1️⃣Why we are doing this

1.1 Carbon Credits: The Emergence of a Major Real-World Asset Class

The need to address climate change has never been more urgent. To put it in perspective, even if we move towards a carbon-neutral economy today, the 2.2 tera tons of accumulated CO2 and other greenhouse gasses will continue to drive global warming for thousands of years to come. This stark reality underscores the critical importance of actively removing existing carbon dioxide from the air through a process known as carbon dioxide removal (CDR), in addition to reducing future emissions. Tracer is an infrastructure protocol for carbon removal markets, not just a carbon credit project.

Limitations of the current carbon credit market

The market for carbon credits, which is intended to fund emission reduction and removal projects, currently suffers from significant shortcomings that hinder its effectiveness and ability to scale:

• Lack of transparency: Inconsistent and opaque verification practices erode trust in the true impact of credits.

• Fragmentation: Varying quality standards across different markets create confusion and undermine fungibility of credits.

• Illiquidity: Absence of efficient, transparent trading mechanisms limits market growth and price discovery.

These issues have hindered the carbon credit market from realizing its full potential as a key tool in the fight against climate change.

Growing demand hindered by market challenges

Meanwhile, demand for high-quality carbon removal credits is surging as a growing number of companies and governments set ambitious net-zero targets. Buyers are increasingly willing to pay premium prices for credits that represent genuine, permanent removal of carbon dioxide.

However, access to an ample supply of trusted carbon removal credits remains constrained by the market's current limitations:

• Complexity: Opaque and fragmented market structure deters participation.

• Lack of trust: Concerns over credit quality and integrity suppress demand.

• Supply shortage: Carbon removal projects struggle to scale cost-effectively without sufficient funding.

This mismatch between growing demand and lagging supply threatens to stall the urgent scaling of CDR solutions. Carbon removal projects find themselves in a catch-22, unable to expand without strong offtake agreements from credit buyers, who in turn are deterred by the shortage of verifiably high-integrity credits available.

1.2 Market Overview

The carbon credit market enables the trading of carbon credits. Each credit represents the removal or reduction of one metric ton of CO2 or equivalent greenhouse gas from the atmosphere. This market has historically been dominated by projects focused on avoiding or reducing future emissions, such as protecting forests or transitioning to renewable energy. While valuable, these initiatives are insufficient to address the vast amount of carbon dioxide that has already accumulated in the atmosphere over centuries of industrial activity.

Avoidance and reduction alone cannot remove the 2.2 trillion tons of CO2 already in the atmosphere. Current efforts are insufficient: we are still emitting over 50 gigatons of CO2 annually and even with net-zero emissions, temperatures will continue to rise.

Carbon markets exist in two primary forms: compliance markets, where governments require companies to pay for their pollution through taxes or regulated emissions caps, and voluntary markets, where companies choose to offset emissions on their own. Most carbon removal today is sold through the voluntary side. About 23% of global emissions are currently covered by a carbon price, indicating significant room for growth in both compliance and voluntary markets.

Within this broader carbon credit market, CDR is emerging as a crucial complement to emission reduction efforts. CDR involves actively removing CO2 from the atmosphere and durably storing it, effectively reversing historical emissions. Despite the necessity of CDR in achieving net-zero targets, the current market remains nascent and fragmented.

As of 2022, the CDR market was relatively small at just ~600 kt (kiloton) CO2 but has seen significant acceleration in 2023 with large purchases from companies like Microsoft, J.P. Morgan, and NextGen. However, the projected available supply of durable CDR in 2030 is limited to ~15-32 Mt (Megaton) CO2 across a few announced large-scale projects, primarily consisting of bioenergy with carbon capture and storage (BECCS), direct air capture and storage (DACS), and enhanced weathering.

Growth potential

A recent analysis by Boston Consulting Group estimates the demand for durable CDR in 2030 could range from ~40-200 Mt CO2 ($10B - $40B), with the vast majority (~90%) expected to come from the voluntary carbon market. This demand is likely to be driven by early purchases from industries with progressive climate commitments and high willingness to pay, such as software and professional services.

Looking further ahead, a McKinsey report projects that a CDR industry capable of delivering gigaton-scale removals at net-zero levels could be worth up to $1.2 trillion annually by 2050. This estimate varies depending on the volumes of CO2 removal deployed and the balance of solutions used to deliver these volumes.

Based on the expected delivery of announced CDR projects, McKinsey estimates a market size of $40 billion to $80 billion by 2030, aligning with BCG's upper estimate. However, if demand for CDR credits is scaled up sufficiently to deliver the volumes needed to meet net-zero-compatible climatic needs by 2050, McKinsey projects annual revenues from the CDR industry could reach $0.3 trillion to $1.2 trillion.

These projections underscore the immense growth potential of the CDR market as the world increasingly recognizes the necessity of carbon removal in achieving global climate targets. The estimated market size in 2030 represents a critical stepping stone towards the trillion-dollar scale that may be required by mid-century.

However, realizing this growth will require significant investment, innovation, and policy support to rapidly scale up CDR solutions and drive down costs. McKinsey estimates that delivering the necessary CDR capacity for net-zero could require cumulative investment of $6 trillion to $16 trillion by 2050, far exceeding current investment levels.

The convergence of these market projections from leading consultancies highlights the consensus around the substantial economic opportunity presented by CDR. As companies and governments alike sharpen their focus on achieving net-zero, the demand for high-quality carbon removals is poised for explosive growth in the coming decades. Early movers who help to establish a transparent, liquid, and trusted CDR market today could be well-positioned to capture a significant share of this trillion-dollar opportunity.

1.3 The opportunity

To unlock the trillion-dollar potential of the CDR market, there is an opportunity for a solution that enhances trust and liquidity while supporting the growth of emerging CDR technologies to become cost-effective and a quality alternative for buyers who are willing to pay a premium for carbon credits they can verify are effective in removing carbon dioxide from the atmosphere.

Trust can be built through a transparent and incentivized solution for verifying and grading CDR credits based on their 'persistence', or the duration for which the removed carbon dioxide remains stored and prevented from re-entering the atmosphere. Liquidity and scale can be improved by creating a unified standard that facilitates efficient trading, enabling price discovery, increasing market depth, and allowing for innovative technologies to get the necessary scale to become cost efficient.

The success of this new standard relies on aligning incentives among stakeholders and fostering a collaborative ecosystem through market-based incentives. Stakeholders who actively contribute to the development and adoption of this new standard will be well-positioned to drive meaningful climate impact and capture significant economic value in. By working together to build a transparent and efficient market for high-quality carbon removals, the full potential of the CDR market could be unlocked.