The Evolution of Carbon Markets

thanks so much everyone for joining us which for a conversation i'm really excited about because carbon offsets uh are often you know talked about as the the key you know they're the way that businesses can easily reduce emissions by buying um credits from other projects but so often they just don't turn out to be what they promised and i've got two three experts here today to talk with me about the evolution of carbon markets where they've been and where they're going um and i think you know when we talk about carbon offsets one of the things that's so interesting is uh there's big questions around the supply side but also around what buyers are doing with offsets but i want to start with you mark because you've been involved with carbon offsets and carbon markets in one form and for another for the last two decades so how have you seen the market evolve over that time to where we are today i'm sure that's a half an hour answer in itself but if you could briefly give the audience an overview of where we've come from so like i suppose like biological evolution it's not been a linear process it's been up and down there have been moments of extreme enthusiasm after the kyoto protocol was signed in 1997 there were people who were almost suggesting that the clean development mechanism would solve not only the climate crisis but also the world sustainable development and all other problems that you could think of there was then slow down because it took a long time for parties to agree and governments to agree the european emissions trading schemes suddenly said ah you know suggested trading could work but it's been very bumpy i think the clean development mechanism suffered from bureaucracy over too much bureaucracy but also lack of scrutiny and i think that is something i hope we come back to this one of the challenges that carbon markets and particularly voluntary carbon markets have faced is a lack of transparency which makes it hard for people to say to see is this market serving its public purpose by reducing additional greenhouse gas emissions and channeling additional finance or is it just moving bits of people around on a table and generating profits without actually adding benefit so i i think we're moving it means we're now moving to something that will be integrity and credibility driven because i think i suspect my colleagues will say the same that that is the basis of trust and without that the market can't grow and it's often described as a kind of wild west market would you agree with that i think that's overplaying it a little bit i mean it's true there aren't single standards and a lot of the verification and validation is outsourced to the market and the but there are standards there are registries there are platforms where you can see what projects which projects are taking place where the pricing is i think where it's probably the wild west bit maybe more apt is in some of the countries where projects take place that just don't have the legal and institutional infrastructure to monitor to verify to check that projects are doing what they should be doing and that's not just true of carbon markets that's true of a lot of investments and so i think strengthening that capacity will overcome a lot of that problem and claire there's a there's a difference between carbon offsets which are entirely voluntary and regulated carbon markets like the eu ets from the from a stock exchange perspective is there any way that you can introduce rules from the supply side to try and to try and make sure that there is some integrity and quality in in this market or is it just too difficult um well that that actually just is exactly what we're trying to do at the moment actually from the stock exchanges perspective because we think that actually the voluntary carbon markets really present sort of an opportunity to support the transition and and also to help to support um financing into projects particularly developing countries and it does give sort of that you know opportunity to be able to bring the activities that have been happening sort of in the in the otc markets into the public arena so we we announced um at cop26 that we were looking at how we would be able to facilitate the listing of carbon funds on the london stock exchanges markets so a lot of in focus is being placed on um the trading or you know the demand side well actually what we're looking to do is that bottleneck of supply side how can we actually create a market environment and structure to be able to support the listing of funds that are investing in projects predominantly in the global south that then would enter into the london stock exchanges regulatory environment with an additional designation around that that gives more confidence and clarity goes to your points around integrity um and visibility to the market um which is what is much needed and in turn this will enable the um creation of carbon credits in the form of a dividend in species so we're really trying to address that bottleneck situation of the supply side and almost six months on since cop 26 how's that project going it's going well uh you know there's a lot of momentum building and we've spent a lot of time um consulting with the market with industry experts and actually shaping what we think the the regulatory environment should look like um and so we hope in q2 that we would actually be able to go out with a public market consultation on the rules for this designation um and then hopefully look to to welcome some funds um to the market later in the year and do you feel um pressure in terms when you look at markets around the world in