Blockchain's Role in Transparent, Credible Climate Solutions

Transcript

foreign I think we are lucky that we got free speeches on very similar topics because it's Gathering people of the same mind thinking about the same issues and I'm happy to welcome Phil Fogel here to give us his take about blockchain and carbon and climate Solutions thank you very much thank you all for coming out this morning I'm here to talk about blockchain's role in a transparent credible climate solution and actually building on top of uh for those of you

who are here for Max's presentation and Alan's presentation before that what I'm going to do is really zoom out a little bit and look at the market as a whole and what the entire Market infrastructure can look like and then zoom in on a couple different pieces that flow carbon is specifically working on so I always like to start out with this question of we're talking about the voluntary carbon market and how voluntary is the voluntary carbon Market actually so pair of quotes up here from crypto's new favorite Trad five CEO Larry Fink and he said every company in every industry will be transformed by the transition to a net zero world the question is will you be led will you lead or will you be led similarly he also said that the

tokenization of asset class offered the prospect of driving efficiencies in capital markets shortening value chains and improving costs and access for investors so when you really take these two things together blockchain has the opportunity to really lead this transition to Net Zero and to help actually facilitate the infrastructure that's sorely missing in this market today so Net Zero commitments are massively On The Rise so looking at the largest 2 000 companies in the world we're at almost nearly half of them now having made Net Zero commitments and that number is increasing pretty rapidly over the last few years and these are the companies and cities and states and Nations that are actually saying we are going to eventually get to Net Zero and creating

a transition plan from where they are today and what their carbon missions are today to where they're going to be at zero hopefully by 2050 sometimes in any cases for companies they've made earlier commitments than that and the whole point of all of this obviously is to keep the planet from warming more than 1.5 degrees which was set out in this Paris agreement that so many countries are signatories to and in order to get there we need to see a nearly 50 reduction by the end of this decade and then beyond that a 70 reduction by the decade after that in carbon emissions and what happens with companies is the way that this works for a lot of companies is you want them to reduce first you want them to cut their actual emissions as much as possible and but oftentimes that becomes a very expensive

process and so what oftentimes will happen is that companies will go and look at ways to outside of their supply chain mitigate the effects of their supply chain so what that means is they go to somewhere else in the world they provide money to a project to actually go and do a mitigation outcome and that is what the voluntary carbon Market facilitates is that transfer of value so that in theory if the next marginal cost of reducing um you know a million tons of carbon for a corporation is basically a hundred dollars a ton and somewhere else in the world for that same amount of money you can actually mitigate 10 million tons of carbon it sometimes economically viable to do so and that's what the carbon markets facilitate you take these carbon credits you retire them you put that against your own emissions and you get

to a net zero outcome and so max talked about how he's creating a new registry and so the idea is let's think about a little bit zoom out on how carbon credits are actually created what a carbon credit actually is is someone does something somewhere in the world that either reduces the carbon footprint or removes carbon from the atmosphere and that information about how that is done is collected and becomes a set of data that data is then presented to a body a carbon registry along with validators along the way and they are applying that data to a methodology or policy framework and what that policy Frameworks does it says okay great if you plant X number of this kind of tree over this period of time that is

going to be the carbon that sucked out of the atmosphere by those trees and so really what we have is a really great use for blockchain we're taking data we're applying it to a policy and out the other side comes the carbon credit and then ultimately the carbon credits are bought by others and retired so this Market is pretty small today um it was a you know only a few hundred million dollars a few years ago it's now roughly a two to five billion dollar market today but it's poised to grow pretty rapidly over the course of the next um decade or so and a lot of that is made up by the fact that there's a massive financing Gap right now for climate projects we've seen that green bonds are on the rise actually for the first time ever the amount of green

bonds being issued it overtook the amount of fossil fuel bonds that are being issued or bonds that are linked to fossil fuel companies and what that has done is it's created a way for corporations to do this but a lot of projects in the carbon space that could do mitigation outcomes that are actually some of the lowest hanging fruit of mitigation outcomes don't require huge amounts of money and wouldn't be done by corporates right 95 of bond green Bond issuances were 50 million dollars and above most of these projects need access to Capital in a much smaller scale meaning you know a few million dollars and so right now this voluntary carbon Market has existed for about 20 years but there are massive inefficiencies that are keeping it from scaling and

keeping it from that four point that four trillion dollars actually flowing into the market today we have an incredibly illiquid carbon Market almost all transactions take place OTC these are people calling each up other on the phone emailing each other texting each other and that's how carbon deals are done it's paper contract there's no standard settlement settlement can take days or weeks someone actually has to go first so there's no trust in this there's no trustlessness in the system so it's a really inefficient Market from an illiquidity standpoint it's also because of that lack of transparency right I can go and do a carbon deal with someone and buy carbon credits for a price and then no one else knows what that price is so that price is not seen in the market so the same carbon credit oftentimes can trade for different price points on the

