Carbon Credits: A Path to Sustainable Funding for NGOs
Carbon credits can be a game changer for NGOs, offering the possibility of significant, stable income. Yet they can also be contentious, and complicated and come with concerns about how much real benefit they deliver. In this post, we explain what carbon credits are, how NGOs can secure and sell them, how to avoid controversial issues, and suggestions for getting the highest possible price when selling them.
Let’s start with the basics: what is a carbon credit? A carbon credit is a financial asset that represents the removal of one metric ton of carbon from the atmosphere. Credits can be awarded to (almost) any project that reduces, avoids, captures, or destroys carbon emissions. Once verified by a certification authority, credits can be sold to buyers around the world, delivering much-needed income to the NGOs that produced the credits.
While carbon credits hold great promise for NGOs, the path to securing them is expensive, time-consuming, and complicated. We will walk through the steps you will need to take to tap into this new and innovative source of funding.
The first step is to confirm if the work you do qualifies for carbon credits. You may be surprised at how many different types of projects qualify, including:
Planting new trees (reforestation, afforestation credits)
Protecting existing trees from being removed (‘REDD’ or avoided emissions credits)
Creating, protecting, or expanding grassland areas
Promoting ‘no-till’ farming techniques that preserve underground biomass
Conserving and restoring marine areas and wetlands (blue carbon credits)
Improving cooktop stoves to reduce emissions
Developing safe drinking water solutions
Restoring and protecting savannahs
Implementing renewable energy solutions
Directly removing carbon from the atmosphere, using various technologies
Reducing or eliminating methane emissions
While these projects can qualify for carbon credits, it does not mean they necessarily will, as they must meet several requirements. These include proving additionality (the carbon removal or avoidance of emissions would not have otherwise happened without this project), permanence (the carbon will be removed for a reasonably long time), no double counting (no other entity can claim the carbon being removed, for example, if the host country has already included this work in its national carbon reduction goals), demonstrating scientific rigor and accuracy in the work, and being very conservative in estimating the amount of carbon being removed.
Let’s assume you are confident your work will qualify for carbon credits. The next step is to generate a Project Design Document (‘PDD’). The PDD is an important and required document under the Clean Development Mechanism (CDM) of the United Nations Framework Convention on Climate Change (UNFCCC). It serves as a comprehensive guide to the project’s design and implementation, including the quantification of emission reductions and other related data. A PDD includes:
Project Description: Brief overview of the project & objectives
Baseline Methodology: Describes the method used to establish an emissions baseline
Monitoring Plan: Outlines the plan for monitoring and verifying emission reductions
Additionality Assessment: Would the project have been implemented anyway?
GHG Emission Reductions: Estimates reductions and explains the methodology used
Environmental Impact: Potential environmental impacts and how they will be mitigated
Stakeholder Consultation: Describes the consultation process with stakeholders
Sustainable Development Benefits
Risk Assessment: Identifies potential risks and risk management
Financial Analysis: Financial analysis including estimated costs and revenues
It is generally recommended to hire an experienced consultant to create your PDD. A good consultant will create the document, manage the ‘back and forth’ with the certification agency, help you choose the methodology and registry, and find options for selling your credits.
A PDD consultant will typically charge $25K — $100K. Some might offer to do this for free in exchange for the right to own (and sell) some of your future credits. If you choose this option, we advise that you carefully assess their terms and conditions to ensure they are transparent and fair. If you can find a trustworthy and fair consultant, this can be a great way to save the upfront cost of 25–100K.
Once you’ve completed your PDD, you will register your project with a certification agency and begin the certification process. You will need to pay the agency for registering, reviewing, certifying, and issuing your carbon credits. They will also require that you hire a 3rd party expert to audit and verify your PDD. Certification agency fees vary between registries but generally include a one-time registration fee, a one-time certification review fee, and a credit issuance fee that ranges from $0.05 — $0.40 per credit issued. To give some context, a high-quality reforestation project today can earn $35 per credit. An issuance fee of $0.35 per credit would equal ~1% of the credit value. Verra, Gold Standard, and American Carbon Registry are examples of larger, more established certification agencies. But we recommend also looking into younger more innovative agencies such as Plan Vivo.
Tip: ReWorld believes smaller PDD consultants can be an excellent approach. They tend to be less expensive, faster, and more flexible than larger firms. We are building a network of consultants that charge from $0 — $30K and can complete the PDD in 8–10 weeks. Contact us if you would like any recommendations; we are happy to help you find a good carbon expert.
The certification process currently takes from 12–24 months, as agencies are experiencing high demand for their services and cannot hire and train staff fast enough. If you are serious about carbon credit revenue, we recommend beginning your certification process as soon as possible.
Once your credits are certified in a carbon registry, you can begin to sell them. Interestingly, it is also possible to sell your carbon credits before they have been certified, a process known as ‘Ex-ante’ selling. Ex-ante selling is based on the forecast of future carbon removal or avoided emissions the project is expected to generate, rather than on actual, verified amounts. Ex-ante sales are typically done through a forward contract agreement where a buyer pays for the expected carbon credits, and the seller promises to deliver them at a future date, once the project has been implemented and verified.
