Mike Smith and John Cleland are the managing partners of RenewWest, an environmental services company committed to replanting forests in areas burned by wildfire in the American West and financializing the practice through carbon offset markets. On this episode of Reversing Climate Change, Mike and John join Ross and Christophe to share the team’s three-phase process and explain why reforestation projects are typically disfavored in traditional carbon markets.
Full Transcript
Alexsandra Guerra: You’re listening to the Reversing Climate Change podcast by the team at Nori, the carbon removal marketplace. This is a show about the innovators and entrepreneurs developing solutions to climate change.
Ross Kenyon: Hello and welcome to the Reversing Climate Change podcast. I’m Ross Kenyon here with Christophe Jospe. We’re here at the Techstars Sustainability Accelerator here in Denver. Only a few weeks left. We just launched the Nori Lightning Sale, which is very exciting. If you would like to purchase carbon removal certificates, you now can for the very first time at nori.com slash remove dash carbon. I’ll put the link in the show notes if you’re curious. That was my obligated plug. I was required to do so. I’m happy that I fulfilled this obligation and we can move on.
Christophe Jospe: Thank you, Ross.
Ross Kenyon: Is that too formal for you?
Christophe Jospe: No, I mean, it’s an exciting day, but it’s sort of like this podcast is going to air in two or three weeks, so it’ll be old news. But if the sale is still open, please go there.
Ross Kenyon: They still need to know. You can still go there. You’ll be able to put your email address in, find out when there’s more, maybe even pre-order something.
Christophe Jospe: Absolutely. So let’s stop talking about ourselves and let’s get our guests introduced.
Ross Kenyon: They can wait.
Christophe Jospe: Okay, go ahead. Great. This is our podium, our pedestal. We can say whatever we want. No, but in all seriousness, we’ve got John Cleland and Mike Smith. They are both managing directors and co-founders of Renew West. Welcome to the show.
John Cleland: Thank you very much.
Mike Smith: Yeah, good to be here.
Christophe Jospe: And just because there are two of you, if you could identify who’s Mike, who’s John?
John Cleland: This is John Cleland.
Mike Smith: And I’m Mike Smith.
Christophe Jospe: Awesome. Mike, we’re going to start with you. We like to start with people’s origin stories, sort of. What is the path that took you to where you are today?
Mike Smith: Makes me sound like a superhero with an origin story. Yeah, I don’t know about the superhero part, but I was a kid growing up in Idaho, and I grew up in Boise, and my grandparents had a piece of property about two hours away in Council, Idaho. And when I was a kid, there was a big fire called the Loman Fire, 44,000 acres, and at the time, that was very large anymore. That’s pretty small. And it was memorable to me as a nine-year-old that it put up this mushroom cloud. And I come to realize later that these mushroom clouds are called pyrohumulonimbus clouds, and they are when fires burn so hot that they literally change the weather.
And so I asked my grandfather, who was a forester, you know, a retired forester, I was like, what is going on here? And he said, don’t worry about it, it’ll grow back. And I said, okay, you know, I’m nine, what do I know? And so I joined the Navy, and I was flying F-18s for the Navy for about 12 and a half years of active duty. And towards the end of that time, I got married, and I brought my wife back to Idaho to show her where I’d grown up. I came to realize that the whole state was very green, it was late May, and it was just a nice time of year to be there.
But we drove by the Loman Fire, and it was still bare, like bare soil. And that just shocked me. You know, I think if I’d had been there for the whole time, I kind of blended into the background. But after 22 years that nothing was regrowing, that just bothered me. And so I came to realize that something had changed and that there was something new under the sun. And we had to figure out a different way to do it. So that led me down a path to getting out of the Navy to try to go tackle that problem.
And I came to realize that it is a climate problem and it’s a forestry problem. And the two are, you can’t separate them. They’re inseparable. And that if you want to deal with climate, you have to deal with forestry. And if you want to deal with forests, you have to deal with climate. So that was how I got started into Renew West. Spent a couple of years out there trying to figure it out, develop a certain degree of expertise. And I had a couple of breaks start going my way in 2017.
The first one was I met my co-founder, John, and we partnered up at about that point.
Ross Kenyon: Yeah. How’d you guys meet?
John Cleland: So I had moved to Denver almost five years ago, leaving Chicago and the finance world behind at Chicago Board of Trade for almost 14 years and decided to get into impact investing here in Denver. The community was very large, as you guys know. And I volunteered at the Impact Finance Center for about two years. And there, Mike was always hanging around at some events, you know, trying to Get his company funded. I think he was looking at doing either a nonprofit and decided to kind of make it a for-profit company because of the ecosystem of venture capital, angel investing and things to make reforestation an actual investable tool with returns seemed like a really good idea.
Considering there were nonprofits doing this work, there was already You know, the federal forest system, the state foresters, and how do you create a funding mechanism for it that’s not in the philanthropy aspect? So total kudos to him for going that route. And what I wanted to do was actually kind of maybe start my own fund that invested into companies like Mike’s. People doing really cool things. And because his was specifically in the carbon markets and back in Chicago, I had actually started my own brokerage and carbon markets was one of the things I was looking at.
I actually took a couple of trips out to San Francisco specifically to meet with Thompson Reuters group that was doing carbon offset brokering. And I found it very fascinating, but they didn’t want to tell me anything. So I was just trying to bug them all the time.
Ross Kenyon: Really? They had a new competitor possibly?
John Cleland: Yeah. They found me quite annoying actually. But I just had this... Thought like, you know, pre 2010, like there needs to be a price on carbon. I mean, that, that makes total sense. So I wanted to get in on it early. And so I saw Mike, what he was trying to create as this opportunity to get into the carbon markets, to start to play in that field. And so instead of trying to raise capital around investing in multiple different companies that I had zero track record in, I figured why not just go ahead first and do a company I thought that was doing something really cool.
That’s kind of how I met Mike because he was going to the Impact Finance Center events. And I told him I had to finish up my obligation to that nonprofit and that afterwards, which was going to be about seven or eight months from then, said, we’ll get to work. So that’s kind of how it happened. And that was 2017? Yeah, that was 2017.
Ross Kenyon: Yeah. Can you tell why we invited them on the show? Listener, this weird intersection of ecology and finance. It’s a good fit for what we’re doing here. Yeah. Then how did we get connected? We were trying to take a little stride down memory lane and figure it out. You think you contacted me, right?
