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Speaker 1: Today on Switched On, we're going to talk about carbon offsets.

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Speaker 1: About a year and a half ago, I took a

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Speaker 1: look at my household carbon footprint. Since then, I've gone

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Speaker 1: on a personal journey that has resulted in several changes

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Speaker 1: in my home. We installed double paned windows with solar

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Speaker 1: reflective film, switched to a renewable electricity, and swore off

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Speaker 1: paper towels. I researched things like living roofs, solar panels,

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Speaker 1: and heat pumps. Bit by bit, I drove down my

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Speaker 1: carbon footprint, but never quite made it to net zero.

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Speaker 1: So what's the girl to do to bridge the gap?

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Speaker 1: Until I can figure out how to reduce emissions from

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Speaker 1: the harder to abate parts of my life. I started

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Speaker 1: buying carbon offsets. Many of you may be familiar with

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Speaker 1: carbon offsets as the box that you can check on

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Speaker 1: the online booking form for flights one selecting offsets. I

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Speaker 1: wanted to make sure I was buying offsets that were

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Speaker 1: actually going to have a net positive benefit. I started

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Speaker 1: using gold Standard who certified projects. Taking a look at

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Speaker 1: their inventory just now, I spotted things like Ethiopian forest

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Speaker 1: regeneration and clean cook stoves in Rwanda. I also decided

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Speaker 1: to look at directly working with charities like Solar Aid,

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Speaker 1: which provides solar lamps as replacements for kerosene lamps, and

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Speaker 1: by donating with them. While it isn't strictly considered a

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Speaker 1: carbon offset, it's served the same purpose in my life

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Speaker 1: on a microscopic scale, my journey to drive down emissions,

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Speaker 1: only to find out just how hard it is to

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Speaker 1: reach net zero and ultimately using carbon offsets to get

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Speaker 1: me the rest of the way. There is what plenty

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Speaker 1: of companies are doing on a massive scale, especially if

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Speaker 1: they're in one of the hard to abate sectors where

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Speaker 1: the technological solutions are simply not there yet. With us

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Speaker 1: today is Kyle Harrison, who writes about corporate sustainability for

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Speaker 1: US at b NF, and he's going to speak with

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Speaker 1: us about a piece of research he wrote titled Voluntary

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Speaker 1: Carbon Offsets a Shortcut for heavy Emitters. This report has

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Speaker 1: a great deal of detail on the different ways of

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Speaker 1: offsetting and companies operating in this space, and if you're

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Speaker 1: a client, you can access it at BNF dot com

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Speaker 1: or b NF go on the Bloomberg terminal. Just a

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Speaker 1: quick reminder that B and F does not provide investment

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Speaker 1: or strategy advice. And we've got a more complete disclaimer

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Speaker 1: that you can listen to at the end of the show.

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Speaker 1: I am here today with Mark Taylor, joined by Kyle Harrison.

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Speaker 1: This is Dana Perkins. You're listening to Switched on the

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Speaker 1: bn F podcast. Kyle, thank you for joining us today.

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Speaker 1: Thanks for having me. So let's start quickly with a definition.

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Speaker 1: We're here to talk about the voluntary carbon offset market

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Speaker 1: for companies and what is a carbon offset Effectively, it's

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Speaker 1: a way that a company can invest in a project

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Speaker 1: that will indirectly go ahead and reduce emissions. So if

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Speaker 1: you think about a company that derives a lot of

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Speaker 1: emissions from air travel and that's a core part of

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Speaker 1: their business and they can't necessarily remove those emissions, they

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Speaker 1: can theoretically invest money in another project somewhere else in

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Speaker 1: the world that will go ahead and reduce emissions in

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Speaker 1: another way. But you actually, in the research note that

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Speaker 1: we're discussing today describe carbon offsets as the black sheep

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Speaker 1: of missions reduction strategies. So why do they have a

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Speaker 1: bad reputation because this seems pretty simple as a solution,

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Speaker 1: is it not? It is? I mean other there is

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Speaker 1: a sunk cost aspect to this. There's no opportunity for

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Speaker 1: savings when you invest in a voluntary carbon offset project.