singapore they've launched carbon exchange i think in chicago as well and do you feel do you feel that there's pressure to keep up or are you collaborating with them how does it work i think we're very focused we're participating in a very different part of the market and i think you know we were talking in the green room earlier there's a lot of room for um for scope and development in each part of that sort of ecosystem of the life of a carbon credit and i think well what we've identified and really sort of laser focused on is how can we support the financing how can we play to the strengths of an exchange you know and the role of the exchange is about bringing capital to those that need capital and this point this plays exactly to that because by creating a fund environment to list these projects you know we hope that actually it will be um really addressing those two two challenges that we've identified as being scaling finance into the market and and supply credits and there's also um over the last 18 months there's been a task force with at one point had about 450 people working on it to try and scale the market for voluntary offsets and part of the aim of that is to develop a set of core carbon principles that you could then stick on like a label like an organic label and say this is a high quality offset is that something that you could see the lse using well i actually think you know the work that the integrity council venture markets and the vce and i have also you know all been doing is actually really integral to how we can have a an environment that is you know very robust and transparent um and i think what what we're doing you know supports that because bringing so into the public market domain brings with it a sense of disclosure and transparency and and governance and brings actually into the market abuse regulation as well so you're naturally getting a lot more um focus that will be placed i think what we're we're going to make sure that we're keen to do is align with a lot of the standards that are in the marketplace to ensure you know that those projects that comprise those funds um are focused on setting out investment mandates that they are investing in projects that create carbon credits and and which the standard bodies that those projects are aligned to great and i'd just like to remind the audience that there's a qr code if you have any questions we'd love to hear them um we'll ask them at the end of the session so please do scan the qr code and meg over here we'll ask them on your behalf ariel claire was talking about the importance of the money from offsets flowing into the global south to the countries that need it most one of the big issues with carbon markets is there's a huge number of incredibly cheap projects which tend to be the ones that get bought up and they often don't actually deliver on the carbon savings that are genuinely needed so how do you think carbon markets can invest in what's needed most rather than just what's cheapest and then claiming that they're they're carbon neutral it's a great question the carbon markets are like really any other commodity markets you have a supply stack of opportunities and my view is just because they're cheap doesn't mean they're low quality things become cheaper or more expensive over time depending on scarcity and technological improvements so i think a lot of the legacy offsets that are coming from renewable projects you know that are still in the market because they registered before you know that cutoff date came on and they were additional at the time that problem is going to work itself out just simply by the projects ceasing to exist because everything has a fixed end date um you know our perspective really is that you know buyers are getting really smart around additionality uh things like energy efficiency uh destruction of hfc gases uh you know in the beginning of the cdm uh whether or not they should have been allowed for compliance in the eu ets is a separate question but without a carbon price and an incentive it's very little reason of why somebody would go in and and make an investment uh that would otherwise cost the money so that basic tenet of additionality i think is really the lens through which we need to look at these opportunities uh and you know we think in order to maximize the chances that we have to get on a path towards net zero by definition we need to direct capital to the opportunities that are most cost effective and from a risk adjustment standpoint so things like ending deforestation um and ours from my perspective kind of large scale low cost carbon removals from nature energy efficiency renewables which now don't need a carbon market but are in the money if you think about the finite pot of capital that we have you want to make sure you're getting as many emission reductions as possible otherwise you end up with a scenario that you put capital to work in a in a part of the curve or with a certain set of technologies that are maybe not commercially viable so when you say your buyers are getting smart about additionality what kind of questions are they asking you now that they didn't previously did they just used to come to you and say we want offsets yeah they would say what's the cheapest yeah what's the cheapest credit we can get where you know whether a credit is able to be issued under the rules that existed at the time of registration is now being you know evaluated versus what is the reality today on the ground so even though i think people are not questioning that whether those credits exist or should exist or their fake credits but they're saying do i as a company want to put my reputation