Biochar holds immense promise for capturing carbon and improving soil health, but getting a biochar project off the ground requires significant upfront investment.
Biochar is a unique carbon removal (CDR) technology: It not only removes carbon from the atmosphere, but has tremendous potential for use in agriculture, construction and environmental remediation sectors as well.
Biochar also holds tremendous economic potential. According to a recent report from the International Biochar Initiative (IBI) and the US Biochar Initiative (USBI), revenues from the biochar industry enjoyed a compound annual growth rate (CAGR) of 97% between 2021 and 2023, and revenues are projected to continue to rise.
But while markets for biochar itself are growing and improving, most producers have yet to benefit from another potential revenue source — carbon credits for the carbon market — and many biochar producers also face barriers to biochar project financing. Here, we share challenges and opportunities inherent to both approaches with an eye to fueling growth.
Launching a biochar project is capital intensive, requiring not only production and storage facilities, but also expensive investments in a pyrolysis unit, feedstock processing equipment, conveyors, loaders, hoppers, and emission control systems. Total cost can vary significantly based on the scale, location, existing infrastructure and choice of specific technology. (Learn more about biochar production here.)
Still, biochar is today’s most successful CDR technology, representing 93% of total tonnes removed. Nevertheless, last year biochar projects received only 13% of funding for CDR technologies.
Closing this gap will require innovative — and robust — approaches to financing as project developers access they need to scale their companies and grow the market overall.
At Flowcarbon, we believe private debt can serve as a catalyst for innovation and scalability across biochar and other CDR projects. By securing investment returns through both the sale of biochar and its byproducts (bio-oil and syngas) as well the generation and sale of carbon credits (see below), debt financing can allow project developers to keep complete ownership and control of their projects, including future decision making. This is especially appealing to founders who prefer not to dilute their ownership stake.
“Debt investors are focused on downside risk protection and contracted cash flows,” notes Martin Kessler, chief business officer at Flowcarbon.
Kessler says determining whether a project is properly structured requires understanding such factors as a project’s feedstock, jurisdiction and current revenue streams, which can potentially include purchase price agreement, along with biochar and biogas sales. Carbon credits can be a critical revenue stream, but are most attractive to debt investors when they’ve secured a bankable offtake. (Read more on that below.)
Choosing private debt over equity financing can be a strategic decision for companies seeking to manage costs by locking in regular payment plans. Private debt can also help shorten the timeline for startups to bring products to market and begin generating sales revenue — and of course, can provide founders with a simple exit strategy if they decide to sell their company or merge with another.
Conversely, biochar investment opportunities are also attractive for many private financiers who may be wary of the volatile returns associated with equity investments in start-up ventures. Biochar presents a compelling investment opportunity particularly due to its dual ability to provide economic returns and environmental benefits.
Aside from private debt, project owners can tap into other funding strategies to support their biochar projects, including equity financing, grants and even crowdfunding.
Venture capital and private equity firms are increasingly interested in sustainable technologies, including biochar. For example, earlier this year, Carbo Culture raised $18 Million in series A funding co-led by GenZero, a Singapore-based decarbonization-focused investment company, and True Ventures, a San Francisco-based venture capital firm, among others.
Meanwhile, many governmental agencies, universities, and non-governmental organizations are also offering funding for projects that contribute to environmental sustainability and climate change mitigation. These grants are particularly accessible for initiatives like biochar that reduce carbon emissions and improve soil health. For example, in 2022 Bloomberg Philanthropies awarded grants to seven cities in the U.S. and Europe to develop and implement biochar programs and in 2023, the Natural Resources Conservation Service (NRCS) awarded American Farmland Trust $4.5 million to develop and demonstrate biochar integration in regional farming systems.
Crowdfunding platforms have also been successfully used to raise funds for smaller projects or for initial funding rounds. Recently, Biochar Life raised more than $140,000 through an investor crowdfunding service.
According to IBI and USBI, revenue from carbon credit sales is the second largest growth-driver for the biochar sector — behind sales of physical biochar — and yet, more than half of global biochar producers (58 percent) report no income from carbon credits.
There is ample opportunity for project developers to generate and sell carbon credits, and in order to maximize financial benefit, timing is critical. While it may be tempting for project developers to sell their carbon credits in advance through forward buys to generate an immediate cash flow, there are several reasons why project developers should rethink this approach:
With these risks, private debt can often provide developers with the flexibility to respond to regulatory and market changes while also building a sustainable financial foundation for their projects and the ability to sell credits when the market is most favorable.
“We are encouraged by early progress in the spot market for biochar demand,” says Flowcarbon’s Kessler, “but offtakes are still very hard to come by. As the market develops, we expect this revenue stream to develop as well.”
With both total production and revenue growth in the biochar sector well above 90% CAGR, the biochar industry is enjoying an early boom with most projections expecting sustained growth for the foreseeable future.
Private debt and other forms of creative financing hold a significant potential to transform biochar projects, and by waiting to sell carbon credits until after they are generated, project developers can ensure favorable prices and terms for the long-term growth and sustainability of their companies.
Interested in learning more about financing your project’s future? Contact Flowcarbon at financeteam@flowcarbon.com.
