Challenges to and Opportunities for Origination in Latin America

By Matthew Carpenter-Arévalo

I recently attended a crypto conference alongside many actors in the regenerative finance space. Conferences always stretch my ambivert tendencies: I find it exhausting to introduce myself to people, repeat my story, and elbow my way into conversations amongst strangers.

Nevertheless, the value in attending conferences is engineering serendipity, so it has to be done. My strategy at this event was simple and genuine: when I met someone from the Refi space, I asked them a simple and genuine question: how can I help you generate more origination in Latin America?

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Right now we’re seeing literally billions of dollars being invested into carbon removal technology based on the idea that carbon markets will grow significantly over the short, medium, and long term.

If we were to ask investors and entrepreneurs what is the single biggest risk and bottleneck preventing the success of carbon markets, most would agree that we have to solve for origination, meaning we need projects that can pull carbon out of the atmosphere.

Representing the supply-side of carbon markets, origination takes two forms: natural systems and technology.

Natural systems are forests, blue carbon (meaning ocean-based sequestration), sustainable agriculture and forestry, etc. Technology-based solutions currently manifest themselves in the form of machines that literally pull carbon from the air.

As Paul Gambill, CEO of Nori mentioned in this article, natural systems are easier to scale and harder to measure, whereas technological solutions are harder to scale but easier to measure.

If we’re going to solve climate change, we’re going to need both natural systems and technology-based solutions, primarily because the technology isn’t yet ready to tackle the scale of the problem at the right price point.

Besides, natural systems have a lot of benefits that go beyond simply sequestering carbon. Humans have evolved to enjoy and feel refreshed in nature. As a species, we have no more important inheritance than our natural systems, especially because life on earth isn’t very feasible without them.

In my conversations with companies working in the carbon markets space, most are looking at ways to subsidize scaling the supply-side of their business, which means offering financing to individuals capable of developing origination projects, especially those projects with the potential for significant additionality, meaning the projects that are able to not only conserve existing carbon in the earth but also increase a plot of land or a region’s sequestration capacity.

As a source of origination, Latin America is sexy.

First and foremost, Latin America is home to the Amazon rainforest, which stretches across 9 different countries, as well as numerous other unique and under-threat bio-rich regions.

Second, despite the technical requirements that a project must conform to in order to achieve formal certification, origination is still very narrative driven.

In other words, a project is more attractive if I can tell a good story about co-benefits.

For example, maybe in restoring a logged part of the Amazon, I can talk about protecting water sources, creating economic opportunities for the local community, and providing protection for a rare monkey species. It’s easy to develop attractive narratives in Latin America.

There are other reasons to want origination to work in Latin America.

For example, a farmer in the United States may not be motivated to receive $20/tonne for carbon sequestration; the reward may be just too small to make a difference in their bottom line. For a small farmer in Ecuador, however, $20/tonne can be a life-changing amount of money.

Agriculture in Latin America is a difficult industry to work in for a number of reasons, including the fact that distributors can accrue the largest amount of value, leaving farmers to struggle to make ends meet.

What’s more, agriculture is different from other industries in that most people in Latin America don’t choose a career in farming but are born into it.

As commodity producers, farmers are subject to market price fluctuations, including reduced demand and/or increased supply, and it’s difficult for them to distinguish their products in order to demand a premium.

Given the oppressive market conditions, allowing farmers in Latin America to diversify their income and potentially increase their yield by adopting sustainable practices can be a game-changer.

Lastly, I see another major benefit to carbon markets, which is allowing farmers to finally access the tools of capitalism.

Hernando de Soto, the economist and former Peruvian Minister of Finance, wrote his celebrated book The Mystery of Capital based on the idea that poor people around the world are denied the benefits of capitalism because they don’t have official title to their property.

As a result, poor farmers can’t leverage their land to get loans to build a future income. Their lands and assets have value, sometimes massive value, but without title, farmers and others are unable to unlock the monetary value of their property. What’s more, they’re limited to transacting with people who will buy their property without a deed, meaning they sell their property at a significant discount.

In addition, interest rates between 15%-20% are common for poor farmers in Latin America, since only informal financial institutions will lend money to people without collateral. Often times loan sharks are using the profits from the drug trade to instigate another exploitative business. It’s badness all the way down.

