[Scott] Coming up on "Energy Switch," we'll look into the creation, buying, and selling of carbon credits.

- At the end of the day, every single cost will trickle down to the consumer.

And as a society, we need to decide what price we're willing to pay for decarbonization.

And that's part of the value - Yeah.

- of carbon markets, is it's a pricing mechanism, and it actually helps quantify the price of carbon.

- You need to verify if a ton of CO2 has actually been reduced or removed.

With so many middlemen, a lot of whom have incentives, they'll get paid more if they issue more credits - Sure.

- Or if they verify more credits.

- Yep.

- And that has led to some over crediting in the markets that we get worried about.

- I can't imagine [chuckles].

- Yeah.

And people have been kind of questioning, like tongue in cheek, are those avoidance credits because it's actually just helping the companies who buy those offsets avoid their responsibility for their own emissions.

[Scott] Right.

Up next on "Energy Switch," part one of our discussion of carbon markets.

[Narrator] Funding for "Energy Switch" was provided in part by, The University of Texas at Austin, leading research in energy and the environment for a better tomorrow.

What starts here changes the world.

[upbeat music] - I'm Scott Tinker, and I'm an energy scientist.

I work in the field, lead research, speak around the world, write articles, and make films about energy.

This show brings together leading experts on vital topics in energy and climate.

They may have different perspectives, but my goal is to learn, and illuminate, and bring diverging views together towards solutions.

Welcome to the "Energy Switch."

Carbon markets, the making then trading of carbon credits, were created to try to reduce CO2 emissions.

There's both a compliance market, government set carbon emission limits, and companies comply often by trading credits.

And there's a voluntary market, where companies and consumers can voluntarily buy credits with the intention to offset a company's or person's emissions by reducing or removing them elsewhere.

We'll unpack this with Jamie Keech.

He's the executive chairman and co-founder of Vita Carbon, an investment company focused on the carbon credit market with a 20-year background in energy and carbon capture.

Kaya Axelsson is the head of Policy and Partnerships at University of Oxford Net Zero, a climate mitigation research program, with a background in political science.

Next on "Energy Switch," we dive into the fascinating world of carbon markets, part one.

Hey, look, welcome.

Glad to have you here, both of you.

- Thank you.

- Important topic.

We like to start with this idea of why would our viewers or listeners care about carbon in carbon markets?

Kaya, I'll just start with you.

- It's actually really inspiring.

Around 69% of people around the world have said that they would give up some of their salary to fight climate change.

And so what that tells me is that they want a way to do that, and carbon markets can be an efficient way to funnel financing into some of the climate mitigation projects that we need.

It's not the only way, but it can be an efficient way.

[Scott] Thoughts, Jamie?

- So, I would say [Scott] Yeah.

- the number one reason people should care about carbon markets is 'cause it's going to impact them personally.

And as Kaya said, it's going to massively affect how we choose to address decarbonization, but it's also going to have big economic effects.

It's gonna affect the cost of food, it's gonna affect the cost of gas, it's going to affect a lot of critical ecosystems around the world, the ocean, rainforests, agriculture.

And they have a say on how that will unfold and evolve.

And I think they should be paying attention to it.

- Sure, well, economics drive a lot of things.

Well, let's just start with some high-level definitions, like a voluntary carbon market versus a compliance market.

- Yeah.

So, governments have regulated the amount of pollution that companies are allowed to emit.

Usually, it's methane or CO2.

- Okay.

- And in those situations, they have kind of a budget.

And sometimes they trade that budget around.

Maybe one company was really over its budget and then another company was under its budget, and so they kind of pay each other to sort of trade those credits around.

- Okay.

- And a compliance market today, you can imagine those are very big companies.

That's around 800 billion.

It's a big market.

- Eight hundred billion?

- USD.

- Okay.

- But then the voluntary carbon market is something that like anyone in a small business or a large business or an individual can join in on.

And it's not a requirement, they're not regulated to do this.

They're saying, "I want to contribute to global mitigation or adaptation efforts.

So, I'm going to voluntarily buy some credits off the market."

- Okay.

- And that market is a lot smaller.

It's about two billion.

- Okay.

- Things to add to that, Jamie?

- It's important to think about the driving forces behind each of these markets.

So, a compliance market is what it sounds like.

It's a rule, it's a regulation, and they're being driven by governments.

