Pilot Insights | Forest Carbon: State of the web3 carbon market
Image courtesy of Forest Carbon
Executive Summary
Blockchain-powered carbon markets have long been proposed as a solution to the opaque, slow, and disorganized issuance process for carbon credits, though with limited real world applications. Together with Forest Carbon, a leading forest restoration company, Mercy Corps Ventures launched a pilot in 2023 to evaluate the potential of blockchain to issue trustless credits, with the ultimate goal of driving greater benefits to local Indigenous communities in Sumatra, Indonesia.
During this yearlong project, we assessed 20+ web3 carbon marketplaces, standards and registries and interviewed multiple stakeholders. Ultimately, we concluded that these players were not yet mature enough to issue trustless credits that matched the unique ecosystems under management by Forest Carbon.
Nonetheless we were successful in building a state-of-the-art buyer transparency dashboard that is ready to integrate with web3 once the market matures. We also completed the first ever carbon credit sale for the Kepayang community forest, to Rippleworks using our dashboard software, which exceeds the requirements of third party verification standards with over 140 unique data points on the project that are accessible in real time.
We did not use a blockchain due to the capacity of current platforms, but the transaction was based on an extensive dataset comprising over 140 unique data layers. These datasets are continuously updated and accessible through Forest Carbon’s proprietary dashboard software. They include the location and cadence of forest patrols, water table levels throughout the peatland areas, weather and fire sensors and audio and camera sensors that track biodiversity. We are ready in the event a blockchain platform emerges that can incorporate this data on a blockchain in a trustless manner. All data can easily migrate on-chain via an API with a chosen partner that demonstrates this capacity. While modest, the model transaction serves as a replicable model for future clients that desire transparency and want to purchase carbon credits from a community forest where 75% of all profits go to the community -Forest Carbon retains 25% annually to ensure a sustainable operating budget for the life of the 40-year project.
The MCV grant primarily funded the development of these robust datasets, and Forest Carbon now offers a comprehensive dashboard for investors and buyers. The funds from the model transaction are being invested in community-led forestry, including peatland restoration, sustainable rubber production, biodiversity conservation and community development projects that include community health programs, water catchment systems, and childhood literacy initiatives.
About the Pilot
In 2023, Mercy Corps Ventures partnered with Forest Carbon to understand how its carbon credits could be listed on blockchain-based marketplace platforms. Forest Carbon is a forest restoration company that restores peatland areas in Sumatra, Indonesia. While Carbon markets show great promise to help mitigate climate change by using nature to store carbon through the preservation of forests and peatlands, regenerative agriculture, and renewable energy they face multiple barriers to scale. These markets suffer from significant challenges, in particular (1) lack of transparency in whether they create the impact they claim and how credit revenue is shared among stakeholders; (2) smaller projects -those below 10,00 hectares and those run by indigenous communities — cannot afford the capacity to meet the ever increasing requirements of third party certification standards; and (3) slow and opaque processes to generate revenue from overly scientific methodologies.
We hypothesized that incorporating blockchain into a top-tier forest restoration company processes (Forest Carbon was recognized by the Natural Climate Solutions Alliance (NCSA) in 2022 for successfully conserving nature and biodiversity, and supporting local communities) would add significant value to the carbon credits markets by (1) creating an immutable record of carbon credits to increase transparency and traceability; (2) widening access to the carbon credit market, for both buyers and sellers by allowing access to the markets to smaller projects with few; and (3) increasing efficiency in the market by streamlining the process in facilitating transactions. This would result in more revenue to indigenous communities stewarding the land.
During the course of the pilot, however, material downturns in both the carbon and web3 markets hindered our ability to successfully find a web3 platform with the capacity to list our credits on a trustless platform. Shortly after starting this grant, the carbon credit market came under heavy scrutiny, and Verra, the main issuer of carbon credits, to banned the tokenization of carbon credits by all platforms in May 2022. This hindered our ability to test our thesis and the overall development of the market.
This move was made in reaction to reasonable and accurate concerns about profiteering and market integrity by these stakeholders. Verra then initiated discussions on credible pathways for carbon credit tokenization and launched a public consultation, the results of which were summarized in January 2023. However, no additional updates or directives have been provided since then, as these events coincide with a material drop in the overall valuation of global cryptocurrency reserves with the collapse of FTX.