Now let’s imagine that a small farmer has an origination contract. By not cutting down trees, planting more trees, and adopting sustainable agricultural practices, they’re going to receive a set amount of money every hour on the hour, thanks to a smart contract built around a satellite that monitors her property and analysis changes based on a machine-learning algorithm.

Now with a guaranteed income, she can access Defi loans of around a 5% interest rate against her smart contract, thus opening up even more economic opportunities. If you think this sounds far-fetched, I can tell you that it’s already happening in Africa with the help of Regen Network, which you can read about here.

Clever readers might notice that she probably can’t enter into an origination scheme without having title to her land, and that’s where the carbon market players and the state will have to work together. More on that in a little bit.

To finish off our conversation on the benefits of origination, part of what holds Latin America back as a whole is poor currency management.

Ecuador, where I live, had its currency collapse to the point where the banking system failed, depositors lost their life savings, and the country adopted the US greenback as its official currency. People in Ecuador are highly aware of how manipulative monetary policy can be devastating.

Recently, the Colombian peso and the Peruvian Sol have dropped dramatically in value vis-a-vis the US dollar, reducing the purchasing power of citizens of both countries. I won’t even begin to talk about the disastrous currency management in places like Argentina and Venezuela.

If origination rewards are paid in a stablecoin like USDC, for example, farmers not only have an additional source of income, but they also have diversified their savings, protecting against inflation. Again, for many, this is a game-changer.

Just like Venezuelan citizens decided to unofficially dollarize their economy in order to bypass poor management of their local currency by the government, providing farmers the option of choosing in what currencies to keep their savings increases their freedom. Or, as Snowden puts it:

Some people may object to this benefit based on the idea that small farmers in Latin America need to be protected from the volatility of crypto-currencies, but personally, I think that depriving poor people of the same tools rich people use to protect their savings is unjust because it perpetuates inequality.

Challenges to Developing Origination in Latin America

So the picture I’ve painted of how origination can improve the lives of farmers in Latin America may seem idyllic, but the truth is that getting to that end goal is going to be very, very hard.

First, not every country in the region has a regulatory framework that enables carbon markets to function.

As I’ve written about here (in Spanish), Ecuador’s constitution currently prohibits the monetization of environmental ecosystem services, thus limiting farmers’ ability to enter into carbon schemes.

Bolivia is another country where origination projects struggle to get off the ground. In the case of Bolivia, the problem is the result of over-regulation and slow-moving bureaucracy.

Latin American policymakers often develop policies based on preventing bad things from happening without considering how such policies also prevent good things from happening.

In other words, public policy in LATAM often optimizes for limiting the downside rather than extracting the maximum potential of the upside.

With that in mind, we then have to consider the role that corruption plays in policy design. If a new market represents a threat to an existing market, you’re likely to find powerful interests lobbying or bribing lawmakers to regulate the new businesses out of existence.

Look at any Latin American country, for example, and you’ll likely find that ride-sharing apps are officially illegal, even though they continue to operate.

Such scenarios exist because taxi unions have a lot of sway over lawmakers, but lawmakers don’t want to upset consumers that demand choice.

As a result, many services exist on the edge between formality and informality. If such a scenario happens with carbon markets, the demand-side, meaning the people buying carbon credits, will not look kindly on investing in projects where legality is in question.

Then there is the issue of property rights. Origination schemes may start with large landholders since they’re able to offer volume and usually have well-defined property rights. The problem with large landholders is that their narrative is less sexy than the stories we can tell about co-benefits being delivered to small-scale farmers.

Small-scale farmers represent ideal partners in origination, but the problem, as I mentioned before, is that many don’t have title to their land.

Without title to their land, it’s difficult for small-scale farmers to enter into agreements based on land management.

Here pro-carbon market actors will have to work with governments to ensure property rights are guaranteed and enshrined into law, but sometimes that’s not enough.

Land invasions are common in Latin America.

When a land invasion happens, someone will show up and occupy your land, and maybe even engage in practices like artisanal mining or logging without your consent. Years can pass while you wait for the legal system to take action, assuming there are no dirty mechanics at play. It’s not uncommon for professional land invaders to pay off bureaucrats in the property registry in order to obscure ownership or to pay off a judge if the case goes to court.