John Cleland: I did. I sent an email, whether it was LinkedIn or you guys, do you have your emails on your website? I don’t remember.
Ross Kenyon: I don’t think so.
John Cleland: So it’s probably a LinkedIn message to connect. And then we went from there.
Ross Kenyon: Yeah. But we had a mutual connection here in Colorado. So the Colorado connections are just omnipresent in this state. I don’t know what it is. There’s some secret sauce here. But yeah, you were interested in us too for digging into the carbon markets. Sure. Yeah.
John Cleland: I saw you guys were trying to make a play on using a blockchain and then, you know, with your Nori tokens. And I noticed that you We’re looking at it from a commodities point of view of brokering and somehow found out that you were getting certifications in finance. And so I’m like, that’s literally the job I was trying to do 10 years ago. How do I figure out? So I was really interested to find out what you guys are doing. So I bugged you. And I think our connection in between, I learned about you from Brandon.
Christophe Jospe: Yeah, Brandon Welch. And he’s actually at Mad Agriculture now. And we brought Phil Taylor on in a past episode. I want to take a little tangent here and talk a bit about your experience as a carbon broker, John. What was that like?
John Cleland: I was never a carbon broker. So I got into commodities trading when I worked for my cousin. And I think it was in high school, the first time he brought me down to the Board of Trade. And I got to kind of be a quote unquote runner for him. He just, I really didn’t do anything. I just watched all these crazy people in the 30 year bond pit. And I think he sat in the two year note option pit. And I just, it was just mayhem. And so I want to say it was Early 90s that I went down there for the first time.
And then during college, I went down there with them for one summer and just kind of got hooked. Like that’s kind of, I’m like, this is amazing. You know, I was an athlete. I was into everyone yelling at each other and it just looked incredible. And then when I got out of school, I ended up, he actually ended up hooking me up with a job with some traders. To trade on the screen. And so I took that after leaving trading in 07 to launching a brokerage with a few other of my friends and being able to execute those trades, I took that ability to start soliciting other commodity trading funds that we could execute their trades for them on the screen.
And so we did. We did options on the screen.
Christophe Jospe: Options on what? What’s the screen?
John Cleland: Oh, sorry, not on the floor. So as some of the listeners may know, the floor is basically dead. You know, if you go down to the trading floor in Chicago or whatever you see on CNBC, like that’s the ghost town.
Mike Smith: Or trading places or something.
John Cleland: Right. Like that movie with Eddie Murphy and Dan Aykroyd, right? So that does not exist anymore. I mean, it does. There’s people down there, but you can electronically trade now. And so markets are typically made on the screen.
Ross Kenyon: It’s more like watching billions or something like that.
John Cleland: Kind of. They trade off Bloomberg on that show, which does have trading screens. But yeah, I mean, something like that.
Christophe Jospe: All right, let’s get us back on track. So you know about brokerage, you care about climate change, you know about trees. Here the two of you come together and say, hey, we can figure something out. Explain to us, what does Renew West do? And how has your experience been so far since starting the company?
Mike Smith: Yeah, sure. So I knew a little bit about trees, but this has been a big learning thing. And actually the biggest learning component that we had to do was around carbon markets because pretty quickly we realized that it’s not a problem of people knowing how to plant trees. It’s a problem of finance. How do we bring money to planting trees? And the existing finance streams were based on philanthropy, government, or timber. And timber has a pretty limited niche and it has to be on lands that they owned. Philanthropy is just not at the scale the problem has.
We had 10 million acres burn in 2018. In context, that’s larger than nine different U. S. states.
Ross Kenyon: Can I ask one clarifying question?
Unknown speaker: Sure.
Ross Kenyon: Do timber companies not use BLM land, Bureau of Land Management? I know he’s about to correct me for the acronym, right?
Mike Smith: BLM is the correct acronym, but the wrong agency. So it’s mostly U. S. Forest Service land. BLM land tends to be more range land for cattle grazing, etc.
Ross Kenyon: But they mostly only do it on land that they own.
Mike Smith: They only invest in land that they own.
Ross Kenyon: Well, that makes sense. Yeah.
Mike Smith: They won’t invest in like U. S. Forest Service lands generally unless it’s kind of a post-cut replant that they’re obligated to do.
Ross Kenyon: Okay. And then take us back to the third one.
Mike Smith: Yeah, and so the third one is government. You know, we’ve been actively defunding the government to put it in context. More even than beyond the defunding of the government part is the fact that the government is just trying to keep its, for lack of a better analogy, keep its head above water. It spent $2. 6 billion in 2018 on wildland firefighting and about $17 million, if I have my numbers right, in reforestation. I mean, several orders of magnitude difference between that. And so, you know, there’s a lot of challenges to force.
And right now, the money is all being spent on firefighting. And they can’t even spend the money that they need to on preventing fire, let alone on restoring post-fire. So, it’s a problem of not enough capital. And so, you know, part of the creative process early on was how do we change the structure here? Where are big sources of capital for this thing? And it came to be that it’s private. Private capital is huge markets, especially in the institutional space, that will move billions and even trillions of dollars. And this is a problem of that scale.
So how do we make it attractive for that? So the long way around to your question is this, which is Renew West finds areas that have been burned by wildfire and works to develop them as carbon offset projects. We coordinate the financing and the reforestation as necessary in order to produce a long-term carbon offset stream. And that’s to pay back investors through that.
Ross Kenyon: I want to walk through exactly how that offset gets created. And are you okay with that?
Christophe Jospe: I wanted you to want that too, Ross.
Ross Kenyon: I do. Oh, I do. I’m going to break with the outline then. Can you walk us through how a project gets shepherded from just the glimmer in your eye all the way to something that’s being sold on a carbon market? Or maybe it’s not fully there yet, but your intention for how it might work.
Mike Smith: Yeah, sure. So we tend to, as we’ve gone through this process, we’ve learned and have been able to streamline it a little bit and So we’ve come to determine that it’s really a kind of a three-phase process. The first phase is the discovery. So you have to go find the project, meet the landowner, literally walk around usually and just look at the land and you get a sense of whether this would be a good project, yes or no.
Ross Kenyon: This is typically a private landowner.
Mike Smith: Right now we’re focusing on private landowners. There’s some space for tribal landowners in the public space and then we’re working with the U. S. Forest Service to see about options with them as well.