The good thing about compliance markets is they're very clear and there's very clear enforceable rules.

The challenge with compliance markets is their regional solutions to global problems.

So, the EU can't control emissions globally.

California can't control emissions globally.

So, whilst they can drive action where they exist, there are constraints on that.

- Right.

- The voluntary markets, by contrast, are driven effectively by capitalism.

It's a true market, where something is for sale.

- Okay.

- And the driving force into that is pressure, either internally or externally, on emitters to offset their emissions or to reduce or remove emissions.

- But I would argue that regional regulation has really strong spillover effects.

- Okay.

- Because not only do we live in a global climate, but we live under global capitalism.

If there are regulations in California or Europe and those companies wanna operate in those places, there are many kind of new regulations that are starting to affect companies, even if they're not headquartered in those places.

- Right.

So, let's get a little granular, the compliance and voluntary.

I mean, what's the process?

Are there, are there gotta be project developers and registries and verifiers?

What are the steps that go through in these markets?

- Yeah.

So, okay, you have to think about a market has two components, right?

There are the market architects and then there are the market participants, right?

There's the group of interested bodies that create and regulate that market.

There are the, effectively, the regulators, and then there are the groups that participate in the market, and those are the sellers and buyers of a product, right?

So, think if you think about a stock exchange, you have the New York Stock Exchange, and then you have the companies listed on the stock exchange and you have the investors.

And so, that's a good example of an efficient, well-managed market.

Voluntary carbon markets are similar to that, but a little bit different.

So, the regulators of this market are known as registries.

There are dozens of different registries, but there's only a few that are considered highly credible that have been around for a long time.

They're structured sometimes as corporations, sometimes as nonprofits or NGOs.

- Okay.

- They set the rules, they enforce the rules, and they attempt to ensure that the product that is created and traded within that market is a high-quality product.

- Where are those major registries?

How many are there?

- They're all in North America.

[Scott] Okay.

- Most of 'em are California.

- And do China and India and Saudi Arabia play in them?

- Certainly carbon projects get done in all those places.

- Yeah, there's a fascinating breakdown where most projects in the voluntary carbon market are based in the global south.

- Most of the projects?

- Most of the projects themselves, but most of the kind of middlemen - The money.

- from the exchanges are based in the global north or in developed contexts.

- Yeah.

But you also have to remember, that's where the money is.

[Scott] Right.

- Money is in the global north.

Is it ideal?

Probably not, but it's kind of reality.

- Interesting.

- Within that market, the next level down of called the regulators, you have what are known as verifiers.

Theoretically, these are independent third parties that go out and they confirm the validity of projects and credits generated.

And then finally you have the participants, right?

So, you have people who are developers, which are creating carbon credits, you have traders and brokers, which buy and sell carbon credits, and then you have end users - Right.

- which are typically corporations that buy and retire those credits against their emissions.

- Yeah, interesting.

- You can imagine you need to verify if a ton of CO2 has actually been reduced or removed.

- Yeah.

- But you can imagine this creates a lot of overhead.

And there are questions about how much this system actually allows the money from those good, you know, well-meaning people - Well-intentioned folks.

- to trickle down to the local communities that are, say, preserving or restoring the forests in one example.

Or, who are, you know, actually using the cleaner cook stoves.

With so many middlemen, a lot of whom have incentives, they'll get paid more if they issue more credits - Sure.

[Kaya] or if they verify more credits.

- Yep.

- And that has led to some over-crediting in the markets that we get little worried about.

- I can't imagine.

[chuckling] - Yeah.

[Jamie] Yeah.

- Interesting.

So, we're still - Well, they're-- - working to evolve them and make them rigorous.

- These are the kind of self, as you said, self-chosen regulators.

And the governments haven't weighed in to the extent that I think they could from a consumer protection angle.

We also are in the midst of a big overhaul of several of these methodologies in response to a whole bunch of studies that showed that the market was over credited.

- Okay.

And how will we know?

- Keep testing, but that might take some time.

[Jamie] Yeah.

- Yeah.

Is the concern that the credits and offsets aren't actually doing what they are intended to be doing or claim to be doing?

Is that the challenge?

- Most of the credits on the market are based on assumed avoided emissions.

That forest was going to be cut down, but then it wasn't.

How do you prove that?