Then there’s the fact that the agriculture frontier and the forest frontier will start to push up against each other.

When we talk about the agricultural frontier we may have an image in mind of where the tree line ends in the north of the planet and the permafrost begins. However, in many Latin American countries, the two frontiers may meet at different places on different properties, and there is likely to be resistance.

For example, if you travel to indigenous and non-indigenous communities in the Amazon, you’ll often find divided opinions about the oil and gas industries. Some people in the community will work on the oil rigs, and some will protest them.

Similarly, arriving in a community with a new carbon sequestration project will not necessarily generate community consensus.

Some will want to restore the forest in exchange for funds, either distributed directly to community members or to a community treasury which will, in turn, be used to build infrastructure projects like schools and health clinics, whereas others will side with the forestry industry and want to push the origination projects out.

The existing industry may even pay members of the community to protest or sabotage the origination project, especially if the existing industry is say, polluting waterways by dumping their trash into the river system.

In other cases, some village members might not agree with the distribution of funds and therefore work against the project by creating leakage (when deforestation moves from one zone to another) as has happened in Brazil (see here).

My point is that no amount of social good will protect an origination project from potential saboteurs.

Finally, as I’ve addressed in previous posts, in order for carbon markets to work, they need to take the form of an hourglass, rather than a bell curve, meaning value has to be concentrated at the top (people who buy) and at the bottom (people who sequester carbon) rather than in the middle (middlemen/distributors).

Such a statement is easier to write than it is to implement.

When markets become sophisticated different layers specialize: someone focuses on buying the land and financing the project; someone else focuses on implementing the project and ensuring proper land management; someone else focuses on commercializing the project, etc.

It would be easy for groups with good intentions to develop infrastructure that leaves small farmers or landholders with the smallest amount of value since each stage of the origination process requires deep expertise.

So where does all this leave us?

Origination has massive potential but also massive challenges in Latin America; no one should enter the space naively.

Broken systems are surprisingly resilient because someone benefits from the disfunction and that person is not necessarily playing by the rules.

Developing a massive origination market will have to begin with finding communities that are deeply committed to the objective.

Their success has to be evangelized such that others want to emulate their success. Such a task may not be easy; in low-trust societies, investors may have to anti-up first before communities are willing to dedicate time and resources to new, untested schemes.

In addition, as much as carbon markets represent an opportunity for farmers to escape the limits of local markets and the restrictions of the state, in order to work properly carbon markets will depend on the state to ensure property rights as well as rule of law.

For origination to achieve its potential, players in the ecosystem will have to get organized.

Professional associations involving agricultural groups, investors, community groups, project developers, climate scientists, and web3 platforms will have to come together to educate the market, including regulators (politicians and bureaucrats) in order to develop the regulatory frameworks and the ideal ground-level conditions in order for origination to soar.

Some organizations are better placed than others to lead this challenge: companies like Regen Network and Pachama, alongside NGOs like the Open Earth Foundation, have strong historical ties to the region and harbor institutional knowledge about how to be successful in LATAM. We’ll even need coordination amongst competitors to make carbon markets work.

New financial models, including DAOs (as I’ve written about here), will have to be built in order to buy land and run pilot projects. Some people object to such models as representing a type of new colonialism, but data can show us where unique ecosystems are under threat from other land purchasers, such as large agro-business or shrimp farming in coastal areas. We’ll need to defend nuance, even when our allies come out against us.

Lastly, success breeds success. As we’ve seen in the tech sector in Latin America, one or two companies telling a story of success against the odds can radically change the competitive environment and help put pressure on regulators to enhance, rather than stymie, the growth of a new sector.

Personally, I have a strategy to manage my own expectations: when I become overly optimistic, I spend time talking to people trying to do origination in LATAM. When I become overly pessimistic, I spend time reading about the technological advances that are bringing us closer to highly functional carbon markets.

Lastly, in outlining the challenges origination faces, my goal isn’t to discourage but to help others think about how we solve the problem.

When I get frustrated, I remember that our objective is not to demand that the systems we want to change modify themselves according to our wishes; rather, it’s our task to figure out how to be successful in different systems.

If the world we’re fighting to create is worth it, then no battle is too big.

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