same day assuming the market actually trades that way um and then on top of that you have value being sucked out by intermediaries right you have because this Market is so inaccessible to the people who want to use it today they have to go through middlemen and Brokers to do that and those people are taking a take rate along the way corporates have to navigate this entire system including lots of different kinds of carbon credits so it's an inaccessible Market it's a difficult Market there is no access for individuals so this Market you can go through again an intermediary who can charge you a huge markup to buy a single carbon credit for you to offset your flight right and Airlines often make that available but if you actually want to own the asset class if you want to buy carbon credits you can't do it today

at least not easily and then it's incredibly difficult to secure financing for a lot of the reasons that we mentioned so web3 excels hugely at solving coordination problems which is really what this is and so now I want to look at what the entire value chain of carbon credits can look like on chain and there are lots of people building this we're really fortunate that this refi space is growing rapidly and there are lots and lots of projects building at different pieces of this infrastructure stack and hopefully what this will lead to in the long run is this entire Market being built on chain and all of the infrastructure needed to scale this Market being web3 native so the first step in a project is the origination someone has to go and do the project they have to figure out where to

do it how to do it start collecting that data and so there are projects right now like Alcott who is committed to doing the First full blockchain based project in a quick stove project in Africa then you have financing so you need to create financing structures that allow for Capital to flow to these projects before the credits are issued so they can actually Finance the credit creation then there's the measurement reporting and verification and certification of carbon credits that can be built out Max is building one of the first web3 Native Registries and so that's one piece of this but there's an entire stack of data collection that needs to happen via iot devices satellites remote sensing and all of that data should be stored in an immutable fashion right so that you can

go always go back to it and say what was that data at that time how did it if the data changes over time right what was that change look like and how did we arrive at the conclusion that a carbon credit should be issued here one of the biggest questions in this market is that of quality as Alan talked about this morning you solve a lot of a lot of those problems by making the data available and allowing for the provenance of how did you reach your conclusion be auditable by anybody right now this Market is basically living in web one where all of this stuff is done via PDFs and spreadsheets and emailed around and not searchable and essentially read only and so there's a real opportunity to do a web 3 upgrade to this web one system and make all this data not only machine readable but

accessible and auditable by anyone who wants to audit that data then once you have that you bring the credits available for trading and liquidity and you can do that on various different layer ones and layer twos as well as in marketplaces that are being created to actually sort through these and then what all of this means together is that we get a ton of innovative use cases for on-chain carbon that now exists because you have a programmable carbon you've created a carbon asset both at the or pre-issuing stage as well as once they're issued that is programmable and once it's programmable if anyone's imagination for how you can use them from things like automatic fractional offsetting so you as Max was talking about also you have an API that can just connect to any application you

can have it connected into any protocol so protocols can do automatic offsetting to make their protocols green or just to be Planet positive you can have Direct Delivery people can now access the credits loyalty schemes Etc so Shameless plug about flow carbon and where we're building in this market we're focusing on the web 3 side on three specific areas one is on-chain financing creating those financial structures and creating an ecosystem in which those can operate the second is the tokenized spot Market taking credits that have already been created and currently live in SQL databases and bringing them on chain creating some level of standardization and then opening up access and liquidity and transparency around those credits themselves so they can trade freely and

be held by anybody and then lastly we're trying to Spur some of these new on-chain use cases to help create ways for people to be programming carbon credits using carbon credits and ultimately leading to Planet positive actions so first in talking about financing we've sort of looked at Carbon markets and the way that they've been financed in the past they've been done that by very large scale Capital so things think about a bank or PE fund that will create a financial structure for anything usually you're talking about 50 to 100 million dollars is the absolute minimum for them to even get out of bed and think about doing a project lots of carbon projects exist in the single million dollar phrase and the risk associated with carbon projects

today is very difficult to understand and very difficult to price and so what we're doing is taking old Financial technologies that have existed for a long time and we're just bringing those Primitives on chain and creating these things around Financial around carbon markets so in this structure that we're proposing here and that we've actually completed a single financing for so far what we do is we take carbon projects we enter into forward contracts basically the ability to buy the credits from the project once they are produced at a specific price and by doing that it's it's sort of a debt-like instrument except the debt is only repaid upon the issuance and sale of the carbon credit so it's linked directly to the carbon credit so it

almost is a collateral type inside of a debt then what you do is we can take a pool of these we can buy a bunch of forward contracts from a bunch of different projects take these five three four million dollar projects bundle them together into a size that makes sense and then create two different tranches of an investment so a senior tranche which is represents 70 80 percent of the investment Capital which is paid essentially is a fixed rate of return and they get paid first so you know carbon credits get issued they get sold Capital flows back on chain of waterfall is executed against and the seniors the senior investors are paid their principal plus their interest before anybody else and then you can create a junior challenge which is a functionally first lost capital or an equity like cap

