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While most investors focus on tech stocks and crypto, a former Goldman Sachs partner is quietly building what could become the next major financial market - one that might actually help save the planet in the process.
Key Takeaways
- Voluntary carbon markets operate alongside mandatory compliance markets, offering companies flexibility to offset unavoidable emissions through verified projects worldwide
- The market faces significant standardization challenges similar to early derivatives trading, with wide bid-ask spreads and limited liquidity creating both risks and opportunities
- Major tech companies like Microsoft are driving demand with massive long-term contracts, including an 18 million ton deal over 20 years announced by Rubicon Carbon
- Three main types of carbon credits exist: removals (like reforestation), super pollutants (methane reduction), and nature-based solutions, each with distinct risk profiles
- Current pricing doesn't reflect the time value of carbon removal, creating market inefficiencies where immediate action gets the same credit as future promises
- The industry needs better standardization, improved liquidity, and institutional backing to reach its potential as a legitimate financial market
- Geographic diversification spans from Uganda to Indonesia, but concentration remains high with roughly 50 companies driving 80% of North American market activity
From Wood Stoves to Carbon Credits: An Unlikely Journey
Here's a story that sounds almost too perfect to be real. Tom Montag's family immigrated to Oregon in the early 1900s and started a company called Monte Stove Works, manufacturing wood-burning stoves. Fast forward a century, and their descendant is now running one of the most prominent companies in the voluntary carbon market, essentially working to reduce the very emissions his ancestors' products once created.
But Montag's path to carbon markets wasn't predetermined. After studying in California, his first job out of college was collecting bad loans for a household finance company next to a racetrack. "When the races came through, I'd have to go through and all the people that moved there, I would get their accounts and try to collect bad loans," he recalls. Not exactly the glamorous Wall Street origin story you might expect.
The real transformation began when he landed at Goldman Sachs in their derivatives unit. "I put the first derivative on Goldman Sachs's books back in the day," Montag explains. He was there at the beginning of what would become a massive financial market, eventually becoming a partner and co-running sales and trading. Later, he moved to Merrill Lynch just before Bank of America acquired it, staying as chief operating officer and president of Global Banking Markets until 2022.
What's fascinating is how his environmental interests developed in parallel with his finance career. Through his work with Oregon's Deschutes Land Trust, Montag spent years buying ranches and restoring natural salmon habitats. They would purchase properties and restore streams to their natural paths, replanting vegetation to create the right conditions for salmon to thrive. "A lot of the problem was how much hotter the rivers were because springs had been buried," he notes, connecting local environmental challenges to broader climate issues.
When TPG approached him about starting a company focused on voluntary carbon markets, it seemed like the perfect convergence of his financial expertise and environmental passion. "It sounded like I could take some of my knowledge from my world of finance and living around the world and hopefully do some good around the climate problem."
Understanding the Two-Sided Carbon Market
The carbon market isn't just one thing - it's actually two distinct systems operating side by side, and understanding this split is crucial for anyone trying to make sense of the space.
On one side, you have compliance markets. These are government-mandated systems where countries or regions set emission limits and companies must either stay under those limits or buy allowances from others who've exceeded their targets. Think of California's cap-and-trade system or the European Union's Emissions Trading System. These markets are essentially taxes with a trading mechanism attached.
Then there's the voluntary carbon market, which operates completely outside government mandates. Companies participate because they want to, not because they have to. "Somebody remember when everybody was making pledges around they were going to have net zero," Montag explains. The basic premise is simple: if you can't eliminate a ton of carbon from your operations, you can fund projects that remove or avoid that same amount of carbon elsewhere.
But here's where it gets controversial. While compliance markets face their own criticism, the voluntary market deals with an entirely different set of challenges. Some people don't believe in climate change at all. Among those who do, there's a split between those who support offsets and those who want everything to be "inset" - meaning companies should only count emission reductions within their own operations.
The controversy usually centers on two main questions: Does buying offsets actually lead to lower global carbon emissions, or does it just allow companies to continue polluting while feeling good about themselves? The second concern is greenwashing - companies claiming environmental benefits that don't actually exist.
