[Scott] On this "Energy Switch," we'll continue our conversation on carbon credits.

- I think we'll be generating a lot more emissions by 2050.

I think as the developing world continues to urbanize and to bring up quality of life, there's gonna be a lot of coal and a lot of gas and a lot of oil burn.

And I think carbon markets are an excellent way to address that.

- I agree that carbon markets have an important role to play in addressing that if we shift them towards high-quality, durable removals that we know we are going to need in order to meet net zero.

And I think we have to be responsible when we're selling, that we're not selling something cheap at the expense of scaling up what we really need long term, which we don't have.

[Scott] Coming up on "Energy Switch," 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.

[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."

In part one, we define compliance markets managed by governments, and voluntary markets, a growing free market in credits purchased by companies and individuals at will.

In this episode, we'll look at the traders who make the market work, market forces that help set prices, the emission reduction potential of low versus high price credits, and the importance of better regulation and verification to the market success.

My guests, again, are Kaya Axelsson.

She's the head of Policy and Partnerships at University of Oxford Net Zero, a climate mitigation research program with a background in political science.

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

Next on "Energy Switch," we wrap up our discussion of Carbon Markets part two.

So, let's talk about the traders in these credit and offset markets.

What do the traders do?

- So, there's a difference between a trader and a broker, right?

Most people are familiar with a broker, like a real estate broker.

Someone that facilitates a transaction, puts buyers and sellers together.

Traders do that, but they do it in a different way.

They take ownership of a product.

And so they're very important because they drive liquidity into the market.

So, they put money to work and they find inefficiencies.

So, a trader's job is to buy something cheap and sell it for a higher price.

So, they drive capital into cheap things until they're no longer cheap, and then they go and find another opportunity.

[Scott] Okay.

- So, traders are essential to carbon markets, but they're also essential to any well-functioning market.

- Interesting.

So, a trader could actually get stuck with it if somebody doesn't wanna buy it or they'd have to sell a discount or take a little bit of a loss or- - Yes.

Yeah.

And that happens to traders all the time.

- All the time.

Any further thoughts on trading?

- I would just add that a carbon market doesn't just have the economic value considerations we place on a commodity.

It also has the perspective of the planet that we have to consider.

And I think that one thing we might benefit from is educating traders on climate science because they have no idea what different types of projects are from a quality perspective a lot of the time.

Is this one more permanent than another?

Is this one more additional than another?

- I don't think that matters.

[Scott] Yeah.

- And I don't think it matters because the end price is driven by the end user.

And so the trader is just an intermediary.

So, as long as the end user is buying the high-quality credits, eventually, an efficient market will drive the traders to those high-quality credits as well.

- So, the education would need to be more on the end user?

- Yeah.

- Yeah.

- That's where, and we think that's important.

- We largely do education of the end user, but I think that there is maybe a way in which the trading system could acknowledge some of the differences between types of credits.

You know, for example, a removals-based credit, which is so fundamentally different from an avoidance- or reduction-based credit, they should be treated differently in the market, including by the traders as well as the end user.

And that's where a little bit of education would be required of the traders.

Not a huge amount.

- And that's gonna happen organically because what we saw is the bottom fell out of the pricing of a lot of credit types that were deemed low value.

And a lot of traders lost a lot of money and got stuck with baskets of credits that they couldn't sell profitably.

So, they're gonna go back to their notes and say, "We can't buy credit X and make money anymore.

Maybe we should be buying credit Y."

Maybe that's removals or something else.

[Kaya] Yeah.

- But whatever it is.

So it's-- in a well-functioning market, that happens organically.

- I would argue that we don't have a free market in the voluntary carbon market.

I would say we have a free-for-all market.

And these, the recent trend towards higher demand for higher quality is so new.

Historically, we have been all over the map, and people have traditionally said, "A ton is just a ton."

And now that consciousness - Interesting.

- among the demand is starting to change, but I don't think it's changing fast enough.

We have a huge removals gap that we need to close.

- Has the trading influenced supply and demand?

- Not at all over a long enough time horizon.

Carbon's not like buying a house or buying a stock or buying a bar of gold, where you can basically hold it forever.

Carbon credits are a depreciating asset, and we see that in the pricing.

So, the more recent a credit was issued, typically the higher value, the higher price it will command in the market.

- Interesting.

- And that's because a removal or an avoidance that happened recently is considered to be more impactful than one that happened a year ago, or five years ago, or 10 years ago.

- And that's because... [Jamie] There's the perception that those older credits are of lower quality.

[Scott] Yeah.

- And at the end of the day, whether that's right or wrong, it doesn't matter.

That is the perception of the buyers.

- Yeah.

Yeah.