an equity like investment that is if there are losses the junior takes those losses first but if there's upside the junior also realizes that upside and then once you start thinking about this again this is old school Financial technology it's just building it on chain for frankly better fund Administration and a better way for these Investments to be accessible and traceable but once you've brought these things on chain you can actually open up an entire world of programmability on top of that and derivatives on top of that so individuals can create you know or companies or protocols can create index style products that look at different kinds of carbon projects and create them you can have corporate off takes coming directly into the system and actually picking out the specific carbon projects

that they want to buy the credits of once they are created at a price and then you can have direct credit Investments meaning that you can create a product that instead of at the end being a cash on cash product right it actually flows back and gives you back the credit so this becomes a really interesting product for corporate treasuries that know that they're going to need a certain amount of offsets and they can invest in them early on and get have some assurances of delivery of those credits later on at better prices because they're capturing that investment return by getting into the projects early while also mitigating risks by having first loss Capital sit in front of them so what this building block these building blocks ultimately allow for is a really robust Financial system of

capital so you have you have lots of different project Originators flow carbon can be a project originator you can have um the oil Majors which run carbon desks they can be um project Originators you can have project developers who are doing lots of different cook stove projects and other kinds of projects be project Originators who are providing that first loss Capital basically putting their money where their mouth is to say I've diligenced these projects I stand believe them and I stand behind them so much that I'm willing to take the first loss if there are losses in this and then on top of that you can create mezzanim Capital that is sort of a combination of the two and then Senior capital and where the senior Capital comes in in a big way is around institutional investors and we've seen a lot of interest from the likes of Apollo

who has a huge web 3 presence and also has a massive climate fund right to come on chain and to utilize these kinds of investment structures in such a away that they are providing you know they can provide Capital at scale that you know few others can seeing the same thing from insurance companies and endowments where they're going to come in and be the massive Capital providers and what's interesting about that is they're actually the ones who are pushing these Net Zero commitments by for companies through their investment process so now by financing the carbon credits they're also sort of providing a stamp of approval that says we've underwritten the process that this carbon credit was created by in its first in the first place and therefore it's a good carbon

credit for Corp for corporates to use so you create this whole system and now you can have a secondary market for these style of Investments as well as derivatives that link back to all of this and because now we're also building a spot Market on chain for the carbon credits these things can actually link together and execute themselves in a trustless fashion meaning that a carbon credit is financed inside of one of these pools it can go then be linked to a derivative in an index fund that can be then re you know hypothecated into something else or corporates can create their offset portfolios and then when the credits are actually issued you can trace on chain exactly where the credits need to go who owns them where they need to be sold or sell them automatically into the liquid spot market and then

that Capital can flow back around so on the tokenization of the spot Market side the way that we are developing this technology to bring carbon credits that already exist um off chain on chain today is we are taking individual projects and keeping all of their unique characteristics in the first instance and tokenizing them on chain so what we do is we basically take carbon credits that exist at a registry move them into a registry account at an SPV that SPV then issues special purpose Vehicles so it's bankruptcy remote and and safe from any other corporate actions and anyone who might try to attack that vehicle for the purposes of removing the carbon credits as collateral or anything like that

they're there purposely just to be linked to a token that's issued by the SPV and that token represents that exact carbon credit and then what can happen is you can start bundling these carbon credits together so you can take like kinds of carbon credits that seem to have the same use case same characteristics put them together as a bundle to create standardization and then you have essentially four functions on that bundle that is liquid and accessible to everybody you can retire the carbon credit so it can actually just go and use that for your offsetting purposes you can redeem the credit back so you can actually go back off chain with that credit if you want to you can unwrap it and select a specific project from inside the bundle or you can just hold it and keep that asset basically in

your portfolio hold it for later offsetting use buy now retire later buy now to provide liquidity into the market so lots of different use cases and then again this the bundle itself becomes programmable and so what this does is it increases access by tokenizing this you create a permissionless asset that anyone can interact with right now it's very difficult to interact directly with carbon credits you create deeper liquidity very good at that in defying web three very good at incentivizing liquidity you have transparent pricing you can actually see what the carbon credits traded for when they trade you can get more funding because you'll actually be able to see the price and have risk mitigation strategies and you get this you know Wonderful composability

and so that leads to all different kinds of use cases right where you can actually have many different bundles that represent different kinds of carbon credits cook stoves nature based biochar tech-based removals tech-based avoidance and then you can create all sorts of great use cases and so some of the use cases that we've talked about and have already been seen evolving in this market is automatic offsetting so we've seen protocols cello was the first protocol to do this and they basically said we're going to take a little bit of our validated rewards every Epoch and we're going to take them and use them to buy and retire carbon credits and doing that on a periodic essentially automatic basis is now becoming a trend for l1s and l2s so we've seen several other l1s

