An anonymized oral history of debt financing within carbon removal

This article is a brief attempt to catalog some of the debt financing hurdles within carbon removal. It is by no means meant to be exhaustive or a permanent statement, and I'd welcome others adding their own anecdotes and ephemeral observations that will hopefully soon be lost in time, like tears in rain. Since leaving Nori, I've been obsessed with financing gaps, and I've heard variations on the following themes:

Venture financing via equity is inappropriate for many carbon removal companies.

Most do not have the breakaway potential that will allow an investor to 100x+ an initial investment. Alternatives to venture equity financing are immature and expensive (though some venture debt is coming online), or old school (I heard of at least one deal being facilitated by marriage.) A surprising number of companies bootstrap their way to revenue. They skip the "selling the dream" early-stage venture rounds and patch together a mixture of philanthropic and public money to show enough traction to get attention. People and tools that facilitate such opportunity will likely be in the catbird seat.

Debt financing is unavailable for carbon removal credit offtakes.

I hadn't heard of a single offtake being financed until the UNDO/CUR8/Standard Chartered deal happened two weeks ago. It's for four-thousand tonnes and has two insurers, and I suspect the FOAK agreement cost more than the value of the entire loan, but that's really what it takes to get a deal done right now. It was also not announced what the interest rate was on this deal (though I'd love to know and I'll probably go ask if it's not too impertinent.)

I have heard stories of big-number deals with blue-chip companies that have limited counterparty, execution, and tech risk. They're still unbankable. Potential financial partners either don't trust the track record of the company and industry or don't like the caveats that allow a purchaser to void the offtake agreement. Relaxing on those caveats makes offtakes way riskier for the buyers though, and I haven't heard of any caveats that struck me as unreasonable (yet). As far as I can tell, everyone's hearts are in the right place, but people would likely lose their jobs if they were forced to pay out a eight- or nine-figure sum for impaired carbon removals.

A few major offtakes have been announced that have been paired or are closely correlated in time with the closing of a major fundraising round. One interviewee told me some portion of the deal included prepurchasing, and that the offtake was for a facility after the one currently being built. This made their business much less needful of immediate financing. I have a few other interesting bits of intel, but I don't believe I can sufficiently anonymize to preserve the relationship and their trust.

Short-duration secured loans are becoming available, and their absence is acutely felt.

I have had several people working in biochar tell me that they would welcome loans against inventory. They're tied to revenue that they know is coming in under a year, but their operations are hamstrung until the check arrives. I have heard of a few of these deals happening in NBS, but they were at promotional interest rates that were not much above the risk-free rate itself. Like the presumed deal terms of the UNDO arrangement, it was more about traction and proof-of-concept than revenue.

Without mass demand for physical biochar, BCR credits are not financable.

I originally approached this problem as a failure of financial engineering, or of software eating the investment world. I am less convinced of this now. One of the most insightful comments said to me was about the difficulty of selling biochar's physical product at scale. Carbon credit sales alone from biochar are not enough to support most biochar production except in certain parts of the Global South (where in many cases, biochar is given away and in some cases may even need to be inoculated to entice farmers to take it).

Until agribusiness demands biochar in its procurement contracts, farmers aren't going to invest in putting it on their fields. So until FritoLay asks their potato farmers to use biochar, farmers are just not going to do that in any non-artisanal amount. But (and this might be the most controversial thing written here) since I have heard from a few people that the main settled benefit of biochar in soil is water retention rather than fertility or anything else (research just isn't complete on how to innoculate and apply, granule size, etc.) the basic science is just not there to get it into contracts. But even if it were, it would have to displace a lot of existing relationships and mindshare. FritoLay probably wouldn't do it unless it was cheaper and/or better than what they're doing now, or if there were enough customer demand, or some sort of regulation. Customers also don't know about biochar. I've literally never heard a single person outside my freaky little CDR world ever namecheck the substance.

But only a few days before finalizing this piece, BluSky Carbon Inc. swooped in with a $105M deal to offtake their physical biochar, so maybe this logjam is about to break. I have so many questions and am hopeful more details will be shared that allow others to work with similar partners in non-competitive locations and further validate this pathway.

Project finance and other big debt deals exist, and once one needs them they may be achievable.

The biggest companies in our space or in adjacencies can line up huge deals. Twelve has a SAF facility in central Washington with a ticket size the better chunk of a billion dollars (with a blend of various finance types). Big DAC facilities still get built. Once through the financing valley of death, these deals do get done.

No one is bending my ear on how difficult these types of deals are, and that could just as easily be that I'm not in the right rooms to hear about it rather than this isn't just as hard as anything else. But I think the fact that there are nine-figure deals like this happening is prime facie evidence is there is some amount of demand for this kind of exposure.

What can you do?

So what are the important avenues for inquiry and action? It depends upon your access to the various systems, but here are some ideas.

1. Get the science figured out for biochar so that it can mainstream. Get the land grant universities to figure out how to use it for any and all of its benefits so it can leave artisanal production. Until I see biochar being bragged about in the grocery store (and it can even be the fancy one you only go to if you forgot something), then it likely needs more work.
2. Do the same thing but for non-agricultural uses. Everyone first thinks of biochar as a soil amendment, but it doesn't have to be. Get research done on the built environment, water purification, anything that creates natural demand beyond VCM revenue for the physical substance.
3. If you have connections in agriculture and CPG, get biochar and ERW into contracts. (One area of interest for me is how much this dynamic is duplicated in ERW, and where those companies get stuck on the demand and implementation sides.)
4. If you have philanthropic money, use it to subsidize interest rates and set up debt funds that validate non-venture pathways for CDR companies.
5. If you have a finance or banking background, design new types of financial instruments that solve problems.
6. If you work on offtake agreements, be selective about which caveats within offtake agreements can be amended or removed to make offtakes more bankable. (This is well-understood and in progress but might just be blocked by contrary interests across the negotiation table.)
7. Support policy that drives more non-dilutive funding to climatetech. It makes the system much less dependent upon pure VCM revenue and venture.
8. Say "bankability" until you are escorted from every NYCW event and/or some new phrase supersedes it.

Thanks for reading! I'd welcome all thoughts, contrary or otherwise. Help me grow this quasi-oral history of debt financing in carbon removal.