Christophe Jospe: Okay. Can you give us a sense of what kind of acreage you’re talking about?
Mike Smith: In the thousands. It doesn’t have to be in the high thousands, but you’re probably talking like two to five thousand as like a minimum size, depending upon where you’re working at.
Ross Kenyon: Just to be economical and for them to make enough money to be worth it.
Mike Smith: Yeah. So a reforestation project is really a carbon reforestation project is really two projects in parallel. It’s a reforestation project and a carbon project. And the costs of reforestation are relatively linear per acre. The costs of a carbon project are almost flat. And so you have to disperse the cost of the carbon project across enough acreage to make it worth it.
Ross Kenyon: You’re throwing out too many good things that we want to derail you from. Keep walking us through this process and we’ll try to keep our mouths shut. Okay.
Mike Smith: So anyway, so phase one is go meet with a landowner. You go talk to them. Landowners tend to be not the sort of folks you meet at networking events. That’s a little bit of a trick. You got to go find them where they’re at. And you got to, usually it helps if you have a local network of a land trust, for example, that can make a trusted introduction. You go meet them, you talk to them, you say, okay, great. You get them interested, and then we put together some paperwork and LOI, a letter of intent that shows that they’re interested in working with us.
The second phase starts after completion of the LOI. And that’s kind of the pre-development phase, which is we do the carbon analysis. We do some legal development around it. We start to do some of the contract development. And then phase two ends with the signing of a contract. And then phase three is the raise the capital, do the planting carbon project. And then there’s kind of a fourth phase that’s post-planting, it’s just a long-term maintenance. We kind of consider that as like phase 3B almost. And so each phase costs an order of magnitude larger.
It’s relatively cheap to go find landowners, but it takes time. The phase 2 costs a little bit more money, and then the phase 3 is where big money comes in.
Ross Kenyon: Where does it work with finding or developing your own methodology that’s accepted by registries, or just how does it fit into the carbon markets? How does that business work like as a project developer?
Mike Smith: So, yeah, we are a project developer is the idea around it. We don’t really have to develop a methodology. Thankfully, this is kind of a no-brainer when it comes to carbon.
Ross Kenyon: There’s just one that’s already on the shelf. You pull out and say, we’re following this one.
Mike Smith: You got it. Now, that’s not to say that we don’t have relationships with the various registries. In particular, we’re fairly close with Climate Action Reserve. And even if you have an existing methodology or protocol that you can follow, like there’s still questions that come up. So you have to go out and, for example, the project that we’re working on in California. We had to go out to their resources board and get an opinion on whether this would be out of bounds, for example.
Christophe Jospe: And that’s called the validation step, right?
Mike Smith: So that’s even kind of a pre-validation because before you really put money into it as a carbon project, you need to make sure that like all the numbers make sense there. So there is a validation step, but that is not between us and the Air Resources Board in the California Protocol version. That’s actually between a third party verification body that would come out and validate the project and then report to the Air Resources Board. So this is almost like doing your homework pre-validation.
Ross Kenyon: I’ve always heard, and feel free to correct me, Kristoff, I’m newer to carbon markets than he is, that reforestation projects are somewhat disfavored in the carbon markets. What even is the correct way to say this? That the incentive is there for... A sort of cobra problem exists, which for listeners who don’t know, I think it was the British Raj when the Brits ruled India so that they would pay per head of a cobra that was brought to them. And of course, people just bred cobras and chopped the heads off and delivered them and collected the money.
And so you wonder too about these people like potentially burning land and then reforesting. I don’t know if this is like the primary concern for why this has potentially been disfavored, but it is a story that I have been told.
John Cleland: There’s a number of reasons why reforestation projects are quite difficult to get going. First of all, with the protocol that we’re looking at, I think in fact both of them in the voluntary and the compliance market is the factor of additionality. Have you guys covered additionality frequently on the podcast?
Ross Kenyon: Oh yeah, but it always bears repeating and there’s so many facets to it. Yeah.
John Cleland: Sure. So additionality is proving that the project you’re working on is sequestering carbon where it would not have done so before. So for example, in states like Oregon and Washington, it is a state law that you have to reforest your property if you chop down the trees. So if you’re a timber company, And you do a clear cut on 10,000 acres of land to bring to market. And then you replant those 10,000 acres. You cannot register that as a reforestation project because the laws of those states that you are in supersede the protocols, even in the compliance market in California.
So if they have to, by law, reforest those areas, you cannot do that as a reforestation and then get carbon offsets for those projects because you are not providing any additionality. You’re already supposed to do that. So for example, the project that Mike and I are doing, our pilot project in Northern California, burned down in 2012 in the Berry Point fire. So because that had been laying fallow for a number of years, it was very apparent trees were not going to grow back. They had actually looked at doing a project there before, but trees were not going to grow back.
So because we are now going to put trees on that property and grow it, we are providing additionality. Those trees would not be growing if we had not found money to go plant them. So does that cover enough additionality?
Ross Kenyon: That was one of the more succinct versions of it that we’ve tried to ramble off an explanation before. I was good.
Christophe Jospe: And I think it puts it in nice light. There’s regulatory additionality. There’s financial additionality. There’s like atmospheric additionality, right? You do a thing. It’s now taking carbon out of the atmosphere, but it’s all of that kind of, if not, but for, right?
Mike Smith: Sure. You don’t get to take credit for things that are already going to happen. That’s just the shortest version of it.
John Cleland: That’s exactly right. Mike said it best. The project that we’re doing, we had, and he was talking about ARB having to give it its kind of final say was because the property had been placed under a conservation easement. And so we then had to go through the conservation easement to see if the obligation of the easement made sure that they didn’t have to reforest it. Because if the easement said they’re required to reforest it, then again, we would not be So it went through a series of steps just to make sure that the project we were looking at was even worth funding.
Ross Kenyon: It sounds like you learned a lot in that process.
John Cleland: Painstakingly, yes.
Mike Smith: Yeah, it’s been a learning process. You know, some of the other challenges around reforestation is just the way the economics work. And this gets to your question of how do you produce an offset? So in other forest projects called like IFM or Improved Forest Management, you get to take credit for trees that are already there. And so they issue you a ton of offsets based upon, you know, if you have, say, 100 tonnes per acre, that’s a high number. But if you had 100 tonnes per acre of carbon in the common stocking in the region was 80 tonnes, then you get to sell essentially 20 tonnes in market immediately.
