Speaker 1: This is Dana Perkins and you're listening to Switched on
Speaker 1: the BNAF podcast. Twenty twenty three was a tumultuous year
Speaker 1: for the voluntary carbon market, with highs and lows. There
Speaker 1: was constant public scrutiny and high profile scandals that undermined
Speaker 1: investor confidence. Meanwhile, despite the turmoil, the carbon offset market
Speaker 1: actually grew to a record size, surpassing the previous high
Speaker 1: set in twenty twenty one. This same year, companies retired
Speaker 1: a wopping one hundred and sixty three million carbon credits. However,
Speaker 1: global agreement on carbon credits failed to get traction yet
Speaker 1: again at COP twenty eight in Dubai, and fears over
Speaker 1: greenwashing continue, making twenty twenty four a potentially make or
Speaker 1: break gear for the sector. So what is it going
Speaker 1: to take to see stability and growth for carbon offsets?
Speaker 1: Today we're going to talk about bnif's a recent twenty
Speaker 1: twenty four edition of the Long Term Carbon Offsets Market Outlook,
Speaker 1: where we put to the test several scenarios on how
Speaker 1: this market could play out in the longer term. On
Speaker 1: today's show, I'm joined by the head of sustainability research
Speaker 1: for the America's and Emia Kyle Harrison and bnaf's Carbon
Speaker 1: Offsets analyst Leila Kanfar. We review three of the nine
Speaker 1: scenarios that they looked at in this report and discuss
Speaker 1: whether they spell success, steady growth, or a disaster for
Speaker 1: the offsets market. To access our long term Carbon offsets
Speaker 1: outlook for twenty twenty four, BNIF subscribers are going to
Speaker 1: be able to find this at BNAF dot com or
Speaker 1: BNF go on the Bloomberg terminal. Subscribe to this show
Speaker 1: for updates when we publish future episodes, and give us
Speaker 1: a review to share us with others. But right now,
Speaker 1: let's talk to Kyle and Laila about the outlook for
Speaker 1: carbon offsets. Kyle, thank you for coming back to the
Speaker 1: show today.
Speaker 2: Yeah, thanks for having me.
Speaker 1: Danna and Layla, thank you for coming as well.
Speaker 3: Thank you for having me.
Speaker 1: So we're here for an update regarding voluntary carbon markets
Speaker 1: and what is happening in that space. Let's start by
Speaker 1: looking back. We recently did an update and we're thinking
Speaker 1: about twenty twenty three. So the year that just closed,
Speaker 1: there were some notable things, not all of them good,
Speaker 1: that happened in that year. Can you give us a
Speaker 1: bit of a highlight of some of the things that
Speaker 1: happened in the voluntary carbon market space that are helping
Speaker 1: us really think about it and are shaping its future.
Speaker 4: Well. To start, we faced a lot of media scrutiny
Speaker 4: against the market in twenty twenty three. We saw major
Speaker 4: headlines that just put buyers and other market players off
Speaker 4: from the voluntary market, and this really forced people to
Speaker 4: think what else could we do better in that market?
Speaker 4: But following the media scrutiny, it kind of materialized into
Speaker 4: something more. We saw big companies getting sued because they
Speaker 4: use carbon offsets, so it was a continuous cycle of
Speaker 4: media scrutiny, some lawsuits. The prices have dropped as well,
Speaker 4: and that just spread a lot of discussion and concerns
Speaker 4: around whether this market is even viable or if it
Speaker 4: should play a role in the energy transition at all legitimate.
Speaker 4: But again, towards the end of twenty twenty three, we
Speaker 4: saw a bigger push for standardizing that market and addressing
Speaker 4: those concerns, and it mainly came from private and independent organizations.
Speaker 4: There was a lot of hope for a un lad
Speaker 4: body to standardize it, but those discussions have fallen or
Speaker 4: fell apart at cop twenty eight.
Speaker 2: Yeah, and just to add to what Leilah is saying, so,
Speaker 2: I think it was kind of a year of two halves.
Speaker 2: Right in the beginning of the year, as Leila mentioned,
Speaker 2: there was an article from The Guardian about a lot
Speaker 2: of forestry projects. We're creating these carbon credits, right, these
Speaker 2: verified emission reduction certificates that were not actually additional or
Speaker 2: they were never actually being created in the first place.
