Falando de mercado: Perspectivas para fertilizantes em 2024

Adam Nye, VP of Business Development for Argus Global Carbon Markets, talks to Nadeem Khan, CEO and Founder of Indus Delta Capital, and Chris Villiers, Director of Portfolio Management at Respira, about blue carbon, including:

• Key fundamentals and co-benefits of blue carbon.
• Future developments on mangrove restorations, protection projects and methodologies.
• Opportunities and challenges that current blue carbon projects face.
• 12-month outlook for the blue carbon market.
  
  

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Adam: Hello everyone and welcome to our Net Zero Transmissions podcast series. In this episode, we're talking about blue carbon. As a project activity in the nature-based removal segment of the voluntary carbon market, blue carbon has been the subject of much interest as the restoration of coastal ecosystems has great potential for carbon sequestration as well as been critical from a biodiversity standpoint. 

The Delta Blue Carbon project has established itself as the key source of supply to this segment of the market, and Argus has recently commenced reporting on the wholesale market for its credits. I'm delighted to be joined by Nadeem Khan, the CEO and founder of Indus Delta Capital, and Chris Villiers from Respira. Let's start with the most fundamental question, what is blue carbon?

Chris: Blue carbon refers to CO2 stored in coastal marine ecosystems such as salt marshes, seagrasses, and of course, mangroves. These ecosystems are particularly efficient at absorbing CO2, and some of the data I've seen, compared to terrestrial forests, are 10 times more efficient at sequestering CO2. They also come with significant biodiversity benefits and provide habitat for marine life.

From a carbon project perspective, these are conservation activities. A lot of them have been degraded and it’s stopping that degradation and maintains and conserves what's remaining. Or they can be restored, which is the case of the Delta Blue Carbon project where you're replanting mangroves in that instance and restoring the ecosystems. There are methodologies under Verra and gold standard but there aren't significant number of projects yet that have reached their full potential. I counted 18 projects on the Verra website, some are relatively small, and there are lots in development, but it remains a relatively small segment of the market.

Adam: If we think of blue carbon divided into mangroves, seagrass, and sea kelp, is it correct that when we talk about it in the context of carbon markets and projects that we're talking about the foreseeable future of mangrove restoration and protection projects? 

Chris: Exactly, all the projects that are at the advanced stage are mangrove projects. There's lots of development going on in developing methodologies around seagrasses and kelp, but it'll be a little while before we see significant number of approved projects in those areas.

Adam: Turning to Nadeem, how are blue carbon projects different to other project types?

Nadeem: The main difference over terrestrial systems is the amount of carbon they sequester. Indus Delta mangroves are sequestering five to six times more carbon than a terrestrial system. What's unique about them is they tend to have a longer permanence than terrestrial forests, so they lock away the carbon in the soil and it's buried there for centuries.

As the project progresses, you see the carbon in the soil, the soil gets more carbon rich. Another important point is the ecosystem services mangroves provide as adaptation measures. They protect against sea level rise, stabilize the shoreline against erosion, and act as a natural barrier to sort of flood surges and storm surges, which is very important in Pakistan because it is amongst the top 10 countries that are affected by climate change right now. Also, the biodiversity benefits are quite unique. The root systems are very important as they provide important spawning grounds for fish and naturally filter the water. There are multiple benefits in terms of mitigation with carbon dioxide and adaptation, protection against sea level rise, storm surges, and floods.

Adam: On that point of degradation, that's obviously a major issue within forestry projects with the risks of forest fires but in a blue carbon context in an ocean ecosystem, fire is not a risk so are there any kind of reversal events that might happen?

Nadeem: What we're finding is the original sources of degradation need to be addressed. Ultimately, we're in an intertidal zone, so fire is not a risk, and the area where we're based is not geologically active. The only risk is storm surges and possibly tsunamis, but as we build the mangrove forest then we build resilience to that, so it's built-in sort of these measures in the project.

