Equity, prepayment or debt: how should nature-based carbon projects be financed?

A mangrove does not start generating revenue on the day its restoration is funded. Rights must be secured, communities engaged, ecological conditions restored, outcomes measured and independently verified. The money goes out before carbon credits can be sold.

That gap raises a practical question for the developer: who funds project establishment, implementation and the associated costs before the first carbon revenues arrive? And what will they ask for in return?

An equity investment, a prepayment for future credits and a loan can address the same funding need. They allocate risk and value differently. Choosing between them requires looking at both the project's maturity and what the developer has already demonstrated.

Three instruments, three commitments

Under equity, the investor becomes a part-owner of the project, usually through an SPV, or special purpose vehicle: a company set up for that project. It holds the contracts, financial flows and rights assigned to it, including carbon rights. Investing in this project company differs from investing in the developer’s business, which may run several projects.

An equity investor shares future gains but absorbs losses before lenders. It therefore generally seeks a higher return. For the developer, the cost is a share of ownership, decision-making and future project value.

Prepayment provides money today for carbon credits delivered tomorrow. A buyer, fund or intermediary can fund implementation this way. The contract may promise a fixed number of credits or a share of credits actually issued; the latter is called credit streaming. The developer retains ownership while committing some future credits.

Under a proportional contract, deliveries follow credits issued against verified net sequestration, for a restoration project. Under a fixed-volume contract, risk sharing depends on negotiated protections: delivery extensions, lower delivery requirements or a developer floor. Replacement obligations or repayment of the advance can instead put more risk on the developer.

Debt must be repaid in cash, with interest and agreed payment dates. In the structures examined here, it relies on a credit sale agreement with a financially sound buyer. The lender may take security over those credits and future receipts. This protection can make debt cheaper than equity, but the project must be able to pay on time.

Instrument	What the financier receives	Economic cost to the developer	Main issue to examine
Equity	Project ownership and future gains	Ownership and future gains given up, shared decisions	Share of the project given up and exit terms
Prepayment	Future credits or a share of production	Advance sale price and delivery obligations	Treatment of delays and underperformance
Debt	Cash principal and interest	Interest, fees, guarantees and cash held in reserve	Ability to pay at each due date

Prepayment often sits between equity and debt in risk and cost. But the contract matters: strongly guaranteed prepayment may protect its financier more than a poorly secured loan.

Compare the same project and the same funding need

Take a project that needs $10m and forecasts 2 million credits available for sale. That is a cost of $5 per credit. Use a $30 sale price, close to the $29.72 blue carbon average reported for 2024 in Ecosystem Marketplace’s 2025 report, table 4. This is a modelling assumption, not a guaranteed price.

In all three cases, the financier provides $10m and the developer contributes no cash. To keep the comparison simple, all sales and payments occur in year 7. A real model must use the project’s actual schedule.

Comparison basis	Assumption
Budget and financier’s investment	$10m in each scenario
Forecast saleable production	2 million credits
Average cost per forecast credit	$5
Central resale price	$30 per credit
Equity	Financier owns 70% of the SPV and receives 70% of actual credits
Prepayment	$12 per credit, or approximately 833,333 fixed credits
Forecast prepayment allocation	41.7% of credits to financier; 58.3% to developer
Simplified horizon	Funding today; sales and distributions in year 7

The 2 million credits are available after the standard’s safety reserve, called a buffer, community allocations and other third-party entitlements. The budget is assumed to cover all costs, including long-term monitoring. The $5 cost belongs to this example, not the whole market.

Under equity, the financier provides $10m for 70% of the SPV. Our example also contractually assigns it 70% of available credits. The developer keeps 30% without contributing cash. At forecast production, the financier receives 1.4 million credits, an effective cost of $7.14 per credit received.

Under prepayment, the financier buys approximately 833,333 credits at $12 for the same $10m advance. The developer keeps approximately 1,166,667 credits. The financier receives its credits first. This fixed volume distinguishes our example from proportional streaming described in the Carbon Finance Playbook, p. 78.

Under debt, the project repays the loan from credit sales. With 8% annual interest added to the debt for seven years, it owes $17.14m. A single repayment is used here to compare outcomes; an actual loan may have several payments.

