With carbon markets at an inflection point in terms of trust, there appears to be a gap when it comes to services and tools that can help buyers and sellers establish an efficient and transparent market. Fenix Carbon is developing a platform that bridges that gap by establishing direct connections with carbon project developers, verifying their data and presenting it in investable way.
We spoke with Thomas Herry, the CEO of the company, about how they’ve placed data, standardization and that bottom-up approach at the heart of their platform.
Firstly can you tell us how you came into climate tech, how did that journey look for you?
For me it started early, because my father was an agronomist. I grew up seeing him traveling the world to survey crop production and using satellite images to forecast crop harvest, which was very innovative 20-30 years ago. I was exposed to how valuable nature is but also to how fragile it can be. Then I went to university, studied finance, and started working in banking in 2009.
At that time markets were collapsing but there was one thing that was booming – it was the beginning of carbon finance. The bank I worked for had a branch dedicated to a carbon project and their financing. And that’s how I discovered it. I was fascinated by it, because that was the perfect illustration of how finance can be used to have a real impact for the greater good.
In 2014 I joined Uber when it was just starting up in the UK and Ireland. It was a small team in charge of launching the business and building it from virtually nothing to generating a billion dollars of gross bookings by the time I left. While working there I realized that I needed to start my own business. Fast forward a few years later and I was working in private equity. During my last assignment I spent six months working on due diligence of the carbon markets. That’s when I realized how big the market was going to be, but also how many challenges it was facing and that it needed disruption.
What is the idea you and your co-founder coalesced around for the company, the problem you solve and the approach you have?
The idea has always been around bringing transparency to this market. But just like any startup, you start with something, you iterate, you tweak the product. When we started, it was really about using our financial skill set to channel money towards those doing the right thing for the planet. We started by building a marketplace for spot credits that were already issued.
What we realized fairly quickly is that there’s a big quality issue in this market. 90% of carbon projects, unfortunately, are not high quality, so you really need to focus on the top 10% of projects.
Those projects never come to the spot market because they’re sold before that. But corporates still need to buy carbon credits, so they start to build and fund their own projects, working hand in hand with project developers. In exchange they receive privileged access to credits when they’re issued. That’s a big trend we see in this market. This is what we call the shift to the primary market.
The primary market is five times larger than the secondary market. Carbon buyers are turning into carbon investors. Just buying something from the market and retiring credits is very different to getting involved in early-stage projects. You need to run the due diligence, monitor other projects for 10-15-20 years. So you need data.
That’s why we’re building a carbon project management tool for developers, to structure how they build their projects, show them what “good” looks like and use it to collect the data. Then we verify and standardize it and share it with investors who want to invest in a standardized format, so that they can compare one project to another.
Is that the reason you are primarily focused on early-stage projects?
Exactly. Our view is that today in the market, a lot of people are complaining that there’s not enough quality. Developers create a project, spend five years working on it, then they get a rating from a rating agency, saying to them it wasn’t done properly.
I think we need to assume that it’s not developers’ intention to create bad projects. Often, they say “look, I was on my own for five years, nobody told me what I was supposed to do. I had zero guidance, I made it happen in the best way I could.” It feels a little bit like taking the exam without having the lecture. They express to us this need for someone to tell them what good looks like.
The beauty of getting involved early on is that you can bring in an investor who really likes it but there might be a couple of things that they’re not quite sure about. They can then influence the project and say, “I would like you to change this.” So, it’s more about finding the language to communicate, and the channel to do it, so that they can guide them to make sure that when the credits are issued [they come from] good, quality projects.
How is quality assurance addressed in terms of technology? Are satellite and LIDAR utilized?
In terms of verification of the projects there are the top-down and bottom-up approaches.
The first uses satellite images, LIDAR technology, and you can monitor the project remotely. But what we often hear is that data from the ground is needed. Knowing exactly where the geo fences are down to every meter. We’re not here to replace any of those digital MRV companies, we are here to provide them with the data they need, so that they create this ecosystem with high quality projects.
