Reforestation, Emerging Markets, and The Voluntary Carbon Market Opportunity
Afforestation and reforestation have been recognized as leading climate mitigation approaches and have the potential to incentivize and reward small producers, landowners, and land stewards for adopting or continuing regenerative practices on their land. We believe that Web3 provides the perfect opportunity to reframe how we identify, assess, finance and incentivize regenerative land practices.
Written by Tim Rann, Managing Partner at Mercy Corps Ventures.
Healthy ecosystems are the foundation of human life. Their fate is intertwined with those of the producers and communities within that must adapt to the increasing stresses of climate change.
Over 1.6 billion people rely on forests for their income, while the livelihoods of hundreds of millions of farmers are increasingly at risk due to the ripple effects of land degradation. At the same time, one of the most promising ways to mitigate climate change is to sustainably plant, regenerate, and conserve forests on large swaths of land to create carbon sinks for drawing down carbon dioxide. Afforestation and reforestation projects have been recognized as leading climate mitigation approaches to reach carbon sequestration goals, but the value of these approaches extends far beyond carbon alone. They support forests to adapt to climate change by decreasing human pressures (for example by reducing the destruction of habitats), which enhances landscape connectivity and reduces fragmentation (facilitating species migration under climate change conditions), and are critical to preserving biodiversity, avoiding soil degradation and protecting other natural resources, such as fresh water.
However, forestation efforts face a number of challenges related to digitization and precise, transparent and accurate verification of forest data.
The measurement, reporting and verification (MRV) of environmental data relies on a legacy system, which is expensive, inaccessible, and lacks transparent and consistent standards. The current centralized carbon accreditation system uses paper-backed, custom verification by private organizations, one project at a time. If we are to curb global temperature increases and preserve livelihoods, we need to restore upward of 350 million hectares of degraded land by 2030. Last year, we lost 12 million hectares of established forest and we only managed to bring 4.3 million hectares of new carbon projects online. This is despite surging, robust demand in the voluntary market for high-quality carbon credits.
We have a lot of work to do.
Carbon project development is highly technical and complex. The current process for MRV is siloed, expensive, and ill-equipped to accommodate the influx of projects necessary to meet the massive and growing demand for carbon credits. You must have specialized knowledge on how to design the project to meet rigorous certifier MRV requirements (like Verra’s Verified Carbon Standard (VCS)), including a deep understanding of feasibility, carbon baseline measurement and sequestration projections, and recognized methodologies and practices. The upfront cost for setup is usually a minimum of $50k.
This means that launching a project does not currently make economic sense if it is below a certain scale (i.e. 10,000–20,000 hectares) due to the costs of a VCM, data collection, and actual project implementation, such as planting trees or adopting new regenerative practices. On top of this, expensive validators are required — third parties paid to provide an independent assessment of a project before it is launched. After launch, another third party validator has to verify project data to determine the actual carbon sequestration.
The cost for all of the above is extremely high, and this is before any credits are issued. This means community level landowners or project developers must have a lot of cash upfront to pay for all of this — perhaps for years — before they can realistically generate revenue from the carbon credits. And the large number of intermediaries in the ecosystem allows for carbon credit fraud, and even double spending.
The Market Need
Let’s start with supply. From a macro perspective, the voluntary carbon market (VCM) is expected to grow significantly over the next decade and continue that trajectory for decades to come. With growing numbers of corporations being pushed to adjust their operating models in line with governments’ net-zero targets for 2050, demand for carbon credits has risen dramatically.
Web3 platform, Open Forest Protocol, estimates that 99% of the 100,000 accessible forestation projects have been untapped in terms of their carbon sequestration and accreditation potential. The world needs at least 350 million hectares of new, high-quality forest carbon projects, but less than 4.3 million hectares of new projects came online in the same year. On top of this, there are currently less than 15 project developers in the world capable of exceeding 1 million hectares under management.
“Even with the tech we have developed and all the capital flowing into the carbon markets, it will be challenging for us to achieve 1 million hectares under management by 2026. This is a massive lift and with large scale projects (40k-250k hectares). The market is not about a few major developers owning the entire market. It is about empowering 1,000s of communal, small and mid-sized project developers that are more or less locked out of the market entirely.
Devan Wardwell | Chief Operating Officer — Forest Carbon
So the current supply cannot be met. But at the same time, there is rapidly growing demand for carbon credits. In 2020 the net-zero pledges from corporations increased threefold, there is a projected 15X demand for carbon credits through 2030, and there has been a 60% increase in carbon credit prices in 2020. The long-term outlook for carbon credits is extremely bullish, though of course there are many unknowns in terms of regulations, trust, corporate governance, investor activism, and new sequestration technology. Regulatory tailwinds will continue to bolster the markets, but voluntary markets are rapidly gaining speed as corporations themselves are setting sustainability targets (pressed by consumers).