Montag acknowledges these concerns but remains convinced the market serves a legitimate purpose. "To me, it does good obviously, or I wouldn't be in this seat right now." He points out that controversy exists in many markets. "Think about buying stocks and how many people look at companies and decide should you buy them and should you not buy them. You can go to somebody at Deutsche Bank and somebody at Goldman and they're going to have completely different opinions about whether you should buy a stock."
The parallel makes sense. Stock analysts disagree about valuations all the time, but that doesn't invalidate the entire stock market. Similarly, people can have different opinions about specific carbon projects without dismissing the entire concept of voluntary offsets.
How Carbon Credits Actually Work in Practice
The mechanics of carbon credit creation and trading are more complex than most people realize. It starts with project developers who identify opportunities to reduce or remove carbon emissions. Maybe they want to protect a forest that would otherwise be cleared, or they're planning to install technology that captures methane from landfills.
These developers work with registries - organizations that set standards for carbon projects and issue credits when certain criteria are met. The biggest registry for nature-based projects is Verra, which operates what's called the Verified Carbon Standard. "You would go to Verra with 'we would like to do this using your standard' and they would decide to say 'yeah, we'll issue you a thousand carbon credits for that,'" Montag explains.
But getting those initial credits is just the beginning. These projects typically run for decades, and developers continue earning credits as long as the projects meet their targets. Satellite imagery helps monitor forest projects to ensure trees are actually growing and the area remains protected.
Here's where it gets interesting from a financial perspective. Developers need money upfront to start these projects, but they won't see revenue until credits are issued. That's where companies like Rubicon Carbon come in. They invest in projects early, securing the rights to future credits, then sell those credits to companies that need them.
Rubicon's core product is called a "Rubicon carbon ton," which works like an ETF for carbon credits. Instead of buying credits from a single project, customers get exposure to a diversified portfolio that Rubicon actively manages. "If you didn't want if you wanted to buy now and retire in a year or two years or three years, you could hold that and we would be monitoring and doing the ton below it," Montag explains.
They offer three main types: removals (like reforestation), super pollutants (primarily methane), and nature-based solutions. Large buyers can also purchase credits from individual projects if they prefer more control over their portfolio.
The process isn't as simple as buying a commodity though. Unlike oil or gold, you can't see carbon removal happening. You're relying on scientific measurements and third-party verification. "Because that carbon removal one, you can't see it, and their science is telling you how much there was, and after the fact there could have been errors in their calculation," Montag notes.
The Derivatives Parallel: Building Market Infrastructure
Anyone who lived through the early days of derivatives trading will recognize the challenges facing carbon markets today. Montag, who was there when Goldman Sachs put its first derivative on the books, sees striking similarities between then and now.
In the early derivatives market, every trade required custom documentation. "Everybody had their own document, so you'd be negotiating everybody's document with them," he recalls. Sound familiar? That's exactly what happens in carbon markets today. Settlement dates, payment terms, delivery mechanisms - everything gets negotiated case by case rather than following standardized procedures.
The International Swaps and Derivatives Association (ISDA) eventually solved this problem by creating standard contracts that everyone could use. This allowed for assignability - Goldman could sell a swap to Deutsche Bank as long as all parties agreed, because everyone was working from the same legal framework.
Carbon markets desperately need their own version of ISDA. Right now, buying carbon credits feels more like procurement than financial trading. "People will say 'can I pay you at the end of August?' It's more of a procurement thing. It's not a financial instrument for them."
But there's another parallel that might be even more important: customization. Just as derivatives customers wanted specific indices, holidays, and maturity dates, carbon credit buyers have very particular preferences. Some want projects only in certain countries. Others prioritize community benefits or biodiversity impacts alongside carbon reduction.
"Here people like certain kinds of projects. They want projects that are in certain countries, or they want projects that give a certain amount back to the community, or they want some that also impact water and wildlife," Montag explains. It's like ordering from a complex menu where you're picking not just the main course but dozens of specific ingredients and preparation methods.
This customization creates both opportunities and challenges. On one hand, it allows buyers to align their carbon purchases with their broader sustainability goals. On the other hand, it makes standardization much more difficult.
