How Do We Solve Climate Change?

An Intro to Carbon Offsets with NORI CEO Paul Gambill

Whenever friends or family ask me for more information about regenerative finance, I start by sending them a 19-minute LOOM recorded by Paul Gambill, CEO of Nori, a carbon removal marketplace. You can find the complete video here.

If you’d like to receive my weekly newsletter about crypto, climate, and carbon, please sign up for my substack here.

If you follow Paul on Twitter, you know he’s a font of useful information about how carbon markets work. In addition, I’ve interviewed Paul for our upcoming podcast series and he’s been incredibly generous in sharing his knowledge. I find the clarity with which he talks about climate change and regenerative finance refreshing.

Despite the clarity with which Paul makes his points, I’ve decided to deconstruct the talk to provide some additional context in order to help non-technical people who might get stuck on some of the finer details. Let’s jump in.

Paul starts with the proverbial question: how do we solve climate change?

Many of the international agreements that refer to climate change use global temperature as a benchmark.

Global temperature is a benchmark because the planet is currently tuned to operate at a certain temperature, and when we get well beyond that temperature, the systems that provide us with climatic stability start to break down. We increase the temperature when we emit carbon into our atmosphere and it converts into carbon dioxide which captures heat, thus warming the planet.

Predictable food production, for example, requires that we stay within a range of 2 degrees Celsius of the pre-industrial temperature. When we get past the range of 2 degrees, we’re in trouble.

Beneath the polar ice-caps, for example, rests 1,400 gigatonnes of carbon in the form of Methane (CH4). If the polar ice caps melt because the planet is too hot, about 40% of the world’s population will be at risk from rising sea levels. Without a means by which to pull that carbon back into the ground, our ability to recover a predictable planetary state would be made increasingly difficult.

As a recent New York Times editorial put it, “Once we overshoot 1.5 degrees Celsius, even getting emissions all the way down to zero will not cool the world back down. This is the brutal math of climate change, and it means that the only way to bring global temperatures back down in the future is through the large-scale removal of carbon dioxide from the atmosphere.”

Paul points out that global temperature as a pursuable goal is problematic because it represents an output, whereas carbon dioxide parts per million (PPM) represent a better metric because it is an input. In other words, when we analyze PPM, we look at how our activities are leading to increased greenhouse gases (GHG) in the atmosphere, rather than the impact of those greenhouse gases on global temperature once they’re already emitted.

To ensure a stable global temperature, we need to get from 420 ppm to 300 ppm, our pre-industrial state.

To get there, we not only have to stop increasing the total amount of carbon in the atmosphere, but we have to pull carbon from the atmosphere and store it in the earth’s natural systems, thus reversing climate change. Our current trend upwards has to be reversed.

With neither governments nor charities doing enough to slow the PPM upward trend, we need another tool in our toolkit, and that’s where carbon markets fit in.

An imperfect yet necessary part of the carbon reduction equation is climate offsets, a means by which companies can compensate for their carbon footprint by paying others to make up for their emissions.

Paul points to three types of offsets: reductions, avoidances, and removals.

Reduction offsets occur when, as the name suggests, carbon emissions are reduced. For example, a startup in Texas aims to convert energy from oil extraction into bitcoin mining, thus reducing carbon emissions from flaring to almost zero. The polluting activity continues, only with far less of a carbon footprint.

Avoidances occur when we replace a polluting activity with a non-polluting activity. Replacing a coal plant with wind farms is an example.

Finally, removals are when we take carbon out of the atmosphere and store it in the earth, most often in natural systems. As Paul points out, 95% of voluntary offsets are reductions and avoidances, whereas to beat climate change, we are going to have to supercharge our ability to pull carbon from the atmosphere.

There are lots of ways to pull carbon from the atmosphere, some of which depend on natural systems, and some of which involve technology and human ingenuity.

Paul makes the point that natural systems scale well but their total carbon sequestration capacity is difficult to measure. Industrial/technological solutions, on the other hand, are easier to measure but more difficult to scale.

Planting trees, for example, is cheap and can be done with or without human intervention. In general, it costs less than $1 USD to plant a tree. An average tree, should it live for 100 years, can hold up to 1 tonne of carbon before it dies and that carbon is released back into the air. Direct air capture technology, on the other hand, costs about $1,200 USD per tonne of carbon captured.