Who are the main industries that are buying credits today and offsets?

- So, the main industries or the trends we see in the data is that industries that are really consumer-facing that are worried about their reputation, and that wanna say they're doing something about the climate, consumer goods, big tech, and especially high-margin industries.

- Yeah.

Thoughts on that?

- Tech, energy, airlines, that's who buys the majority of the credits.

[Scott] Tech, energy.

- Tech is consumer-facing.

- So, the consumers, the producers.

- But airlines are driven by governing bodies of airlines setting targets.

And I would say that energy is driven by government criticism and activist shareholders.

- And energy being broad energy or just the- - Yeah, sorry.

Fossil fuel energy.

Of course, yeah.

- Okay.

How about some of these industries that make things that society depends on?

Cement, steel, fertilizer, plastics.

Is it worth it?

Is it too expensive?

How do we go after some of those?

- Yeah, I mean, given how important decarbonizing cement and steel, those kind of hard to abate sectors is, my preference would be that those industries just really focus on cracking how to use less fossil emissions as part of their production.

And I think it would be really valuable if we supported them in that by not requiring them to offset or not asking them to meet their targets through offsets in the voluntary carbon market.

- So, estimates vary, but there's something like 50% of all emissions are considered unabated today, either technologically or economically.

So, technologically means we really don't have the technology, or we don't have the technology at scale to do this.

I would say cement production, potentially steel production would be very, very hard to have the technology at scale to do.

The second part of this is economically.

I think it's something like 40% of the world is fed based on synthetic fertilizers, which, of course, come primarily from natural gas.

- Ammonia.

- So, what happens if we massively or dramatically increase the price of natural gas and the products created, the food products created for that?

How does that impact people, the ability to feed themselves, right?

So, that's an example, I think, of economic constraints there.

So, I don't think a lot of industries can decarbonize.

I think we're lying to ourselves if we think that they can.

And I think what we want to do is provide them the best mitigation they can.

And I think low-priced carbon credits are the way to do that.

- Yeah.

I disagree.

If you're talking about 2030, yes, we have some obstacles in-- we're talking about that pace of decarbonization.

But in 2050, there could be a lot of changes in technological advancement.

And IEA Pathways show, you know, for most sectors, we might be able to decarbonize something like 80 to 95%.

It really depends on the sector and depends on where you are and what's available to you.

Pretty much all of these models are suggesting that there's gonna be a final 10, 15%, depends on the sector, right?

And so what I think we should do is start planning and start today by pricing in the cost of those anticipated residual emissions, which we'll either have to deal with through removal technology or through really expensive R&D to kind of close that final gap.

And that's why I think it would be helpful for us to be pricing in that carbon cost today so it's not a shock to the economy tomorrow.

[Jamie exhales heavily] - So, I think this would be our one major disagreement here, which is I don't think we will not be generating emissions by 2050.

I think we'll be generating a lot more emissions by 2050.

I think as the developing world continues to urbanize and to bring up quality of life, there's gonna be a lot of coal and a lot of gas and a lot of oil burn.

But I don't really want to debate you on what the outcome will be if carbon emissions continue to go up.

I think they will continue to go up, whether I want them to or not, or whether you want them to or not.

And I think carbon markets are an excellent way to address that.

- I agree that carbon markets have an important role to play in addressing that if we shift them towards high-quality, durable removals that we know we are going to need in order to meet net zero.

- The problem with something like direct air capture is it's so expensive, it has to be impractical for these heavy emitters as well too, right?

What does it cost to remove a ton of carbon from the atmosphere by direct air capture, right?

I've heard anywhere from $250 to $1,000 dollars or more, depending.

[Kaya] Today, yeah.

Direct air capture is one important technology, but carbon removal technologies, there's many, many options of that.

'Cause it's not just direct air capture.

- And we should invest in them and we should improve them, and we should make them better and cheaper and more efficient.

I just think it's gonna be challenging, that's all.

- But if you are selling cheap offsets that undermine the development of those technologies, then I think you are creating a moral hazard.

- Well, I believe my offsets are inexpensive and effective and doing the job they're supposed to be doing.

- You sell REDD+ credits, a huge number, even the majority of REDD+ credits have been found to be ineffective or over-credited.

- What's REDD+?

- REDD+ is an accreditation system for a lot of force credits around the world.

- So, we sell REDD+ credits in a portion of REDD+ called Improved Forest Management, which is much higher quality.

And so we're doing that on a project that was permitted and licensed to be deforested, and it was purchased privately and it was protected, and 30% of that had been deforested and is now regenerating naturally.

So, that is the REDD+ project that we have in our portfolio.

And we selected that specifically for some of these criteria that I believe, and I think a lot of our buyers believe enhances this quality.