What This Means for Emerging Markets
Small producers, landowners, and stewards of communal lands have limited incentives or rewards for adopting or continuing regenerative practices on their land. Within this rapidly growing carbon market, corporations are eager to pay these stakeholders to provide ecosystem services that improve water quality, biodiversity values, and sequester carbon. While we have the technological infrastructure in place, the current system simply does not reach small and medium-sized landowners. Currently, only large forestation projects are able to afford the tools, data and other services to demonstrate project legitimacy and access financial support. This creates issues of equity and justice, as marginalized landowners and communities are unable to demonstrate the value of their projects and ongoing stewardship of the land.
For a small land steward in Central Africa, for example, the ability to be paid directly for restoring degraded and unproductive land can be life changing. Not only is this critical income source, but it also is regenerating ecosystems that are the most vulnerable to, or already affected by, climate change. This has positive ripple effects on the resilience of their agricultural livelihood, as well as the resilience of the surrounding ecosystem and food system.
The Opportunity
We believe that Web3 provides the perfect opportunity to reframe how we identify, assess, finance and incentivize regenerative land practices. This is why we invested in Open Forest Protocol (OFP).
In response to the mammoth VCM market opportunity and digitization challenge, OFP has built a comprehensive blockchain solution for forestation projects and MRV of nature-based carbon removal.
OFP’s solution straddles two very different worlds that are equally important: the climate movement of nature-based solutions and carbon markets, and the crypto world of smart contracts and distributed ledgers.
The company’s product offering consists of mobile and web applications for data uploads from the field, a blockchain-based structure for trustless verification of environmental data, and the resultant open-source data upon which climate solutions can be built. The protocol is permissionless and open-source. It’s built on the NEAR blockchain, providing transparency and security over a traditional data ledger. It allows anyone from around the world to start a forestation project, credibly report its progress, and access carbon financing. By 2030, OFP is targeting 10,000,000 hectares to be managed for delivering carbon credits.
“Through OFP we’re able to invert a lot of how traditional reforestation has been done. Traditional reforestation is opaque — with OFP we make it open. Traditional reforestation is disparate, you don’t upload data on a routine basis, it can be every 3 or 5 years — with OFP it’s timely. The existing system is binary, it’s between a consultant and an individual project and the consultant will help the project access the market — with OFP it’s systematic, it’s a collaborative effort and the value is held on the protocol instead of held in a specific siloe.”
Michael Kelly — CPO, Open Forest Protocol
Key Stakeholders:
- Project Operators (Land Stewards)– upload forest data
These are the people restoring ecosystems through reforestation, afforestation, assisted natural regeneration and conservation. This could be a small landholder, a collective / community managing a shared resource, an NGO, or a project developer. These initial operators will be critical in helping to refine the product, value proposition, user segmentation and initial minting of carbon credits in 2023. - Project Validators — confirm or challenge data upload
The Open Forest Protocol is secured by a network of restoration monitoring experts known as validators. Validators earn fees in exchange for using their technology to verify forest measurements. These could be government agencies, tech companies and forestation organizations. OFP currently has >16 validators leveraging bleeding edge tech and datasets. - Local Communities
Truly sustainable restoration projects require the support of local communities. OFP’s projects contribute to community health in the long term and in the short term by providing access to the OFP as community validators.
“We’re creating a value cascade, where, if the project is employing indigenous community members, when the data upload is affirmed and the carbon credit is created, the credits go direct to the indigenous community members instead of being bottlenecked through some type of consultant.”
Michael Kelly — CPO, Open Forest Protocol
OFP’s value proposition is desperately needed. Their protocol is creating a new market for small and medium-sized projects to access carbon accreditation, with a blockchain system for certifying nature-based carbon removal. Carbon is rewarded in a recurring and transparent manner and credits are issued only after forest data has been uploaded and communally verified on-chain, while carbon credits can be burned (retired) on-chain, in a way that double spending is not possible. On top of this, it’s a scalable infrastructure for connecting best reporting practices with carbon accreditation and project financing, in a transparent, and iterative manner.
We’re excited to be part of OFP’s journey in building a community at the intersection of climate and crypto.
Want to learn more? Listen to OFP founders, Fred Fournier and Michael Kelly on Next Creators podcast: A Deep Dive Into Open Forest Protocol — Reforestation, Decentralization, and Creating a Greener World