That's very difficult to prove or the renewable energy, oh, we weren't gonna build it until you gave us some money.

But with falling renewable energy costs, it's getting harder and harder to prove that actually your dollar in markets where renewable energy is mature is actually adding to - Sure.

- the building of renewable energy.

And so there are kind of fancy methodologies for how people prove that what the spend is from the consumer is additional, not-- - Because if it's not additive, you shouldn't get a credit.

- Yeah.

Yeah.

Exactly.

- Because it was gonna happen anyway.

- Exactly.

- Okay.

[Kaya] So, the ones that I just talked about are called avoidance credits.

[Scott] Right.

- And people have been kind of questioning, like tongue in cheek, are those avoidance credits because it's actually just helping the companies who buy those offsets avoid their responsibility for their own emissions.

- Right.

- Which is kind of a cynical way to put it.

But there's another type of credit in the market called a removal credit.

So, I flew over here and I know that that has a carbon cost.

And so I gave some money to a direct air capture facility to take a whole bunch of carbon straight down from the atmosphere.

That's the most expensive kind.

- Yeah.

[Kaya] If it's more expensive, it's sometimes higher quality.

- Yeah.

What are some other really measurable ones besides DAC?

- Really, really good ecosystem management.

[Scott] Okay.

- That actually restores ecosystems.

Doesn't just kind of leave them there.

Like, "Oh, good, we protected it."

Especially if you're gonna use them as an offset, you should probably be doing something additional, an enhanced restoration, which can both avoid the emissions of cutting down the forest and restore the forest.

And the more biodiversity, the better at storing carbon, the forests are.

[Scott] Okay.

- Which is cool co-benefit.

- Yeah.

Nice.

Other really measurable carbon removal or-- - Well, before we can really answer that, it's really worth looking at like defining what a high-quality carbon credit is, right?

So, it has certain attributes.

And Kaya has touched on a few of them.

So, the first is it has to be quantified properly, right?

So, to the best of our available knowledge, it has to represent one ton of CO2.

So, we have to get that part right.

But then it has to have a few other attributes.

So, Kaya touched on the idea of additionality.

So, additionality is kind of the linchpin of carbon credits, which basically means the creation and sale, and thus economic driver from carbon credits, it has to incentivize the action that created them.

So, to Kaya's point, you shouldn't be able to build, you know, solar panels or wind farms and get carbon credits from them if they were going to be able to be built anyways and be economically viable.

So, it needs to incentivize something that wouldn't have happened otherwise.

That's the concept of additionality.

Planting trees is often a very good example of that.

- Okay.

- The second part is the idea of permanence.

So, permanence is, are they going to last a long time, right?

You can't plant a tree, get a carbon credit, and then cut it down the next week.

That destroys the concept of permanence.

- You plant another one the next week and then you got a good deal going there.

- Yeah, that's why I'm fundamentally pretty uncomfortable with the concept of offsetting.

I'm more comfortable with the idea of using credits as contributions to a global net zero goal that we're all working towards.

- So, you're uncomfortable with the concept of offsetting, so of effectively corporations counting those credits against their emissions.

- Yeah.

- However, you are okay with the corporations purchasing the credits, not counting them against their emissions?

- Yeah, purchasing high-quality credits.

[Jamie] And then working to reduce their emissions.

- Yeah.

Alongside, yeah.

- Okay.

I, first of all, agree that removals make up a tiny percentage of the market.

I think it's something like four to five is what I read normally.

And that money should be allocated there and that should grow.

What I also agree that avoidance is extremely hard to quantify, to calculate, right?

So, because basically you're trying to calculate something that didn't happen, right?

And I often think about it, like, we like to celebrate the presidents that go and win a war, but how do you celebrate the president that avoided the war?

And so it's a really challenging, really, really, really challenging problem to quantify the counterfactual of avoidance.

You know, I would seed that there is a lot of improvement that needs to be made in almost every avoidance methodology that currently exists.

However, if you can get it right, it's really, really valuable.

It's also much cheaper and faster.

And so it's something that can be done today.

[Kaya] Yeah.

- Very well said.

- So, you just said these are cheaper.

Well, that creates a perverse incentive, right?

If I wanna replace my, you know, gas boiler in all my buildings, but I find out that's really expensive and I can just go buy a four dollar a ton credit.

