a donor advised fund for CDR & financial leverage for philanthropic carbon investors

tools and leverage

Let’s assume you have some money that you want to use to dramatically scale up the CDR market. That’s your primary goal. You could start an AMC like Frontier. You could do set up a volume guarantee vehicle. Both good!

But in the case you’re a maximalist like me: what about a donor advised fund? For those unfamiliar with donor advised funds (DAF), have a look there, but it’s a common tool in American-style philanthropy: “A donor-advised fund is a private fund administered by a third party and created for the purpose of managing charitable donations on behalf of an organization, a family, or an individual.” It’s not particularly novel, but usage of DAFs is growing quickly in the slow moving world of philanthropy. In 2020, assets held in DAFs was ~$150B.

Think of it like a philanthropic holding company. You can donate to it like a regular non-profit and get a federal income tax deduction. Once your money is in the DAF, you can’t get out. But, you can use that money to donate like normal, or to invest, make a return(!), reinvest(!!) in whatever you want, all without tax implications (!!!). Debate over whether or not this is a good thing is outside of scope here. It’s a tool, we’re exploring what it might be like to use it to influence the CDR market.

Let’s take Frontier’s ~$1B AMC as a model. In Frontier’s case, they spend $1B buying carbon over a decade, lead the market, and are generally the most influential force in the market to date. Amazing leadership and tons of PR, technical, scientific, and market leverage. But, for better or worse, not much financial leverage. You might assume that they end up spending $1B at ~$150 a ton (all said and done), which is something like 6.6M tons of CDR over the period of the fund, say, 10 years. Those tons are made available to the companies paying into Frontier, and they get to use those millions of tons to count as progress towards their carbon commitments.

What might a CDR DAF look like?

But, what if you had instead made charitable contributions totaling $1B to a DAF that has the explicit goal of scaling the carbon market?

<aside> 🔥 Please note - I’m going to exaggerate the DAF’s behavior to highlight the risks and opportunities. I haven’t thought about it enough to argue this is a net good, I’m just saying it can be done and is worthy of consideration.

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• First, the corporations could deduct these donations from their tax liabilities (yes this already happens and is legal, afaik). The effective corporate tax looks like it’s 13-16%. Not sure it’s a safe assumption, but if you assume the donors to our DAF would have paid taxes on $1B, but instead avoided them via donating to the DAF, you’re up +100M). Theoretically, that means you now have $1B in a DAF and $100M in your bank account.
• Next, let’s say you used the DAF to buy carbon from the top CDR suppliers. You converted your $1B into contracts for 5M tons of CDR during the 2023 and 2024 calendar years. I want to highlight that you don’t have the carbon yet. You only have the contracts. And, you had to pay a bit more ($200 a ton) because you’re getting it all done fast. Now, from a simple “impact” perspective, you’ve increased the demand perceived by CDR companies by ~4x by compressing your purchases from 10 years down to 2 years.
• Now, you’re not offsetting any emissions, or removing any historical emissions, so you don’t need to actually take delivery of the carbon. Remember, the goal is to dramatically scale the carbon removal market, so whatever allows you do to that best is what you do. So, you sell the contract for the carbon removal to another buyer. On one hand, you want to sell the contract as quickly as possible, freeing you to turn your money over, so there is a priority on speed. On the other, you want to retain as much of your principal as possible, or grow it, so you want to sell it for a much as possible. A healthy tension, but one that should be prevent the DAF from hoarding CDR and trying to squeeze the rest of the market.
• As soon as you sell your forward contract for CDR for cash to a corporate, you turn around and do it again. Let’s make do a little napkin math here. If you’re Frontier, you’re getting 100M out the door every year for 10 years, making for $1B of net demand. If your DAF can resell half of its contracts every year, and reinvest the money in new forward contracts, then you’re putting out $500M every year, meaning 5x the impact.
• As far as I know, this is ~similar to how financiers of solar projects work. They find and fund a project, generate a long-term PPA which yields a fixed rate of return. Then pension funds and other deep pocketed investors come through, and buy up the PPA, returning the cash to the financier for another crack at the solar development market. Run this back, but set up a DAF and focus on the CDR market, and use forward contracts as your PPA. Now, we’re skipping a step here - to get to PPA level, you’d also need to organize an offtake contact. I’m going to ignore that for the moment, but it’s important.

Some additional notes - please add q’s, and I’ll get to them if I can.