Pilot Launch | Promoting High-Quality Carbon Projects And Community Benefits In Indonesia Using Web3
Mercy Corps Ventures and Forest Carbon launch a data transparency pilot that will bring high-quality forest restoration data on-chain for the voluntary carbon market, driving positive impact for rural communities in Indonesia.
Pilot goals:
- Integrate Web3 technology into the carbon credit issuance process, generating and storing the high-quality data missing from the current market
- Increase trust in carbon markets and capital flow into local communities
This post is the first of a two-part series; the second blog will share key insights after the pilot is completed. Written by Ken Kou, Web3 & Innovation Lead at Mercy Corps Ventures, and Devan Wardwell, Chief Operating Officer at Forest Carbon.
Carbon markets are working, but need to be optimized for quality and equity.
Despite the nearly 400% increase in demand for carbon credits seen in the last 12 months, small landowners and Indigenous communities are at risk of being left behind. Climate finance is often only accessible to large-scale projects with a minimum of 10,000 hectares of standing forest. The barrier to entry is high due to an opaque and highly technical system.
In addition, credits can vary widely in quality. Some are generated by high-quality projects that are truly shifting land use behavior, but others generate questionable additionality or co-benefits. Thus buyers are often under pressure, wondering where to channel millions in climate finance.
A carbon offset project is an area of land or water that is being used to reduce carbon emissions or remove carbon from the atmosphere (e.g., through land regeneration, which accelerates the natural return of forest cover). Projects like this are growing in Indonesia, which is one of the world’s biggest carbon sinks, home to 36% of global peatlands and 20% of mangrove forests.
The challenge starts at the beginning of the value-chain with project design, research, collection of baseline project data and community engagement. Associated expenses are often prohibitive; with the upfront cost for project setup at a minimum of $3–5 million, it does not make economic sense to launch a small — yet valuable — project at the community level. Reducing these costs is critical to ensuring a more equitable flow of carbon finance.
Beyond the initial design and launch phase, which takes approximately two years before cashflow can be generated, regenerative projects then need to operate in a centralized carbon accreditation system. This approach relies upon manual audits that can take up to six months to verify a credit, which has to go through a series of standard bodies and auditors. Without a sophisticated technical team, Indigenous communities usually cannot overcome these barriers, which is why most carbon finance is directed at large-scale commercial projects. Further, even with successful projects, investor and broker intermediaries can take up to 50% of the revenues from carbon credit sales, reducing revenue for project operators and communities.
The Pilot
We’ve partnered with Forest Carbon, developer of the Sumatra Merang Peatland Project, which restores degraded wetland forests in Indonesia and delivers benefits for local communities and corporate buyers, while increasing biodiversity. Over the past five years, Forest Carbon and its partner Global Alam Lestari have successfully prevented forest fires through hydrological restoration of the project site, which has accelerated forest cover return on the 22,000-hectare project by 27%. This project captures an average of 1.3 million tons of CO2e annually, employs more than 40 local community members, and has facilitated investment into local educational programs and a community health center. Investing in community-led forestry is an efficient way to distribute community benefits, in addition to direct investments in community health, education and livelihoods.
This pilot is designed to address quality and equity concerns in the current carbon market, as we seek to more clearly define what makes a quality carbon credit.
We believe we can improve the quality of carbon credits by offering more granular and robust impact data to buyers and channeling more funding to community-led initiatives.
To accomplish this goal, the pilot will leverage Forest Carbon’s 22,000-hectare peatland restoration site in South Sumatra, working with a Web3 protocol to increase data transparency. Data layers will address some of the common criticisms that projects face, and also add a monitoring and evaluation layer to analyze Forest Carbon’s community impact.
Web3 can support a more equitable flow of climate finance to local communities by:
1) Increasing trust
Web3 protocols have the potential to provide an immutable ledger to make data accessible to buyers and enable them to track impact on demand. This makes a currently opaque audit and verification process far more transparent and builds a foundation for decentralizing the verification process. Decentralized verification for projects like Forest Carbon’s are currently just a roadmap feature of platforms in the regenerative finance (ReFi) space. Currently, the focus is on bridging carbon credits on-chain, which relies on a trusted third party — defeating the concept of a trustless system that underpins most Web3 principles.