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Speaker 1: But the reason it kind of has this reputation as

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Speaker 1: a fringe marketer, as you said, the black sheep of

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Speaker 1: emission production strategies is for a lot of companies, when

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Speaker 1: they go ahead and reduce their emissions, they'll actually go

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Speaker 1: ahead and invest in some form of decarbonization that directly

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Speaker 1: offsets what they're doing. So if you think of a

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Speaker 1: large technology company that derives a lot of electricity from

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Speaker 1: its data centers, they'll go ahead and purchase clean electricity

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Speaker 1: because that effectively reduces the emissions that they're getting from

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Speaker 1: the grid. But at the same time, with a carbon offset,

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Speaker 1: you can theoretically invest in any project anywhere in the

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Speaker 1: world and it doesn't necessarily have to correlate with your

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Speaker 1: business and where your emissions are coming from and your operations.

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Speaker 1: So as a results, you know, with our report, we

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Speaker 1: actually called it a shortcut for a lot of companies,

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Speaker 1: and as a result, some companies are a bit embarrassed

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Speaker 1: to admit that they're using a shortcut to achieve their

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Speaker 1: sustainability targets. Before we get into the companies that are

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Speaker 1: actually doing this. Can you describe a bit about what

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Speaker 1: kind of makes a good project versus a bad project? Yeah,

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Speaker 1: And this actually is another reason data that you and

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Speaker 1: I were talking about the fact that this is the

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Speaker 1: black sheep of emission reduction strategies. The pricing that goes

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Speaker 1: into a voluntary carbon offset is very opaque, and it's

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Speaker 1: really dictated by a bunch of arbitrary factors. And the

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Speaker 1: biggest driver of quality in the voluntary carbon offset market

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Speaker 1: is this phrase that we call additionality. And you've heard

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Speaker 1: me previously discussed this when it comes to clean energy buying.

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Speaker 1: But additionality and the voluntary carbon offset market means that

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Speaker 1: the money that you're giving to one of these projects,

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Speaker 1: or the revenue that that project is earning from you,

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Speaker 1: is driving brand new decarbonization that wouldn't have otherwise have

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Speaker 1: had been. When you think of certain sectors and the

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Speaker 1: carbon off set space, some of them can make that

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Speaker 1: additionality claim better than others. Something with low additionality would

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Speaker 1: be clean energy projects, which actually by sector or the

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Speaker 1: biggest sector, but they're the lowest quality because those clean

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Speaker 1: energy projects already have financial support, so if you think

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Speaker 1: of a solar wind project in the United States, they

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Speaker 1: already generate renewable energy certificates as an additional revenue stream,

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Speaker 1: and at the same time they already have subsidy support,

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Speaker 1: so they have the investment tax credit of the production

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Speaker 1: tax credit. So is my investment into that clean energy

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Speaker 1: project really going to drive additional decarbonization or would it

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Speaker 1: have already been built without that additional carbon off set

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Speaker 1: revenue either way, So it's hopping in on the cotails

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Speaker 1: of something that already would have happened, exactly for a

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Speaker 1: low quality project on the other end of the special project,

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Speaker 1: and we call those red plus and that actually stands

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Speaker 1: for reducing emissions from deforestation and forest degradation, but we'll

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Speaker 1: go ahead and use the the abbreviation moving forward. When

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Speaker 1: you think of a project like that, you're investing into

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Speaker 1: a company that's going to either a plant more trees

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Speaker 1: or invest more resources into the conservation of a forest.

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Speaker 1: So you can much more directly claim that additionality those

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Speaker 1: trees would not have been planted without that carbon off

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Speaker 1: set revenue. Are most of these organizations doing these reforestation

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Speaker 1: or forest project of the companies or the nonprofits typically

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Speaker 1: it's a good combination for red plus. You do have

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Speaker 1: a lot of NGOs that are functioning in this space,

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Speaker 1: but in some of the other sectors you actually have

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Speaker 1: private companies that specialize in carbon offset project development. Kind

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Speaker 1: of a whole spectrum of different types of companies, but yes,

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Speaker 1: very much so in these large red plus projects, you're

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Speaker 1: looking at NGOs mostly. So when we look at the

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Speaker 1: benefit of planting trees, let's say forty years, over the

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Speaker 1: course of a tree's life, they're able to absorb x

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Speaker 1: amount of c O two from the atmosphere. I would

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Speaker 1: imagine that actually guaranteeing that a project is going to

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Speaker 1: be there for forty year time horizon is reasonably difficult

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Speaker 1: to do. Given that these projects are taking place all

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Speaker 1: over the world and a variety of different political environments.

