Carbon removal credits: A deeper dive into Nature-Based Solutions

Tom Heintzman: Welcome to The Sustainability Agenda, a podcast series focusing on the evolving complexities of the sustainability landscape. I’m your host, Tom Heintzman. Please join me as we explore today’s most pressing issues with special guests that will give you some new perspectives and help you make sense of what really matters.

Greg Adams: There’s a lot of folks in this space that are building marketplaces. It’s as if the Chicago board of trade, built the Chicago board of trade before cotton and sugar were invented. They’re building marketplaces, but they’re not necessarily bringing demand or supply to the marketplace. We need people that are, you know, not trying to solve the marketplace problem. But are trying to solve the supply problem

Tom Heintzman: Over the last several months on this show, we’ve been exploring various topics related to carbon and the carbon markets. On today’s episode, we’ll discuss nature-based solutions, or NBS, which is an important complement to the engineered solutions we’ve profiled in our earlier episodes. Specifically, we’ll take a deeper dive into the market for nature-based credits, how these are evolving, some of the criticism the nature-based offsets have faced, and the steps one carbon project developer is taking to deliver high quality carbon removal credits to corporate buyers to help them meet their net zero ambitions. I’m delighted to introduce my guest, Greg Adams, who is the Chief Financial Officer of Chestnut Carbon, a nature-based carbon removal developer headquartered in New York. Greg is a capital and commodities markets professional with more than 20 years of experience in the energy, power, and metals sectors. His experience spans many roles in corporate project and structured finance, treasury, risk management, business development, and strategic planning. Good afternoon, Greg. Welcome and thank you for joining us on today’s episode of The Sustainability Agenda.

Greg Adams: Thanks, Tom. It’s great to be here.

Tom Heintzman: So I’d like to start at a very high level. Can you begin by giving our audience a brief overview of what nature-based solutions, NBS, is and some background on the range of the different types of forestry carbon projects?

Greg Adams: Sure, I’ll do my best. Nature-based solutions as you pointed out, NBS, there are projects that are based on trees, soil, or marine ecosystems. Examples include IFM, which is Improved Forest Management of existing forests, afforestation or reforestation, which is planting new trees, grassland, blue carbon, the restoration of green ecosystems, peatland soil carbon, and agriculture. In terms of afforestation, that refers to land that has not had forests for longer than 10 years, and reforestation is replanting lands that have been forested within the last 10 years, often damaged by fire or blight. One common project type that people hear about when they think about nature-based solutions or NBS is Red Plus, which is reducing emissions from deforestation and forest degradation projects, mainly in the developing world, which tends to be more avoidance credits. But again, the NBS world really spans a gamut, but a lot of the history around the space has been more focused on avoidance credits than removal credits, and we can get into that if you wish.

Tom Heintzman: Well, Greg, why don’t we do that right now just off the top? Can you give us a quick distinction between avoidance and removal credits? And then I’d love to drill a little deeper on the criticism that Red Plus has faced.

Greg Adams: There has always been the question of additionality when you’re basing your carbon credits on a counterfactual. That is that the forest that is underpinning these credits would have otherwise been cut down if not for these credits. It’s very hard to prove that it would have been otherwise been cut down with enough specificity that warrants the valuation of tons of carbon emission avoidance. Ultimately, I think this is where people have struggled. And it’s hard to prove that. But for the actions of the developer of these projects, these forests would otherwise been cut down. And I think there’s been a lot of criticism around that in part because some of the projects that have been focused on this IFM or Proof Forest Management regarding avoidance have really been focusing on the existing forest, not the growth of the existing forest, the additional carbon that will be captured over the life of the forest. In some cases, they’ve been as short as one year. People have really questioned the efficacy of those types of products.

Tom Heintzman: Okay, so just to paraphrase and tell me whether I’m putting this too simplistically, but afforestation projects, and those are projects where you’re planting trees when they haven’t existed for more than 10 years, they’re actually absorbing carbon, so that’s a removal project. But a conservation project where you’re stopping forests from being cut down, in order to measure the carbon benefits, the methodology infers how much carbon would have been released had the trees been cut down and that’s the counterfactual that you’re talking about and because of the hypothetical nature of it that’s what creates the controversy to the extent it exists. Is that a fair representation?