Structure	Value received by financier in year 7	Gain after its $10m investment	Developer’s residual	Financier’s annualised return
Equity: 70% of actual credits	$42m	$32m	$18m	22.75%
Prepayment: 833,333 credits at $12	$25m	$15m	$35m	13.99%
Debt: 8%, capitalised	$17.14m	$7.14m	$42.86m	8%

The assumed returns are illustrative orders of magnitude informed by public carbon finance data, before fees and tax.

If the project meets its forecast, debt leaves the most value for the developer here, followed by prepayment, then equity. That difference pays for different risks: equity shares success and underperformance, prepayment expects a fixed volume, and debt expects repayment. Developers need to consider both what each party receives when things go well and what remains due when the project falls short.

In this central case, the parties share a total $50m gain: $60m in sales less the $10m invested. The financier’s receipts include its original investment. Costs are already funded and are not deducted twice; no SPV sale value is added.

For the same project, the cost of capital and the amounts retained by the developer therefore vary considerably between financing structures. All three options are nevertheless rarely available at the same time, as we explore in “Project maturity and developer track record are separate questions”.

Price and volume: where scenarios diverge and interests must stay aligned

Now test three production levels, 50%, 100% and 150% of forecast, and three sale prices: $12, $30 and $45. The advance stays at $10m, and the prepurchaser still expects approximately 833,333 credits bought at $12. The budget stays fixed; delays and cost overruns are not modelled.

The tables show what remains for the developer after the financier’s share, in millions of dollars. Under equity, it keeps 30% of sales. Under prepayment, it sells the credits left after delivering to the prepurchaser. Under debt, all principal and interest due are subtracted from sales: a negative figure means the project lacks money to repay. Prices run across columns, production down rows. Prepayment is shown without a floor.

Equity

Production / forecast	$12	$30	$45
50%	$3.60m	$9.00m	$13.50m
100%	$7.20m	$18.00m	$27.00m
150%	$10.80m	$27.00m	$40.50m

Prepayment

Production / forecast	$12	$30	$45
50%	$2.00m	$5.00m	$7.50m
100%	$14.00m	$35.00m	$52.50m
150%	$26.00m	$65.00m	$97.50m

Debt

Production / forecast	$12	$30	$45
50%	-$5.14m	$12.86m	$27.86m
100%	$6.86m	$42.86m	$72.86m
150%	$18.86m	$72.86m	$117.86m

At 50% production and $12 per credit, sales bring in $12m. The developer keeps $3.60m under equity and $2m under prepayment. Under debt, the project is $5.14m short of the $17.14m owed. Selling the same production at $30 instead leaves $12.86m for the developer after debt. Production and sale price are separate risks.

When production falls, the prepurchaser still expects the same number of credits, while the equity investor receives fewer. In this example, prepayment therefore leaves less for the developer than equity below roughly 60% of forecast production. At 833,333 credits or fewer, nothing remains for the developer without negotiated protection. Penalties or replacement obligations can make things worse. A fixed sale price protects covered credits against market declines, but not against a shortage of credits to deliver.

For the developer, financing needs to work in a downside case. At half the forecast production, prepayment leaves less than equity. Debt can still be more attractive at $30 but produces a deficit at $12. Funding cost matters alongside the ability to absorb a shock and retain an economic stake in the project.

Prepayment: a floor as the developer’s safety net

The developer expects to keep approximately 1,166,667 credits after delivering to the prepurchaser. It can negotiate a floor reserving half that allocation, approximately 583,333 credits. This is the safety net used in our example.

Reserve those credits for the developer first, then deliver to the financier up to its 833,333 credits. If production falls below the floor, the developer can only receive available credits. The floor protects volume, not guaranteed income. The table holds the price at $30 to isolate its effect.

Production / forecast, at $30	Developer without a floor	Developer with half-allocation protected	Financier with a floor
50%	$5.00m	$17.50m	$12.50m
100%	$35.00m	$35.00m	$25.00m
150%	$65.00m	$65.00m	$25.00m

At half the forecast production, the floor leaves $17.50m for the developer instead of $5m, at a $30 sale price. At 100% and 150%, it does not change the allocation. If the price falls to $12, the developer receives $7m with a floor versus $2m without; the financier receives only $5m against its $10m investment.

The financier accepts more of the downside so that the developer retains an incentive to maintain, monitor and improve the project. This safety net aligns their long-term interests: continuing to generate credits benefits both parties.

That protection must hold throughout the contract. It loses its value if penalties or replacement obligations reclaim the developer’s reserved share. Our calculation assumes lower final deliveries under permanent underproduction. A delivery extension could also be negotiated, with a clear time limit.