The market is still far from achieving the liquidity and standardization that made derivatives successful. "We're not very close," Montag admits. "People are trying to do things that make it more commodity-like, but here because that carbon removal you can't see it... there's just so many degrees of freedom that you don't really have that assignability."
Most buyers purchase credits and retire them immediately, meaning there's no secondary trading. It's like bonds that get held to maturity rather than traded actively. Without active secondary markets, bid-ask spreads remain wide and liquidity stays limited.
The Microsoft Deal and Market Concentration
Two weeks before this conversation, Rubicon announced what they believe is the largest carbon deal in history: 18 million tons over 20 years with Microsoft. To put that in perspective, that's roughly equivalent to taking 4 million cars off the road for a year, every year, for two decades.
Microsoft's involvement isn't surprising when you think about it. Tech companies are massive electricity consumers, and that consumption is only growing with AI and data centers. They also tend to have ambitious sustainability commitments and the financial resources to make large, long-term investments in carbon removal.
"The tech companies... you can see the kind of people that do it," Montag notes, referring to public data on carbon credit retirements. The market is surprisingly concentrated. Roughly 50 companies account for 80% of the North American voluntary carbon market, while about 120 companies drive 80% of global activity.
This concentration has pros and cons. On the positive side, having sophisticated buyers with long-term commitments provides stability for project developers. Microsoft's 20-year commitment allows Rubicon to plan and invest in projects that might not be viable with shorter-term contracts.
But concentration also creates risks. If a few major buyers change their strategies or face budget constraints, it could significantly impact the entire market. The diversity of buyer motivations helps somewhat - some companies are driven by genuine environmental concerns, others by stakeholder pressure, and still others by regulatory requirements that may be coming down the pipeline.
The Microsoft deal also highlights another important trend: offtake agreements. Similar to streaming agreements in mining, these contracts commit buyers to purchase credits over extended periods under agreed-upon standards. "The question is, can you borrow against those offtake agreements?" Montag wonders, pointing to potential opportunities for financial innovation.
These long-term contracts create something approaching predictable cash flows, which could eventually enable more traditional financial instruments like asset-backed securities or project financing. But the market isn't there yet, partly because the underlying projects still carry significant risks related to weather, permitting, and political stability.
Global Projects, Local Risks
One of the most interesting aspects of the voluntary carbon market is its truly global nature. Rubicon works on projects spanning from Uganda and Ghana to India, Indonesia, the United States, Mexico, South Africa, and Panama. This geographic diversity creates opportunities but also introduces complexities that don't exist in most financial markets.
Many projects are located in the Global South, which makes economic sense. Labor costs are lower, land prices are more affordable, and there's often more opportunity for large-scale reforestation or conservation. "A lot of it's Global South things, and so that's really good and we invest a lot of money in those projects in those places," Montag explains.
But global reach means dealing with geopolitical risks that don't factor into traditional asset classes. Political instability, changing regulations, currency fluctuations, and varying legal systems all create additional layers of complexity. Credit ratings for these countries often aren't great, which affects how investors perceive project risks.
There's also a newer wrinkle related to international climate policy. The Paris Agreement created mechanisms for countries to use carbon projects toward their own national commitments. This raises questions about "double counting" - if a country counts a reforestation project toward its national goals, can a foreign company also count those same credits toward its corporate targets?
"You have to work with the countries and whose credits are these and make sure you can really sell them and you have the validity of the country behind it as well," Montag notes. Navigating these international frameworks requires diplomatic skills alongside financial and environmental expertise.
The geographic spread also creates operational challenges. Monitoring forest projects in remote areas of Indonesia is fundamentally different from verifying methane capture at a U.S. landfill. Satellite technology helps, but ground-truthing still requires local expertise and relationships.
Despite these complexities, the global nature of the market is also one of its strengths. Climate change is a global problem, and the most cost-effective solutions often exist in developing countries. If the market can figure out the risk management and verification challenges, it could channel significant capital toward both environmental and economic development in places that need it most.
The Time Value Problem and Market Inefficiencies
Here's something that drives Montag crazy: carbon markets don't properly value timing. In every other financial market, time matters. A dollar today is worth more than a dollar next year. But carbon credits that remove emissions today get the same treatment as credits that promise future removal.
