Sources of finance
Commercial financiers and development financiers are two key potential sources of funding for carbon projects.
Commercial financiers
Commercial financiers provide financing with the main objective of obtaining a profit.
a) Carbon finance funds
Carbon finance funds are investment funds that specialize in financing carbon projects. They provide capital as well as expertise in carbon project development. In exchange of funding, these investment funds can either take a share of the generated carbon credits, revenue generated from the sale of carbon credits, or equity in the enterprise pursuing the development of the project.
Based in Vancouver, British Columbia, Key Carbon1 finances carefully selected carbon projects by making an upfront payment in return for a share of future carbon credits. They receive those credits when they get issued by a verifying body such as Verra. They then sell these carbon credits to corporates who would like to offset their carbon emissions, or to other organizations.
b) Carbon credit buyers
Carbon credit buyers are companies that purchase carbon credits to offset their own emissions. They provide funding to enterprises before the credits are generated in exchange for carbon credits coming from the project in the future.
To offset its emissions, Netflix invests in carbon projects that not only help the environment, but also protects biodiversity and generates jobs and educational opportunities for vulnerable communities too.
One of the projects in their 2021 portfolio was the Vida Manglar carbon project2, based in Colombia.
This project was the first blue carbon3 project registered under Verra’s Verified Carbon Standards(VCS) program.
The goal of the project was to sequester (remove) almost one million tonnes of CO₂ over 30 years by conserving and sustainably managing 7,561 hectares of coastal mangrove ecosystem, marshes, and associated streams.
c) Commercial banks
Commercial banks fund carbon projects by either offering loans or making equity investments.
d) Intermediaries
Intermediaries in the carbon market are either carbon offset project developers or carbon market brokers. Most project developers and credit brokers offer financing in exchange for future carbon credits.
Project developers support enterprises to develop their carbon projects and facilitate the exchange of carbon credits between enterprises and credit buyers. Brokers buy carbon credits from enterprises that develop carbon credits and sell these credits to entities looking to offset their emissions.
Development financiers
Development financiers provide financing with the objective of maximizing their impact with the funds available and may do so through a for-profit or a nonprofit model.
a) Development finance institutions and multilateral development banks
DFIs and MDBs provide long-term financing for sustainable development projects in developing countries. They also provide technical assistance to support project development.
b) Foreign governments
As part of achieving the NDCs, foreign governments invest in carbon offset projects in exchange of carbon credits.
The government of Japan provided funding for a solar energy project at Krystalline Salt Limited on the Kenyan coast.
The goal of this project4 was to reduce CO₂ emissions by introducing a 991.1kW grid-connected solar photovoltaic (PV) system at the plant.
The power from the solar PV system would replace the grid electricity and power from the diesel genset.
Japan, through the Ministry of Environment, provided financial support of less than half of the initial investment for the projects in order to acquire JCM credits. Capacity building on operation and monitoring was provided by Pacific Consultants Co., Ltd (PCKK).
c) NGOs, donors, and international organizations
NGOs, donors, and international organizations are entities that provide non-commercial funding. They may provide grants, concessional loans, or donations to help enterprises overcome financial barriers to conceptualize or implement their carbon projects.
Next: Financing mechanisms
Footnotes
Blue carbon is the carbon captured by the world’s ocean and coastal ecosystems.↩︎