Adam: Could you talk about the barriers to entry to these blue carbon projects? 

Nadeem: One barrier to entry is restoration of mangrove forests as it is quite an expensive business and cost of carbon can be quite high. Simply planting would be cheaper but in some cases, you'd have to change hydrology which involves a lot of earthworks. So, entries of barrier are how much is it going to cost to restore and is restoration possible? 

The Delta Blue Carbon project is unique in the fact that we have scale. We're very fortunate in the fact that we have over 600,000 hectares of degraded delta, and I can't think of anywhere else in the world where you have that kind of intertidal space available to do a carbon project. There are coastlines and shorelines all around the world, but what we're doing is restoring an ecosystem. Our area, the whole 600,000 hectares, was initially a mangrove forest which had been degraded over the years. The scale makes it doable and gives us the ability to raise money from the carbon markets and do it on a scale. The other projects around the world tend to have smaller hectarage so they'll struggle to sort of raise the financing because it's a very expensive business. Another barrier to entry is methodologies available for greenhouse gas accounting. Most methodologies out there look at terrestrial forests.

The first mangrove methodology that we're using was developed in 2020. So those entry barriers are strong. Setting a base case is difficult as well. A lot of fieldwork is involved, and a lot of data is needed. We were lucky in Pakistan that we had over 30 years of sort of historical data sets in terms of mangrove growth. So, a lot of work goes into developing the baseline and then secondly, developing the technical documentation, and then you realize you have enough carbon to make it worthwhile.

Adam: On the topic of adaptation finance as an element to blue carbon projects, is there a finance gap versus sequestration?

Nadeem: There's a huge sort of adaptation financing gap right now, and there's plenty of money in the voluntary markets for mitigation and conservation projects but you don't find any adaptation measures. This is what makes this project very unique in that we are protecting against sea level rise, we are protecting against coastal erosion, and we're protecting the communities against flooding.

Recently we had quite a few floods in Pakistan in the Sindh province. Fortunately, higher areas were less hit because the mangrove sort of provided a natural barrier. In terms of non-tech solutions, mangrove forests are the best adaptation measures out there. And this kind of marries both mitigation, adaptation as I said before. So, the funding is going into mitigation and adaptation, which makes this project unique in that sense.

Adam: To focus on the project itself, Delta Blue Carbon, could you give us a sense of the history behind it, how it came about, and why it’s been successful? 

Nadeem: We started in this Delta Capital in 2010 with the view that Pakistan had a huge deforestation problem, and at the time REDD was a big scene. Pakistan has these natural resources so it should be tapping carbon markets to make things happen. We started in 2010 and we started initially in the northern areas of Pakistan looking at terrestrial forests. We saw there was a deforestation problem and thought REDD would be a good solution. We then signed up with several provincial governments there and started arranging workshops. There was a huge sort of knowledge gap, so capacity building was needed at the federal and provincial levels. We brought in experts from around the world to talk about carbon markets and carbon projects. It's one of these sorts of events that we first came across the work that the Sindh government had been doing in the Indus Delta.

The Indus Delta is a vast 600,000-hectare area on the coast of Sindh, and since the 1950s the mangroves there have been degrading due to upstream activity. There's a lot of huge dam projects in the northern part of Pakistan which has stopped the supply of fresh water, and since the 1950s these lands had been abandoned. In the 1980s, the Sindh government first started experimenting with small-scale restoration and they built up specialism and knowledge over a period of sort of 20 years and reintroduced some extinct species as well, but all this was done on a very small scale and through grants. We decided to start negotiations with them so that there's an opportunity here to tap into the voluntary markets and do these activities on a scale, which was important for us.

From day one we thought “We were going to do trade, not aid, we're not going to go for grants, we're not going to sell cheap. We're going to really invest in the area and start the project.” So, in 2013, we signed an MOU with the Sindh government, and the project kicked off in 2015. It's been active now for nine years. We've planted sort of 110,000 hectares of new mangroves. The plantations have been successful.