And so it’s a pretty quick way without having to do a whole lot of change to the land to sell a lot of offsets for, you know, just some paperwork. That’s really your only cost of doing business is to shift some paperwork. But in reforestation, it’s the reverse. You don’t get to sell the offset until you’ve grown the tree. And so you have to plant the tree, wait, and then you measure the difference. Say you wait five years. The difference between year five and year zero, you get to sell that amount of offset.
You wait another five years, and I’m just making up numbers here, then you get to sell the difference between year 10 and year five. And so that makes it a back-ended problem. Now that’s valuable if you believe, as we do, and I think you guys do, that carbon offset markets are going to be hugely valuable in the future. Because that means you’re producing the offsets when they’re going to be most valuable. But if you’re worried about the longevity of a carbon market, and that’s why a lot of people got into IFM originally, you can get in and out pretty quickly and leave the landowner with a fair amount of responsibility.
Ross Kenyon: Of all the different ways that projects like this can be financialized, I know green bonds get a lot of play now with forestry too. Why go for offsets, which I think there’s multiple questions being nested here all at once. Some offsets are better. So why choose to participate in those rather than something like the green bonds or are there other options too that I’m not aware of for financializing this resource?
Mike Smith: Well, when you talk about a green bond, that’s a financial structure, not necessarily a financial return, right? And so like, what are you producing the return off of to fund the bond?
Ross Kenyon: Yeah, mostly something done with people who rely on the water downstream in case it burns. So they have a stake in that system in some regard. They’re safeguarding their future access to water.
Mike Smith: Yeah, sure. So in the case of monetizing it through water, there are some plays there. And for example, we got invited to present at the California Water Action Collaborative about some the water outcomes. And this project in California does have some pretty attractive water qualities and avoided erosion and aquifer recharge. But the reason we kind of stuck with carbon is, one, it’s universal. You can do this project anywhere. Water tends to be very local. And so if you have a fire in Idaho, there’s not a whole lot of people that are going to pay for it.
If you have a fire in Northern California on the Sacramento River watershed, people are going to pay for that. So it’s a little bit more universal. It’s something that you can do in more places. And we view it as more of a growth market as well.
Ross Kenyon: It’s such a funny contrast to a lot of the previous guests. Wendell Berry’s come up like a dozen times in just as many podcast episodes and the importance of place. And then it’s interesting having people who come from a commodities background. It’s like, no, universal, fungible, sort of like transportable. Thanks for coming on and adding a little intellectual diversity to your approach here.
John Cleland: Sure.
Ross Kenyon: Yeah.
Christophe Jospe: I’m still curious in unpacking more of the carbon market dynamics and some of the financing, because when you’re planting trees, you got to pay for the seedlings up front, but you’re not able to monetize until the carbon’s been pulled out of the atmosphere and it’s actually been paid for. And we’ve talked a little bit before about this idea between ex-ante and ex-post, right? So ex-post is like you’re getting paid for the thing that already happened. Ex-ante is you’re getting paid for some projection of that thing, which might happen. But how does that play out in the space where you work?
John Cleland: So back to Ross’s question, we could probably spend two hours talking about it. I mean, the difficulty with reforestation in general versus like an IFM project where you’re putting a huge easement around an existing forest. We have to actually pay upfront for the reforestation costs, which can be huge. This project we’re doing in California is around $4 million just for 10,000 acres. And that’s kind of on the low side. So just the cost in general and the expense. Anti-credits are that we won’t be able to receive any offsets until the sequestration happens.
So in other words, until the trees actually grow. And for anyone that understands tree growth, especially here in the West, it’s not terribly fast unless it’s in the Northwest, you know, where you guys are from, right? In Seattle or Portland?
Unknown speaker: Seattle.
John Cleland: Seattle. So tree growth in Colorado, tree growth in California even can be slow. So there is a protocol now that was developed by Climate Action Reserve that I don’t know that they’ve done any projects through it yet, but we’re hoping to launch one with them to pay for X anti-credits to get those offsets up front, whether it’s through a real estate development company that can, you know, Be in compliance with their, I want to say it’s CEQA with the California Environmental Quality Act. They can use those ex-ante credits to use towards their emissions reductions.
Unfortunately, what is awarded to the project developer is very, very conservative and won’t nearly pay back to investors what it costs to actually plant the trees. So it seems very difficult to use that one for reforestation. It’s very expensive.
Ross Kenyon: And for 4 million, give me 500 grand and I’ll Johnny Appleseed that. Block those 10,000 acres. What was I going to say? Crap. I had to make that dumb joke and now I’m stuck with this lingering comment.
John Cleland: Well, I can, I’ll back up. So as far as the seeds go, that’s another hurdle that you have to go and you can’t just say, all right, we have the money, let’s go plant the trees. You have to order your seeds or your seedlings. And so the seed stocking is a huge aspect of it that Needs to get looked into. Where are you going to provide? So even if Mike and I got $200 million right now and we had all these projects teed up, it would take years to plant them all because of the seed stock.
So just coordinating that with who’s going to provide the seed stock, not only that, then you have assisted migration. Is the seed stock that we have going to be useful trees in 20 years if the climate change is enough? So that’s a whole other problem in itself, which you guys should get some other guests on here to talk about.
Ross Kenyon: That’s a great angle, yeah. Yeah.
Mike Smith: What all that does is it drives us to a specific financial structure, right? Because the timeline is dictated to us by nature and by the governing protocols and methodology, right? And so that was, you know, some of our original challenge was that John and I won the Clean Tech Open, the Rocky Mountain region in 2017, kind of in spite of the category, because we’re not tech, really. You know, we’re, I mean, there’s some tech enabled stuff, but we’re not really a tech company. And as we went out and tried to sell this to the VC company, You know, angel investor world, it just wasn’t particularly interesting to them.
They loved the idea of doing reforestation and that there might be a profit motive associated with it, but it just doesn’t fit into their timeline or their return expectations. What that ended up driving us towards is actually more like a, they call it a Timo, a timber investment management office, which is a fund that we would actually end up creating a fund. And because all these returns are back ended, but there’s a management, you have to invest upfront and there’s a management cost over the time span. That a fund is actually the best way to go about doing this.