The ultimate goal of the pilot is to secure corporate buyers that value transparency, and are willing to pay a premium for impact measurement data embedded into each carbon credit. In addition to impact metadata, buyers will also have the option to choose exactly how much of their sales contract is directed towards community impact, through a community forest program that delivers more revenue to Indonesian communities.
2) Ensuring quality
Ensuring high-quality projects can tell their impact story is a critical step toward strengthening the impact verification process. By building a foundation for decentralized verification, multiple experts can weigh in on the technical aspects of a project like Forest Carbon’s restoration site. Providing more robust and transparent data on biodiversity, climate, and community impact opens up elements of the project that are currently only analyzed by a single auditor.
The pilot will support an innovative structure that goes beyond co-benefits alone; the goal is to help communities create forest restoration businesses, not just co-benefits.
For buyers supporting Forest Carbon’s commercial-scale peatland project, which generates over 1 million carbon credits per year, the Web3 protocol will also provide the option for buyers to channel additional funding to a new community forest project next to the Sumatra Merang Peatland Project — bringing an additional 5,000 hectares under management by local communities. This sales premium will provide critical pre-funding to build a long-term, community-based project where 100% of all revenues generated from the community forest will exclusively benefit community members, providing a sustainable revenue source.
“We are actively working to bring revenue to Indigenous and local communities, but we need to bring down margins on investment and sales to make projects like these commercially viable. Shortening the time to market, and bringing project data on-chain is an important first step towards decentralized verification of project impacts and making small-scale projects work.”
Jeffery Chatellier — Chief Executive Officer, Forest Carbon
Our Hypothesis
Integrating Web3 into the carbon credit issuance process can optimize current systems by adding a data-driven layer of validity, as measured by:
- Time and money saved during this process compared to the traditional verification process, while also increasing the quality of the carbon credit
- Qualitative feedback from buyers on the confidence in the data on-chain compared to traditional, off-chain verification
Reducing reliance on intermediaries such as sales brokers will bring more tangible benefits to Indigenous communities by eliminating transaction commissions and optimizing the flow of carbon finance, as measured by:
- Increase in carbon credit sales price (due to presence of more transparent and comprehensive impact data and the ability to directly invest in additional community benefits)
- Total $ revenue secured through the sale of carbon credits
- % margin taken by intermediaries (pre- and post-Web3 integration)
Implementing the pilot will direct more revenue to the communities in Indonesia who are working on this project, as measured by:
- Total $ value and price per credit channeled to the community forest on top of normal carbon sales
- Touchpoints with communities to collaboratively design co-benefits
- Measurable, long-term improvement in community wellbeing from co-benefits, ensuring the project is tracking more than just outputs, such as investment into local health and education programs.
Our Learning Questions
- How can Web3 increase revenue and co-benefits for Indigenous communities involved in forest carbon projects? How can we measure the impact of carbon credits to communities effectively?
- How can we accelerate the process to get more carbon projects verified? What is the path for a project developer to leverage new verification technologies in the Web3 ecosystem?
- Are corporations willing to make the jump to Web3 protocols if the impact data is of higher quality? Will more carbon financiers, or existing buyers of forest carbon credits, pay a premium for a project verified like in this pilot?
Improving the quality and integrity of forest carbon and restoration projects is key to their future.
As a result, Web3 offers huge potential for transparency and to ensure high-quality projects are recognized in the market. At present, most Web3 carbon projects are simply tokenizing and bridging existing credits to sell onwards to buyers.
This pilot is an opportunity to go beyond that by working with an established project developer to integrate Web3 technology into the carbon credit issuance process itself, generating and storing the high-quality data missing from the current market.
Moving this process on-chain would introduce more speed in verification while maintaining or enhancing quality, and also more transparency in the carbon credit sale. This has the potential to build a far more equitable and trustworthy carbon market. In doing so, the pilot can help increase capital flow into carbon markets, while driving vital efficiency and co-benefits for local communities.
Stay tuned for updates, evidence, and insights on our other Mercy Corps Ventures pilots, responsibly testing Web3 solutions for unbanked and underbanked populations in emerging markets.