at risk by retiring a renewable credit in 2024 um based off of the additionality test of 10 years ago where before they're saying okay well vera has issued it or the cdm has issued it and that's good enough for me and because this is now voluntary grassroots really organic and a lot stronger from my perspective than kind of this artificial demand that the eu ets represented reputation quality and integrity matters almost more than anything else for these companies more so than price what about renewable energy projects because when you look at offsets you've got different kinds of offsets you've got offsets which will avoid emissions from being released so you've got offsets that will remove emissions renewable energy projects now compared to 10 years ago are so cheap that many people argue they shouldn't be even sold as offsets do you do you agree with that it's it's not an argument you can't register a renewable project as a as a pro as a carbon project so the rules have been changed the only exception to your comment on global south is if that renewable project is in the least developed country because there's so many obvious co-benefits you know and societal benefits of having that project large-scale small scale doesn't matter if it's in a least developed country you know you can you can get carbon offsets for that but my personal opinion is if you would build a renewable project without a carbon revenue it's not additional and the reality is we're seeing a huge amount of renewables deployed around the world the pace needs to pick up um but objectively you know you are better off investing into renewables even before the war uh than you would on generation fired by coal uh oil or natural gas and if someone came to you after this conference and said i want to invest in the best quality project that's gonna you know the best technology in the best country what would you what would you tell them well what i would say is first of all it doesn't exist a lot of people talk about removal projects the best removal project today started 10 years ago right so the from my perspective you know the the best the best i mean it depends on what you're trying to achieve but when you think about avoidance versus removals clearly the market is heading towards removals and removals will be needed to get to net zero as opposed to carbon neutral by definition um you know and from our perspective really what will the market will really start to price uh permanence and durability of the storage in a really much in a much more sophisticated way because aforestation as we know is very effective very cheap in in in removing but not so much in storing because things can burn down soil carbon is the same so i think highly durable carbon removal projects potentially that have a nature element like bioengineered carbon capture storage biochar that that are basically removing carbon at a relatively low cost and then storing it in a way that's highly durable and really kind of maximizing permanence that's that's where we put our chips so while i absolutely agree with erin a point about that focus on permanence i think when we talk about additionality and i think that's what we're trying to allude to at the beginning we need to think about additionality not only the project level but the market as a whole sure the the market has to go above and beyond what policy drives and above and beyond the decarbonization obligations of companies it can't undermine that and it can't be a substitute for it so it's got to be the above and beyond not the instead of and on your point about high quality carbonyls i think the underlying quality of a credit is is it additional is it is it permanent and all the rest of it but when we think about additionality of the market and this is why i think sort of the lowest cost is not necessarily the right option so if we're thinking about a country uh however good quality the underlying credit is if a country has to meet its ndc its national obligation if it is selling off the cheap options and leaving itself with the more expensive options that may undermine its ability to meet its targets and go beyond in the future also if we think about where we want the investment the investments needed in those technologies and techniques that are not easy to do at the moment we want to how do we drive more technological change and that's not to say we shouldn't be looking to reduce costs one of the reasons the eu ets has been reasonably successful is it's reduced compliance costs for the companies that are operating within the system this is not just about cost reduction it's got to be about transformational change it's got to be investment in where the host countries most need it and be part of perhaps a blend of different sources of capital that can drive a just transition so i i'm not disagreeing with the economic efficiency argument of it but that's not the only argument it this is a market that exists fundamentally if not exclusively with a public purpose and that's to get us to a net zero as easily as we can i agree with everything you said what we found when we do a lot of research on this is that most of the co-benefits that you're referring to translate into the price so an area with high biodiversity has a big carbon stock and the marginal cost of avoiding or removing carbon is lower areas that have very low gdp per capita low human development indicators have a very low bar for additionality because a 10 price changes somebody's future right where if you're trying to do that same project in norway uh it's not additional it doesn't move the needle so that's why i said risk adjusted price when you risk adjust