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Speaker 1: How do companies go about actually verifying that the project

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Speaker 1: that they want to have done as their offset will

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Speaker 1: actually continue to exist. Yeah, that's a great question. Data

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Speaker 1: and that actually that is a huge impact on pricing

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Speaker 1: as well. Mark and it's actually one of the less

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Speaker 1: arbitrary factors that goes into that pricing. So the actual

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Speaker 1: measurability of an offset, so over time, if you have,

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Speaker 1: say again a red plus project. I mean you plant

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Speaker 1: that tree, you need to go ahead each year and

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Speaker 1: verify the fact that not only is that tree still standing,

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Speaker 1: but it's going ahead and producing carbon offsets. Different projects

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Speaker 1: are a lot harder to actually go ahead and verify.

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Speaker 1: If you think of say a methane capture project, which

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Speaker 1: is a very common voluntary carbon offset project, it simply

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Speaker 1: involves installing a sensor at say a coal mining operation,

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Speaker 1: and then actually it's measuring the methane that's captured and destroyed.

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Speaker 1: But with something like a forestry project, you actually need

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Speaker 1: to use satellite imagery or physically fly over that site

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Speaker 1: to make sure that that tree that you're specifically referring

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Speaker 1: to is still standing every single year. And that's not

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Speaker 1: only difficult to verify, but it's expensive to do as well.

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Speaker 1: So that has a huge impact. I'm driving up that

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Speaker 1: price and it's a huge factor in the market as well.

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Speaker 1: So it seems to set up a whole value chain

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Speaker 1: for the offsets market. Right, you have the people that

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Speaker 1: do the forestry, the reforestation, I guess, and those who

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Speaker 1: will go out and verify the three still standing? Is

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Speaker 1: that right? Yep? And unfortunately some of these project developers

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Speaker 1: actually happened to double as verification agencies as well. So

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Speaker 1: there is a little bit of objectivity that's thrown out

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Speaker 1: the window when it comes to the market. And I

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Speaker 1: think that's another reason that this market's reputation has taken

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Speaker 1: a hit over the years, is you don't necessarily know

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Speaker 1: if you have a developer that's offering you a price.

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Speaker 1: It's very possible that you could find a similar project

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Speaker 1: in the same market and get an entirely different price.

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Speaker 1: UM So a lot of that is up to the

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Speaker 1: jurisdiction of the developer, right, So can you lay this

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Speaker 1: to rest I in my notes when I was reading

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Speaker 1: your note, I just said, is it a racket? Is

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Speaker 1: this a racket? There's even brokers here too, right, they'll

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Speaker 1: help you find a project. You know, they might be

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Speaker 1: selling this project to multiple buyers. I don't know. I

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Speaker 1: don't know. Maybe it's fully legitimate, maybe it's not. Can

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Speaker 1: you comment on that. I'm not going to go as

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Speaker 1: far as saying that it's a racket, but I think

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Speaker 1: that the market needs to see serious improvement for it

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Speaker 1: to be a viable strategy for companies to achieve their sustainability. Goals.

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Speaker 1: So you're right, there is this angle of measurability, but

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Speaker 1: all the factors that go into this, the opaqueness of

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Speaker 1: pricing in the voluntary carbon officet market, all really mean

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Speaker 1: that the reputation takes a hit. And moving forward, I

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Speaker 1: think as you have more demand from harder to abate

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Speaker 1: companies that are going to start looking at the voluntary

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Speaker 1: carbon offset market as a lifeline for them, I think

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Speaker 1: you're gonna need to start to see a little bit

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Speaker 1: more legitimacy when it comes to a delineation of companies. So,

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Speaker 1: as we said before, specific companies serving as developers, nonpartisan,

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Speaker 1: impartial companies serving as verification agencies, and everything in between.

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Speaker 1: So you need that clear delineation, but then you also

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Speaker 1: need a much more clear methodology into what goes into

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Speaker 1: pricing and how you measure those offsets. How would I

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Speaker 1: start doing my research to find a project that's worthwhile.