What's stopping me from buying the four dollar a ton credit and saying I've met my targets?

You know, I think that actually, the fact that the removal credits are much more durable and therefore more expensive makes them a good carbon price for the company who has to make those good trade-offs.

- And your concern is the four dollar a ton may not be real.

You might be buying a credit for something that didn't actually reduce anything.

Is that the concern?

[Kaya] Well, as Jamie and I have both said it's really hard to prove.

Look, even if a credit is over- credited three or four times, as we've seen with most REDD+ credits, I would still spend some money on it as a contribution because there's still a good chance that I'm helping.

But I would not be comfortable saying that's an offset.

- I actually agree with everything you've just said, but I think like if we zoom out a little bit, you know, what is the average company doing?

The average company is doing nothing.

- Yeah.

- Zero.

They're not changing the way they run their business, they're not buying carbon credits, they're doing nothing.

So, I do think there's value to creating something that's accessible.

[Kaya] Yeah.

- And so we do wanna minimize barrier to entry when possible, but still keeping the quality high.

- I don't know what your percentages were, Jamie, but you said most companies are doing nothing.

Is it half or-- - I know most large, listed companies in the United States, so, think of the Forbes 2000.

[Scott] Sure.

- Over half of them have committed to decarbonization, but that doesn't mean they're doing it.

- Right.

- And if they are doing it, they're not doing it today.

[Kaya] Yeah.

- They're doing it by 2030 or 2040 or 2050.

- Right.

Is this why the big tech companies, who are the largest consumers of energy by far, are actually starting to talk about now building nuclear power plants right next to their... Is this why this is happening?

Because they realize if in order to have a chance to meet those promises, they actually have to do something real like that or-- [Kaya] Yeah.

- What thoughts on that?

- These are very profitable companies, right?

And it's important to, I think, do a differentiation, right?

Because there's high-profit, relatively low-emission companies, for like, like technically like Microsoft.

- Yep.

- And then there's high-emission, low-margin companies, which is basically every natural resource for manufacturing business in the world.

- Oil, gas, and coal.

- Right?

- Yeah.

- Cement manufacturing.

- Cement, yeah.

Steel.

[Jamie] Steel.

- Yeah.

- Oil and gas, mining.

Basically all these sort of foundational businesses.

And so Microsoft has no problem paying two, three, 500, $1,000 a credit, or maybe building a nuclear power plant.

They have the margins for that.

That would put every cement business in the world out of business.

- Right.

- So, there have to be different solutions for different types of companies.

And that complicates it further.

[Kaya] Yeah.

Yeah, arguably, cement and steel should be just paying for dealing with decarbonizing cement and steel, and maybe even we should be helping them pay for that rather than them pay for offsets.

- Well, we would be helping them pay for it, right?

At the end of the day, every single cost will trickle down to the consumer... - Yep.

- in any business.

And as a society, we need to decide what price we're willing to pay for decarbonization.

And that's part of the value of carbon markets is it's a pricing mechanism and it actually helps quantify the price of carbon.

- And every tax trickle down to the consumer too.

- Yeah.

I mean, we've seen what the price of food in North America go up by something like 30% in the last few years.

I mean, that's nothing compared to what we'll see if every ton of CO2 is built in to every tomato that's grown in Mexico and put on a truck and driven to Canada, so you can eat it in the winter.

[Scott] Yeah.

- There will be big impacts there.

- I'm kind of pulling us back in here a little bit.

This is a good discussion by the way.

So, which projects, if you will, are not doing much right now, you know?

Or, what percentage of the market, if you will, isn't doing much right now and why?

- Some studies seem to show that only 10%.

between like 10 and 12% of the voluntary carbon market credits avoid both double-counting or over-crediting and additionality issues.

That is not as much of a concern to me if you are claiming these as contributions, but it is a concern to me if you're claiming them as offsets.

- Okay.

Thoughts on that?

- So, I take a bit of a different tack on your question.

So, like, what percentage of the market doesn't work?

I don't think anyone can answer that accurately.

And, you know, to Kaya's point, there are a lot of studies that criticize different methodologies.

So, different project types.

- Yeah.

- There are studies that support some of those.

There are other studies that criticize the studies that criticize the methodologies.

So, it's very complicated and it's very confusing.

