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March 18, 2024

The Carbon Market and Salability


The father of Austrian Economics, Carl Menger, said – the key to any commodity market is salability – the ease with which a product can be sold in the market.

This market friction has been a core problem for the carbon market. To illustrate, let’s compare the salability of the carbon market to that of agriculture.

In agriculture, landowners are used to planting crops in the Spring, harvesting in the Fall, and getting paid shortly thereafter.

In the carbon market, from the end of the growing season in the Fall to the issuance of credits, the process takes at least a year.

  • From measurement to an exhaustive verification process followed by Registry review, there is a tremendous transactional drag just to position a credit for sale.
  • If the verifier’s schedule is such that the verification can’t start until well after the growing season stops (as is currently the market reality), the lag elongates.
  • This reality makes structuring forward contracts and matching vintage years challenging.

Why it matters: From a landowner perspective, the transactional drag from growth to issuance is long enough to bust any pro forma.

  • Then, you add KYC and AML so that you can begin other layers of due diligence.
  • Each step of the way, the lag elongates further…and further.

The bottom line: If the market’s focus is on “sale and scale,” the combination of growth-to-issuance lag and issuance-to-payment lag is now a defining issue.

Depth of Time: Creation vs. the Created

The oldest forest in the world, Daintree, is 180 million years old. The youngest forests may be those that we planted last month.

The first 20 years of a forest is a nano-second in the time continuum.

  • The first few years after planting are the establishment phase for a forest. Often, evidence of growth is also not yet visible as trees lay their roots and prepare for growth.
  • After establishment, the construction phase can last another 20 years. During this phase, the stand forms structure and shape, and early succession begins.
  • Because we plant trees to grow a forest, sometimes we have to replant trees or increase stocking rates.
  • In the last three years alone, GreenTrees has replanted over 7,000 acres, with more to come.
  • Although GreenTrees is by far the largest reforestation project in the US by credit issuance, the acres GreenTrees has replanted alone would constitute the second largest project.

Why it matters: The carbon market tends to view Afforestation Reforestation projects through the lens of REDD and IFM. As John Fowles, author of The Tree, wrote, “The danger, in both art and nature, is that all the emphasis is placed on the created, not the creation.”

  • REDD and IFM forests can be hundreds of years to millions of years old. The forest is created. Carbon, in these scenarios, is a function of a management change on an existing asset.
  • Reforestation starts with a land-use change. Then, we must create the forest first before we can create carbon.

Reforestation is the unfolding story of creation. And it is magical!