Financing carbon removal projects, especially nature-based projects such as reforestation and afforestation has been challenging in traditional offset markets. In the past couple of years the voluntary carbon market has been suffering from a chronic lack of due diligence which has opened the doors for a series of fraudulent practices.
Money that should have gone into planting forests or forests being preserved from deforestation, for example, has actually been diverted and ended up in pockets of middlemen who’s been reluctant to disclose their pricing structures.
There was also a lack of due diligence when it comes to ensuring the additionality of carbon credits and whether the actual quantity of carbon sequestered corresponds to the number of credits being issued. That has been the reason behind the big problem of overwhelmingly high number of cheap, exaggerated and fake credits that has been flooding the voluntary carbon market.
One German startup – recarb is aiming to respond to this problem and has come up with a unique and entirely new concept for ensuring the viability, credibility and additionality of nature-based carbon removal projects. It also provides the critical liquidity the projects need to be implemented. The company is a pioneer in creating a form of equity that makes environmental protection and biodiversity attractive for companies – Carbon Shares.
As the problems of the traditional voluntary carbon markets escalated in recent years due to investigations from the Guardian, environmental organizations and NGOs, the industry started seeing where the market was falling short of providing the climate impact it was created for. It also came up with critical, innovative and groundbreaking solutions.
We had a conversation with Daniel Vetterkind, co-founder of recarb who explained in more detail the problems that recarb is aiming to address and the new concept of carbon shares taken from financial markets as a way to provide the needed initial funding for nature-based carbon removal projects.
“Projects need funding and they need a structure that can provide for the money necessary for carbon removal to reach our climate goals… We don’t have a structured way through an investment that investors can trust and use to participate in a project. Trust is a big problem in the voluntary carbon market. They don’t invest because they don’t trust the market,” explained Mr Vetterkind.
Recarb helps with financing of nature-based carbon removal projects through its carbon shares concept. The projects it is aiming to support are mainly new reforestation projects that have not started planting trees yet and therefore are not generating any carbon credits.
Securing funding before they start is historically the biggest issue with reforestation projects as at the beginning the projects do not have credibility and are not able to guarantee it will provide the environmental benefits it is claiming to. This is also hindering the whole nature-based carbon removal space as millions of dollars are needed to be secured before the project has actually started.
Recarb is addressing this problem by providing a scientific and dynamic due diligence process that rates the quality of restoration for most nature-based carbon removal projects. The company’s goal is to contribute to higher standards of projects by using a criteria and a monitoring system that focus of biodiversity gains and the resilience of ecosystem services.
What differentiates recarb’s approach apart from existing credits rating agencies is that it assesses the likelihood of success of a nature restoration project rather than the likelihood of issuing carbon credits. That provides the security investors and companies need to take part in nature-based carbon removal.
Once the assessment is complete, investors or banks can prepare for IPO of carbon removal projects, for example, in the form of carbon shares. Other financial products are possible as well. An IPO allows the projects to receive the funding they need to start before any carbon has been sequestered.
The carbon shares are a fraction from a nature-based carbon removal project that allows for investors to participate in the future performance of projects and benefit from its ongoing capabilities to store CO2.
The value and growth of carbon shares is linked to the carbon being sequestered by the project. The more CO2 is sequestered over time, the more value is reflected into the carbon shares for this project. Investors can profit from selling their carbon shares later on when the forest grows. Alternatively, they can cash in the dividends that they are receiving from the project.
Investors receive dividends from the project that given in the form of carbon credits or cash. The carbon credits can be used to make reputable climate claims as the carbon removal projects are of high-quality.
The IPO price is calculated based on the project development costs, plus due diligence and MRV costs. The number of carbon shares being issued at the IPO depends on the predicted maximum sequestration capacity of the forest.
The sequestration capacity is limited, and depends largely on the land, the tree species, the soil type, etc. The company is able to make predictions based on a variety of datasets. It also performs continuous monitoring and measurement to estimate the value of carbon sequestration over time.
Apart from the future carbon sequestered, other market forces are also influencing the carbon shares price like the carbon credits prices on the voluntary carbon market or the carbon taxes companies pay for emitting CO2.
The first stage of the company’s development is being able to offer due diligence process that issued carbon shares. The next stage in the product development pipeline is listing the carbon shares on the stock exchanges. The timing of this stage depends factors like financial regulation and approval by authorities.
After that, recarb sees its role similar to JP Morgan and other analysts – performing the due diligence of projects to be able to be listed on the stock exchange to make sure investors can invest safely into reputable carbon removal projects. Once listed on a stock exchange, the projects will continue to report data on a quarterly basis similar to the reporting processes for public companies, ensuring their reliability and transparency.
Recarb will also continue with its monitoring and measurement processes. The carbon credits generated by the forest and provided through dividends, will be issued by the industry-leading certification body Gold Standard.
Recarb offers a detailed analysis and due diligence process that ensures the viability of nature-based projects, unlocking a critical early-stage financing to help expand rapidly the space. Continuous monitoring and publishing of data are important to increase trust, prevent greenwashing and make projects attractive for investors which is the key in securing their valuable contribution to mitigating the climate crisis.