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Speaker 1: There's four major volunteer a carbon offset registries that verify

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Speaker 1: the legitimacy of a project, and when a project goes

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Speaker 1: up on that registry, they list in annual capacity, so

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Speaker 1: how much they actually can reduce emissions by on an

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Speaker 1: annual basis. And one of the key things that I

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Speaker 1: would do is a buyer is first go ahead and

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Speaker 1: look at what projects are issuing the most offsets relative

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Speaker 1: to their capacity, because if you actually, you know, kind

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Speaker 1: of peel back the skin a little bit, you'll see

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Speaker 1: that maybe three quarters of the projects that are verified

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Speaker 1: and registered in this market are not actually issuing any

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Speaker 1: carbon offsets. They're they're lower quality projects, so they don't

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Speaker 1: have a buyer. So you want to find those projects

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Speaker 1: that are issuing a lot of offsets relative to their capacity.

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Speaker 1: The second thing I would do again is kind of

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Speaker 1: key in on the sector. So we talked about certain

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Speaker 1: sectors of higher additionality and are considered higher quality offsets,

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Speaker 1: So you want to go ahead and look at those

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Speaker 1: sectors like forestry or red plus, but then also something

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Speaker 1: like energy demand projects, So what I mean by that

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Speaker 1: is either energy efficiency or something like clean cookstone distribution.

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Speaker 1: So the sector is also key, but then the developer

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Speaker 1: as well. So you're gonna have a lot to developers

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Speaker 1: that are fairly prominent in this space, but it becomes

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Speaker 1: quite evident very quickly that they're using voluntary carbon offics

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Speaker 1: as an additional revenue stream to what they're already doing

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Speaker 1: with that project. What you want to do is go

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Speaker 1: ahead and find those developers that specialize in voluntary carbon

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Speaker 1: offset projects because they are building those projects and they're

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Speaker 1: focusing on that additionality factor. So those are kind of

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Speaker 1: the main things. So there clearly is a lot that

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Speaker 1: goes into ensuring the additionality. But then once you as

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Speaker 1: a business have found the offset that you're going to use,

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Speaker 1: and let's say you've gone through all the checks that

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Speaker 1: you're happy with, then the question is are those that

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Speaker 1: are purchased by companies is that looked upon favorably or

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Speaker 1: negatively by the finance communities? For example, I'm thinking of

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Speaker 1: E s G focused asset managers who might be invested

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Speaker 1: in these businesses. So I think the way a lot

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Speaker 1: of companies would look at this is after they've tried

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Speaker 1: to decarbonize in every other possible way that doesn't involve

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Speaker 1: a holistic shift in their business model, then you kind

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Speaker 1: of have this final lifeline of a voluntary carbon off set.

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Speaker 1: So I think if empties are going to use it,

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Speaker 1: they're not the ones holding their hands up the highest

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Speaker 1: in the audience, right, and they might keep it a

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Speaker 1: little bit closer to their chest, and actually, you know,

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Speaker 1: you can look at some of these registries and actually

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Speaker 1: see what companies are purchasing and retiring offsets, and I

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Speaker 1: think some of those companies are pretty tight lipped about it.

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Speaker 1: So in a lot of ways, it's kind of viewed

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Speaker 1: as an end of the line strategy. But I think

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Speaker 1: as you see more of these harder to abate sectors,

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Speaker 1: so I'm thinking of aviation, thinking of oil and gas

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Speaker 1: chemical companies, it's really challenging for those companies to decarbonize

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Speaker 1: any other way. And as they're getting pressure from investors,

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Speaker 1: I think the investment community will become a little bit

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Speaker 1: more accepting of this market. And the last thing I

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Speaker 1: would add is, you know, you have this whole world

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Speaker 1: of what we call science based targets. So these are

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Speaker 1: emission reductions goals that are effectively in line with the

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Speaker 1: well below two degree scenario and the Parish agreement. And

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Speaker 1: for companies that have set a science based target, they're

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Speaker 1: not legally allowed to use carbon offsets to meet those goals.

