📅 Carbon forward contracts x Blockchain: Investing the future of our climate, now!
Why do we need forward contracts of carbon credits?. GreenTrade: infrastructure for forward financing of climate & impact projects
Future trading can be high risk and high return. But what if the returns are good for our environment? Welcome to the world of forward financing of carbon credits.
I learned the concept of forward contracts of carbon credits or long-term purchase agreements when writing an article about Blue Carbon: underwater solution to climate change. Helena Merk, the founder of Spirals protocol (regenerative infrastructure for blockchain) told me that there are innovative carbon capture projects with huge potential but lacking enough attention and funding. For example, seagrass meadows or blue whale conservation.
These are new types of carbon projects with a long time horizon needed to realize the expected carbon capture. The legacy certification bodies do not yet verify these projects. Due to the unproven results and risks of failure. The only way to fund these projects is through long-term purchase agreements in the voluntary carbon market.
It sounds simple, but not easy. Currently, these projects are not well connected to buyers. While on the other side more and more companies and institutions are willing to bet their money on forward-looking high-impact carbon offset projects.
In this article, I will share my learnings from talking to the founders of GreenTrade, a Berlin-based Climate FinTech startup using blockchain to resolve market constraints by making long-term purchase rights of carbon credits easily accessible and tradeable.
💭 Why do we need forward contracts of carbon credits?
Before going deep into carbon credits. It’s worth understanding the concept of long-term purchases, or forward contracts. It is not a new concept. Since hundred years ago, farmers have been selling the forward contracts of their produce before harvest. From the Japanese rice farmers in the 1700’s to the Chicago Mercantile Exchange as we know it today. Farmers benefited from a guaranteed selling price. While buyers can secure a stable supply of the needed commodities. Both sides exchange the risks of price volatility with stability.
Forward contract 101 from Khan Academy
Not just in commodities, the concept of forward contracts has been used in various types of economic trades, from the fiat system to the crypto world. So why not do it for carbon credits?
In a long-term purchase agreement, project developers can sell a pre-determined amount of carbon credits years into the future. This incentivizes more project developers to think more long-term. Currently, the global carbon markets, both mandatory and voluntary, are expected to be worth around 12 Giga tonne of CO2e. These are only 20% of global GHG emissions. To achieve net zero, we still have a huge cap to close.
Leading companies such as Stripe, have led the way by allocating more than $1 million to fund more innovative carbon removal projects. They are even willing to pay more than $1,000 per ton of CO2 (>50x of the average carbon credit price). Stripe believed that being an early adapter by purchasing these credits with a high premium, will help to kickstart the carbon removal industries.
🏗️ GreenTrade: infrastructure for forward financing of climate & impact projects
I was lucky to have the chance to talk directly with the founders of GreenTrade: Ulf Hackbarth the business mastermind, Katrin Klingenberg a 15 years veteran in environmental projects, Frederick Leuschner coming from Microsoft & Google and Carsten Hermann the blockchain & product expert.
GreenTrade is a climate tech startup trying to solve the problem of long-term carbon projects. Both the demand and supply sides.
They explained that there are 3 main problems:
Funding: The verification process of a carbon project is complex and can take several years. Small project developers do not have enough capital to set up the project. And cover the operational cost needed until the projects are certified and carbon credits can be sold.
Quality: Project quality can be defined by the confidence level that carbon removals are additional, permanent, and not overestimated. Leading companies and huge funds (e.g. pension funds) are becoming more careful of the carbon credits that they are buying. Moving away from lower price credits at the spot market towards high-quality carbon credits through a long-term partnership.
Supply: Although reduction should be a priority, offsetting through carbon credits could be a temporary solution before reaching net zero. The demand for carbon credits is skyrocketing, while the supply did not grow much. Companies are looking for ways to ensure a large supply of carbon credits to keep their long-term commitment.
Triangle inspired by the article “The Climate Action Trilemma for the Global South”
GreenTrade Solutions:
In one sentence, GreenTrade creates forward CO2 certificates to finance new CO2 projects by offering long-term purchase agreements for carbon credits to project developers. Splitting these purchase rights into smaller portions enables several parties to share in the benefits.
To understand better, let’s break it into smaller chunks. First is the future financing model. GreenTrade aims to be the platform that makes it easier for buyers of carbon credits and project developers to engage in a long-term contract of carbon credit purchases. Buying a long-term purchase agreement of carbon credits is now as simple as buying anything online.
Second is the use of web3 technology. GreenTrade infrastructure increases the traceability and price transparency of carbon credits in the market. With blockchain, the carbon credits data will be immutable (cannot be altered) and open to be used as building blocks for other derivatives. Unlike the existing carbon registry that centralized the data.
With NFT (Non-fungible tokens), carbon credits from one project can be broken up into smaller units. For example, 1 NFT is worth 1 tonne of CO2e that will be captured in the future. This allows more buyers to engage with one project. Shifting from a 1-to-1 relationship to a 1-to-n relationship between project developers and buyers. Both the benefits and the risks are now distributed amongst many buyers.
In their own word, it can be summarized to:
However, currently, not everyone is familiar with web 3.0 tools. To make it easier for most corporate buyers and project developers, GreenTrade is building a simple user experience such as payment with fiat money and a web 2.0 customer interface. A crypto wallet will be set up in the backend and can be managed either by GreenTrade or the buyers.
To increase the adoption of tokenized carbon credit forward contracts, GreenTrade is also working with project developers to digitize MRV (measurement, reporting, and verification). And with Solid world to create liquid publicly traded forward contracts of carbon credits.
Thanks to the dream team founders at GreenTrade for sharing these insights.
If you are interested to learn more about long-term carbon credits, check out greentrade.tech and see it for yourself.
⏳ Conclusion
We all have different time preferences. Either in investing or personal relationships. But as Naval Ravikant says “Play the long-term game”.
This also applies to solving climate change. We need to take short-term risks to gain long-term value.
(Disclaimer: this article is for educational purposes only. Not investment advice or sponsored message. I am genuinely enthusiastic about bringing regenerative finance to the masses).
Thanks for reading this article and enjoy the weather ☀️.