"There's no time value of carbon," he explains with obvious frustration. "If you remove carbon from the atmosphere today, it has a better impact than removing carbon 20 years from today. Absolutely right. But people don't think that way."
The physics are clear - atmospheric carbon compounds over time, so earlier removal provides exponentially more climate benefit. If you remove one ton today, that's equivalent to removing three or five tons (he admits he's making up the exact number) in 25 years. Yet the market treats them identically.
This creates perverse incentives. Companies set net-zero targets for 2050 and plan their carbon reduction accordingly, but they don't get any credit for acting sooner. Everything gets treated as equivalent as long as the total math works out by the target date.
The problem gets worse when you consider how the market actually values credits of different vintages. Like wine, carbon credits are identified by the year they were issued. But unlike wine, older vintages sell for less than newer ones. Credits from 2018 trade at a discount to 2025 credits, even if they're from the same project and developer.
"Which is ironic given what I just said, because in theory if the 2018 credit was from the same developer on the same project as the 2025, it should be worth more because it's actually done more good," Montag points out. The market discounts older credits because there's more time for something to have gone wrong, standards may have changed, and buyers prefer "fresh" credits that align with current verification methods.
How could this be fixed? Montag suggests it would require changes at the standard-setting level. Organizations like the Science Based Targets initiative (SBTi) could incorporate time value into their frameworks, allowing companies to count earlier action more heavily toward their commitments.
"If they were doing that and others were doing that, then by definition you'd want to buy more today because you get the value of compounding," he explains. It's a simple concept that could dramatically improve market incentives, but implementing it would require coordination across multiple organizations and corporate reporting frameworks.
The Road to Real Market Status
The question everyone in carbon markets grapples with is whether this will ever become a "real" financial market in the way that derivatives or commodities are. Right now, you can't really short carbon credits, post them as collateral, or trade them with the liquidity you'd expect from mature markets.
"I mean, somebody might have lent against [carbon credits]... We're trying to do things like that, but I wouldn't call it a market," Montag admits. The infrastructure just isn't there yet for sophisticated financial instruments.
The bid-ask spreads are too wide, meaning the cost of getting in and out of positions is prohibitively expensive for most trading strategies. "If you get in, the cost of getting out even if it's fine is expensive to get out. So you have to have real conviction in that position before you do it."
But there are signs of progress. Rating agencies like BeZero are starting to analyze carbon projects the way credit agencies evaluate bonds. This provides more standardized risk assessment and could eventually enable more liquid secondary markets.
The concentration of buyers, while problematic in some ways, also creates opportunities for institutional development. Large, sophisticated buyers like Microsoft can demand higher standards and more standardized contracts, gradually pushing the market toward greater professionalism.
There's also growing interest from traditional asset managers. While most current activity involves companies buying credits for their own use, some firms are starting to view carbon as an investment asset class. "We're investing in projects kind of at source and what we're getting out of it is the carbon credits to sell to people," Montag explains. "The answer to that is yes. But... there's so many projects out there, so it's hard to understand which is going to go up and which is not going to go up."
The key challenges remain verification, standardization, and liquidity. Unlike oil or gold, you can't physically inspect carbon removal. You're relying on scientific measurement and third-party verification, which introduces uncertainty that traditional commodities don't face.
But if these challenges can be solved - and derivatives markets faced similar skepticism in their early days - the potential is enormous. Climate change represents a massive market failure where the environmental costs of carbon emissions aren't reflected in market prices. Carbon markets, if they develop properly, could help correct that failure while channeling trillions of dollars toward climate solutions.
Montag remains optimistic despite the challenges. "I think the money that we can, if we get this right, the money that will come into this area and fuel all these projects all over the world can be great for this world." Coming from someone who helped build one of the last major financial markets to emerge, that's a prediction worth taking seriously.
The voluntary carbon market might still be in its infancy, but with the right combination of institutional backing, standardization, and technological development, it could become the financial infrastructure that helps address humanity's greatest challenge. Whether that happens fast enough to matter for the climate - well, that's the trillion-dollar question.
