How to Invest to Decarbonize the Economy: Supply-Side Decarbonization
What do nature and energy have in common?
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Post COP-28, we’re seemingly at a tipping point of building a new economy centered on reduced emissions and valuing nature’s ecosystem services. Eighteen countries endorsed the COP28 Joint Statement on Climate, Nature, and People, placing climate change, biodiversity, and land degradation together in a holistic manner. The EU has agreed to a law on deforestation-free products, a nature restoration law, proposals for soil and resilient forest monitoring laws, and a directive on corporate sustainability due diligence limiting impact on human rights and the environment. These regulatory and reporting tailwinds seeking to limit greenwashing have also enabled systematic accounting and reporting and the creation of many new four-letter acronyms (TCFD, TNFD, CSRD, EUDR, etc).
For us at Cerulean, this is a generational, huge opportunity, with somewhere in the realm of $33 trillion of annual un-captured economic value rapidly becoming part of the global financial system. For us, in many ways it finally provides the target that global sustainable finance initiatives from the EU to ASEAN and beyond were trying to strike, by earmarking about $23 trillion of capital to ESG initiatives in the last 15 years.
It would seem the world now has both the capital and interest to reshape the economy and take advantage of these massive financial (and impact!) opportunities, for maybe the first time since the second Industrial Revolution.
So how are we really trending?
Well, based on the above, we may have the capital and the interest, but what we lack, though, is the physical and digital infrastructure to drive these regenerative and climate-positive initiatives, measure their effectiveness, learn from our interventions, iterate, improve and deploy capital at scale to achieve the outcomes we want. Capital flows to the point of lowest friction often in our economy—right now, there still remains the problem of building the systems necessary to open new capital flows triggered by these global agreements.
On the consumer side, demand is manifesting for less carbon-intensive and environmentally costly energy, commodities, and more, but there’s a gulf between the demand and its effective deployment. We’re in about year 15 or so of FairTrade initiatives, zero waste initiatives, circular plastic or 99% recycled plastic initiatives, and most of these are nearly impossible to measure accurately, or have resulted in greenwashing. Accounting for nature with the type of fintech we use for the rest of the financial system, nature data made easily available the way Jupiter Intelligence makes physical climate risk available, natural assets for more than just carbon credits, and payments for outcomes coupled with digital infrastructure for measurement and verification of global ecological state, will be required by:
multilateral nation-state trade agreements
hundreds of top corporate sustainability goals (including an increasing percentage of banking and financial services)
by citizens the world over who are trying to make better sustainability decisions.
It’s up to founders and investors building the next generation of nature-positive companies on the back of these developments, to channel that demand to the highest value opportunities. Two of the biggest ones we see are in building markets in natural assets, and digitizing the energy markets which we think will drive decarbonization of the supply side of the economy.
What’s the Supply Side of the Economy?
Consumer demand is “satisfied” by a supply-side of the economy where consumers are offered limited choices. This supply side comprises everything from utilities like electricity (and the degree to which it is renewable), to discretionary items like fashion and automotive and consumer commodities like agriculture. Consumer choice is limited to products that have vast global supply chains that create and deliver from mostly biodiversity-destructive industries; though there are increasingly more fully-sustainable products and the supply chains that enable them.
If we want to drive effective decarbonization of the economy, it requires far more than consumers flexing their agency and making “better” choices. We have to make it fundamentally the best choice and the easiest choice to select the least carbon and biodiversity-intensive option. This involves taking a hard look at the markets that deliver most of our goods and services, and how to value them, and how to change. Nature Markets and Energy Markets are two ways to look at this growing opportunity.
The Nature Markets Opportunity — Measuring and Monetizing Ecosystem Services
As referenced above, the EU, the ASEAN nations, and to some extent the US have all started adopting reporting and compliance frameworks for reducing their environmental impact. This goes beyond “ESG” initiatives — these have been found wanting in the last 15 years, and there is a strong demand against greenwashing in the EU, and this is going to be built on a foundation of ground-truth data with traceability and due diligence at its core, in order to get nature on the balance sheet.
Let’s dig in a bit further on what it means for nature to be on the balance sheet. Take global food and agriculture markets. As of 2022, the “hidden” costs of the global food and land use systems sum to $12 trillion. When compared with the market value of the global food system, it would be appear that we’re in the red:
Source: Food and Land Use Coalition. (2019). Growing Better: Ten Critical Transitions to Transform Food and Land Use. Food and Land Use Coalition.