In agroforestry you often see group projects which are an aggregation of tens of thousands of farmers. But it’s really hard for digital MRV companies to have the exact boundaries of the project because everyone owns a piece of land, but they’re not necessarily adjacent. The power of our platform is that we can communicate with the project developers, and they can relay the message to people on the ground and say “We’re going to give a smartphone to all those people, can you please walk along the fence of your property, make sure you put the data point, so that people can run the digital MRV.” And that makes that job a lot more accurate and easier.
How is the data translated into financial models that are then presented to carbon investors?
The work we do with project developers is really about understanding how their project works from the ground up. We’ve developed data models per methodology for afforestation, reforestation and revegetation. We work hand in hand with them so that data is presented in the same way.
The first section is what we call biomass variables. This is about building carbon sequestration curves, using the relevant scientific literature to agree on how many tons of carbon are going to be sequestered for every single tree planted in this project.
Then we look at how many hectares you have onboarded, how many trees are planted, as well as the climate, the geography, the age of the project, as well as the mortality and replanting rates. Being able to have a live inventory and to say how many trees are standing on this piece of land at any given time is very important.
Then we combine the two elements to build an emission reduction forecast – how many tons are going to be sequestered every year, and how that translates into carbon credits and how much they could potentially be sold for.
How many projects are you currently working with and how rapidly do you expect that number to grow in the coming years?
We have 35 projects on the platform, but we expect to have thousands in the coming two years. We’re still in the early days of developing it and [at this stage] we want to spend a lot of time with project developers who really understand the pain points and what this market needs. What we need is a tool where project developers will be able to create their own projects and enter their own data in an automated and scalable way. We’re also exploring how we can use AI for this.
What is the addressable market for Fenix Carbon?
By 2030, we expect the need for carbon credits to be about four billion credits per year. 2030 is when most of the net zero targets are going to hit for most companies.
There’s about 50 billion tons of carbon emitted every year on our planet and within the SBTi scheme, companies are allowed to buy up to 10% of credits to meet their targets. They know that it’s going to be really hard to reduce by more than 90%, so they’re very likely to use it.
in order to have a pipeline of projects generating 4 billion credits a year, you need a pipeline with 25 times more credits, because one project is 20 to 30 years. So 25 times four billion, that’s a pipeline of100 billion credits by 2030.
We endeavor to support the creation of this pipeline, consisting of many projects and monitor them. We don’t work with project developers like a broker. We work hand in hand with project developers for the entire duration of the project and continue to monitor for many years and take a monitoring fee for that.
What types of companies are among the carbon investors you mentioned earlier?
We see three types of carbon investors. The first type are large corporates, who have bought carbon credits in the past. They have realized the changes in accessing high quality credits and want to stay away from any greenwashing scandals. They had started buying forward, getting into long term offtake agreements, and then realized they might as well just invest in the project.
The second category is made up of companies that might be a little bit smaller, still very large ones, but maybe with slightly smaller needs. They work through cooperative funds where around 20 companies are going to put 5 million, creating a pool of around 100 million. They mandate this team to go and invest in projects on their behalf and to secure access to the credits, buy them and retire them for their own purpose.
The third category is essentially trading houses, who are building a portfolio that they can resell to companies who don’t necessarily want to develop their own projects but are happy to buy high quality credits. They’re moving upstream, getting involved with these early-stage projects, and they also need data on the finances of the projects to sign for long-term offtakes.
And finally, what are your thoughts on the situation with carbon markets at the moment?
There have been many scandals that have negatively impacted the market. I think it’s the opportunity to have a restart. There’s always something good coming out of something that might be first seen as negative.
I think the VCM is here to stay simply because companies don’t really have a choice. Of course, they need to reduce their emissions, but it’s really hard to reduce everything to zero. Having all this criticism around the market forces them to think “how can we get something better.”
Between now and 2050, we need $1.6 trillion of investment in this market to generate the pipeline that is needed to meet the expected demand for carbon credits. That’s an average of $60 billion every year, so when we look at the primary market, we feel very positive and enthusiastic about it.