We work with the local communities. There are 60 villages around the project area of 42,000 people. We have community buy-in, we have complete government buy-in, and us as the private sector working together. It works well, and every partner is just as important as the others. We rely on the communities as the ultimate stewards of these mangrove forests. It's a 60-year project so it's going to be there for some time. We need to instill into the community that these forests are worth more standing than cutting. And slowly but surely as 10, 11 years have progressed, we're getting to that stage now.

Adam: Can you bring to life how the co-benefits of the project and the sustainable development goals that it meets are embedded with those communities that you mentioned? 

Nadeem: The project that we are doing covers 14 SDGs. It goes back to the design of the project. The project was designed in partnership with the communities where we asked, "What are the main causes of the degradation, and what can we do about it, and what do you guys need to act as stewards to these plantations?"

It came down to the fact that we need to provide extra sources of income for the communities and lower their living costs. A lot of these communities live in remote areas, so they don't have quick access to medical and education facilities. These are some things that we provide them. We have given them ambulances, set up local health centers, and regular meetings where we go to them and talk about hygiene and sanitation. We have done vaccination drives throughout there.

Indus Delta Capital has a community outreach team which works very closely with these communities. A lot of them were actually fishermen and in the past, they were doing unsustainable practices. The feedback we got from them, as the years went by, the fish catch became smaller and smaller. We work with them, we've taken away a lot of their illegal gill nets, given them proper nets, and told them we need to fish in a sustainable way.

They work with us in the fisheries department and we're planning sort of two marine protected zones as well. We pay the fishermen to protect the area and not to fish which generally helps overall with the fish catch. Up until now, it had been totally unsustainable. And the last two years we've had sort of feedback from the fishermen. They're seeing improved catch. They're seeing bigger fish as well, which is great. That feeds into life below water, no poverty, no hunger, lines up with those SDGs.

Also, what we do is employ community members to do all our planting work. Since the project's inception, we've employed 8,000 people from the communities to do the planting. Once the planting is done, then we pay families and community members to act as mangrove stewards. We'll take a 10-hectare area, give it to a particular family, give it to a particular village to make sure that the mangrove is grown successfully, and if there's any problems, they give us feedback.

What we're really trying to do is sort of create a sort of green economy where the communities are paid to plant, to look after the mangroves as stewards longer term because this has to be a generational thing, it can't be just for 10 years, and in return we increase their incomes and reduce their living costs through measures like access to the healthcare, access to better education, access to clean water as well.

There are several reverse osmosis plants that we're putting in strategic locations. A lot of these people must travel a long way to get their water. So, it's available locally. We're working with them and getting continual feedback. We've arranged all the 42 villages into village development committees. We meet them on a regular basis just to keep track of how our intervention is doing and what we could be doing differently. It's an evolving process over time but it seems to be working very well, and the feedback we have from the community is excellent. The success of the project sort of demonstrates the full community buy-in because without the community buy-in then these projects wouldn't be successful.

Chris: I was lucky enough to visit the site last year, and apart from being struck by the vast size of it and the planting that was being done, it was clear that this project has just breathed life into these communities in a very rural location, who were simply reliant on pretty sort of subsistence fishing, and this has given them new opportunities.

Nadeem mentioned there the health, the education, water sanitation, but it’s livelihood as well. They are part of the project, going around the mangroves, families going out and collecting proper gills, seeds effectively, that they can then deliver to the project and get paid for. It's an alternative source of income. Nadeem mentioned the stewardship plan there and the significant involvement in the planting. This diversified the local economy enormously through the one project.

Adam: To focus on Respira now, can you tell us about what their involvement has been in the project?

Chris: Our involvement has been a little more recent than Nadeem's. We were introduced to Nadeem by Pollination, who is a shareholder in the project, in 2021. We're providing a route to monetize some of the credits. The proposition that we have for not just this project, but other projects as well, is to provide a multi-year offtake which provides the project developer with a floor price or a minimum price for the credits that they issue and then deliver to Respira.

