We are honored to launch our Investment Strategy in Carbon by announcing our most recent investment in Open Forest Protocol (OFP), a blockchain based protocol that aims to disrupt one of the main bottlenecks of the carbon credits’ industry: the MRV process – Measurement, Reporting, and Verification.
OFP is building an open platform on the blockchain allowing forest carbon projects of any size, all over the world, to measure, report and verify their data. Individuals, communities, NGOs, specialists, entrepreneurs and governments compose their network of independent experts, creating transparent, immutable, proof-of-impact data that is comprehensively verified by the network.
The Carbon Market encompasses the whole value chain of the credit’s creation. Those credits are the result of activities that avoid, reduce, or remove emissions. More than 95% of carbon credits in the market fall under the category of renewable energy installation, clean cooking stoves, or e-mobility credits. The remaining 5% are carbon removal offsets, including nature-based solutions (such as afforestation and reforestation projects) or technology activities that take the carbon out of the system by permanently storing them underground or elsewhere (such as direct air capture).
Carbon Credits: exponential growth and ESG potential
The Carbon Credit market is not something new, it was created in the 90’s as a mechanism to protect the environment through market incentives. The demand for carbon credits has increased exponentially over the past few years and is expected to keep this growth pace for the foreseeable future. In 2011, 40M CO2 tons were transacted in the market, while in 2021, this number was about 500M CO2 tons (12.5x growth). In addition to that, the number of forest credits traded quadrupled from 2021 to 2022. There are two main reasons:
- Private sector pledges: the private sector has committed to setting voluntary targets to reduce emissions and the regulators are also pushing in this direction. The voluntary market has already topped $1B. By the end of 2022, over one third of the world’s largest publicly traded companies have announced net zero targets. Google, for example, has set the goal to operate everywhere on 24/7 carbon-free energy by 2030.
- Market maturity: has resulted in an increasing attention by companies and regulators, being responsible for the creation of new methodologies to be utilized by the developers, an increasing access to data and technology, and a clear development of projects. In addition to that, Verra (the main registry today) has accelerated its approval process and the path to acquire credits has become much more clear.
It is also important to mention that this asset class should not only be seen as a carbon offsetting tool to drive global climate actions, but also as a strategic revenue generation. For 80% of the world’s population living in developing countries, carbon credit generation can also be seen as a way to facilitate an equitable energy transition. Selling those credits can be a simple way of creating an additional revenue stream to those companies.
Brazil: a clear target and potential leader in this space
When one looks at the Brazilian landscape, it is easy to observe some interesting dynamics and significant demand gaps, which brings along with it several opportunities:
- Supply capabilities: Brazil is one of the largest suppliers of carbon credit generator projects, in terms of tons generated and potential and diversity of type of credits, with the potential to increase even more global market share in the next few years. The country currently accounts for 12% of the carbon credits issued worldwide; furthermore, this number could reach up to 48.7% considering the projections for this market to reach $347B by 2050
- Favorable regulatory landscape: Recent government moves have indicated the willingness of the public authorities to really engage in this space. As of June 2022, a new national policy on climate changes has been established, adding new industry sectors to the plan. Every sector will have to establish its own targets, aligned with the national goals
- Lack of tech driven solutions: There is a clear bottleneck in the carbon chain today: the verification of the projects that generate carbon credits. Even with a promising natural ecosystem and a vast range of possible projects, there are not sufficient technological tools to unlock this supply and meet the demand
- Increasing demand pressure: Recent regulatory changes and global sustainable development goals have pushed companies and other institutions to really act against climate change. Even with carbon prices reaching record highs in many jurisdictions, less than 4% of global emissions are currently covered by a direct carbon price within the range needed to meet the goals of the Paris Agreement.
- Fragmented and niched market: Purchaser preferences for carbon credits are highly diverse with factors such as sector, geography, and co-benefits of mitigation projects influencing demand and prices. Having said that, solutions offering standardization and pattern adequacy will have room and demand in the next few years
OFP: the MRV blockchain pioneer
Open Forest Protocol gives decentralized agency to natural projects of any size to measure, report and verify their forestation data. This is done via the Proof of Stake (PoS) – a cryptocurrency consensus mechanism for processing transactions and creating new blocks in a blockchain – in the climate neutral NEAR protocol.
Projects register tree data using the app and send information that is immutably stored in the blockchain. What was previously an expensive, centralized and slow process, excluding a considerable amount of potential projects and local communities, is now ensured and validated by the OFP network. Every single data set is ultimately reviewed by dozens of entities such as validation/verification bodies (VVBs) and forest expert companies in remote sensing, and environmental consulting.
And why do we believe OFP has an interesting approach to win in this space?
Given the increasing demand for carbon credits, Brazil having the natural conditions to be the world’s credit supplier, and clear inefficiencies in the traditional carbon chain – OFP is proposing an innovative approach with an unique combination of factors:
- Native team both in the climate and crypto markets: OFP was founded by a unique combination of crypto savvy and environmentalist entrepreneurs looking for a different approach to solve the carbon credit verification pain point. Crypto can play an interesting role in the climate tech space once it brings efficiencies and solves some security issues that were not able to be addressed
- Cross border angle: the OFP team is spread over the world and has attracted a syndicate of investors with different geographical backgrounds. As of today, this is key to their project once the supply of credits is mainly located in places where there is no technology being developed to address the whole sector. With its decentralized nature, OFP can be the bridge to connect proper technology to the players that will be able to meet the demand with their supply
- Unique go to market strategy: It is clear that the verification of carbon credits is the bottleneck of the chain. Currently, there is almost a monopoly run by Verra – that issues almost 70% of all the verified carbon credits worldwide; this is a huge entry barrier for any company that is bringing new solutions to this stage of the market. Nevertheless, OFP is proposing a technology that could, in the beginning, be complementary to Verra – and even used by them – and, in the future, substitute this centralized market and democratize the verification of credits worldwide