And there’s different ways you could do a fund, whether it’s a debt fund or an equity fund or some sort of blend thereof. But the fundamental structure is invest the capital up front, provide the returns on the back end, and expect people to have to lock it up. What that drove us to is to recognize that this long time span, this high capital cost, that’s not a flaw, that’s a feature. And the feature is to the right investor, to the institutional class investors, this is very, very attractive. That if you have to move a lot of money and you want to not have to deal with it for a while and you want it to be relatively safe and have predictable and incremental returns over a longer time span.
Okay, now you got a ballgame. This is interesting. But there’s a lot of hurdles to get between a couple of motivated guys in Denver to institutional class. And so that’s the problem that we’re working on right now is how to get across that chasm.
Ross Kenyon: Yeah. And with the safety of it and in particular regard to John’s comments on it being ex ante, what happens if you plant a forest and it burns down, but you’ve already been paid some of the credits? Like how exactly does this work? Or you’ve already sold the credits and been paid?
Mike Smith: Yeah. So there’s two things that you have there. One is on the climate side of things, which is if you’ve already sold the credits, we actually in any forest protocol have to overproduce. And then you put it into essentially a common insurance pool called a forest buffer account. So in this project in California, we have a 17% risk rating. So that means for every 100 credits we produce, we get to sell 83 and 17% or 17 of them are put into a common pool with all forests offset projects under that protocol.
And so if any one of them burns down, the offsets that already been sold from that forest are pulled out of the pool from the collective pool. The other side of the equation though is for the investor. This is a natural system. There’s risks. And so one of the things that John and I are working on here is actually to create an insurance product that is designed around carbon-focused reforestation and that can remove the downside risk there. The other part that we’re looking at there is that there might be a way to actually leverage that forest buffer account if we could plant even more and to create an insurance pool elsewhere.
And so that’s something we’re exploring right now.
Christophe Jospe: Interesting. Man, there’s a lot there. And, you know, we’d be remiss to not say Nori wants to be a player in this game and we’d love for you guys to be project developers. And I think there’s some alternative insurance buffer pools that we’ve thought of, but that is probably a conversation we should first have offline before we try to hash it out on the air. We can if you want.
Ross Kenyon: I’m interested in all these. I love the intersection of ecology and finance. I think it’s always super interesting. You both are very obviously thinking creatively about ways to solve problems that have maybe... Maybe hindered or not allowed you to full access to these resources because you have to put a certain amount aside or the ways to mitigate risks that have not been done.
Christophe Jospe: We haven’t really talked about this too much, which is like some of the pine beetle infestations or some of the precursors that face fires and fires in the West. I was curious on your perspective on that front.
John Cleland: So I didn’t know much about forests coming into this at all. I knew about carbon markets. I came in straight from a financial play on this. And so I always defer to Mike to start talking about forests with people we work with. But one really huge aspect of learning about it was I would have just thought, hey, don’t we just need to plant more trees, right? Just keep planting them. But the forests that we are working with and looking at are substantially overstocked and becoming weaker. So like right now, for example, Mike is trying to work on developing a Colorado State Forest Carbon Plan with some of the state foresters and with another couple of key players.
And so there is a tremendous amount to learn about the beetle infestations and the substantial loss of forest due to Simply just being overstocked. And you would have not thought that would have been an issue. And so coming at this from multiple angles is incredibly important. We can’t just go out there and keep planting more trees when they burn down. There needs to be healthy forests. There needs to be thinning. And so being a true environmentalist would include actually doing deforestation to some degree. I don’t know. Mike, what do you think?
Mike Smith: Yeah. You know, the three main challenges that face Western forests are climate change, disease slash insect outbreaks, and fire. And they all feed off of each other because the number one thing that actually unites Western forests is water. Water defines what forest type you have and how successful it is. And so most of the West used to have frequent return of fire. In many places in Colorado, for example, it used to be that you’d have like a low-grade fire that come through every 15 years. And you can almost think of it as like wolves to elk.
It picked off the young, the old, and the weak. And it also burned out the underbrush and it allowed stands to be relatively open. We suppressed fire for many years in this country, about 100. And as a result, you’ve got a lot of places where there’s just too many trees, all the old and the weak, and the trees are still there. And what that means is you have a lot more trees competing for the same amount of water. And so they’re weak. And so now they’re all weak. And so when a fire comes through, they have a hard time resisting it.
And the fires, because there’s so much fuel, tend to burn very hot. At the same time with the disease and the beetles, you have a problem of the number one defense against beetles or anything for a tree is to dump sap on it. Well, sap takes water. And so the more water stress the tree is, the less defenses it has to take care of that. And then, you know, the absolute unifying factor of the whole thing is climate change. And our summers are getting longer and hotter and our winters are getting shorter and drier.
And so these trees, even in properly stocked, are now essentially going to an overstock condition because it’s becoming a more water stressed environment. There should be fewer trees per acre in the climate that we’re going to. And so you get that in having to do some thinning in order to kind of improve the resiliency of the stands that remain. But you also have to realize that you’re going to have some really high-intensity wildfires moving across our landscape, and we’re starting to see those now. You know, as we’ve talked in this conversation, just in Colorado’s state history, the largest fire went from 15,000 acres six years later to 140,000 acres, right?
Wow. The Heyman Fire is the 120th largest fire in the United States in the last 20 years. There have been 119 fires. And this actually is a little bit old. It’s a couple of years ago that I did this look. There have been 119 fires that have been larger than 140,000 acres. So we got to figure out both how to kind of play defense. How do we keep the force we’ve got? And how do we play offense on the climate? How do we plant the force that we need?
Ross Kenyon: I’m happy to have your comments on that because I’ve seen two different Reactions to forestry that I’ll lay out. One was a video that just came out with Greta Thunberg and George Monbiot. And they were a little smug in it where they were saying like there’s a carbon removal technology that’s essentially free and it grows from the earth and it’s called a tree. I was like, oh. I groaned at it, which is fine. I mean, they have plenty of good stuff to say too, and that’s okay. But also the idea that we just plant more trees without figuring out how to manage them, that clearly is not correct.
And granted, it was like a three-minute video, so there wasn’t enough time to get into this. But then the flip side of that is, I remember, I think it was last We don’t let them burn. It just fills up with stuff that should have burned. And then it’s much more dangerous. I don’t know. It seems like management is very difficult. And I don’t know that we have figured it out.