Now the $10 trillion in market value is fairly straightforward. This is the value of the food produced and sold by global food and ag conglomerates as reflected in their market capitalization in global capital markets. So, making that number go up or down is relatively straightforward. A capital market of some type with folks who buy or sell shares in those companies based on their current and future performance roughly determines the existence of the companies in that sector.
But, what about the $12 trillion of red? Who bears that cost?
This is where we see markets in Nature playing a role. The GHG emissions, the natural capital costs (e.g. degradation of soils, pollinators, chemical and pesticide leakage, etc), and human health costs are unaccounted for in the system because they fall outside of an existing compliance regime. They’re maybe not accounted for at all because it’s scientifically or technically costly (e.g. what is the current and future value of a bee species to the kiwifruit bearings in a particular area?).
This is also where we see the nature-tech opportunity going. This sector has attracted about $8bn in investment over the last 5 years, and is poised to rapidly grow. Our thesis here is that we’re now at a technological and financial inflection point where we’ve learned a bit about the playbook necessary to build deeply liquid markets in natural assets, how to fund the transition to more regenerative and nature-positive forms of land management and agriculture, and how to measure and verify the impact (reduce greenwashing).
What does this tech opportunity look like?
Regen Network: Peer-reviewed Scientific Methodologies for Ecological Asset Issuance, Stewarded by Global-Local Networks
It’s a long, expensive, and bureaucracy-laden process to originate, issue, and sell new carbon credits, mostly for good reason. Twenty or more years of carbon credit markets have shown us that when it comes to nature-based carbon, the industry is rife with greenwashing and fraud. About 6 years ago, a group of regenerative farmers and permaculture experts decided that the missing piece of this market was a community-owned and governed protocol with scientific, peer-reviewed methodologies for asset issuance, and a deeply liquid market for these natural assets.
That group is Regen Network, and in four years since launch the group has brought together scientists to design and launch three methodologies for carbon capture and land restoration (with over 40 in progress), catalyzed the development and issuance of 124,000 soil carbon credits which were sold to Microsoft. They’ve shown in a short timeframe that its possible to account for natural assets and ecosystem services, design a way to measure these services, issue an asset that represents those services, and prove out that capital will enter this space if you can demonstrate the impact. We don’t have to imagine a new system that internalizes the externalities we indicated above in the food and ag sector—we’ve now seen that a group can come together and measure those costs, and incentivize regeneration and restoration in a parallel system. This is the promise of nature tech. (Disclosure: we hold $REGEN token)
Earthbanc: Scaling up Carbon Removal Through Agroforestry
Earthbanc is a 2022 Cerulean portfolio company, and in a very short while has proven out that they can measure ecosystem worth through carbon sequestration as well as biodiversity restoration, and above all else, they’ve attracted some of the largest amounts of capital in the space to their company.
They’ve developed proprietary MRV technology for nature-based carbon sequestration, a set of forward contracts to address the critical 4-5 year funding gap that all carbon projects face as they originate their first assets, and the project development chops to ensure that NbS projects happen on the scale necessary to achieve climate impact. What the most exciting development is from our perspective is that they have the potential to issue bonds against natural capital assets they’ve originated in much the same way as a bank would (hence the name Earthbanc).
They envision a world where you can take a tract of land or ocean, measure it for its natural capital worth, issue assets against this underwriting which would be purchased by corporate entities or governments with natural capital targets, and value the natural capital asset from now to its future worth. This would enable us to make natural capital competitive with other commodities and assets that originate from land—imagine a situation where a tract of land is worth more in future harvests because of the value of its pollinators, than for the amount of palm oil that can be grown from it after its razed. Land valued for pollinators and carbon it keeps in the ground, instead of carbon that can be released and extracted from it with commodities. That’s the vision Earthbanc is already delivering on (keep this thought in your mind as we drive to our conclusion, we’ll revisit this framing).
The Energy Opportunity: Digitizing Old Infrastructure, Emissions Accounting, Grid Coordination
Natural capital as we’ve shown is one tool in the toolbox that can keep extractive commodities in the ground based on market mechanisms and work to decarbonize the physical assets we rely on. However, the way we create and deliver electric power is responsible for nearly 25% of global emissions, and this only gets more complicated as we zoom in on developing economies.