Greg Adams: No, I think that’s a fair statement. So, yeah, afforestation, again, I mean, in the case of Chestnut, for example, we own roughly 21,000 acres across four states, Arkansas, Louisiana, Mississippi, and Alabama. We have purchased marginal pasture land, marginal rotational crop land, and we have planted in the case of our pilot program, which we purchased land in 2022. We planted three million seedlings, hardwood and softwoods, in the planting season in the south east of the United States which was in December of 22 through February of 23. We did more purchase of land back in 23. And we’re now this season planting roughly five million trees. Again, a mix of softwood and hardwood. It’s hard to argue that what we’re doing by planting these seedlings when there were no trees doesn’t constitute true removal. That said, another part of Chestnut Carbon is a company called Forest Carbon Works, which is what we bought about 20 months ago. Historically, they were really focused on Improved Forest Management, but where Forest Carbon Works and Chestnut differ from an IFM perspective relative to others in this space is that we only credit carbon removal against the annual tree growth and share the credit proceeds with our forest owners, meaning there’s an existing forest, you own 100 acres. We can help you register these credits and we do this with verifier, IFM projects. But the only credits that we are capturing and taking credit for, and then sharing with our landowners are based on the annual tree growth and we’re only capturing the incremental growth in that forest. That is true removal. Avoidance is if hey we’re only focusing on the trees that exist today assuming they capture no CO2. Additionally, and it’s only based on whether or not we cut trees that were going to be cut down in a year or five or ten or twenty years. And when we do our IFM program, our membership commitment is 60 to 100 years. So when you think about traditional IFM programs, we’re looking really on the cutting edge of obligating our members. We have over 115 signed up thus far in about an 18 month process for a 16 to 100 year commitment. And we will generate credits for the first 25 years under Verra. We think our approach is very different.

Tom Heintzman: And Greg, maybe can you go a little deeper into how the 60 to 100 years, how you demonstrate that and how you ensure that the longevity will be of that length.

Greg Adams: So Tom, our IFM program is US based. We focus on family owned forest conservation memberships. They signed a master lease agreement, which obligates them for a commitment for 60 to 100 years, which relative to most of our peers is considerably longer. And the reason why we require that is because we think that is what’s required to really make a difference in the space. I think it has struggled with or suffered from other products that really didn’t have the same level of commitment by their members. And ultimately, we believe because part of what we’re doing with our customers is providing a revenue share opportunity in the future. So the credits that we’re generating, we’re going through the process and we’re registering these credits with our foresters that we have on staff, with the technology that we have as proprietary that enables us to do the carbon sequestration modeling, that ultimately we’re going to end up with a product of a higher quality. So when we go to sell those products in the marketplace the marketplace will recognize the value of those products, the removal aspect of those products, the true integrity of those products, and ultimately the price that we will get for those products. And the revenue we can share with our customers is going to be higher and more beneficial. Because again, the underlying product is really what’s going to be driving this. And in order to get a higher quality product, we believe that term, that 60 to 100 years is really essential.

Tom Heintzman: Got it. Okay. You mentioned Verra a couple of times and some of our listeners will be familiar with that. Others will not. Verra is a registry where carbon credits and carbon offsets are registered and it would in turn have a methodology which would set out how the forests are supposed to be maintained and also how the amount of emissions would be calculated.

Greg Adams: Yeah, that’s correct. There are a handful of different registries out there. We use Verra for our improved forest management or IFM, and we use gold standard for our afforestation projects.

Tom Heintzman: Greg, one question I hear a lot about nature-based solutions relates to permanence. And so we’ve all seen the forest fires recently during the summer times throughout North America. How do you protect against the loss of trees as a result of forest fire or blight or other forms of death of the trees? And how can people get the confidence that the credits that they’re purchasing actually have materialized and will be permanent for the 60 to 100 year period that you’re talking about. 

Greg Adams: So the 60 or 100 years is relating to our improved forest management program. On the afforestation side, part of this is portfolio diversification. So on the IFM side, the Improved Forest Management side, we have over 100 different landowners. I think the average parcel is 500 acres. On the afforestation side, we own this land today in these four states that I mentioned, We’ve chosen those areas for a reason, partly because the yield is strong relative to other parts of the country, right? So trees will grow quicker. But again, we are growing a diverse forest, right? So we’re not just growing a monoculture. We’re not just growing loblolly pine. In our pilot program, we planted in December of 22 through February of 23, up to 17 different species per one parcel, okay? And we did that because it’s harder. It’s more complicated, it takes more work. But we believe that ultimately is better for the health of the forest and your point about blight. Well, if you have one species, if you have monoculture and you only have loblolly pine and you have a pine beetle, you have blight, you’re out of luck. So inherently, it’s better for the forest, it’s more indicative of what that forest would have looked like 50 to 100 years ago. So that biodiversity is really important in the wildlife that comes and so for all the co-benefits that we really want to promote. When you think about wildfire or other tornado risk or hurricane risk. The way we think about it on the afforestation side is not putting all our eggs in one basket. We have 21,000 acres across 18 different parcels in four states. So how we manage that is having non-contiguous parcels of land in four states. Its’s another inherent way to mitigate wildfire risk. But also the Mississippi Louis Valley relative to other parts of the country, namely the Pacific Northwest, has a materially lower wildfire risk on a historical basis. And we also, through Kimmeridge, the private equity firm that backs Chestnut, we have been able to utilize their data analytics through their technology, which is proprietary, are able to screen every parcel of land in the lower 48, in the United States. We literally will be able to screen land based on soil, based on, you know, weather patterns and so forth. And so we believe that we’ve got the right technology that helps us choose the right parcel to mitigate these risks before we encounter those risks. But I would also say what’s really important for afforestation, Tom. We’re also using gold standard. And gold standard requires a 20% buffer pool. What I mean by that is, let’s assume that gold standard wasn’t there. And we, with our methodology, generate 100 credits, which is throwing out a number in a year. Well, we could sell those 100 credits, but what happens if there was a reversal, if there was a fire or something like that? Okay, well, you’re potentially selling credits that didn’t exist, right? Or you’re overselling your credits. What gold standard does is take that 100 credits I mentioned, they say. We’re going to take 20% off the top. We’re going to put that in a buffer pool for folks in our ecosystem. So in the event they have, in their ecosystem, someone has a problem, there’s wildfire, there’s blight or what have you. It’s used as an insurance policy against folks within the gold standard ecosystem. So off the top, if we generate 100 credits, we only have 80 credits to sell. So we believe there are a lot of mitigants. One of which is the buffer pool by Gold Standard which is not to be underappreciated. How we think about land acquisition, non-contiguous parcels and not putting all our eggs in one basket and how we make sure we have a diversified forest.

Tom Heintzman: Fantastic. Okay, so moving along now to the volume required. So the UNEP estimates that funding for nature-based solutions will need to triple from the current US $200 billion to reach climate, biodiversity, and land degradation targets by 2030. That’s a lot of growth. The challenge for funding is multifold, but including long project life cycles and uncertainty in terms of what the credits will be worth when they’re generated. How does Chestnut Carbon deal with the long project durations where you may not see any financial or uncertain financial benefits for a long time?

Greg Adams: That’s a great question and it’s an important question. Foundationally, we are well-capitalized as an organization. Chestnut Carbon was founded by a private equity firm called Kimmeridge. And so we were very blessed to be backed by a private equity firm that believes in the mission, but also has the capital to help us get started. And so, between the capital that Kimmeridge has provided, in addition to the two levers that we have, one being improved forest management, which provides near-term cashflow. Because again, as I mentioned before, we already have existing land owner signed up we have over 56,000 acres under management that we are already generating credits from. While we wait for our trees to grow on our 21,000 acres that we have either planted or planting in the southeast which will generate millions of credits over the next 50 years or so under gold standard we are benefiting from the capital from Kimmeridge as well as the cash flow that will be generated from the IFM credits. That said, capital is critical, right? I was chatting with someone the other day and they were telling me well this market historically has been dominated by that now are bearing fruit and have carbon credits but really the carbon credits was an afterthought. It was just icing on the cake and that was never really the intention. And you know five or ten years have passed or you had other constituents that were really focused on, you know, not-for-profits and it was really doing it for, just purely from an environmental standpoint with no real focus on  a return on investment or return on capital. And as a result, you think you’ve had a market that’s really been starved for projects because it has been really under capitalized and underfunded. And I think we are seeing this now is changing. We’re seeing folks like Kimmeridge that are coming into the space. We see a tremendous amount of interest from investors around the space for the right projects, to be clear, right? Tom, I think the reality is there’s been a lot of bad press in the space, for sure. And again, I think a lot of that criticism has been fairly leveled, to be honest. Again, I think we want to be what good looks like. And I think when you’re bringing projects like we’re bringing to the market that are US-centric, right, where our assets, our land is in the United States, where the rule of law, where how people view what it means to have a contract in the United States in terms of the title to a land, what it means to deal with local communities and community engagement and dealing with different communities. It’s a different construct than what we see in other parts of the world. And so I think what we’re bringing to the table from a U.S. perspective that was well-capitalized is being well-received by the marketplace.

Tom Heintzman: Greg, offtakes and pre-purchase agreements are beginning to help scale the market for carbon removals, enabling project financing and providing much needed price signals. Chestnut Carbon recently announced a first of its kind 15-year offtake agreement with Microsoft for nature-based credits. Can you provide a few more details about this agreement? And briefly speak to how the afforestation credits that you will deliver align with Microsoft’s criteria for high quality removals?