Mike Smith: It’s an ongoing thing. And part of the joke that goes in forestry is that make a mistake and you won’t be around to deal with it because 20 years later you’ll actually realize it, right? Oh, okay. So you have to try to think ahead of the problem here. And we are in a quickly changing environment. And so thinking ahead of the problem is going to be increasingly more important. Not to dive too deeply into the politics. Management is absolutely critical. There’s an irony in Trump attacking the state of California because they spend more on management than any state in the country.
Ross Kenyon: So it still was a bad comment then. I’m not being too fair to the guy.
Mike Smith: No, no. With everything, like it was grounded in some sense of reality and then blown way out of proportion with that guy. Politics. Yeah. So, you know, I don’t want to get too into that, but management’s important, you know, but the problem is that, you know, we’ve gotten to, you can get into deeper issues about social license here as well. So I toured a site down in Southwest Colorado called the Lone Pine EA. And one of the things that they highlighted there that there’s this overstock condition that you need to do thinning.
And then once they do thinning and they remove some of that stuff, then they can start doing prescribed burns, which is to introduce fire into the landscape and to allow it to kind of do what fire used to naturally do. And the ideal situation here is that they get the landscape to a setup where they can allow fire to just naturally return. Now, where you get into here is social license, right? Which is, are we okay with fires burning? You know, what’s the general population’s understanding of that? There comes an education component of it too, right?
But when Everything is all smoky. You tend to complain.
Ross Kenyon: And there’s a death count associated with it sometimes too.
Mike Smith: Well, yeah. And that’s the other part is you can’t just let fires burn in our current state because they don’t do that low-level fire. They do high-intensity, large-scale, catastrophic fire sort of stuff. And so there’s a pit that we’ve gotten ourselves into on management that we’re going to have to dig ourselves out of. And that’s an absolutely important part. And there’s some great companies like Blue Forest Conservation that are doing work around that in the creative finance space. But there’s also this component of even after the management’s happened, you’re still going to have high intensity, large scale fires.
And we got to figure out how to replant after that.
Christophe Jospe: This has been really fascinating. We’ve mentioned a few obstacles on the different levels, whether we’re talking state or national, private, but what haven’t we talked about? What are some of the obstacles in afforestation or reforestation? And carbon markets. And carbon markets that you’re up against.
Mike Smith: You know, so when I think about carbon markets, you know, when I first started doing this a few years back, people would be, well, you know, they’re not going to last, they’re not going to be around. And so they didn’t see it as an investable opportunity. And that mindset is slowly and pretty rapidly shifting. It was slowly shifting. And now it’s, you’re starting to see in the last, you know, couple of months, there’s this rapid shift around people focusing on climate. And to your point with the George Monga and Greta Thunberg, the three things that they said were, if I remember, protect, restore, and fund.
And that’s actually fairly common within the forestry space, which is it’s the defense offense and you got to pay for it. So you got to protect, you got to play defense, you got to do the management activities to keep our forests in a healthy condition. So that way we don’t lose them to high intensity wildfire or disease outbreaks. You have to restore them. So post fire planting. And the only way that’s going to happen is through funding. And so it’s going to take a lot of people to get their head around the idea that this is an investment in your future.
And that this is kind of old-fashioned capitalism where you... You know, you built a factory and you expected it to produce off of over 30 years, right? Well, or a power plant or whatever the case may be. This is infrastructure. It’s green infrastructure. And as soon as people start realizing that this green infrastructure provides us water outcomes, climate outcomes, and they invest in it and they expect it to produce over the appropriate amount of time span that a forestry hit, you know, requires, the better that mind will all be because that mindset is a pretty key shift that needs to happen there.
When they start to realize that, they’ll look at carbon markets and be like, Oh, this isn’t an in and out thing. This isn’t where I need to do my IFM project and be gone in two years. I’m investing. I’m here to last and this is only going to get more. You know, the other component that kind of hasn’t fully bubbled out is that there’s some good scientific literature around what your climate mitigation strategies are out there. They call it natural climate solutions or nature-based solutions sometimes. And up to 20 to 25% of the world’s emissions can be offset through natural climate solutions.
And the number one channel both domestically and internationally is reforestation. And so it’s this really huge segment. If you think about roughly 20% of the fossil fuel emissions on the planet can be offset through reforestation and its friends. That’s a huge, huge market opportunity. And I don’t think people have really baked that into their thoughts. The other part of it, the carbon markets in general, just the legislation aspect of it. You know, the California compliance market, as you guys know, and have probably talked about on this show, goes through 2030.
John Cleland: So I think we all kind of fully expect that will be extended maybe to 2050 or whatever it is. I think there’s been some executive orders placed in California. But have you guys talked much about the Republicans fleeing Oregon and, you know, them missing the cap and trade this year as well?
Ross Kenyon: I don’t think so. They said no to it, right? In Oregon? It got voted down? Well, because they didn’t meet quorum.
John Cleland: That’s right. So 11 of the 11 Republican state senators left the state. So it was quite a blow to the compliance cap and trade.
Ross Kenyon: Why not just vote no? I feel like that looks so much weirder to leave and not get quorum.
John Cleland: Because it would have gotten passed. They would have passed and they would have joined the California cap and trade market had they met quorum. So that was a huge blow for cap and trade compliance markets in general. And so hopefully it’ll be back on the ballot again this year. I don’t see something like that happening, like getting passed in Colorado anytime soon. I don’t even think they’re even talking about it. And if you do, you get kicked out of the room immediately. Types of carbon markets or carbon finance, carbon pricing, things trying to be developed.
I think the Republican Party right now is coming up with carbon dividends, which has been talked about for a number of years now. And which is so ironic considering that it was Republican Party that came up with cap and trade, you know, 20 plus years ago.
Ross Kenyon: That was like the original market friendly Al Gore able to be like, come on guys.
Mike Smith: It wasn’t even Al Gore, it was George H. W. Bush.
Unknown speaker: That’s right.
Ross Kenyon: Was it really?
Mike Smith: Yeah, the Clean Air Act Amendments of 1990.
Ross Kenyon: Well, I just remember Al Gore talking about it, but he was like presenting it as a way, as like a bridge. Yeah, but it was, it was, yeah, right.
John Cleland: It was, it was before that. And it was a market solution to, you know, handling things like too much sulfur. Yeah.
Ross Kenyon: Are you cringing over there? Is this too political for you? Are you biting your tongue?