the price it takes all of that into account in most examples so we we have a story in the um in the latest green magazine which i hope you get a chance to read about a company in the us that's trying to now have having made quite a lot of money off of cheap carbon offsets is now trying to sell credits at 60 a ton do you think that's a realistic price mark would anyone pay for it well i mean you've almost answered the question if people are prepared to pay for it yes yes yes of course it's a realistic price and i think the price is not the only variable i mean if the if the entrepreneur or the broker is buying the credits for two dollars and selling them for 60 well then that's 58 a profit that's not going back into the climate if that 58 actually stayed with the local community or was reinvested in helping the host country meet its climate priorities then bring sixty dollars on so i wanna talk a bit about the buyers as well because uh if anyone who's been following this uh the evolution of this market in the last couple of years we'll know there's a lot of acronyms to keep up with and you're now involved with the vcmi uh voluntary carbon markets initiative so what's the what's your main objective with with this group and how is it different to perhaps the the the task force on scaling voluntary markets which now seems to evolved into an integrity council on voluntary markets so for those who are a bit older it's like the people's front of integrity and the integrity people's front but um so the difference is the icvcm is looking at the supply side so everything from the germ of an idea about a project through to the validation and verification issuance of credits until that credit goes into the market the vcmi is looking at what what guidance should there be for companies on how they make use of those credits when they make use of credits and probably most importantly what they can say about it and i think i mean people have heard me speak have heard me say this before i mean if you look in uh financial newspapers you will see lots of advertisements by companies who say they are carbon neutral climate neutral emissions neutral net zero you name it they rarely mean the same thing they rarely cover the same scopes of emissions or the same activities and it's never clear whether they are above and beyond what companies should be doing or just a substitute so we're going to the vcmi will issue guidance which we hope many companies will pilot which will create some clear guidelines on what companies need to do first what what kind of credits they should be buying what they can say about that and how they need to be how they need to report and disclose that information and i think this goes back to the key point about transparency there isn't there aren't governments at the moment who are regulating those claims directly although a number of governments are looking at how to manage environmental claims but the public the consumers when you buy your yogurt that says it's carbon neutral or net zero or whatever it may be you don't know what you're buying so we need to be able to as consumers to have the tools to make that choice and that's part of what vcmi is doing and will it have teeth um i hope so i am it'll have teeth in where we're aiming for it to have several sets of teeth one will be through this emphasis on transparency so that you and others can scrutinize this and say this stands up and this doesn't um we can see that a lot of governments around the world are looking to upgrade their rules on consumer protection and advertising to ensure that there aren't false claims so we've been working with a group of governments to look at that and hope that what we produce or some version of it will make its way into consumer protection regulation as well um and then as we've seen in some countries companies are being sued over misleading claims and um that will be should be another stick or character depending how you look at it to use the guidance properly and make the make robust claims but how have we got to the situation because i know ariel we were talking about this last week i i got very confused by how some companies and nestle's nestle's done this um in particular you set a net they set a net zero goal and say we will not use carbon offsets to meet net zero um but they then buy offsets and claim and use them to count to the carbon neutrality of individual product products such as a bottle of water i can't see the difference between net zero and carbon neutrality and i can't see how you can use offsets for one and not the other but they claim that the neutrality carbon neutrality and net zero is completely different but to me i don't understand and i write about this kind of thing to the average guy on the street he's definitely not going to get that how on earth have we got to this situation i mean the market is bifurcating between avoidance and removal units and you know first what i would say is most companies that have made net zero pledges do not have no idea how they're going to get there because it's impossible to know it's literally impossible to know what the price and availability of certain technologies will be over time and what the carbon price will be and what budget it's impossible to know literally so when they say we're not going to use offsets i think that's a way to bolster the claim into you know to to to communicate that they intend the plant to be high integrity um but the reality is we're not going to get to zero right without any offsetting activities and restoring nature and natural sinks and and and eventually pricing in technology at well above 60 60 a ton so i think it is a