Web3 for tackling VCM pain points Pt. 2: Lack of supply side financing 💵

This is part 2 of a 4 part series exploring how web3 technology can address VCM pain points. You can find all posts on the Toucan blog and Medium.

📍 The pain point

Project developers are responsible for sourcing and initiating carbon credit projects around the world, producing a supply of carbon offsets. Their role involves:

• Bringing implementation partners and investors together
• Working with verification bodies to certify the quality and amount of credits a project will produce
• Bearing the financial risk of developing the project over a number of years
• Working with a network of distributors and retailers to deliver auditable, verifiable credits, which align with a purchasers offsetting claims

Ensuring that these steps are completed to a registry’s standards is a lengthy, rigorous and costly process. There is also a lag between claiming a certain amount of offsets will be produced and actual implementation, preventing revenue from being claimed for many years.

While some agreements are signed for the forward supply of carbon credits, contracts are unstandardized and there is little ability to buy or sell them. These forward assets are therefore illiquid, sitting on a balance sheet until the carbon credits are (hopefully) realised.

At present, it is therefore difficult for project developers to access upfront finance to develop high quality projects, as returns are perceived as risky and slow.

This issue is exacerbated by small project size, as many less well-resourced projects are unable to engage in the processes required to certify their carbon benefits and access carbon market revenues.

2021 saw multiple joint ventures between project developers and investors, especially in relation to scaling nature-based solutions like afforestation. While this better enables suppliers to scale operations to meet demand, it also risks concentrating project supply into the hands of a few larger firms.

This could create issues over distribution rights to large credit portfolios or effect the equity of engagement with local communities and landowners, as experienced with other large scale offset deals.

Therefore, while demand for new projects is growing, project development remains a risky business. While there is some new investment entering the space in the form of VCs like Breakthrough Energy and firms like Stripe, these interventions remain too small to boost supply levels to that required.

✨ How web3 can help

Web3 based solutions have the potential to contribute to overcoming this supply pain point in the following ways:

• Provide more reliable, upfront finance for project developers
• Reduce the complexity of project validation and increase access to revenue

Below we explore a few examples of projects emerging in the space.

💵 Provide reliable, upfront finance

Several projects are exploring how tokenized credits and communities of climate conscious crypto users can boost upfront capital for carbon projects.

BasinDAO works at the real-property level to develop and source high-quality, nature-based carbon removal credits. They leverage web3 as a hivemind for creative solutions and collective resources to enable the development and support of these projects.

Individuals and organisations engage by purchasing and holding BASIN tokens. These tokens give access to the forward purchasing of carbon removal credits at wholesale prices, with the option to invest in as few or as many offsets needed.

Solid World is a project instead focused on bringing greater security, liquidity and efficiency to forward markets. This will be achieved by tokenising carbon credit pre-purchase agreements, creating a public price signal that makes them both a more attractive asset and giving carbon projects more clarity on pricing. Tokenization will also allow for greater market liquidity, by enabling the creation of carbon credit pools for simpler purchase.

Solid World recently partnered with low carbon commodity company SCB, who are interested in involving this blockchain enabled approach in their future operations.

Finally, Eden Dao is an emerging supply-focused project, specifically focused on channelling capital into the development of carbon dioxide removal projects. One means of achieving this is via the DRM Syndicate, where individuals can contribute to the collective purchase of permanent removal credits from Patch.io.

✅ Reduce complexity and increase access to revenue

Other projects are emerging that use web3 platforms to bring project developers closer to other VCM actors, streamlining the process of bringing quality credits to market.

Open Forest Protocol (OFP) is developing a blockchain-based, global community of forestation project operators, validators and funding partners. It aims to become the world’s first communal verification platform for forestation projects, bringing transparency and credibility to a streamlined market place.

This benefits project developers by creating access to affordable, easy-to-use MRV, which can be verified by the OFP community. This then creates opportunities to sell high-quality, data-backed credits to potential investors also using the OFP platform in an efficient way.

OFP are a partner of the Center for International Forestry Research (CIFOR) and currently involve 27 project developers. They recently signed a pact with Ivory Coast to work with local communities to sustainably reforest and restore 5,067 hectares of degraded forest land.

The Regen Network is a project that enables regenerative farmers and land stewards to assess, tokenize and sell the ecosystem services that they provide as carbon credits. This enables practices such as crop rotation and agroforestry to access and benefit from carbon markets. Regen currently engage 216 farmers and ranchers across 16.4 million acres of land.

Both OFP and Regen Network also facilitate decentralisation, increasing access to carbon markets for smaller project developers while maintaining carbon credit standards. This in turn promotes greater equity and local-level engagement, which is a key pillar of the ReFi (regenerative finance) movement within web3.

Our next post will explore the pain point of lack of market transparency 🔎