Mike Smith: It’s also the reality of things. I mean, like, I’m not quite as pessimistic about it for a lot of reasons. And one of the things I look at is that as we go and talk to these landowners, they’re almost universally pretty conservative politically. I mean, small c. But, you know, when we first started talking about this, they would just kind of like, hey, who are you? This might be snake oil. Like, what’s going on? And now they want to talk. They’re interested. You know, we’re talking to a landowner, a wealthy landowner who’s very conservative.
And he thinks that we’re absolutely on to something. He’s wholeheartedly behind us. And that’s a change that is, I think, kind of happening subtly in the background. Your political leaders aren’t talking about it, but the rank and file within the conservative movement are starting to think that way.
Ross Kenyon: This wasn’t on the Nori bingo card that a fan made, but it very well could be. But we talked to a lot of conservatives too, and we work with farmers for the most part. And I think if people have the chance to make money doing something good, it’s pretty easy to talk to them. If you’re proposing a tax or a Regulation for what they can do on their land. You’re going to be unpopular. So you either have to have a lot of support from other people to force it onto them, or you can try to do the carrot approach.
And we try to go for the carrot approach, and it sounds like you’ve had success primarily because you’re not threatening them with some sort of legal obligation, but an opportunity to make money.
Mike Smith: Yeah, there’s that, and it’s on the landowner capacity, right? But there’s also, in the California market, it’s enabled by a government program that is essentially a tax system. Or a fine or a fee, however you want to label it. But it’s some drag upon what they would consider the free market. The purest libertarian mindset on the whole thing would be is that a tragedy the commons problem needs to be paid for by the commons. And so that the only way that you can reduce the tragedy of the commons problem is to reduce access or charge a fee for it.
Ross Kenyon: Privatize the commons.
Mike Smith: Yeah, you know, and that gets into some pretty fraught territory as well, right? But at a minimum, when you pollute with carbon, you are creating health problems, you’re creating a, you know, a long-term climate problem, and you probably should be paying for that. You know, if you find people that are willing to look at things with a little bit more nuance, you know, they’re very much on board. You know, your pure ideologues, unfortunately, tend to be overrepresented in politics, but your pure ideologues may not, you may not get them on board.
Ross Kenyon: I think most people that are pure ideologues, they just hang out on the internet. Most of the time I meet people I might not see eye to eye with in person. And we’re able to have productive conversations with people all across the board. I’m sure you both have success in that way too. There’s something about the internet that makes just people vicious and not willing to have fun, nuanced conversations. That’s part of what we’re trying to do, at least with this podcast. We’ve had a lot of people on the show before.
I’m not even sure you could always tell who we most agree with and who we don’t. And maybe that’s the fun of it.
Christophe Jospe: Depends on the day too. I might’ve changed my mind learning some things on this podcast here.
Unknown speaker: You change your mind, flip flopper. Yeah, right. Oh no. What a weak willed. New evidence lets you change your mind. Yeah.
John Cleland: And these, these foresters that we, one thing that Mike and I really want to do is embrace the landowners. You know, we want to embrace the foresters that are local to the areas that we’re going to work on. We certainly don’t want to come in with our own mindset of, no, no, no, this is how you’re going to manage this forest. We just want to come in with the money and say, What kind of trees do you guys want to plant? Hopefully native species. What kind of, I guess, forest plan are you going to have for these?
Well, we want to let them develop that themselves because I’ve gone to a number of timber conferences now, which are quite different than the financial events I used to go to. And some of these are like, you’re overdressed if you tucked your shirt in. No one’s going to tell some of these foresters how they’re going to forest their property. And as you guys know, Probably with the different type of farmers that you work with, no one’s going to tell them how to plant their crops. You don’t want to be doing that.
Exactly. So there’s this complete disdain for how the environmentalists in Sacramento or in San Francisco are going to tell them how they’re supposed to plant their trees or how they’re supposed to burn their trees or cut their trees. And so it was really eye-opening for me because most people will just have this thought in their head of how you’re supposed to grow your trees and These guys are incredibly intelligent. They know what they’re doing. And so everything from the argument from glyphosate to how many stands they’re going to put per acre, they have to deal with a whole basket full of issues on making sure that their trees grow and making sure that they’re harvesting them in time and getting them the biggest bang for their buck out of their trees.
Ross Kenyon: We’ve also noticed a funny correlation between we talked about this on the Benji Backer podcast and it comes up with conservatives sometimes that the people who are right of center often are more rural and therefore they have actually like practical interaction with the environment on a daily basis and care quite a bit about their land. Whereas most people left of center, I think are more urban generally. It’s more of an idea that’s somewhere out there. And I think whenever we’ve talked with people who are more rurally inclined and speaking like that, I feel we’re on the same page.
As long as you treat that like you extend that lifestyle. You’re a farmer. You’re probably just dropping the equivalent of nuclear waste on your field and poisoning everything or your farm or you’re a, you’re a forester and you’re responsible for some problems. And yeah, you probably don’t even know about enough to even levy that charge against them.
Mike Smith: Yeah. One of the things we really like about Colorado is it’s a very collaborative state. And so as we’re going through developing this forest carbon plan and how do we bring people together, that’s what happened with Colorado’s water plan. And so you have to bring everybody to the table to have that discussion. Because the flip side of it is that even though I live in Denver, I also have a Right. And a desire to make sure that even though I don’t interact with those lands on a daily basis, but they are, I own them like the public lands.
I am a public lands owner and I, you know, I have a right to want to make sure that they’re well cared for too. And so to say that it’s all one or all the other, as with most things in life is probably not the right answer.
Ross Kenyon: It’s a really good point. Oh yeah. I agree. And I hope I didn’t present it in that way.
Mike Smith: No, I was, I guess, agreeing with you as well.
Christophe Jospe: No, but I think we forget as members of the public in the United States, we’re all landowners because it’s public lands. I like the way that you framed it. We’ve talked a little bit about risks and we’ve talked about fire risk, talked about failure risk, I think. I don’t exactly know what these words mean, so I’ll just say them and maybe you can tell me what it means. Assisted migration risk. What’s that about?