and l2s start to be interested in and agreeing to doing automatic offsetting at the protocol level you can build loyalty reward programs in the form of carbon credits so you can give sea charge for example is a charging net an EV charging Network and they are rewarding people for using their Network by actually giving them carbon credits on top of that and so they get a reward in the form of carbon they can then retire for further environmental benefits or use in other ways Direct Delivery which is super important right now investors in carbon projects have a really hard time when you invest in a product that issues carbon credits they don't have registry accounts and so they can't actually take the carbon credits they have to find and work with an intermediary who's going to hold them on their behalf and you know oftentimes

that creates a lot of friction and then carbon claim tracing so sort of what Alan was talking about earlier this morning and lots of other people are Building Supply Chain management is coming through where we're actually tracking all of the different carbon Footprints of every different action inside of a supply chain and if various different parties along the way offset the footprint to actually make it Net Zero you can actually now track that record it have hyper search that give you actually proof point and keep all of that information on chain using unchain carbon so bringing this all back together we think this creates a massive flywheel to actually scale and grow the voluntary carbon Market by delivering financing in early stage Capital we get to then structure that Capital make that Capital more risk adjusted so that different investor types can invest in different

parts of the stack tokenize the spot asset which creates this you know whole system and usability of carbon credits leads to Innovative use cases which actually comes back to financing because those Innovative use cases will spur more demand for carbon credits and therefore more financing will flow into the system so we're always looking for new partners we're looking for people to help build with us and if anyone has any questions at this point please I'd love to ask them now or you can feel free to reach out on Twitter or Telegram [Applause] hey Phil um great presentation pretty broad great comprehensive story

really loved it so question for you is where are you in your current journey in in your build uh what exactly has been issued from insurance perspective and from financing perspective which jurisdiction are you specifically talking about you know from you know creating these forward contracts Etc so pretty Keen to understand that yeah so on the on the spot tokenization side of the market there is a pause put on last year by the issuers of carbon credits towards tokenization so that technology stack is fully built out we're very hopeful that by the end of the year gold standard being the first major body to move will have a guidelines their guidelines for tokenization and open tokenization back up and that will then

be the first thing to be deployed on that side of the market on the financing side we've done uh One financing structure on chain we're starting to do more financing structures on chain and in terms of where in the world truly it's a global market right right now now the goal is to create to find and finance projects that will spur more investment so we're looking at how do we mitigate risks in the projects that we're investing in right we don't want Even though these structures are set up to have some like failure tolerance right the idea is to not have them the projects do that at all especially in the early days when we're trying to prove to the institutional Market that these are really good solid Investments that will yield returns um and so that is unfortunately limiting

certain parts of the world from geopolitical risk standpoint and there's a lot we can get into on why those geopolitical risks exist um there's the possibility that countries could nationalize their carbon production or tax heavily tax we've seen 50 take rates for by governments for carbon production that's exported and so in situations like that you want to sort of avoid that those scenarios so you don't end up in a very bad situation and focus more on areas where there are very well established property rights and that's not or they already have implemented policies around around nationalization of carbon the carbon energy hello Phil thank you for your

presentations I have a question maybe more technical from how you manage to [Music] um carbon credit is like you say not fungible from the project point of view and then you put them together in the bundle which will be like an ETF from the common credit if I want to buy specific carbon credit from a specific project I will be able to do it and to do or need to buy only etf1 and can I take in the other way can I take a carbon credit from uitf and recomposite on the specific cabin credit from Project yeah great question um so from a legal construct right the

way that we've developed the system is very it was very important to us to maintain the spot commodity status at all times and to follow through a legal and creation construct that didn't all of a sudden create something that looks like a security or it looks like a pool of Commodities which has specific regulation in the United States of how those things are done and so the construct that we've designed actually allows for one credit to equal one bundle credit it's a one-to-one match and then because of that you can always unbundle and select something specific from inside there and that's what allows you to basically keep that status so if you want to pick a specific project you can one of the innovations that we're working on is how do you actually differentiate when there are slight differences inside of a bundle of carbon

credits and maybe there is some price difference right now how do you actually programmatically differentiate that to have a fee setting that's an intern like an internal closed system fees to incentivize and disincentivize the removal of specific credits because what you don't have unlike an ETF in this construct is a claim on a little piece of each one right you have a claim on you only basically if you own one bundle token you have a claim on one carbon credit and that is programmatically determined and if you want to pick a specific one there's going to be a fee associated with it or possibly an incentive okay thank you Phil thank you everybody and hope you enjoyed the speech and you will stay here for the next one

thank you [Applause] foreign