Respira is obviously not an end user of the credits, so they will then sell to any number of their corporate clients. To the extent that they make any profit or gross margin above the floor price, Respira will share that margin with the project developer, Indus Delta Capital in this case, so that over the long term the contract remains equitable.

There's a kind of fair share to the project developer. To the extent that there is a big uplift in the market, then the project and the associated communities are benefiting from the uplift in the market, which we think is very important in this market. The project is now issued, and we have monetized those credits and we've sold them on, and we've made those rebates back to Indus Delta Capital.

Adam: Focusing on that commercial side, what are some of the typical structures and roots to market that you use to sell those credits to the market?

Chris: For the Delta Blue project, we felt it would be a good idea to do an auction because it was the first substantial issuance of a blue carbon project, and the public auction that we did with CIX provided a useful pricing benchmark to the market. We thought that was a good approach given the first substantial issuance of those credits in the market and to give a bit of price transparency. We found that there was significant demand for blue carbon credits and those from this project. They commanded a high price relative to other nature-based carbon projects. So that's one route that we have to market.

We have several corporate clients, and we sell to them bilaterally, so they are purchasing carbon credits as part of their decarbonization pathways. We're looking to enter either sale for just spot credits but also, we're looking to do longer-term sales to them as well so that they can have regular supply of carbon from this project and can get some association with the project, which is typically what corporates are looking to do.

We’re adding extra reach on the commercial side for the project, ensuring that we're able to supply those out through the market and directly to corporate end buyers.

Adam: Blue carbon has become a corner of the market that's attracted a lot of interest. They price at a premium to almost every other part of the actively traded voluntary carbon market. What do you think the appeal is for buyers? Is it a combination of factors we’ve been discussing like the high co-benefits and SDGs? 

Chris: Exactly, a critical part is that it is a removal project, so it's sequestering carbon, not avoiding carbon emissions. It's relatively clear and easy to measure. There's sort of simplicity in that, which brings comfort around the carbon integrity. The co-benefits are very clear from a biodiversity perspective, improving fish yields even in the delta, and to the communities. I think it's a combination of all those factors.

Adam: Nadeem, what's coming up over the next 12 months or so for the project?

Nadeem: For the next 12 months, we will continue to scale up our planting activities. We're planning to build 35,000 hectares for next year. We've just sort of launched the second phase of the project which is a further 250,000 hectares of delta. We'll be very busy sort of planting for the next eight to nine years and we'll complete our planting.

Another thing we're looking at is the use of technology to help in the monitoring and sort of increase the integrity of our project. We're investing in LiDAR and remote sensing technology and just comparing that to sort of traditional methods and see if there's any differences or inaccuracies in terms of biomass measurement, which is very important in this industry. You're completely judged on that. So hopefully, we'll be collecting a lot of data sets there and building a digital model of our forest, which we'd like to share with our buyers. Some of the technologies that we'll employ will be useful for the wider blue carbon market and hopefully, help bring down costs for project developers throughout the world. In that way, we may see more projects kicking off in the region and globally. We're interested in promoting our project but in the wider context, we're looking at really pushing blue carbon and making it easier for everyone to enter doing a blue carbon project.

Adam: Chris, what about the outlook for the market?

Chris: We're expecting blue carbon projects, particularly the removals, the restoration projects such as Delta Blue to continue to command a premium in the market. We continue to see strong demand for the project, and supply is probably going to continue to be relatively constrained. Nadeem started this in 2013, it takes an awfully long time to develop these projects. It is painstaking work. There are lots in the pipeline, but it's going to be a while before we've got lots of other issued carbon credits from blue carbon restoration. So, we expect that strong pricing to continue, and with more visibility it gives more transparency that we think is only going to reinforce the premium and the demand that there will be for this project and projects like it.

Adam: Thank you both. Thank you to everybody for listening. 

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