Dive Brief:
- Citigroup announced this week it had closed a $72 million bond for a biochar carbon removal project, representing a “first-of-its-kind” outcome bond for verified carbon removal, the bank said in a press release. Outcome bonds have returns linked to performance of “predetermined development outcomes,” according to the Luxembourg Stock Exchange.
- The bond runs for three and a half years and is designed to support carbon removal startup Applied Carbon and its biochar project in Texas. Under the bond, investors will forgo traditional coupon payments and Applied Carbon will receive upfront financing for its project, according to the Wednesday release.
- Applied Carbon has at least 198,190 tons of carbon dioxide removals contracted so far, according to carbon dioxide removals registry and data analytics platform CDR.fyi. Microsoft serves as the anchor offtaker for the Texas project, and Citi said in the release that Microsoft’s offtake agreement provides “long-term demand support for the underlying carbon removal activity.”
Dive Insight:
With investors forgoing traditional payments under the bond, their returns will be linked to the issuance and delivery of carbon credits from Applied Carbon’s Texas biochar project, according to the Oct. 21 release. The carbon removal startup creates biochar on the move, with a mobile system designed to pick up crop residue, pyrolyze it and cool the resulting biochar, all while in the field, according to Applied Carbon’s website.
The outcome bond issuance looks to build on Citi’s work “linking bond performance to environmental outcomes,” according to Sonia Battikh, the bank’s global head of carbon offsets trading.
"The voluntary carbon market requires new financial structures to bridge the gap between investor capital and the long-term funding needs of carbon removal projects," Battikh said. “By bringing together investors, project developers and long-term carbon demand, we are continuing to expand the range of opportunities through which capital markets can finance real-world outcomes."
Biochar is created by decomposing biomass like food scraps, wood chips or, in this case, crop residue without oxygen. The remainder is a black carbon mineralized substance that can then be mixed with soil to increase its ability to draw down and store carbon dioxide from the atmosphere, according to the U.S. Agricultural Research Service, a branch of the U.S. Department of Agriculture.
Citi disclosed that Nuveen participated in the bond issuance. Other investors were not disclosed.
Applied Carbon Founder and CEO Jason Aramburu said in the release that the bond shows that “biochar and engineered carbon removal projects can be structured and financed like any other asset” and that it’s “the kind of structure that will unlock capital for carbon removal at scale.”
Carbon market financial infrastructure company Kumo said in a separate Oct. 21 release that it worked with Applied Carbon to secure the funding. Kumo said this represents the sixth carbon outcome bond it’s tracked since 2023. While all have been arranged by commercial banks, this is the first not issued by the World Bank, according to Kumo’s release.
“The innovation here is that a commercial bank and a private investor have replicated the structure,” Kumo said in its release.
Kumo said though the financing is a “milestone in itself, it matters far beyond a single transaction.” The bond shows that outcome bonds are a replicable instrument for commercial banks and provides institutional capital for carbon removals, according to Kumo. Additionally, since Microsoft is a long-term offtaker for the project, Applied Carbon was able to raise capital without giving up equity.
“This does not work for everyone. The structure still has requirements, and demand in the form of a contracted offtake remains a key unlock,” Kumo said. “But the routes to capital for removal projects are widening, and this is one of them.”