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Speaker 1: And one of the things that we highlight in the

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Speaker 1: report is for this market to really gain more legitimacy

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Speaker 1: and truly thrive, it needs to get acceptance from those

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Speaker 1: third party sustainability commitments, otherwise it's going to continue to

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Speaker 1: have that reputation as the black sheep. Let's talk a

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Speaker 1: little bit more about the companies that actually do use

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Speaker 1: these offsets and the hard to abate sectors. So one

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Speaker 1: thing I'm wondering is what percentage of total greenhouse gases

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Speaker 1: do these hard to abate sectors really represent. If you

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Speaker 1: look at data from the i p c C, some

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Speaker 1: of the most heavy emitting sectors are ones like industrials

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Speaker 1: and agriculture. You have oil and gas, but then you

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Speaker 1: also have transport as well, and if you actually if

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Speaker 1: you add all those sectors up, you're looking at probably

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Speaker 1: four fifths of the emissions pie is coming from those

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Speaker 1: harder to abate sectors and companies and all those sectors

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Speaker 1: are leaning on this voluntary carbon offsets market as a

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Speaker 1: way to decarbonize. What countries is this popular in? Because

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Speaker 1: it is more popular in certain locations and others if

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Speaker 1: you look at the markets with the most projects, and

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Speaker 1: I should clarify that doesn't necessarily mean it's the most

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Speaker 1: popular from a demand standpoint, But on the supply side,

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Speaker 1: the three biggest markets by quite a large margin are China, India,

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Speaker 1: and the United States. So in China, you have a

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Speaker 1: lot of projects that were actually built potentially over a

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Speaker 1: decade ago, and they are actually built for compliance markets.

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Speaker 1: So China in the past years had initiated a cap

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Speaker 1: and trade program, so a lot of these projects were

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Speaker 1: basically built for the compliance markets, and they've earmarked a

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Speaker 1: certain segment of those carbon offsets for the voluntary markets,

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Speaker 1: and generally those are considered much lower quality. So you

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Speaker 1: have those projects that were built ten years ago and

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Speaker 1: they don't necessarily need that additional revenue. It's not going

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Speaker 1: to drive additional decarbonization. If you look at a market

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Speaker 1: like India or the United States, you see a much

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Speaker 1: heavier focus again on those red plus projects, but also

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Speaker 1: a mission abatement projects as well, so thinking of things

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Speaker 1: that capture landfill gas and destroy it, but also projects

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Speaker 1: that are related to potentially like capturing livestock and mission

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Speaker 1: and destroying those. So those are kind of the three

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Speaker 1: biggest markets, and I would say from the demand side,

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Speaker 1: it's very heavily focused on those European and US companies

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Speaker 1: that are more forward thinking it comes to sustainability. So

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Speaker 1: if you went ahead and pull data on pretty much

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Speaker 1: any major sustainability commitment, and you looked at the geographic breakdown,

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Speaker 1: it's going to be heavily focused on uk, US and

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Speaker 1: some other European countries. Those are the companies that are

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Speaker 1: domiciled in those markets. Those are the ones who are

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Speaker 1: leading on buying these offsets around the world. Are there

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Speaker 1: any glaring omissions in project locations? I mean, as a

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Speaker 1: concerned citizen, I would think I would want to see

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Speaker 1: red bus projects in Brazil. Mark. I'll throw a question

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Speaker 1: back at you, if you were a corporation and all

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Speaker 1: of your emissions were coming from the United States, would

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Speaker 1: you feel a little bit weird about purchasing offsets from Brazil?

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Speaker 1: And I'm not saying your question was wrong. There actually

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Speaker 1: is quite a big portfolio of projects in Brazil, so

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Speaker 1: it was a good question. But I think that is

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Speaker 1: one of the reasons why some of these markets that

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Speaker 1: make logical sense from a oh you could use the

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Speaker 1: conservation there, we could use the emission reductions don't necessarily

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Speaker 1: add up as the best voluntary markets because maybe the

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Speaker 1: demand isn't there, maybe the policy isn't in place, but

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Speaker 1: you do have a heavy reliance on I would say

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Speaker 1: emerging markets. Those energy demand projects I mentioned earlier, so

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Speaker 1: clean cook stove distribution that's heavily focused on Latin America,

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Speaker 1: Southeast Asia, and Africa. Same for these forestry projects. You

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Speaker 1: do actually have some big forestry projects in California. I'm

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Speaker 1: sure that excites you, Dana, being a California native. But

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Speaker 1: the spread overall back to your original question is I

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Speaker 1: mean there's over a hundred markets that these projects exist

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Speaker 1: in that have been implemented already, and at a certain point, again,

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Speaker 1: as demand goes up, I would suspect that portfolio of

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Speaker 1: markets and countries that you can buy these from is

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Speaker 1: going to continue to grow. So as an individual, I've

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Speaker 1: looked for carbon offsets in the past, and what immediately

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Speaker 1: comes to mind is your online You're buying a flight

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Speaker 1: and it asked you whether or not you want to

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Speaker 1: participate in the scheme that the airline is presented to you.