Project maturity and developer track record are separate questions

A well-documented project may be run by a developer that has never delivered credits. An experienced team may also launch a project in a country or ecosystem it knows less well. Both the project’s stage and the developer’s proven results matter.

Here are financing options to explore in each situation. This is a guide, not a set of requirements shared by all financiers.

Situation	Funding to explore first	Evidence that changes the discussion
First project, feasibility still unresolved	Sponsor capital, grants, patient equity or a strategic partner	Documented rights, consent, feasibility and budget
Documented project, first deliveries still ahead	Project equity, prepayment or a combination	Execution capacity, purchase agreement and clear risk allocation
Experienced developer, new project	Equity or prepayment; debt where contracts and support allow	Experience that genuinely transfers to the new project
Operating project, proven deliveries and collections	Senior debt, refinancing or a facility backed by revenue	Available, recurring cash flows that withstand stress

For a lender, track record means proven delivery: works completed, costs controlled, credits verified and delivered, and sales proceeds collected. Team experience matters, but it does not fully replace the record of the business taking the loan.

This evidence helps unlock cheaper debt. It does not guarantee access: the World Bank still identifies barriers to carbon finance, including insufficient equity and working cash.

Offtake: a frequent prerequisite for funding

One question runs through all three structures: who will buy the credits? The developer often needs to secure an offtake, a contract to buy some or all future credits. If the financier acquires them for its own use, it is already the end buyer. Under prepayment, the financing agreement may itself be that purchase contract.

This commitment helps unlock funding without being required for every equity investment. In Carbon Capital Lab’s 2025 survey of 74 NBS developers, 85% of projects primarily funded by project-level debt had a signed offtake or were in late-stage negotiations. The developer needs to examine buyer creditworthiness, price, volumes, payment dates and termination rights. Advance payment funds implementation; payment on delivery can support a loan. The same credits must not be promised twice.

The sales schedule should also guide when principal repayments begin. The developer needs enough time to implement the project, verify sequestration and sell credits, with headroom for delays. Interest may still be payable during this period or be added to the debt, increasing the amount owed.

Reserve a senior allocation for MRV and long-term project costs

Funding the launch is not enough: the project needs to keep operating for years. A prudent developer therefore reserves credits to fund MRV, meaning measurement, reporting and verification, alongside long-term monitoring, maintenance and management. This allocation is called senior because its proceeds pay these costs first, before value is shared between the developer and financiers. That order must be agreed in the contracts and respect the buffer, community rights and other parties’ entitlements.

This reserve pays project costs; the floor described earlier protects the developer’s economic share. They serve different purposes. Size the reserve against a long-term budget and a prudent sale price. Only money left after these costs can support repayment: that is the logic of cash available for debt service. Our simulation assumes these costs are already funded, without deducting them twice.

One financier may offer several instruments

Once the funding need is clear, examine the proposed structure rather than the financier’s name alone. In its 2023 request for proposals, Climate Asset Management offered funding against future credit delivery and also considered equity.

Debt is also available in restoration: IFC announced a $50m loan for BTG Pactual TIG’s reforestation strategy in July 2024. It combines commercial forestry, conservation and restoration. Its terms cannot therefore be directly applied to a mangrove project funded solely by carbon.

Another example comes from outside NBS: in September 2026, Vaulted Deep secured $35m in debt provided by Mediobanca and arranged by CFP Energy. Service agreements and credit sale contracts support the financing. The activity is subsurface organic waste storage, but the principle remains useful: contracted revenue can attract lenders.

Major institutions also open new routes, including the World Bank Group Guarantee Platform. Through a different mechanism, the $225m Amazon reforestation-linked bond, issued in 2024 for nine years, mobilised approximately $36m for Mombak through interest payments investors forgo. Their bond principal is protected at maturity, while part of their return depends on credits generated. These mechanisms broaden funding sources; they do not guarantee every project risk.

Choose funding the project can support

A developer can begin with patient capital, fund implementation through prepayment and consider debt once available, verifiable cash flows support it. It can also combine these instruments. Grants and concessional finance can address needs that commercial capital struggles to fund.

The decision should compare retained value, transferred risk and the obligations that stay with the developer. The budget must continue funding field delivery, community commitments and long-term monitoring when production or prices disappoint.

Demonstrating and managing risk strengthens the case for cheaper capital. Build that evidence before negotiating the rate.