🌱 LAYING THE FOUNDATIONS OF CARBON CREDITS “FARMING”
What is a nature-based carbon removal project and why Carbonable supports them?
Some nature-based solutions, such as restorative agriculture, regrowing clear-cut native forests, or mangrove restoration, actively remove CO2 from the atmosphere. This makes them a form of carbon removal project.
Such projects have been identified as one of the top priorities to fight climate change in the most recent IPCC reports (read more).
Simply put, the more we regenerate nature, the more carbon we absorb.
That’s where Carbonable comes to play: leveraging crowdfunding and blockchain through decentralized finance (DeFi) to fund vetted projects to restore the world’s carbon sinks.
What is the financial incentive to restore nature?
For these nature-based carbon removal projects to come to life, they need funding. And what do funders get in exchange for their financial support? Voluntary carbon credits.
Each voluntary carbon credit equals one metric ton of CO2 equivalent that has been removed from the atmosphere, thanks to the given project financed. (Dig more info here)
Voluntary carbon credits are the origin of the Carbonable farming mechanism. To make it simple: through Carbonable NFTs you participate in the financing of a carbon removal project. And in return, you receive, gradually over the life of the project, voluntary carbon credits to use as a source of profits or offset (at the choice of the funder, we will come back to this later).
How are calculated the number of carbon credits that a given project will generate?
All our projects are certified by third-party certifiers guaranteeing the quality and credibility of our projects. Such certifiers use proprietary Voluntary Emission Reductions Standards (think of it as a methodology) to calculate the number of voluntary carbon credits that a given carbon removal project will generate.
This number of carbon credits will differ from one project to another, depending on various factors, including their typologies and geolocation of the given projects (learn more)
What is the difference between a carbon credit and a carbon absorption capacity?
Carbonable NFTs ARE NOT carbon credits. Instead, they can be seen as farms that generate carbon credits over time.
In other words, each NFT corresponds to a share of a project, or a plot of land of the project, giving the right to a carbon absorption capacity. (understand better our NFTs)
Carbon absorption capacity = Number of carbon credits delivered per year.
For each asset, the carbon absorption capacity equates to the number of carbon credits generated in a year. Not all Carbonable assets have the same carbon absorption capacity.
Indeed, carbon absorption capacity is driven by various factors:
- The number of certified carbon credits from the project itself: as described above, some projects are more efficient in absorbing carbon than others (learn more)
- The “size” of the land tied to the digital asset: see it as the area surface that represents the given digital asset, or in other words, the shares it represents in the overall project (learn more)
- The duration of the project: generally speaking, carbon removal projects last between 20 to 30 years.
Is the yearly carbon absorption capacity linear?
Scientifically speaking, no. The carbon sequestration of a project cannot be considered linear (spread evenly over the project life cycle) since the amount of carbon absorbed by nature does not follow a linear pattern. For example, in the specific case of a reforestation or mangrove project the volume of trees does not follow linear growth. The speed of development depends on their age and size. As the carbon is directly related to tree volume, it follows the tree’s growth curve and cannot be linear.
Contractually speaking, it depends. Indeed, each certifier uses its own standards, with its own carbon credits emission schedule.
Some follow an approach that goes against the scientific approach as all carbon credits are released after the first years of the project (right after all trees are planted), while some follow a linear schedule, and others the scientifically-based one.
At Carbonable level, we follow the schedule defined in the contract with the certifier. But in the interest of ethics and transparency, we strive to ensure that the schedule for the release of carbon credits is as close as possible to the reality on the ground (learn more), with at least a linear schedule, and at best one based on the scientific approach.
Profit or Offset? What are the two main types of Carbonable Farming?
As described before, when you buy a Carbonable NFT, you acquire carbon absorption capacity, and you will receive a given quantity of carbon credits every month/year (depending on the release model and schedule defined by the contract), until the end of the project.
As part of Carbonable mechanism and value proposition, you have two main choices for taking advantage of these carbon credits:
- Profit: Receive income from the resale of carbon credits on the voluntary market
- Offset: Use the carbon credits received to contribute to carbon neutrality
As part of our model, you can decide to mix your farming outcomes, by choosing the offset and profit allocation ratio, according to your wishes.
🌾 UNDERSTANDING THE CARBONABLE FARMING MECHANISM
How are priced the underlying carbon credits?
To be clear, this is a rather complex formula. And the truth is that there is no formula, but rather many variables. Variables that are sometimes difficult to estimate because of their subjective nature.
First, let’s clarify this: Setting a standardized price on a carbon credit is not only impossible, but it is also incoherent. Each project is unique, and so are the inherent carbon credits associated. It’s as simple as that.
Ultimately, what drives a carbon credit price is its quality. Let’s now analyze all the variables that influence the price of carbon credits.
- The operational cost of carrying out the project (purchase of equipment, tree species, maintenance crew etc.)
