A Carbon Fund For Farms and Forests: How One Conservation Innovation Grant Recipient Is Spending Its Money

2 November 2015 | Saving nature isn’t cheap, and a 2014 report by WWF and Credit-Suisse pegged the global cost of conservation at between $300 billion and 400 billion a year – an amount that dwarfs the resources of the world’s conservation NGOs and the foundations that fund them. Conservation finance should, theoretically, pick up the slack by directing money to programs that protect the living ecosystems on which our civilization depends, but theory has only slowly been evolving into reality.

Last month, the United States Department of Agriculture (USDA) announced it was nudging the process along with $20.5 million in Conservation Innovation Grants, which are intended to stimulate creative approaches and technologies in the conservation space. Forty five projects received funding, and roughly half of them incorporate environmental markets, while eight are identified as conservation finance initiatives.

“We see the conservation mission as being bigger than what we can fulfill with public funds. We need to recruit partners and build relationships that can also invest in conservation,” says Adam Chambers, the Environmental Markets Leader within the USDA department, the Natural Resources Conservation Service.

One million went to The Climate Trust, which is a Portland, Oregon-based nonprofit operating in the conservation finance space, buying and selling credits in the carbon markets while also investing in environmental projects. The grant enables The Trust to launch its carbon investment fund to finance environmental projects in the biogas field, along with forestry and grasslands that can in turn be used as offsets generating credits in carbon markets such as California’s compliance cap-and-trade system.

According to The Trust, investments in the fund will result in the reduction of 800,000 metric tons of carbon emissions released over a 10 year period with ancillary cleaner water and air benefits. It also would lead to sustainable management on more than 20,000 acres of land in the US.

Why it Matters

“Carbon markets provide a unique opportunity for producers to be paid for effecting these emission reductions, but these projects face significant capital costs,” said Sean Penrith, The Climate Trust’s Executive Director in a statement.

Peter Weisberg, Program Manager at The Climate Trust, says the upfront financing this grant provides is vital in developing a fund for the nascent environmental markets. Traditional investors and lenders aren’t anxious to pump money into a risky venture, he explains.

“Environmental credits do have very real value and can change the economics of a project but they’re heavily discounted for some smart and not so smart reasons,” adds Weisberg, who says the fund offers an opportunity to build carbon finance into a more patient long-term form of capital that can really change behavior. And behavior change, among the different actors altering landscapes, is at the heart of mitigating climate change.

One real risk is the carbon markets’  dependency on policy, which means a simple legislative alteration could eliminate demand for credits. “That always spooks investors,” Weisberg says.

But The Trust purchases as well as sells carbon offsets, which it claims offers fallbacks that other environmental markets don’ have. If the California market were to go away, for instance, The Trust has existing programs that can purchase offsets, mitigating demand-related risk.

Investments at Work

The Climate Trust’s investment fund will incentivize behavior change primarily among farmers, ranchers and forest owners. The biogas pipeline of projects consists of anaerobic digesters at livestock facilities that capture methane, a potent greenhouse gas, off of manure and then processes it as renewable energy.  The avoided methane emissions results in tradable offsets.

For its forestry projects, the investment fund will focus on two types of domestic forestry projects that qualify for California’s market: improved forest management and avoided conversion. Improved forest management is any practice that sequesters more carbon than the regional average while avoided conversion is protecting forestland with a high risk of being converted into an urban development like a housing project. The difference in how much carbon the forest stores over the urban area is what can be generated into credits.

The grassland projects are also focused on avoided conversion, avoiding turning grasslands into croplands.

The Five Year Plan

Currently, The Climate Trust is wrapping up its first round of raising private capital, which amounts to $4 million, plus the $1 million grant, to put to work in these biogas, grasslands and forestry projects.  The Trust estimates financing four to 12 projects with this first round of funds. And if all goes as planned, this $5 million will quickly turn into $15 within the next 2-3 years as investments increase.

Ultimately, this fund is a pilot that will demonstrate The Trust’s ability to raise private capital for climate projects, generate environmental credits, sell the credits and deliver a return on investment all within 10 years. And this demonstration will enable the group to raise much more money-$50-$100 million in the next five years, Weisberg says, and $200 million over 10 years.

“The carbon investment fund will be the track record to raise capital at a larger scale,” he says.

An Uphill Journey?

The fund has a clear path to follow although not necessarily a smooth one and Weisberg notes a few obstacles. For one, it requires a big pipeline of projects in need of carbon financing that meet The Trust’s standards. Securing a large supply of projects will be one of the hurdles, Weisberg says.

Another hurdle to overcome is the aforementioned risks. The Trust does have something of an insurance policy for investors via its ability to purchase credits. However, Weisberg says it plans to scale up funds well past the capacity of credits for which they can ensure buyers and so carbon markets, like California’s, must continue to mature.

Achieving certainty that there will be demand for credits post 2020 is vital, Weisberg says.