In addition, while we reviewed more than 20 different web3 platforms, none were fully suitable for transacting high-quality carbon credits with verifiable data through a trustless system. Without leveraging the permissionless nature of a blockchain, these services are no more valuable than a website. Therefore, the project pivoted to address some of the existing issues in the market and prepare for a potential web3-based carbon platform once it becomes available. We also note that at the time of publishing this article, Open Forest Protocol is the only known web3 platform to have a semi–permissioned chain active for carbon credits, and while highly promising, they have currently issued a total of 7 carbon removal credits on their platform to date.
Insights
Blockchain-enabled trading platforms for carbon credit issuance and sales aren’t realizing the full potential of Web3
During the submission of the original grant concept, initially hypothesized that it would be straightforward to find a partner that would allow us to put the credits on-chain in a way that met our specifications for trust and transparency. We can safely say that we would not have performed this analysis without grant support, as we knew this was a relatively high-risk strategy and there was no ability to get funding from another source to conduct this evaluation.
Forest Carbon reviewed over 20 potential partners to assess their suitability for transparent data collection,bmonitoring data, and transaction information. This exercise revealed that while there are interesting applications out there, none were ready to issue trustless credits. Most were focused on either bridging credits or forward-selling credits, neither of which would address root issues in the market. Open Forest Protocol showed viable capabilities and was able to accommodate the largest amount of data. They also have a semi-permissioned chain that is managed by a Swiss-based nonprofit that adds a huge degree of trust in their platform, but they currently only support carbon removal methodologies and not peatland restoration or forest conservation. Toucan recently pivoted to become an infrastructure and service provider for data-driven smart credits, which may be a fit to issue credits in the future.
Buyers want transparency and more accessible project data
Buyers, sellers, and governments all view transparency as essential to the success of carbon markets. After conducting in-depth research and interviews to understand the current demands of Forest Carbon’s core customers, findings revealed that buyers prioritize transparency and the ability to access detailed project information, which they can integrate into their ESG, sustainability, and impact reporting frameworks.
Forest Carbon identified common buyer profiles with specific interests in different types of data. For example, risk-averse clients are interested in tracking the state of the project in real time and having as much information as possible about climate and market conditions. Alternatively, some buyers focus on biodiversity conservation and prioritize ecosystem health metrics, while others are interested in understanding how the benefits of the projects flow to local communities.
Increasing transparency from the buyer side is also important. For example, the U.S. Government Principles for High-Integrity Voluntary Markets call for — under principle #4 — the public disclosure of the nature of purchased and retired credits. In an interview discussing these principles, Josh Zoffer, Special Assistant to the President [of the United States] for Economic Policy says: “One of our strongly held views is that transparency is essential to the success of this market. This step brings more transparency. Credit buyers and users making these robust, detailed disclosures can enable other market participants and stakeholders to understand whether they really are living up to the claims that they’ve made and to the science that climate change demands.”3
Launching a first-of-a-kind transparency dashboard for buyers
Forest Carbon designed a custom dashboard to increase transparency in the market as no off-the-shelf product was available, hiring a team of three in-house software engineers that are dedicated full time to the effort. These hires were de-risked by the grant funds, which were catalytic in onboarding these individuals and training them up in our sector.
The dashboard contains more than 140 metrics providing detailed information about vegetation regrowth, fire monitoring, water conservation and management, biodiversity, and community co-benefits, forest patrols, vehicle locations and forest canopy return. These metrics include year, vintage, credit type (ARR vs WRC), baseline carbon removals, project carbon removals, net carbon removals, baseline fire emissions, project fire emissions, water table level data, and average tree height per pixel. This dashboard allows potential and existing buyers to see the real-time state of the forest as well as biodiversity and community co-benefits, thereby bringing significant transparency to the market.
Dashboard example: Vegetation
Forest Carbon’s dashboard offers an overview of Sumatra Merang Peatland Project’s (SMPP) regeneration program, aiming to restore more than 22,900 hectares of degraded peatland forest with native tree and vegetation species. Users can access satellite images displaying the progress of regrowth for each year since the project’s inception, allowing for comparison and analysis. The image on the left displays the satellite picture for 2016, while the image on the right shows the satellite picture for 2022.
In addition, Forest Carbon designed the dashboard ensuring customization to meet specific needs of the different buyer profiles identified. For risk-averse buyers, for example, the dashboard offers detailed market insights and real-time monitoring of climate conditions, including fire risks and hydrological data, enabling them to monitor potential threats to credit production. Buyers focused on biodiversity can prioritize and track ecosystem health metrics, monitor species sightings, and assess habitat connectivity and resilience. Those interested in community co-benefits can evaluate metrics related to health, education, and socio-economic contributions, allowing them to align their purchases with broader ESG strategies and the Sustainable Development Goals (SDGs).