- The typology of the project (blue carbon, green carbon, etc.)
- The physical location of the project
- The vintage (year of issuance) of the credit: Generally speaking, the older the vintage, the cheaper the price per credit will be.
- The trust behind the certifier and its certification methodology.
- The certification cost
- The positive externalities, both in terms of biodiversity and local communities
- The commissions taken by middlemen
- The traceability, monitoring, and correlation to reality on the ground (if the forest has burned, it shouldn’t keep emitting credits).
That’s why at Carbonable, we take all of these factors very seriously when selecting projects to fund, and when monitoring them (learn more). We perform a very precise due diligence process in order to select only what we consider top-quality projects.
Further, we cut out all unnecessary middlemen to ensure that the money goes back to the project developers, thereby guaranteeing high-quality projects, competitively priced carbon credits, and generating maximum impact.
Finally, the combination of verification partners and the use of blockchain technologies allows for the highest level of traceability. Thus, at any given time, any carbon credit can be linked to a project, the project owner, the certifier, due diligence, and project monitoring.
What are the worst/base/best scenarios of the carbon credit market?
Various consulting firms including Bloomberg and McKinsey have analyzed the Voluntary Carbon Offset Market in-depth and have published reports on the forecasted evolution of this market. All agree that based on the intersection of price, supply and demand the market is expected to grow significantly.
Below is a graph extracted from BloombergNEF report on the voluntary market, which highlights the 3 main types of scenarios:
- The voluntary market scenario (worst scenario), which assumes the current design remains out to 2050. In this scenario, prices should rise 650% by 2050, with an average of $47/t.
- The hybrid scenario (base scenario), which looks at a gradual evolution of the market towards removal only offsets. In this scenario, prices should rise 2,500% by 2030, with an average of $200/t.
- The removals only scenario (best scenario), which assumes only removal offsets are allowed. In this scenario, prices should rise 3,000% by 2029, with an average $224/t.
Carbonable which focuses on carbon removal projects only is perfectly well aligned to benefit from any of the scenarios outlined, particularly the hybrid or removals only scenarios.
What are the carbon credit funding price and the carbon credit market price? And how do they differ?
To make it simple, there are two main types of prices, that correspond to the moment in the process at which you acquire the carbon credits:
- The funding price: At Carbonable, we finance “ex-ante” projects, meaning projects seeking financing, which once funded and executed will generate certified carbon credits
- The market price: Once the carbon credits are available, they are sold, generally through Carbon brokers which bring together buyers and seller in over-the-counter (OTC) marketplaces
It goes without saying that the funding price is generally significantly lower, because very early in the process (cutting middlemen) and because it is actually much more an investment rather than a purchase.
It is mainly on this price difference that the performance of Carbonable Farming is defined (learn more).
How performant is the Carbonable Farming?
As explained previously the difference between the carbon removal credit funding price and the carbon removal credit market price is where the Carbonable Farming originates.
When financing a carbon removal project, it is like purchasing the entirety of the carbon credits that will be available for the project’s lifespan, at the funding price.
In contrast to the carbon credit market price, which as we saw earlier, is expected to increase drastically over time.
In the graph above, the Delta is the gain that you get at year 15, whether you are farming for profit or for offset purposes:
- Profit: The Delta is the difference between the price at which you pre-purchased that carbon credit (funding price), and the price at which it’s expected to be sold, hence your projected APR on Year 15.
- Offset: The Delta is the difference between the price at which you pre-purchased that carbon credit (funding price), and the amount you would have had to purchase it for on the market, hence your cost avoidance on Year 15.
The later in the project we are, the higher the delta is and so is your yearly farming performance growing.
As illustrated in the graph above, the Profit or Offset farming occurs continuously over the life of the project, thus offering a total revenue or cost-avoidance being the sum of all its parts.
📈 CARBONABLE SIMULATOR: FROM EXPLAINING TO MODELIZING
In order to enable investors to make informed decisions, we have decided to develop a farming simulator.
It allows everyone to calculate the expected gains from investing in our nature-based carbon removal projects, based on several inputs.
One version of the simulator is Profit oriented: users input the $ amount they are willing to invest, and select the duration of the project, and it displays the overall revenues and the average APR expected for the entire project, as well as the individual revenues & APRs to expect year after year, in graphical form.
The second version of the simulator is Offset oriented, with the same logic, except that the main input is the yearly amount of Carbon that they would like to offset, and the outputs are about costs avoidance.
Our goal is to make investing in carbon sinks as simple and transparent as possible, while making it accessible to everyone.
We know how essential these types of projects are in the fight against climate change, in addition to being profitable investments, and our aim is to scale them up. We hope that this article and this simulator are one more step in this direction.
If you want to dive deeper into carbon removal subjects or want to know more about Carbonable.io, reach out to us via email or social media: