Removing risk from carbon removals: Our Investment in CarbonPool
The Problem
Limiting global warming to 1.5 degrees Celsius in accordance with the Paris Agreement has proven to be a colossal challenge. In its most recent assessment report, the Intergovernmental Panel on Climate Change indicated that we need not only to more aggressively cut emissions but to scale up carbon removals - technological or nature-based solutions that capture already-emitted CO2 from the atmosphere.
In our previous explainer of why we invested in Sylvera, we emphasized the important role of voluntary carbon markets (VCM’s) in driving the adoption of carbon removals. In fact, McKinsey projects VCM’s to be worth up to $50 billion by 2030, over half of which will be comprised of removals. Yet, as of 2022, the value of VCM transactions stood at just under $1.3 billion, with credits for 200 million tons of CO2e retired.
To unlock the true potential of VCM’s and realize this 40x market growth by 2030, we need to tackle head-on two potent barriers to carbon removals - lack of transparency and uncertainty.
We have shared at length about the transparency problem, and we believe that novel approaches to measurement, reporting, and verification like that provided by our portfolio company Sylvera are key to ensuring trust.
So now, let us add our perspective on the issue of uncertainty.
The Risky Business of Carbon Removals
First, let’s revisit how nature-based removals work: companies striving towards their net-zero goals often buy carbon removal credits through forward purchase agreements, which help fund a project’s development.
However, in this setup, the buyer also faces the risk that the credits might not be delivered in full, for instance if the project is affected by natural disaster or technological issues.
The risk of under-delivery exposes buyers, especially those large corporations investing millions of dollars into removal projects, to significant climate and reputational risk. Furthermore, buyers hesitate to invest large amounts in unproven future removal projects, which leads to a lack of available capital for new project developers or new technologies. On the supply side, the traditional way of guaranteeing removal certainty has been “buffer pools”, which are imprecise and limit a project’s financial return.
In short, the uncertainty and risk associated with carbon removal projects have hindered their growth as a means of decarbonization.
Introducing CarbonPool
Insurance has been, for centuries, our preferred tool for controlling risk - so why not apply this to risk within the voluntary carbon market? This was the question asked by Coenraad Vrolijk, Nandini Wilcke, and Frederic Olbert, three seasoned executives at insurance giant Allianz.
The answer, they determined, was to create a full-stack insurance provider with the express purpose of serving the carbon removals market. Hence, CarbonPool was founded.
Creating insurance for removal credits is no easy feat. The future prices for carbon removals are difficult to predict, causing traditional insurance models to falter. Moreover, the limited supply side means a scarcity of credits available on the spot market.
Thus, in order to make carbon removal credits truly insurable, CarbonPool has established an unprecedented “pay out in kind” model. This requires not only advanced climate and technical risk modeling, but also building out a robust balance sheet through the acquisition of removal projects.
Once achieved, the company’s groundbreaking vision in establishing this first-of-its-kind insurance provides not just a new business model, but a safety net allowing buyers to confidently invest towards their net-zero targets and unlocking capital for suppliers to get projects off the ground.
We at Revent are beyond excited to support CarbonPool’s team of seasoned experts, climate specialists, and visionaries. In our view, CarbonPool’s approach ranks among the most promising ways to address the risk and uncertainty hindering carbon removals. Their solution has the potential to bring voluntary carbon markets into a new phase of maturity.
With our investment in CarbonPool, we hope to contribute towards a powerful tool in the world’s decarbonization toolkit - just as insurance has catalyzed efficient financing of countless other asset classes and business activities, so it will too for voluntary carbon markets.
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