The dashboard now stands as the foundation for a web3-enabled advancement when the right platform is ready, as we have already streamlined metadata verification with our internal audit interface. Once a web3 platform emerges that can issue trustless credits, Forest Carbon will integrate our dashboard into the platform via API. For example, we are evaluating connecting our dashboard to the Renoster open source project database.
Community Co-Benefits
Ensuring that the benefits of carbon projects flow to local, indigenous communities is a key component for equitable projects. Forest Carbon has invested more than $2 million in community development initiatives in villages around the SMPP project. These initiatives include health center support, providing 8,000 villagers with access to basic health care, maternal and child health programs, mobile health services, clean water access, and extensive educational support for children and adults.
In an example of using benefit sharing funding as catalytic capital, we used a portion of free cashflow to finance the launch and design of a 4,000 hectare community forest, supported by our anchor buyer Nestle. In addition to direct funding, we leveraged our technical and operations teams to build a carbon asset that is owned directly by the Indigenous communities and managed by a local cooperative. This area forms a buffer zone around our 22,000 hectare commercial project, creating a biodiversity corridor into the nearby national park. The communities receive 75% of all project profit, and we retain 25% to ensure the project has long term operating funding. This is a key example of how benefit sharing can be used as catalytic capital, rather than just a direct cash payment. Our approach has been published as a leading example for Indonesia on Bloomberg’s Carbon Knowledge Hub.
In another example of co-benefits, Forest Carbon launched initiatives to improve adult education rates within three villages in and surrounding the SMPP in Indonesia. Through the adult education program, the project has enabled adults to continue their formal education from elementary to high school levels. In 2023, 88 adults enrolled to pursue diplomas at the elementary, middle, and high school levels. Additionally, 15 students have been enrolled in Universitas Terbuka (Open University) as part of the program. Approximately 2% of the local population is currently enrolled in an adult education program supported by the project.
Forest Carbon has also invested in improving access to water for the communities. Between July and September 2023, the project installed 50 rainwater catchment systems in Kepayang Village, bringing the total number to 147. To date, these rainwater catchment systems have provided access to clean water to around 1,500 residents in the nearby settlements. Each newly installed water catchment system’s location is represented on the project dashboard in purple, along with the name of the household head. Upon selecting a particular location and clicking on it, users can view detailed data, including proof of installation with accompanying photos and GPS data, in a pop-up window.
Dashboard example: Water Catchment Systems
Forest Carbon’s dashboard provides an interactive report in both map and list formats, including all household locations, head of household names, GPS coordinates, installation dates, and photos.
Carbon Credit Sales
To support Forest Carbon’s benefit sharing strategy and catalyze the project with an anchor purchase of carbon credits, Rippleworks agreed in December 2023 to purchase carbon offsets to mitigate their footprint. Rippleworks is now the first buyer from Forest Carbon’s Kepayang Community Forest project, dedicating 100% of their funding to the community forestry project. Rippleworks is using the new dashboard to monitor the performance of their carbon credits.
Rippleworks prioritized data transparency over storage methods, confirming a willingness to pay for high fidelity data over the utility of blockchain. This multi-year partnership compensates for their Scope 1 and 2 emissions from 2023. This purchase provides catalytic capital to the Community Forest as an advance purchase that will be fulfilled once credits are issued. Although the transaction is modest it serves as a replicable model, and the MCV grant enabled us to develop the necessary robust datasets for our dashboard, benefiting all new buyers.
“We’re thrilled to be supporting community led forestry in Indonesia with carbon credits that directly fund community peatland restoration, biodiversity conservation and sustainable agriculture in South Sumatra. Forest Carbon’s technology platform is best-in-class and we’re happy to support their industry-leading commitment to benefits and transparency.” Rippleworks
Next Steps
Mercy Corps Ventures and Forest Carbon will continue to build innovative solutions in this space. Please reach out if you are interested in partnering, if you are looking to access high quality environmental credits, or if you would like to learn more.
Forest Carbon is a leading environmental asset manager in Southeast Asia. The company’s portfolio includes over 260,000 hectares of diverse forest types that deliver benefits for local communities, biodiversity, and investors through a proven business model. Based in Jakarta and Singapore, Forest Carbon is built on a track record of over 15 years in the region. Forest Carbon has issued 4.1 million credits to date, with contracted sales totaling $46 million from premium global brands. The company has over 8 million hectares of pipeline opportunities and is currently deploying project finance to expand its portfolio further.