So if voluntary carbon markets are growing and there is, as Paul states, more demand for carbon credits than there is supply, why is the carbon offset market bottlenecked? What’s holding it back?

Currently, in order for a carbon offset project to be attractive to buyers, it needs to pass through a verification process which, in theory, ensures that offsetting is actually taking place. The process of certifying projects is currently managed by three main NGOs who create the standards for protocols for projects and then ensure the methodology to measure the overall sequestration capacity is scientifically sound.

Herein lies the problem: as the above graph suggests, achieving certification is a long, drawn-out, and expensive process that few people can afford. Estimates I’ve seen some estimates for accreditation between $100k and $400k for projects in the United States (Paul puts the number at between $30k-$100k USD), a cost that is unachievable for anyone except the largest of landholders.

With such high barriers to entry, carbon markets are currently excluding the vast majority of potential landholding participants, including small farmers that make up the majority of landholders in the global south.

Small farmers will be key to solving climate change: if we can align incentives correctly, they stand to open a new revenue stream that can be life-changing. If we don’t get market design right, small farmers in the global south will be at the forefront of cutting down the forests.

Once a carbon offset project is certified, we then enter into the labyrinth of opaque markets in which brokers sell credits to corporations in private sales. Private sales have proven time and again to be problematic. It’s easy for some credits to be sold over and over again, and monies tend to accumulate in the hands of the re-sellers without ever getting to the project originators.

When re-sold, carbon credits do not fulfill their purpose of reducing anyone’s emissions. If anything, they enable, to use Paul’s words, fraud.

Carbon credits can also be double-counted, meaning more than one company claims the same credit for their emissions reductions, or a farmer sells the same credit to multiple buyers.

Finally, without transparency, the marketplace cannot properly calibrate carbon credit prices.

So why is the unaccountable model of carbon markets allowed to flourish?

In essence, the registries that certify projects do not have any reason to change the status quo. NGOs like Standard Verra make their fees by charging the project originators, and because they’re non-for-profits and not companies, they also don’t have a competitive imperative to move the industry towards innovation.

At around the 12-minute mark of the video, Paul switches to discuss how Nori is designed to help fix the problems inherent in the current carbon market design.

First, Nori prioritizes carbon removal, as opposed to reductions or avoidances, in order to help get us closer to our PPM goals.

Second, carbon credits should not be re-traded; according to Nori, they should be bought and immediately consumed (retired in carbon market-speak) such that they cannot be re-sold. That way, the buyer immediately attributes the offset to their company’s footprint, and the middlemen are given no opportunity to flourish by operating in the market’s shadowy corners.

Third, carbon credits need to go on-chain, meaning they should be registered on the blockchain, along with their date of registration, who originated the project and how it was verified, and what the final price was.

By moving carbon credits onto the blockchain (for more info on blockchain’s use case here, see this article), we can avoid the issue of double-counting by making sure no one is selling the same credits to more than one person.

Similarly, with more perfect price information, the market can give buyers and sellers a better sense of what they should be paying/receiving for carbon credits, similar to how stock markets give everyone the opportunity to gauge in real-time the market’s valuation of a company’s shares.

Nori seeks to accelerate the carbon market’s evolution by acting as a go-between for suppliers of carbon projects and buyers. In Nori’s marketplace, suppliers have their projects quantified by a third party and then their methodology is verified by another third party.

Once projects are verified, they are converted into Nori Removal Tonnes (NRT), with each NRT equating to 1 tonne of Co2 sequestered for 10 years.

Why 10 years? A lot of carbon projects are paid either ex-ante or ex-post. Ex-ante means a buyer pays for the carbon before it has been sequestered, whereas ex-post means that it is paid for after the carbon has been sequestered.

Because carbon sequestration occurring through natural systems is difficult to project, buyers prefer to pay ex-post because they have more guarantees that they’re actually getting what they’ve paid for. Sellers would prefer ex-ante, and a lot of financial mechanisms will eventually be created in order to allow buyers to reduce costs and increase risks by financing projects from which they can later source carbon sequestration capacity.

In the meantime, Nori’s model ensures that, once it is removed, it is guaranteed for the next 10 years. A warranty is important because forests can sometimes burn down, so if you’ve counted towards your footprint offsets from a project that no longer exists, you’re offset balance is all of a sudden short.