- Yeah, I think the methodology improvement on that is really awesome.

But I would still say that protecting an existing forest that are already factored into the climate models as to how we meet net zero instead of building new removals by reforesting, creating new kind of ecosystems that can better capture sinks and using a whole other suite of removal methods that might be more expensive.

There's still a trade off there.

And I think we have to be responsible when we're selling, that we're not selling something cheap at the expense of scaling up what we really need long term, which we don't have.

- You mentioned something that I think is worth addressing, which is they're factored into climate models.

That means it's assume that they will be protected, right?

[Kaya] Yeah.

Yeah.

- So, I would say to that, why are we assuming they will be protected?

Governments have not been able to, in my opinion, effectively protect against deforestation in a lot of the poorest countries in the world.

So, money has to go into that for that to happen.

I think we should not rely on charity for that.

I think we should rely on markets, and I think carbon credits are an excellent pathway for that.

- Yeah, but not at the expense of ongoing emissions [Jamie] I... - that we're letting off the hook.

That's just my view.

That's a double loss in my view.

- Okay.

- That's a great dialogue.

I think this speaks to the difficulty and challenges of addressing some of these things.

- Well, we're actually on the same side for most of things.

[Scott] You are.

[Kaya] Yeah.

Yeah.

that's to say actually, right?

- I agree.

You are.

And you're both [Jamie] We probably agree - Trying to find ways to reduce emissions - on like 90%.

[Scott] at scale.

- So, let me kind of come in here to the challenges we've discussed and some of the neat possibilities and opportunities.

So, what's happening to the market?

Is it static?

Is it decreasing?

Is it growing?

Let's just pick a timeframe, in the next decade.

What do you see happening there?

- I think I'm excited by some of the trends that we've all discussed here about users demanding higher-quality credits and users demanding a lot more removal credits from the market.

We need to close a removals gap in order to meet our climate goals globally.

And so the market is starting to respond to that understanding of science.

That's a beautiful outcome, but it's not happening nearly fast enough.

And so I'm interested in ways that we can reform the market to distinguish between the types of credits to help really stimulate more demand and supply of that removal and storage technology that is really high-quality and additional and permanent.

I'm also really excited about the ways that we can innovate on how we are making claims based off of investments in the voluntary carbon market, saying these are contributions, they're not compensating, I'm still trying to reduce emissions.

Then I think that we create an honest narrative and continue funding those important projects.

- Right.

If I heard you right, focused highly on differentiating the quality.

- Yeah.

- So, how do you see that, Jamie?

- So, as you can probably tell from this conversation, there's a lot of debate within the carbon market about how the market should look, [Scott] Right.

- Where the focus should be, and what makes a good quality carbon credit, a high-quality carbon credit.

That is good, in a way, for the evolution of the market.

The problem with that is there's a lack of clarity for buyers.

And we've seen some of the biggest carbon credit buyers on the planet get routinely and aggressively criticized by a variety of publications for buying the wrong credits, the wrong credits.

And it's important to note, these are the companies that are trying to do something.

They receive often more criticism than the companies that do nothing.

- Yeah.

- So, if I were running a decabillion-dollar energy company, there would be a lot of temptation to do nothing until there is clarity around what is a good credit.

So, that has to happen.

The faster that can happen, the better.

And I know my business, which is a business that exists to create credits, but to create credits at a profit, I will create the highest quality credits I can and I will sell them for the highest price I can- if I know what they are.

And people will buy them once they know what they are.

[Scott] Right.

- So, the faster that can be settled, the better and the more money we're gonna see pour into this sector if and when that occurs.

- So, how do you begin to improve and infuse that clarity?

- You distinguish between removals and reductions.

I think that's a really big first step, and it's a simple first step.

- Okay.

- There are a variety of governing bodies that are trying to tighten up the rules.

Probably the best known one is Integrity Council and Voluntary Carbon Markets.

- Carbon markets.

- So, they're trying to rewrite the rule book that will advise or dictate on what a high-quality credit is.

That's being largely taken on board by the major registries to flow down through their system.

- So, there's action happening here.

- There's a lot of action happening.

I mean, at the end of the day, it's important to note, for the time being, at least, this is a voluntary market.

So, if corporations are not getting the rewards they're after, which at this point is effectively, they want to demonstrate to their shareholders and to regulators and customers that they're doing the right thing and they're taking steps to reduce their emissions impact.

If they don't get that, they're not going to buy carbon credits.

And unfortunately, the most likely thing they do is nothing.

- So, I would argue that if there is some uncertainty in the carbon market right now, as methodology is getting updated, it's not like I would completely disregard that tool.

