Work program 3: Removals Portfolios for Commercial and Sovereign Carbon Management; Financial tools and ecosystem
Work program 1 concentrates on the accounting and architectural (market design) foundations of credible and liquid markets that can trade carbon removals at scales implied by the delayed pace and incomplete scope of transition to decarbonization. Work program 2 focuses on the implementation of a prototype carbon trade at scale that answers challenges about the practicality of these rules and architectural reforms for credible E-asset markets. Work program 3 concentrates on replicating and adapting to the exceptional demands of financial markets for carbon the ecosystem or industrial organization of financial institutions that has generally characterized effective cases of capital mobilization and allocation.
Although there is an increasing range of natural, synthetic and engineered removals technologies across forests, soils, mineralization, atmospheric and oceanic supplies of removals assets, the potential assets these modalities can yield depend upon efficient provision of financial services linked to alienability, custody and fungibility. These services are most likely to be adequately supplied by specialized (competitive) firms linked through multiple layers of commercial and public risk managers, re-insurers, exchanges and supervisory networks to perform as fit for purpose systems.
Formally, as specified in work program 3, we would describe our work on carbon markets as resolving three specific problems within current carbon market practice: carbon storage modalities vary in risk and uncertainty, but trading requires normalization; carbon cannot be physically delivered while financial settlement undermines the end goal of carbon trading. Our research and institutional design approach builds on well-established market approaches to (a) rationalize risk and uncertainty to commoditize carbon; (b) establish and perfect custody for a non-deliverable commodity that must exist for arbitrarily long time periods; (c) link these two concepts through regulated and monitored insurance entities.
More schematically, workstream 3 programs recognize that Net Zero purchasers of removals products will require assets that match the liabilities created by (non-permitted) residual emissions that will have physical effects enduring for hundreds of years. Since most risky, duration-termed removal assets to be traded will not have such potential longevity, normal Net Zero practice will be composed through acquisitions of removal e-assets with differential terms that as a portfolio match e-liabilities and create positions of carbon solvency. As with pension funds or other forward liability matching financial offerings, qualified removals portfolios will vary in their make-up of asset modalities, geographies, durations and preferences for risk that satisfy buying firms, sovereigns, and speculative traders. Given high specialized knowledge around single portfolio and multi-portfolio risk assembly management, carbon assets will be acquired, held and sold by special and general-purpose asset managers (carbon delivery companies or CDC). Carbon asset managers, will, predictably, efficiently transfer portions of their overall risk positions to carbon reinsurers, associated special purpose syndicates, non-carbon capital market funds or sovereign dedicated entities. The rules for market entry and capital adequacy of these firms will require supervision at some margin by authorized combinations of exchanges, delegated associations, regulators or harmonization bodies comparable to the Bank of International Settlements for central banks.
In the absence of a special purpose carbon finance ecosystem and during the early years of its population, most likely by adaptative behavior and spin offs by market entrants with related expertise in the commodities, financial, and data industries, SFI is actively engaging in research, design and implementation of removals transactions that will be structured through contract terms and conditions to demonstrate the functional financial services (custody, alienability , fungibility) later to be provided at scale through the industrial organization of the carbon finance sector.
During 2026-27, exploratory discussions on high value scientific collaborations with potential research associates have prioritized the dedication of an SFI post-doctoral fellow, working under Marc Roston’s direction, to develop a scoping analysis of methods for removals portfolio formation. This initial work program 3 would then focus on risk-driven, empirical analytics to define credible fungibility across natural capital capture in reforestation, alternative biomass uses, engineered removals solutions, and storage in multiple reservoirs. We thus anticipate in-depth exploration the wider ecosystem of carbon financial services in the structuring of a significant-scale sovereign to sovereign (Article 6.2), diverse-tropical ecologies, reforestation and below the soils removal transactions, as described in work programs 2 and 4.
The contractually instantiated financial ecosystem to be developed through contract is diagrammed below.