If you spend a lot of time reading through climate change articles, you’ll eventually come to the conclusion that the most efficient and effective way to pull carbon out of the atmosphere is through soil. Proper soil management not only sequesters carbon but also enriches the soil, thus enabling more productive agriculture.

Nori focuses on regenerative agriculture because, as Paul says, it's the largest opportunity available at the lowest cost. With regenerative agriculture representing a win-win for farmers and the planet, one might ask why it’s such a hard sell to convert farmers to regenerative practices?

Simply put, monoculture-focused agriculture can provide the best return in the short term, even if it degrades the soil and reduces returns over the long term. Farmers moving to regenerative practices require 7–8 years of proper land management before achieving the promised benefits. Those farmers need a revenue bridge to incentivize their behavior, which is exactly what participation in offset programs can provide.

In the example given by Paul, a farmer sold 14,010 tonnes of carbon and earned $210,000, while only paying $4000 to be verified (I assume it’s cheaper to verify because regenerative agriculture is adding sequestration to land that starts with very little and is thus easier to measure. I’m still trying to clarify that point and will update this note in due course).

I am not sure what the unit economics are in the United States, but in Ecuador, where I live, a hectare of tropical forest can sequester around 5 tonnes of carbon. Across the world, the exact value can vary from as low as 0.7 in some boreal forests to 10 tonnes in other settings (source).

If we assume a 5 tonnes per hectare and we assume he’s paid for 10 years of carbon (I have to confirm my math), we’re looking at a farm that is roughly 4,200 hectares or roughly 10,000 acres, which is not a bad return for someone working towards an increased agricultural yield. $20,000 a year in the US is a decent return for a farmer in transition; it can be a game-changing return for small farmers in the global south.

In Nori’s marketplace, we have two concepts we have to grasp: the first is that Nori Carbon removal tonne (NRT), which is created when a supplier (let’s say a farmer) is able to verifiably sequester a tonne of carbon. That supplier sells his credit on the Nori marketplace for a Nori Token ($NORI). The price of the NRT is fixed at one $NORI, but the value of $NORI can increase or decrease with market fluctuations.

Once the NRT is sold for $NORI, the NRT is retired on the blockchain; it can no longer be re-sold. However, the $NORI the farmer has received can be redeemed immediately for cash, or if the farmer thinks the value of $NORI tokens will increase over time, she can hold on to them and redeem them for a greater price at a future date.

Paul points out that the company’s goal is for $NORI tokens to become a reference price for carbon, similar to how we speak of West Texas Crude as a reference price for oil.

I like this analogy because, even though crude is a commodity, different varieties of crude carry different prices. For example, Amazonian crude or Oil Sands crude is thicker and thus requires more engineering to get through pipelines and incurs a higher cost to refine. Even though, in the end, it’s all oil, different strains of crude demand different prices.

If $NORI is viewed by the market as representing high-quality carbon projects, for example, its price may trade above the market price for a tonne of carbon. If, on the other hand, Nori the company does a bad job selecting its projects, the price could decrease, thus acting as an incentive for Nori to safeguard the quality of its projects.

Paul ends by pointing to Nori’s early results: as of March 2022 Nori had helped remove 76,000 tonnes of Co2 and paid out $1.41 million USD to farmers (roughly $18/tonne).

In addition, Paul mentions Nori’s long-term goal: image behind every purchase, every airline ticket, every Amazon order, a transaction occurs in the background to offset the activity’s footprint by purchasing carbon removal. These types of systems are needed if we really want to get towards a net-zero world.

What I like about Nori is that it’s a clear example of what I call no-tradeoffs innovation: Nori sets out to tackle the major problems inherent in existing markets by building around the current design flaws and proving that a better way exists.

Of course, Nori, like the Carbon market overall, will struggle in the short term to scale its supply. However, with the total addressable market of Co2 removal representing 5 billion tonnes of carbon, the business opportunity for Nori is over $90 billion, the type of opportunity climate-focused investors can get behind. If Nori’s methodology is sound, buyers will flock to the company’s marketplace.

I offer this summary in hopes of spreading Paul’s talk further and providing some additional context. If you appreciate this type of content, let me know and I’ll do more.

If you’d like to receive my weekly newsletter about crypto, climate, and carbon, please sign up for my substack here.

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