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Speaker 1: So my question is in this voluntary offset space, is

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Speaker 1: this largely a game for large corporations or is there

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Speaker 1: a critical massive individuals that are out there offsetting their emissions.

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Speaker 1: I would say it's for both. So I think from

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Speaker 1: the airline standpoint, airlines are among the most vocal sectors

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Speaker 1: about purchasing carbon offsets, and again, they fit squarely into

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Speaker 1: that harder to abate sector, right because all their emissions

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Speaker 1: come from flight, and how do you go ahead and

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Speaker 1: reduce those emissions if your core business is flying. It's

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Speaker 1: nearly impossible, right. There's a few ways that you can

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Speaker 1: reduce it, but overall, offsets are huge for the airline industry,

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Speaker 1: and it's actually a great way for airline companies to

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Speaker 1: go ahead and pass on those costs to customers and

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Speaker 1: make it. Obviously we're talking about a voluntary market as

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Speaker 1: it is, but actually add another level of voluntary into that, right,

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Speaker 1: because customers can actually go ahead and pay that additional

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Speaker 1: premium for those offsets. I mean, airlines are a particularly

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Speaker 1: interesting one right now because we're talking about this, but

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Speaker 1: social distancing has caused their industry to change massively overnight.

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Speaker 1: Extrapolating out from that, what do you think the COVID

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Speaker 1: nightteen social distancing is going to do to the voluntary

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Speaker 1: carbon offset market. It's a great question. One of the

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Speaker 1: long term impacts of the pandemic potentially is that you

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Speaker 1: have shifting consumer behaviors, so you might have customers that

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Speaker 1: are less keen on flying moving forward or less keen

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Speaker 1: on using transport moving forward, and both of those factors

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Speaker 1: are going to have an impact on aviation demand and

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Speaker 1: transport demand. So those companies, longer term, their emissions profiles

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Speaker 1: could look very different. So I think the one thing

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Speaker 1: we can guarantee is in the immediate term that COVID

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Speaker 1: will have an impact on demand for voluntary carbon offsets.

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Speaker 1: In the long term, we still think that it's going

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Speaker 1: to be a prominent way for companies to de carbonize,

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Speaker 1: but you could see that shift in some way, shape

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Speaker 1: or form as we're in a recovery period. So our

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Speaker 1: last question for today, what is the most interesting project

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Speaker 1: that you've heard of? That's a tough one. I would

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Speaker 1: say that there's some really cool redwood conservation projects in

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Speaker 1: northern California. But one of the big things that I

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Speaker 1: think is interesting about those projects is that they tout

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Speaker 1: the secondary environmental benefits. So if you keep those trees

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Speaker 1: in the ground, you're also looking at healthier ecosystems for wildlife,

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Speaker 1: but also things like improved water filtration. So I think

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Speaker 1: the ability for a project to really tell that full

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Speaker 1: environmental story. I would say that impacts my perception of

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Speaker 1: the project, and I would say it also impacts the

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Speaker 1: way corporate buyer would as well. When those redwood forests,

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Speaker 1: beyond being super cool and really grand and having the

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Speaker 1: ability to reduce emissions a lot, they tell that story

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Speaker 1: really well, so I would say I'm a fan of those. Well, Kyle,

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Speaker 1: thank you very much for joining us today to talk

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Speaker 1: to us about the voluntary carbon offset market. Yeah, thanks

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Speaker 1: for having me. And I'll just one final plug. Take

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Speaker 1: a look at the Voluntary Carbon Offsets Data Viewer when

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Speaker 1: you get a chance. That's a great way to identify

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Speaker 1: keep projects for buyers to look at. Thanks Kyle. Bloombergin

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