near zero percent chance that we're going to achieve net zero without some sort of market mechanism whether carbon offsets or carbon removal units or technology doesn't really matter we're going to get to minus 70 80 85 90 and that residual balance will have to be offset you know because some missions are just impossible to abate using the current technology and we hope that changes but it's impossible to know exactly where we're gonna end up what the slope of the curve is and you know and how we're gonna balance but what's known is we will need to balance one way or another i'd agree i'd say you know carbon credits are not a substitute correct for corporate action and you know you've got to actually be putting all the hard work in and looking how you're addressing your scope one scope two emissions you've got to do some the decarbonisation first as part of the transition you're right you know a lot of zero strategies are being set and you don't know how they can get there without some form of offsetting at some point so i think you know the work that you you're doing is really great to help with the education of the corporates because that's where there is you know a lack of education understanding you know you've got sort of different sort of you know offset requirements um and is it removals what what sort of the options available um and certainly we're seeing that when we're talking to some of the listed companies on our market because we actually see that what we're doing by the listing of funds opens up corporates to be investors in those funds so it's going to be another way for companies to be able to procure offsets you know you can list it you can list and hold a share hold it on the balance sheet and in time those um carbon credits will be released in the form of dividend and species so that can be retired or you know or held or you know it can meet those um those offset requirements thanks i'm going to throw open to the audience for the questions i think meg has some already what happens to markets in the event of an extreme incident such as major forest fires that cause loss of permanence beyond the current reserves built into the system does everyone have to buy their historic offsets again i'll give that one to mark no well i'll i'll start the answer but i'd like to hear what the financial markets think about it as well at the moment the main standards that deal in um land use and forest based offsets do have some sort of a mechanism normally called a buffer which deals with permanence so that there is if there is a reversal either through a forest fire or pests or whatever it may be then that buffer acts as an insurance pool it's a um and how much any given project has to put in that pool depends on some kind of risk assessment of the likelihood of pests or fires or whatever it may be that obviously can't ever take into account a sort of catastrophic event of the type you're talking about and that's where i think while the ha this hasn't evolved developed properly over the last two decades what is really needed is a finance based risk management tool an insurance mechanism um there's quite a lot of debate about when there is a reversal who should bear the brunt of that is it the buyer who's responsible for replacing it because they bought a reversible credit and therefore should have known better or is the onus on the seller and if does the seller still exist if it's a local community how can they possibly do it so i think that's a role where you know where financial markets have traditionally played a role and can continue to do so i don't know what you you think about that yeah you know i think it's you know it's not you know an area that we've you know we've had to sort of address ourselves you know from a stock exchange perspective but as you say you know it's about the broader financial markets the banks um insurance having to look at that as how can you get a solution there um and i think that that is something if i'm thinking about the construct of what we're looking to do from the fund perspective then actually there's there's a debate there to be had between sort of the the fund managers and how they when they're building out their portfolio and the type of projects that they're looking at that's something that's going to have to be incorporated in sort of you know the mission documents and perspectives and and comes under sort of that that risk assessment i agree with everything that's been said fundamentally you lose the buffer future supply is decreased the owner of that project has a loss but to the best of my knowledge there's no clawback mechanism another one uh geographically if carbon offsets are concentrated in one region to offset emissions elsewhere is that still acceptable should there be a rule that regions identified for carbon offsets should be evenly spread out on the planet well i can start i mean i it depends how much you want to interfere with the operation of the market i mean i think the experience we saw under the clean development mechanism and also with voluntary carbon projects in the last couple of decades is that they went tended to go primarily to larger countries but and larger and perhaps somewhat wealthier countries but there are obvious reasons for that because they're larger and so you can get bigger projects because they tend to have not always but tend to have more developed financial markets more developed governance and governance systems and institutions so the risk for project developers and investors is much lower so i don't think necessarily saying you've got to have 10 projects in every single country is going to work what is needed is how