From Cerulean’s perspective, we think that any sovereign nation that can mine fossil fuels profitably on its own sovereign land over the course of the next century will, especially if it is their only tool to bring development to their population across the Global South. Given that the fastest growing economies in the world continue to be in the ASEAN region and the African continent, we think a huge opportunity exists to coordinate grid energy, understand what the grid is producing, what the energy split is, what the impact of that energy production is, and how to load-balance consumer energy needs with green energy production so that we obviate this need for developing economies to turn to fossil fuels, instead of scolding them for not adopting our values around carbon footprints.
If we’re able to produce more green electrons, understand the impact on the environment from that production, and manage the demand for energy against production, then we’ll make a sizable dent in the 25% of global emissions caused by burning fossil fuels to meet “unpredicted” demand. On that front we’ve made two investments we’re excited about.
Quantum Energy
Quantum Energy is building an integrated renewable energy analysis platform combining energy system optimization and life cycle assessment to measure the environmental and social impacts and tradeoffs of nearly 279,000 corporate and government energy purchase decisions made each year globally. These decisions are largely ill-informed of the life cycle of environmental and health impacts, commonly referred to as “externalities,” yet when impact analytics are quantified and financially valued, they can be more than 10x larger than infrastructure costs alone. What we observed in the chart above with respect to the global food and ag sector’s costs vs. market cap, is surely similar in global energy food production, and step one will be QE figuring out where we stand. They recently won a contract to monitor the impact of the US’s largest wind and solar complex.
Valuing Land and Ocean Ecosystem Services with Markets Will Keep More of the Fossils in the Ground
Navigating the Global Shift Towards a Nature-Positive Economy: Following COP-28, where 18 countries endorsed a groundbreaking Joint Statement, the world stands at the cusp of a transformative era emphasizing reduced emissions and recognizing the value of nature's ecosystem services. Regulatory measures have created a holistic framework, tackling climate change, biodiversity loss, and land degradation collectively.
Seizing Opportunities in Nature and Energy Markets: The immense opportunity, estimated at around $33 trillion annually, beckons us to build a nature-positive economy. While capital and interest are abundant, the lack of digital and physical infrastructure poses a challenge to driving regenerative initiatives. Developing markets in natural assets and digitally transforming energy markets to effectively decarbonize the supply side of the economy is the biggest opportunity of our time, and together represents more than 50% of global carbon emissions.
Nature-Tech's Moment: The burgeoning nature-tech sector, with approximately $8 billion in investments over the last five years, has emerged as a crucial player. Aiming to monetize ecosystem services and tackle unaccounted costs, particularly in sectors like global food and agriculture, pioneering companies such as Regen Network and Earthbanc exemplify the potential of nature-tech in creating robust markets for natural assets and advancing carbon removal through innovative approaches like agroforestry.
The imperative for technological and financial innovation looms large as we embark on the journey toward a nature-positive economy. The rise of nature-tech provides a promising avenue to measure, monetize, and account for ecosystem services, offering viable solutions to the challenges hindering effective decarbonization. At Cerulean, our dual focus on nature and energy markets we think will light a path toward reshaping the global economy, enabling us to do tactically what decarbonization actually is: keep the fossils in the ground.
Nothing contained herein constitutes investment, legal, tax or other advice nor is to be relied upon in making an investment or other decision. This article contains the opinions of the author, and such opinions are subject to change without notice. Furthermore, it may also include data and opinions derived from third party sources. Cerulean Ventures does not accept liability for the accuracy or completeness of any such information or opinions which can be subject to change without notice.
Valuing Nature via Ecosystem Services Valuation is straightforward using BASIN's RealValue Framework. Any polygon, any ecosystem, can be put into $/ac/yr or $/ha/yr for 18 Core Benefits of Natural Capital to show both the public goods values and anthropocentric values as related to the underlying real asset value.
$'s are a language we all speak and most understand. Besides the line item $ values and total annual economic $ value, the main indicator of RealValue is the Natural Capitalization Rate, which shows the relation between holistic value and real estate value. The Natural Cap Rate shows what sites have high conservation value and which have high restoration potential value relative to project cost.
RealValue helps answer the question: what is the higher and better use of this property as opposed to the common appraisal standards which focus solely on maximum financial productivity which almost always destroys the ecological and biotic communities for myopic human use.
And despite the criticism of Instrumental Values, putting a $ value on the benefits Nature provides will help protect the Intrinsic Value.