But I think we've forgotten that there's other tools at our disposable for financing climate projects.

I would invest in a lot more offtake agreements.

I would use the power of demand pull financing to scale removals if I expect to have residual emissions.

I would take more direct action to create the kinds of products I wanna see in the world later.

That's how I would be spending my money.

- Okay.

Final thoughts.

Let's frame this in a kind of a timeframe of sorts.

Five to 10 years, if we could see some success in the next five or 10 years, Kaya, what would that look like?

- I'm thinking about the viewer who, like me, took a flight over for a business trip.

I'm thinking about their decision based on this conversation, whether or not to tick the little box that says, "I want to pay for a carbon credit."

And what I would say to them is, "Tick the box," but don't tick the box because you think that credit is perfect.

Tick the box because you're sending a signal to the airline that more and more consumers care about green, right?

Tick the box because there's a chance, even if that credit is really over-credited, that a little bit of money will flow into conservation.

And tick the box because we believe in creating and growing a market that has, you know, high-quality in it over time.

But do not, for one moment, think that your flight is covered by that, or that those emissions have truly been offset.

They have not in today's market.

So, don't be fooled, but still take the action would be my advice to consumers on that choice.

- Gets us started.

[Kay] Yeah.

- And gets it started.

- Why not just try things.

[Scott] Signal.

- Say, yes.

[Scott] Interesting.

- So, here's how I like to think about carbon markets.

I have a 2-year-old son, and every night, I give him a bath.

And what I do is I turn on the water and I play with him and he runs around and I get him ready.

And anyone's had a kid knows that that's basically havoc.

And more often than not, the bath water almost overflows, but it doesn't overflow because my bathtub, like most bathtubs, has an overflow drain.

I think of that overflow drain is very analogous to carbon markets.

They are not going to solve the problem in of themselves.

There are so many emissions filling that bathtub, but they might, they might be able to slow it down.

They might be able to take a little bit off the top so that we don't risk overflow.

And that's what I think the role of carbon markets is in decarbonization.

I think where I differ most, it's not that I don't think this problem should be addressed or can be addressed, I think our timeframes are very different.

I don't think that this decarbonization is a five-year problem or a 10-year problem, or probably even a 50-year problem.

I think, realistically, it's gonna take a generation or more to get off CO2 emissions.

And I think anything we can do to slow that down practically is a very good thing to do.

- So, something is better than nothing.

Let's do some percentage of that.

And you said, let's get started, check the box.

So, in some ways this comes together.

- Yeah.

- Let me ask you just a quick final, and we'll wrap it up here, but what gives you hope?

What makes you hopeful?

Kaya?

- I feel really hopeful that people, users, are starting to look twice.

That they're not seeing, you know, investment in carbon markets as the only solution, but one of a menu of solutions.

That they're rejecting the outcome that we just let climate change happen to us and let people suffer.

And I'm just hopeful because I think we're gonna see one of the greatest economic transitions in modern history, and I get to watch that in my lifetime.

- Yeah, you will.

I'll miss it.

- No.

- I'm an old guy.

- No, not on my timeline.

Maybe on Jamie's.

[laughing] - I kind of echo what Kaya says.

You know, when I was in grad school, a big part of my thesis was on decarbonization of mining projects, and carbon credits played a role in that.

And at that time, no one knew what a carbon credit was.

It wasn't in the popular vernacular.

And very even, you know, very few people were very concerned about decarbonization and it wasn't on the radar.

So, I am hopeful that there are, you know, literally tens of billions of dollars lined up, waiting on the sideline to address these problems.

And I'm excited about helping to craft those solutions.

So, I'd say that what gives me the most.

- Hopeful.

Yeah.

Excellent.

Well, look, I appreciate your knowledge and your experience and your candor.

It was really a fun conversation.

- Pleasure.

- Kaya.

- Thank you.

- Yeah, appreciate you joining us.

- Thanks, Scott.

- Yeah, thank you, Jamie.

Scott Tinker, "Energy Switch."

In carbon markets, like other markets, brokers make sales between parties, while traders are temporary owners.

Jamie contends that by striving to buy low and sell at a profit, they drive capital into the market, increase efficiencies, and keep prices affordable.

Kaya argued again that low price credits may give companies the appearance of but may not actually reduce emissions, and may draw funding away from more expensive projects, which are more likely to actually remove CO2 emissions.

Jamie countered, they're an affordable way for companies to try to do something, though many are then criticized for buying the wrong credits.

He argued that all buyers want high-quality credits that deliver on their promises.

A more mature market will reveal them.

My guests agreed that to get there will require better regulations and verifications to establish the effectiveness of credits.

Once buyers have faith in the system, they'll invest more fully in 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.