in those countries that most need the carbon finance and are least capable of getting it at the moment what do they need to be able to do that is there a role for multilateral development banks is there a role for governments for aid funding partic both in capacity building and training but also perhaps underwriting some of the risks and again um and i think you know ariel will be able to talk to this more there is now more of a premium being put on projects that do have really verifiable meaningful um sustainable development benefits that leave resources with the local community and perhaps that's something that the market can drive as well um and to support that completely carbon is just the base unit and you know my opinion is climate change is a global issue so you need a global set of solutions and that's what this voluntary market represents so it's it's more efficient okay um so i have i have one final question for each of you same question which is um whether you think the voluntary carbon market will still exist in 10 years time or whether you think it will have been folded into compliance markets or kind of given some kind of formal regulation i'll stop um i i think the starting point for the answering that question is we only have a voluntary carbon market now because we have failed so spectacularly over the last two decades to deal with the problem of climate change so you said i've been working on this for two decades i started just before kyoto protocol and we needed to make a 10 or 15 percent reduction in global emissions by 2010 we got 5 from the developed world only and we've been successfully further underperforming so we've got a voluntary carbon market as a substitute almost for our inability to have rigorous policy for an inability for many of us and i count ourselves amongst amongst those to change our way of lives i mean i still have a footprint that's six or seven tonnes when if we think in 2050 there's only half a ton each for everybody in the world within the removals so will will there be a voluntary carbon market in 10 years time i sincerely hope not i suspect this will be that's not to say that's not because i don't believe it's the right thing to be doing i just think we need to catch up when this needs to converge with other markets it needs to be policy driven it needs to be much more certainty for what companies are going to do and what governments are going to do so it's vital now because we know that in the next 10 years and as we keep being told this is the decade where we we win or lose the battle on climate change so we need to do everything we can as quickly as we can and carbon markets can play a role in that but they're not the long-term answer ariel i completely agree we price somewhere between 20 and 25 of the world's carbon in compliance carbon markets or tax regimes 25 so the scope today for the voluntary market is the remaining 75 percent and the only reason it exists is because that 25 is not higher so even if you get a doubling of carbon pricing it's still 50 percent of emissions that are unpriced and really the only mechanism that i'm aware of that even provides an incentive to start making investments above and beyond just seeking profit is the voluntary carbon market so i think pretty much close to 100 chance we're going to have the voluntary market or something that is a derivative of the current market trying to address those unpriced emissions and i think the chance that the whole world comes together and puts in a global cap and trade system and we stick to it and we go to to zero in 2050 at a three percent linear reduction factor is near zero it's unfortunate but yeah that's how we got to where we are um and in a way it's a little bit it's it's it's strange because the word voluntary makes it feel not serious but as you've heard from burberry earlier today when you make a pledge and you go public and you're a public company and you're regulated you can't just walk that back so in a way it's almost easier because you can't lobby yourself out of this when you've made the pledge yourself publicly so that's it i mean you know we're on the journey um a lot needs to be done but i think the voluntary carbon market and the broader environmental commodity market kind of ecosystem has a major role to play not just in reducing carbon but saving biodiversity promoting sustainable development um everything all of these other externalities and and things that are great for the world that are currently unpriced and this is the mechanism last word to you claire look do i think you know there's going to be more regulation brought into it yes because that is exactly what we are going to do but there's others that are doing that as well in different parts of the market but i think you know you made some really good you know points that i think when we were looking at this and thinking voluntary is this really voluntary it doesn't feel like it's voluntary actually we do need you know we've got one planet we heard previous speakers saying that we've all got you know to work together to make sure that we are um that we we keep you know our planet for generations to come um and so actually we've got to make action um and and with and facilitating it i think through sort of offsetting seems a solution today but will it be in the future somebody will come up with some other greater idea i think and we'll be sitting here discussing that let's hope so maybe we won't be but somebody others will be okay claire mark ariel thank you very much thank you

Channel: Bloomberg Live

Views: 12,825

Keywords:

Id: GEOSlI2Ef5Y

Length: 32min 3sec (1923 seconds)

Published: Thu Mar 31 2022