Greg Adams: We executed our first-taker pay contract with Microsoft that will generate over the life 50 years under gold standard, roughly 1 million credits. Those types of contracts are critical they’re definitely desperately needed in this space. But I also think from their perspective, I don’t want to speak for them, but there is a perception that there’s a dearth of high quality projects out there. And so Chestnut is seen, I think, as you know, a higher standard in terms of products are coming to market today they want to see Chestnut do more projects like this in order to, to drive that and to enable capital to flow into this market and for the nascent market to become more mature. What you need is these long-term taker pay contracts. You need a bilateral contract that has an investment grade off taker on the other side that is going to provide the incentive, the anchor, if you will, for developers such as Chestnut to get the financing and to take the revenue and go to a bank and get the financing to then use that financing to recycle that capital, buy more land, or create more projects, and then in turn, deliver more credits to the Microsoft’s and other people that are trying to scratch that itch. They’re looking for the right projects. They’re looking for a higher quality credit. They just can’t seem to find them. But these take or pay contracts, particularly those that are long in term, are really foundational. In my background, I worked in the project finance world and I worked in the power space and worked in other areas. This is somewhat akin to where the wind and solar space was 20 years ago. And in order to get those markets up and running, you needed these long-term power purchase agreements, which you see today, and they’re quite prolific. I mean, they just tend to be all over the place today, but that wasn’t actually the case 20 or 30 years ago. So I think we are at a similar point where the wind and solar space was 20 years ago. But with one big difference, 20 or 30 years ago, you’re getting these wind and solar contracts were just starting to move ahead. But a lot of institutions had big questions about the operation. How are these going to operate the technology? I don’t think people are going to be doubting the technology of a tree and its ability to capture CO2. And so I think there are some similarities where the space was 20 years ago for wind and solar. But I think that market has really matured over time and you’ve seen cost of capital come down and capital flow into that market. But a lot of that was really only done because you ended up having long-term contracts with investment grade utilities, for example, investment rate off takers.

Tom Heintzman: Greg, I just want to pull on that thread and your analogy of the carbon markets being in their infancy. The number of companies who’ve set net zero targets continues to rise. According to Net Zero Tracker, half of the world’s 2,000 largest publicly traded companies now have net zero goals. As more of these organizations look to the carbon markets to help them with their carbon management efforts, What more can carbon credit developers in the NBS space do to meet the increasing demand for this product? Or in other words, what does your industry need between now and 2030 to scale faster?

Greg Adams: Well, I think obviously some of the responsibility falls to developers, but developers can’t do it in a vacuum, right? I think we need more companies, more folks that have stated their decarbonization goals to embrace MBS as part of their toolkit. Right? You cannot just do this alone with engineer solutions because we’ve seen, you know, engineering solutions today, irrespective of costs aren’t necessarily going to meet, going to be available by 2030 or beyond. And so when you factor in cost, we see engineered solutions that are well above $1,000 per ton today. And so I would encourage these companies, again, hard in some cases because I appreciate there’s been bad press in 2023. But again, for the right projects, for the right developers, these companies need to start really embracing nature-based solutions as part of their overall strategy because to be quite blunt, these companies won’t be able to meet their obligations with just one tool in their toolkit, that being engineered solutions. If they’re willing or the reputation enables them to push back there are their obligations to 2024, 2025 and we’ve seen some of that but those companies that really care about their reputation have 2030, 2035 goals you know I think are really starting to embrace NBS in part because in case of ours you know Kimmeridge and chestnut we strive to be at the front of the cost curve so we want to be competitive in the space because that’s really important end of the day secondly as much as it takes us four or five years for the trees to grow, we are still able to start to deliver credits from afforestation that are true removal under gold standard that is supported by FSC, long before 2030. And so I think part of this is, you know, the developers can try to develop projects, but if they don’t have customers that are willing to lean in and sign these contracts and if customers are only willing to buy one or two years, it’s not going to be sufficient enough for developers to extend that capital. I see Tom in this space, I’ve only been here for a little less than six months since I joined in August of 23. There’s a lot of folks in this space that are building marketplaces. It’s as if the Chicago board of trade, built the Chicago board of trade before cotton and sugar were invented. They’re building marketplaces, but they’re not necessarily bringing demand or supply to the marketplace. We need people that are, you know, not trying to solve the marketplace problem. But are trying to solve the supply problem. And that needs people providing capital, constructive lenders, quality-minded buyers to help enable development of these projects. 

Tom Heintzman: Well, Greg, that was extremely comprehensive, and thank you for your time. Congratulations on your success with Microsoft, and thanks to our listeners for tuning in.

Greg Adams: Thanks very much, I really appreciate the time.

Tom Heintzman: Please join us next time as we tackle some of sustainability’s biggest questions, providing you different perspectives to help you move forward. I’m your host, Tom Heintzman, and this is The Sustainability Agenda.

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