Intense natural disasters are on the rise around the world and biodiversity is quickly diminishing.
The negative impact that humans are having on the earth is undeniable, but it doesn’t have to be this way. Preserving and restoring nature is our clearest path to solving this problem, but there is not nearly enough attention or funding going in this direction. Markets have proven to be far more motivating than altruism or even self-preservation, which is not ideal, but this is the reality that we are living in. This means that we need to harness the motivational power of financial markets to bring more funding and labor into the fight to save our planet.
Voluntary Carbon Markets
Voluntary carbon markets are one of the possible solutions that are being developed to fund this mission. In voluntary carbon markets, individuals, organizations, and corporations that want to offset their carbon output can buy assets called carbon credits. These carbon credits are generated by people who are planting trees, improving their soil, or taking some action on their land that sequesters carbon. So, in theory, the people who are polluting are funding the restoration efforts. This is a great model, but there is a lot of room for improvement too.
The market opportunity has the potential to be significant. If 85% of the global emissions of 51 billion tons are reduced through decarbonization strategies, more than 7 billion tons will need to be offset. Assuming a cost of $100 per ton to sequester emissions suggests a $765 billion market. This is larger than the software sector today. The total volume of retired credits in the market is currently at $1-$2B a year and it’s expected to 100x by 2030 (Ecosystem Marketplace, McKinsey, IFF) when S&P1200 ESG goals and net zero commitments start kicking in.
One of the biggest challenges currently facing voluntary carbon markets is the fact that it can take carbon projects up to 5–10 years from the start of the project to actually get certified and generate revenue. During this time, projects need to spend capital to actually run the operations.
There are also risks that many projects will fail for some reason and will be unable to deliver the credits. These risks need to be assessed, and it is easier to determine that a project will succeed as it gets closer to completion. This assessment requires highly specialized due diligence and risk analysis which most of the investment firms do not possess.
Forward Credits
There is obviously a need for methods of funding carbon projects in advance, before they get started, to increase their chance of success, and to create projects that may have never been possible without that initial funding. To address this need, traders in voluntary carbon markets have started to purchase carbon credits before issuance by giving an advance payment, which are called forward credits. These forward credits allow the projects to get their money in advance, and the traders are able to capture the arbitrage opportunity and make extra money when the credits are delivered, since they purchased the forward credit at a discount.
Forward credits are still a relatively new idea, and there is no infrastructure to facilitate these types of deals on a larger scale. All forward credits are currently handled over the counter (OTC), which essentially means the deals are done behind closed doors and on a case by case basis, with no liquidity, no public trading and no clear market price. Carbon projects are easily taken advantage of in this arrangement because they don’t know if they are being given a good price, and they typically aren’t. Traders will often get credits from projects for pennies on the dollar, which prevents that money from going towards carbon sequestration. Traders don’t really win in this arrangement either though, because they are locked into these contracts for up to 5–10 years and it’s hard to exit them, because they are illiquid assets. There is a lot that can be improved for all of the participants here.
Enter Solid World DAO
This is where Solid World DAO comes in. We are providing the blockchain infrastructure that will make it possible to issue and trade forward carbon credits in a public market that is fully transparent with clear price signals. Our unique Web3 platform will offer narrow banded liquidity pools, which will bring a market price to different types of carbon projects for the first time ever. This means that blue carbon projects such as mangroves will be in their own pool and will have their own price, while other project categories such as agriculture and reforestation will be in their own individual pools with their own prices.
With these mechanics, investors and carbon projects can look at the market rate to easily estimate what their forward credits should be worth. In addition to this increased transparency and price clarity, this infrastructure also makes forward credits more liquid for investors, as they can buy or sell them at any time they want. These liquid pools are enabled by liquidity providers on the automated market makers. Anybody can become a liquidity provider and start earning up to 17% APR yearly through protocol fees.
Solid World carefully screens projects and only accepts forward credits from trustworthy investors. There is a very intentional risk management system set up to account for the risk of nondelivery. Solid World DAO has a community of experts who vet projects in advance to determine potential risks. The investor is obligated to provide solutions to these risks in order to be tokenized by guaranteeing delivery with replacement credits or using insurance providers.
These derisking techniques coupled with a liquid infrastructure will make it orders of magnitude safer to invest into new carbon projects. As liquidity, safety and trust of funding carbon projects increase, the investors are expected to start deploying 10–100x more capital towards new carbon projects.
The Solid World DAO platform is planning to launch in early 2023, but the community is already starting to form. Join our Discord server today to learn more and to reach out to our team with your questions.