But I think there's an interesting internal design structure to the cover markets that needs to be appreciated, which is that they're designed to evolve over time.

So, methodologies are not static.

They're dynamic.

- Yeah.

- Which means they change.

And they're designed to improve and become more stringent as time goes on.

So, Kaya mentioned that almost every major methodology is going through some form of review right now or revision right now.

We have, it's about six projects in my business that we've invested in and are involved in managing.

Every single one of them has gone through a major review since I started this company three years ago.

What does that mean?

It means the actions we have to take on the ground are stricter.

It means we have to monitor it better.

It means we have to report it better.

It means most of those projects have taken a haircut on the volume of credits that they can generate.

So, the challenge is getting those volumes right.

And that happens pretty consistently and rigorously in the major registries, that they're designed to constantly be reevaluated.

That's from internal pressure of the scientists and professionals that work there, and external pressures from policy experts and scientists and critics.

So, that's part one.

[Scott] Okay.

- So, part two is these methodologies evolve, but they also get removed as well.

So, I think we talked about renewable energy.

You know, it's getting harder and harder and harder now to get any sort of renewable project-- - Solar, wind, hydro.

- Exactly.

Verified to issue credits because the major registry and the major buyers do not see them as credible in terms of meeting the additionality requirements.

- Interesting.

- So, that was the big major clearing out that's sort of happened over the last five to 10 years.

Now, that's happening in conservation as well.

I think conservation is a really, really important part of that.

I also think the standards should ratchet up.

So, it's about getting that right.

And also getting the number of credits right.

Because maybe credits shouldn't be four dollars a credit.

Maybe they should be $10, maybe they should be $20, maybe they should be $1,000.

We don't actually really know yet.

And we don't know until we get the volumes right.

So, having those standards increase to the point where we have an extreme amount of confidence in those projects is what we really wanna see.

But there is a lot of growing pains.

- Yeah, interesting.

- Yeah, I think building on that, one of the challenges we have is that the cheaper credits in the market are kind of undermining the really good projects out there.

One of the high quality definitions that is required for a good project would be are you consulting with local communities and have they helped to define the project.

And the projects that are really locally conscious, that have good adaptive governance, that work well with local communities, that avoid power asymmetries, those tend to be the one where the carbon sinks last the longest.

And that's another reason why I think we need to be factoring in permanence more into how we think about good-quality carbon credits.

A ton is not just a ton.

- Right.

- There are many different types of tons out there and are better than others.

- My view is this, okay?

We wanna maximize quality and minimize cost.

- Right.

- Because that makes it a very clean entry point for people.

- And it'll get your volumes up.

- And if we believe that this is actually doing what it's supposed to do, it's good that it's cheap because they're not meant to be a punitive mechanism for companies.

They're meant to solve a problem.

- Sure.

- But if you buy a cheap watch, it's likely to break.

And that's the same, that's true in many cases.

All the scandals we've seen, the voluntary carbon market, local communities not getting paid to do years and years of forest protection.

- So, I would say that's not a high-quality credit though.

That's the beautiful thing about the market.

No one's buying them anymore, right?

There are inventories of old credits [Kaya] Yeah.

- that are just sitting on registries because they're effectively worthless.

It's because of the work groups like yours have done to shine a light on quality and to criticize these things that the buyers are influenced and they don't want to buy things that are considered low quality.

- Okay.

Well, I think we're gonna take a break.

[gentle music] This discussion raised some important carbon credit issues.

First, their quality.

Do carbon credit projects actually avoid, sequester, reduce, or remove CO2 emissions?

Kaya said the vast majority of projects are overrated.

Jamie argued that as the market becomes more sophisticated, standards will increase.

Related to that, offsetting.

Companies may buy cheap and perhaps ineffective credits rather than do the expensive work to reduce their own emissions.

In which case, the company's costs rise, prices may rise in response, and no CO2 may actually be offset.

Projects that directly remove CO2 from the atmosphere would be the easiest to verify, but are also the most expensive, making their credits more expensive, less attractive in the market, and more likely to raise prices.

All complicated issues, and we'll talk more about the market participants trying to solve them in part two of carbon markets.

♪ ♪ ♪ ♪ ♪ ♪ [Narrator] Funding for "Energy Switch" was provided in part by The University of Texas at Austin, leading research in energy and the environment for a better tomorrow.

What starts here changes the world.