Why Carbon Projects Struggle to Borrow Money

Alvin Lim and Benoît Clément

The unbankable carbon project

A carbon project developer can spend years and millions of dollars before a project issues a single credit it can sell. Land agreements, baseline studies, validation, registration, equipment, implementation, monitoring, and verification must all be funded before the first dollar of revenue arrives. Yet many developers still struggle to access conventional bank loans, particularly during the earlier stages of project development. This limited access to conventional debt can significantly shape project economics. Shut out of conventional debt, developers are pushed toward more expensive, less scalable forms of capital like founders’ equity, friends-and-family funding, venture capital, or prepayments from commodity traders and other buyers at expected returns that often resemble equity rather than debt. In effect, many carbon projects are financed more like start-ups than infrastructure assets.

For carbon markets to scale, that needs to change. As with renewable energy and other low-carbon infrastructure, as carbon projects move from development to construction and operations, risks should progressively decline or be allocated to parties better able to bear them, allowing less expensive capital to enter over time.

Banks currently remain reluctant to lend due to multiple risks, including underdelivery, counterparty risk, country and market maturity, and the emerging nature of carbon credits as an asset class. Today, repayment of debt largely depends on carbon credit sales, and carbon credits are not yet recognized as a formal revenue stream that can be underwritten. Then, if the developer is unable to repay the loan, the bank cannot always be confident it can take control of the asset, enforce against or sell the credits backing the loan.

Fixing one without the other still leaves the bank with a reason to say no.

The external risks developers absorb

Lenders can assess risks attributable to the developer itself, including execution, governance, and operational performance. However, three external risks in particular can independently disrupt the cash flows needed to repay a loan, even where the developer performs well.

The first is country and political risk. A project may have permits, an approved methodology, and years of development behind it, but monetising its credits can still depend on government action. Under Article 6, for example, a host government may need to authorise the project, apply corresponding adjustments, and permit the transfer of credits. If that authorisation is delayed, withheld, or revoked, access to the intended market can disappear even if the project itself continues operating.

The second is merchant and contractual risk. An offtake agreement does not necessarily provide the revenue certainty a lender needs. Buyers may retain broad termination rights, while an uncontracted project remains exposed to carbon prices. Without a sufficiently firm purchase obligation, price floor or other revenue support, the developer continues to carry the risk that cash flows from expected sales disappear or carbon prices fall below the level needed to support the project’s economics and repay the loan.

The third is project performance and issuance risk. Monitoring results may differ from assumptions, methodologies can change and crediting programs can tighten their rules without grandfathering existing projects. A project may therefore issue materially fewer credits than its original financial model predicted.

Today, the developer often bears all three risks at once. A government decision, a buyer withdrawal, or an issuance shortfall can each undermine repayment. Infrastructure finance works differently, where risks are allocated to parties best able to bear them. Political and delivery risks can be insured, buyers can provide greater revenue certainty, and insurance or a layered capital structure can absorb part of an issuance shortfall. The aim is not to eliminate risk, but to prevent any single event from destroying the project's ability to service its debt.

What the bank could seize

Even if those risks were solved, the lender faces another problem, what can it actually take if the borrower stops paying? A bank lends based on collateral it can seize if the borrower defaults, making loans cheaper than equity.

Consider a house. A public register establishes ownership and records the bank's security interest. The owner cannot freely sell the property without addressing the bank's claim, and if the borrower defaults, the bank has an established process for taking and selling the asset.

Carbon credits provide far less certainty.

Start with ownership. In most countries, the legal nature and ownership of a carbon credit are not clearly defined. A registry may record which account holds a credit and when it is transferred, but that does not necessarily answer questions of legal title or the priority of competing claims.

Then there is custody and control. Conventional financial markets use regulated custodians to hold assets subject to lenders' rights. In carbon markets, control often remains tied to whoever controls the registry account.

Finally, there is accounting. There is still no universally accepted treatment for how carbon credits should appear in a company's accounts. A loan can therefore appear clearly as a liability while the asset intended to support it may not be recognised in an equally straightforward way.

The market has developed contractual workarounds, including special purpose vehicles, control over registry accounts and agreements assigning credits at issuance to third parties. But these are often negotiated transaction by transaction. And when a lender holds credits under a contract rather than a legally recognized claim on the asset itself, one question stays open: if the developer goes bankrupt, does a court read that transfer as a sale, or as security for a loan? The answer decides who gets the credits.

Even where a valid security interest is created under one country's law, questions remain over whether it will be recognised and enforceable where the project operates, under the rules of the crediting program, in the jurisdiction where the registry operator is incorporated, and in an insolvency involving the developer. For a lender, that uncertainty matters precisely when the financing goes wrong.

Why both halves matter

Suppose the market solves the first half. An insurer takes the government risk, a buyer guarantees a floor price, and another party absorbs part of the delivery shortfall. The project’s cash flows are now more predictable. But if the bank still cannot reliably take and sell the credits after a default, its collateral problem remains, so it lends against the developer's other assets, and project developers may not own additional assets. 

Now suppose the market solves the second half. The law settles ownership, a regulated custodian controls the credits, and auditors agree how to book them. The bank has better collateral, but the developer still bears the risk of a government withdrawal, price collapse or issuance shortfall, and the bank is lending against sales that any one of those three events can end.

Neither solution on its own produces financing at a price the project can afford. That is why the two halves have to move together, and why we wrote this as one piece.

What would have to change

Three things need to change, and none of them the project developer can solve alone.

First, the risks currently concentrated with the developer need to be distributed among parties that are willing and able to bear them at a price the project can afford. That means insurers writing government and delivery cover, buyers providing stronger revenue certainty or a price floor, and underwriters absorbing part of the potential issuance shortfall.

Second, the market needs a settled legal answer to what a carbon credit is, who owns it, and how security interest over it can be enforced across jurisdictions. National legislatures and courts will ultimately provide those answers, while international initiatives such as the work underway at UNIDROIT can help establish a common starting point.

Third, the market needs an agreed way to hold, control, and account for the credit. That requires regulated and well-capitalized financial institutions willing to provide custody, alongside accounting standard setters and auditors establishing consistent treatment.

Carbon projects do not need to become risk-free before banks will lend to them. They need risks that can be identifiable, allocable, priceable, and enforceable. That is how other infrastructure assets became bankable, and carbon markets will need to make the same transition.

We leave you with some things to consider:

Do the registries the market already has grow into these roles, or do regulated financial institutions step in to perform them?

Every risk taker ultimately gets paid out of the project's economics. Insurance premiums, price floors, and underwriting fees come out of the same cash flows that must repay the loan. How much de-risking can a carbon project actually afford before the economics no longer work?

Lenders may be reluctant to lend until these roles and protections exist, while service providers may be reluctant to build them before there is meaningful lending demand. Which side moves first, and what would the first few transactions need to prove?