Why would you want to sell Ex-ante? You might need capital now to buy land, invest in equipment, or expand your operations. Ex-ante sales give you capital now in exchange for a discounted price later on the carbon credit sale. This discount varies depending on factors such as the type of project, the level of risk involved, and the credit’s expected certification timeline, but generally ranges from 20% to 50% of the current market price. The specific discount will depend on the individual project and the buyer’s risk tolerance.
Ex-ante buyers will generally only buy after you have completed your PDD. A good consultant can help you find ex-ante buyers while they are developing your PDD.
Tip: If your project also increases biodiversity and/or fulfills any of the United Nations Sustainable Development Goals, find an independent company that will further validate your credits as ‘High Quality’, as buyers will pay a premium for these credits. Patch and Compensate are two examples of ‘high-quality validators’. Having this extra layer of quality certification helps deliver confidence to buyers that the credits they will purchase have a very positive impact on the planet and helps avoid the controversy surrounding low-quality and questionable credits.
Let’s assume you completed the certification process and now have certified, registered credits. How do you find buyers? One option is to list them for sale on a carbon credit exchange such as the European Union Emissions Trading System (EU ETS), the Chicago Climate Exchange (CCX), the Chicago Mercantile Exchange (CME), the NASDAQ California Carbon Allowance (CCA) futures, and the Australian Carbon Credit Union (ACCU).
Alternatively, you can hire a broker or retailer to sell your credits for you. They might take a commission of 10% — 30%, or they might buy them from you at one rate, and turn around and try to sell them at a higher rate. Some of these buy/sell markups have been reported to be over 100%, depriving the NGO of much-needed revenue and creating concerns about the ethics of this practice. Brokers and retailers also provide services such as buyer due diligence, sales contract negotiation, and transaction execution.
It is important to know there are many scammers in the carbon sales market, so research a potential partner carefully before committing to work with one. Ask questions such as how many total credits they have sold, the names of buyers they have sold to, the average size of the sales contract, the average time to find a buyer and close a sale, and how they share information with you regarding offers received, buyer names and asking prices.
You could also choose to work with ‘full services’ companies such as Taking Root. Taking Root works with small farmers and landowners who are planting and/or protecting trees. TakingRoot does pretty much everything so the farmer can focus on what they do best: farming. The downside is that the farmer receives a smaller percentage of the carbon credit income generated from the sale of their credits.
A final way to sell your credits is to find and negotiate directly with buyers. This is arguably the best option as there will be no commissions, fees, markups, or middlemen. You will also receive 100% of the income from credit sales and develop a direct, long-term relationship with the buyer. Imagine having a relationship with Apple, Google, Salesforce, Cisco, Volkswagen, Porsche, etc. Once secured, you will be able to sell more credits much faster and more efficiently. The downside to direct selling is that you need to invest the time to find and directly negotiate with these buyers. Our team at ReWorld has deep experience selling to large companies and we can help you find buyers for your credits.
A word on technology. Technology can dramatically increase the efficiency, transparency, and simplicity of selling carbon credits. Much like eBay made it fast and easy for buyers and sellers to buy (and return!) goods, new technology platforms can do the same for carbon credits.
Tip: Search for technology solutions that automate and reduce the cost of your carbon credits. For example, AI tools that can generate your PDD faster, software-based markets that enable you to find buyers quickly and efficiently, software tools that quickly and cost-effectively create sales contracts, technology that automates measurement, verification, and reporting (‘MRV’) services and so on. Our team at ReWorld is developing AI tools that help automate as much of this as possible. Please reach out to us if you would like to learn more.
It is worth noting that you do not have to sell your credits as soon as you receive them. As more countries and businesses commit to reducing their greenhouse gas emissions, the demand for carbon credits is likely to increase, which may lead to significant increases in the price of carbon credits over time.
A recent Ernst & Young carbon credit study projects the price of nature-based carbon credits will rise to $160/ton by 2035 and $265/ton by 2050, from the current price of $35/ton today. ‘Banking’ credits might be a smart strategy.
The last step in your carbon journey is to deliver regular measurement, reporting, and verification (‘MRV’). You need to prove that you are successfully removing carbon or avoiding the carbon emissions that you committed to doing. You will be required to submit regular MRV reports, initially frequently and becoming less frequent over time. You can complete the MRV yourself or hire a 3rd party to do it for you. Or a combination of both.
Even with well-delivered MRV services, your project can still fail to deliver carbon removal, and those (future) credits would be lost. Let’s look at reforestation as an example. Planting trees is only the first step. You need to regularly monitor the trees as they grow and take the steps needed to maximize their survival rate. There have been instances where every newly-planted tree died before reaching maturity, invalidating years of carbon credits. MRV is an essential part of carbon credits, as they deliver confirmation, credibility, and trust.
ReWorld’s mission is to help the world’s conservation and climate NGOs secure carbon credits quickly, easily, fairly, transparently, and with the highest possible income going to the NGO. We are also developing new AI-based tools that will help simplify, speed up and drive down the cost of securing and selling carbon credits. Give us a call if we can be of help; we would love to hear from you. You can reach us at chris@reworld.eco.
