Your correspondent’s last few articles have looked at the importance of forestry projects for carbon sequestration, offered a short history and overview of carbon credits, and taken a detailed look at the workings of the compliance and voluntary carbon credit markets.
Reading the series, you have been introduced to the largest offset project developer in the U.S., Bluesource and to organizations like Verra that publish the standards to which new projects must comply to receive credits.
In this article, I will introduce you to an up-and-coming player in the carbon offset market, Pachama, founded by a young, dynamic entrepreneur with a vision to move up the carbon credit value chain by applying AI, LiDAR, and satellite technology to the eons old practice of forestry management.
Diego Saez-Gil founded Pachama after co-founding a truly brilliant but ultimately doomed smart luggage company called Bluesmart (the lithium batteries that powered the “smart” part of smart luggage were banned by airlines).
Traveling through the Amazon with his brothers to clear his head after the unexpected flame-out of the Bluesmart venture, Saez-Gil was shocked to see large swathes of the Amazon rain forest being razed to make way for soybean farming, cattle ranching, and mining.
He discovered that an estimated 15% of all greenhouse gas (GHG) emissions come from deforestation (World Wildlife Fund) and admits that he started to feel overwhelmed by the enormity of the interrelated problems of deforestation and climate change.
Many developing countries, after all, find themselves trapped in a Catch-22. If politicians in resource-rich but poor countries make a policy choice to create incentives for business people to open up forested areas, they increase tax revenues and add vigor to their economies but incur the righteous indignation of leaders of developed countries.
On the other hand, if developing country politicians decide to maintain their pristine forest land, they get nods of approval at international conferences, but their countries’ economic growth tends to remain moribund.
The only workable economic solution, Saez-Gil realized, was if landowners could be compensated for the value created by maximizing carbon sequestration on their land.
Enter the carbon credit markets. The compliance market forestry project mentioned in my last article serves as an example of how landowners can be paid for sequestering carbon through not harvesting timber – breaking through the Catch-22 and allowing conservation to spur economic growth.
As mentioned in the last article, an important part of the carbon credit value chain is the verification that certified carbon sequestration projects are being maintained so as to generate the benefits for which the credits have been issued.
This verification process is expensive for land-use projects because the only way to check that carbon credit protocols are being upheld has been to send expert personnel into the forests to count, measure, and calculate an estimate of the forests’ sequestration potential.
Considering this highly manual process, it’s clear that monitoring and verification can only be done at significant intervals. Understanding the disastrous impacts of climate inaction, it is similarly clear that civilization cannot afford to have inefficiencies in this process.
The insight that prompted Saez-Gil to found Pachama was that modern technological tools – satellite-borne LiDAR imagery and artificial intelligence – could be applied to the bottleneck to make the process of verifying carbon credit standards compliance much more efficient. In contrast with the legacy manual methodology, Pachama’s technology allows verification to be carried out essentially in real time.
Pachama raised a seed round of capital in early 2019 from several prominent Silicon Valley investors and is now charging full speed ahead at the avant-garde of a nascent industry.
At present Pachama is acting as a carbon credit aggregator and retailer – it does not manage sequestration projects but offers an added level of verification to projects that have already been validated and charges a fee based on its added, real-time validation services.
This real-time validation allows credit buyers more confidence that the credits they are buying are backed by bona fide sequestration benefits.
In my mind, though, the real prize for Pachama will be acceptance of its automated verification methodology by one of the Standards organizations mentioned in my last article. Because Pachama is essentially a SaaS company, its profitability expands rapidly with each new dollar of revenue.
Pachama’s software is already being utilized to verify carbon credit projects across the world – two in Brazil, one in Peru, and the rest in the United States (the Middlebury College project mentioned in my first article in this series is one developed by Bluesource and verified by Pachama).
Adding a new client tacks on some extra expenses in imaging costs and processing resources, but if Pachama’s verification procedures are written into one or more Standards, the business will be able to scale very well, in my opinion.
One especially powerful potential source of near- and medium-term demand for carbon credit verification services is the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA), an international agreement to make civilian air travel carbon neutral compared to 2020 emissions.*
CORSIA will require airlines from participating countries (representing over three-fourths of civilian air travel) to buy carbon offsets for any emissions greater than those in the base year.
Even though Saez-Gil’s experience with Bluesmart luggage was certainly a painful one for him, his new venture, Pachama, arguably has the potential to make a much greater impact on travel than smart suitcases ever would have.
Diego knows, as I do, that business in the twenty-first century must adapt to the new reality of climate change and that capitalism’s paradigm must shift for us all to survive and thrive. Intelligent investors take note.
* As an aside, COVID-19’s effect on air travel this year will mean that the CORSIA base year calculation will be relatively low. A relatively low base year calculation will drive demand for a much greater volume of credits compared to a “normal” travel year. COVID-19, while a tragedy to those families affected by it, will provide a benefit in terms of the airlines’ carbon neutrality targets for the future.