Mike Smith: So the climate is changing faster. The natural systems can adapt. And so a forest that exists there today will not exist there 50, 100 years from now. And so if you’re coming post-fire, you need to recognize like, okay, if I plant what was there before, that’s a bad investment because it’s likely to die. But it’s also not the reason we’re here, right? Which is we want to restore forests, not to You know, to satisfy our ego that we can just replant. And so, you know, it’s important to recognize that, like, sometimes these fires are actually an indication that we are entering a new biome.
A good example of this is there’s a lot of really large fires in interior Alaska. And a lot of these fires are occurring in areas where the average temperature of that forest across an entire year has gone from below freezing to above freezing. You know, and Alaska is facing climate change much more rapidly than the rest of the United States right now. And so... We have to kind of recognize that the forest that was there probably will never be there again. And that’s kind of a difficult thing to swallow, but you need to think, okay, well, what can be there?
And if we don’t get into some sort of post-fire restoration there, because we’ve exceeded, you know, some of these fires in Alaska are over a million acres. And so if we don’t get back into doing some sort of replanting, the biome that we’re going to have there is going to be essentially savanna. An Arctic version of it, but it’s just going to be grasslands where it really should be a different forest type. And so that’s the assisted migration. The shorter version for the more lower 48 mindset is that generally your forest, you know, a certain forest type is going to be moving north or uphill as the climate warms because it needs to get to someplace where it’s the right temperature and moisture bad.
Ross Kenyon: Yeah, there’s a section in Elizabeth Colbert’s Sixth Extinction about how some trees can’t move up fast enough. So the fast moving trees will end up in these higher zones and will like relatively overpopulate relative to the slower reproducing moving trees. That does seem like a problem. What’s going to happen to those guys caught in those little islands? By which I mean like you’ll have a local maximum that’s like 6,000 feet and then it drops back down and then it goes back up to 8,000 feet and they need to get there, but they’re not going to be able to do it alone.
Mike Smith: Yeah, you can actually look in like Utah and Nevada. They have Southern California as well. They have these things. They call them Sky Islands. And so there’s a national forest in Nevada right in the middle of the state. And it’s actually for these ridges that get up into enough altitude that it’s cool enough and wet enough for a forest right in the middle of the Great Basin. And so, uh, down by Tucson, they have a bunch of those too. Yeah, exactly. You know, and so it’s, it’s, you know, where we have interconnected forests in, in Colorado, for the most part, you may start to see more sky islands emerge.
Christophe Jospe: I did want to get the question in, which was, what are some of the challenges that you have that we maybe haven’t talked about with carbon markets as they’re set up today? Like if you could fix one or maybe two things, what would those things be?
John Cleland: Transactional costs. I mean, it’s super expensive to get these projects going. And it’s just a common carbon offsets, their fungibility, the understanding that the public has of them, you know, obviously there’s previous fraudulent offset issues that happen, carbon offsets that were being double sold. So I think the California compliance market is an amazing job of making sure they do the best job to prevent any of these issues. So I think If you can expand on that and make them better, more power to you guys. But the transactional costs I think involved in carbon offset projects is to me the biggest issue.
It’s hard to do because especially with something like reforestation where you have to go out and you have to spot check the acreage. If we’re going to do a 15,000, 20,000 acre project or if you’re going to do a 200,000 acre IFM project, you’ve got to go out there and verify that property is there. Until we get drones that can fly and verify and do all this stuff quite easily, you need to deploy people out there to do this job and they’re just not going to do it cheaply.
Ross Kenyon: So you’re not talking just about transaction costs in terms of matching buyers and sellers. You’re also talking about verification and that being...
John Cleland: Yeah, the brokerage part of it, buyers and sellers, I think that’s easy. I mean, you know, being a former broker, I think that is going to be the easiest part of the job that we do. I mean, finding an offset buyer, piece of cake. I believe it will be much easier than getting actually funding for trees in the ground. And... Mike and I have to hopefully get capital on board where we can employ a GIS professional. You know, the projects that we’ve developed have been through referrals, introductions, networking events, actually getting in a car and driving to California to meet with foresters.
That is just not efficient. So how do we get GIS support to understand where is the exact locations that we need to go after? What are the exact acreages? Who are the owners? We need to become much more efficient. Then once we get those properties engaged, maybe we get letters of intent on different areas. We need to then pay expensive costs to do carbon feasibility tests on them. I mean, all of this stuff costs money. And just to make sure that you are following all the guidelines of the California Air Resource Board protocols, they are incredibly expensive.
Mike Smith: Yeah, there’s kind of this irony that the closer we get to like, you know, we talked about like this, we believe is ultimately an institutional grade. The closer we get to that, the easier the money gets. And so there’s lots of people that we find that want to pay for reforestation. They don’t want to pay for the developing the reforestation project. And it’s kind of, it’s ironic because again, you know, like the project in California costs us about $100,000 to do the pre-development on and it costs us $4 million to do the planting on.
The $4 million was the easy part. And that’s really backwards, right? So we can say, hey, we have a huge lever. And so in order to achieve a lot of really positive environmental outcomes. So that’s kind of the phase that we’re in right now is to try to find who wants to help us really advance the art.
Ross Kenyon: Well, if someone like that is listening, what’s the best place to find your work and to engage with you?
Mike Smith: So the website is www. renewwest.com. That’s two W’s. And then my email is msmith, like Mike Smith, at renewwest.com. So that would be easy there. We’ll be having an announcement about one of our projects here probably the next couple of months, and we’ll be sure to share that with you guys. So there’s that, but also hopefully you’ll see that in the press as well.
Ross Kenyon: Great. Well, I’m sure we could even talk more, maybe as Nori’s farther along, you guys interact with it or test it out. I think that could be a fun one to do. If you do have a project come out that is actually removing carbon dioxide from the atmosphere, it should come on the other show, Carbon Removal Newsroom, which if you’re listening and you haven’t heard yet, you can find it in whatever podcast app that you use. Thanks for being here. That was fun.
John Cleland: Thanks a lot for having us. Yeah, I enjoyed it.
Ross Kenyon: Do you feel honored that it went way over time?
John Cleland: I was thinking about that a little bit. I’m like, what are they going to cut out of this podcast to make sure they fit?
Christophe Jospe: Very little though. We’re nerds. We like it. And hopefully the listener liked it too. But if you like the show, please rate and review it on iTunes, share the podcast. This helps us get the word out. And we’re just here trying to learn along the way and hopefully you learn something with us today. Yeah. So thank you. And also Stitcher, you can rate it there as well. So thank you for listening.
