Evergrow: 30 Questions

It’s been 2 weeks since I wrote a post outlining Evergrow. I’ve received quite a few questions and feedback from friends on it. I’ve organized these questions into a single list, and am publishing it here. Over the next few weeks I’ll go down the list and take a stab at answering each. My thanks to everyone who read my initial post, and in particular Jason Jacobs, Jeremy Schneider, Jonathan Kuo, Nikhil Basu Trivedi, Catilin Collins, and Mike Intrator for their questions which form the bulk of this list. Quick note: for convenience, I’m using the term “reforestation” to describe both reforestation and aforestation (the former being the process of planting new forests on areas that had previously been deforested, and the latter being the process of planting entirely new forests).

  1. Discuss carbon offsets, generally. What is a carbon offset? What is a “unit” of carbon offset? Is a carbon offset persistent or is it somehow consumed? Where do carbon offsets come from, and how many exist today/have been generated historically?
  2. Are offsets good or bad? Are carbon offsets from a global perspective priced properly such that they are able to achieve their aim of positive environmental impact? Could we end up in a world where carbon offsets are priced sub-optimally, that the buyers are able to avoid fully internalizing their environmental costs?
  3. Describe the economics of a carbon offset. How does a carbon offset function from a financial perspective? How does the buyer of a carbon offset come to a determination of value? How does overall supply, demand, and pricing for carbon offset happen? What mechanisms are available to increase carbon offset pricing? Are offsets a commodity, or is there potential to differentiate?
  4. How does the California cap-and-trade program work? How does it compare to other major cap-and-trade programs, e.g. the EU ETS? What are its most important features (e.g., carbon offset banking, etc.)?
  5. Describe the offset market and pricing in California. Who are the buyers and sellers? What are the buyer motivations? How do they buy? Where does their budget come from? What is the total and average transaction volume? What is the duration over which carbon offset pricing has a price floor? What price risk over what duration are buyers and sellers exposed to? What (tail) risk is there in the form of legislative or regulatory change? What does the forecasted market demand for offsets in the future look like?
  6. How does the offset futures market in California work? Who are the market participants? Is the market speculative, or do sellers need to have assets in the pipeline in order to participate? Is there an exchange, and/or are transactions handled privately? Are there brokers or market makers?
  7. How do you create an offset, procedurally, in California? Is the qualification process “as-of-right” or is the approvals process discretionary? Is there a cap on approvals or the creating of new carbon offsets?
  8. What are the ongoing obligations for offset buyers and sellers in California? Do we assume any contractual obligation or liability through the sale of a carbon offset to a buyer? How about a buyer? Are there any ongoing requirements like reporting and recertification? Is there anything we risk defaulting on? Do the buyers assume obligations when they buy or retire offsets?
  9. How do reforestation projects create offsets? What is the process of converting a parcel of barren land into a unit of carbon offset? What is the relative financial efficiency of this method vs other methods of generating carbon offsets? Do we need to certify each defined tract of land separately? What is the frequency of which a carbon-offset-producing land asset can produce a unit of carbon offset? What happens if there’s a fire or other natural disaster? To what degree is eminent domain a factor?
  10. Land acquisition: Does the land exist to do this? Where is it? How much does it cost to buy it? Where is this land located, and why? How does land in these locations compare to land located elsewhere in the US/world? What are the factors that determine how much carbon can be sequestered by trees on a given plot of land?
  11. Land planting and maintenance: What does it cost to plant a plot of land? What is the “carrying”/maintenance cost of forestry? What risks are involved, controllable or otherwise, and how do we mitigate them? Who manages the forests – employees or contractors? Are there uncontrollable risks like stunted growth, forest fires, blight? Do we need to buy insurance, and if so, what does this cost?
  12. Yield on land: Timber pricing. Timber customers. What else can we do with the land that generates cash without harming the trees? E.g., water rights? People getting to buy individual trees and name them for 100 years? Recreational use/people buying memberships to go visit the forests?
  13. People & expertise: What people do we need to run the business? What core expertise must the business develop and own?
  14. Tooling: What software or other tooling do we need to run the business? Is there an opportunity to develop superior tooling or processes and sell them to the industry for profit?
  15. Ecosystem & partners: What partners do we need to run the business? What is the ecosystem like in this space?
  16. Market size & segmentation: How do you define this market, and what segments is it broken down to? Is it constrained by land, regulations, or something else? Can the market be grown over time?
  17. Defensibility & returns to scale: What is the defensibility of the business at scale? Does the business exhibit increasing or decreasing returns on scale? Are there potential network effects?
  18. Competitors and substitutes: Who would you consider competitors and what would you consider substitutes for demand in this model?
  19. Can we move the market for offsets? At scale, how large of a producer of carbon offsets would the business be? How large is this relative to existing production? Are we so large that our production has a material influence on supply (and thus potentially pricing?)
  20. This vs conventional timber investing: What is the relative value of the carbon offset income stream vs the value of the forest asset? As an investor to what degree am I excited by the carbon offset income stream vs the long term appreciation of the underlying forestry asset?
  21. Alternate models of land acquisition: If part of the theorized value capture is being able to hold forestry assets a longer duration, why not simply directly acquire those forestry assets from those “shorter duration” holders, and capture that temporal arbitrage without needing to plant trees? Alternatively, we partner with landowners – e.g., “Airbnb for reforestation”?
  22. Lobbying/future regulatory developments: Do we engage in regulatory capture by lobbying for stricter environmental standards (and thus demand of carbon offsets?) Does this company have an enemy/group with diametrically opposed interests? What do the major political parties say about this topic? What would the passage of the Green New Deal imply for the model?
  23. Why now?
  24. Financial model: Produce a financial model for the business, taking into account the above. Is the math too good to be true? What is the model sensitive to? Under what theory does this business “work” from a financial perspective?
  25. How does one start this? What is the smallest scale that this concept could be tested? What is the smallest scale necessary to take this kind of company public and listed on a major exchange? What are the major risks to the plan, and the milestones to get there? What KPIs would be most relevant for the business to measure and optimize?
  26. Initial financing: What are the upfront capital costs, within an order of magnitude (i.e. $1Ms, $10Ms, $100Ms?). How do these change over time (e.g., are there economies of scale, can we remove marginal costs, etc?)
  27. “The trade” Is this business long or short carbon, land, and/or trees? To what extent are our buyers and partners taking other sides of this trade? Describe the incentives that occur or may occur over time as a result of these dynamics.
  28. Drucker: Taking into account all of the above, what is the company in the business of? Who is the “customer”?
  29. Think bigger, financially: Under what circumstances does this become a $1TN company?
  30. Think bigger, impact: Under what circumstances does this company make a planetary scale impact toward combating climate change?