Speaker 2: But things really did start to pick up in a
Speaker 2: positive way in the second half of the year, and
Speaker 2: I think that all kind of came to fruition at
Speaker 2: COP twenty eight. You had all the carbon offset registries,
Speaker 2: you had some of the verification bodies and the standards
Speaker 2: come together and say the private sector needs to take
Speaker 2: a more active role in legitimizing this market. We can't
Speaker 2: just rely on the UN or government bodies to do so.
Speaker 2: So yeah, a lot of volatility. I think one of
Speaker 2: the key indicators that we really saw that reflected kind
Speaker 2: of some of the negative thoughts and feelings about this
Speaker 2: market were futures prices. So, for example, there's a futures
Speaker 2: product for voluntary carbon offsets called n GEO trades on
Speaker 2: the CBL expanse of exchange, and what it does is
Speaker 2: it bundles together a bunch of forestry carbon credits. And
Speaker 2: at the beginning of twenty twenty three, that product was
Speaker 2: trading at around six dollars a ton. If you fast
Speaker 2: forward to the end of the year, it was trading
Speaker 2: a closer to forty cents a ton. So that reflects
Speaker 2: a lot of buyer sentiment in this market over the
Speaker 2: past twelve months.
Speaker 1: I mean, that's a pretty wild shift. But even then,
Speaker 1: what you guys have just laid out is the fact
Speaker 1: that this is a fundamental questioning of the role of
Speaker 1: voluntary carbon in a net zero future. So let's kind
Speaker 1: of break this down a little bit. So part of
Speaker 1: it is the media scrutiny, which is something that is
Speaker 1: not new. A view on greenwashing and whether or not
Speaker 1: certain projects will be additional are things we've talked about
Speaker 1: on this podcast, I think with both of you, maybe
Speaker 1: not at the same time. This is in our first
Speaker 1: podcast about voluntary carbon, but it's clear that this really
Speaker 1: kind of came to a head in twenty twenty three.
Speaker 1: So then you have this then second part of the
Speaker 1: conversation that's around standardization. Can you go into a bit
Speaker 1: more detail on well, first of all, what those bodies
Speaker 1: look like and what the progress was on the standardization front.
Speaker 4: So the market as of right now is quite fragmented.
Speaker 4: So even if you do have those bodies that are
Speaker 4: trying to standardize the market, when they first emerged, there
Speaker 4: were a bunch of different ones and it looked like
Speaker 4: they were operating independently of each other. So it kind
Speaker 4: of just added another problem because why would you standardize
Speaker 4: something with having too many cooks in the kitchen, And
Speaker 4: we'll just end up with a more fragmented view of
Speaker 4: the market, even if those fragments are standardized. But what
Speaker 4: happened throughout twenty twenty three, especially towards the end, is
Speaker 4: that those independent bodies started talking to each other and reconciling.
Speaker 4: So one of the major ones is the Integrity Council
Speaker 4: for Voluntary Carbon Markets, and you have another one called
Speaker 4: the Voluntary Carbon Markets Initiative, And these two try to
Speaker 4: target the supply and demand sides of the market. So
Speaker 4: while the ICVCM looks at standardizing projects so from the
Speaker 4: upper supply side and saying they need to be additional,
Speaker 4: they need to be permanent, they need to be measurable
Speaker 4: and just accounting for all the different risk factors that
Speaker 4: would come when buying an offset. The VCMI, on the
Speaker 4: other hand, targets corporations and buyers and tell them telling
Speaker 4: or giving them incentive to buy high quality offsets. So
Speaker 4: if you buy x percent of your offsets from this
Speaker 4: high quality project, you're going to get a gold claim
Speaker 4: for example. And now we see them talking to each
Speaker 4: other and aligning those policies with one another. So those
Speaker 4: are the two most prominent ones in the market right now.
Speaker 4: You've also got a pseudo standardization body which is the
Speaker 4: Science Based Targets Initiative the SPTI. Now the SBTi doesn't
Speaker 4: really isn't really concerned with telling us what a good
Speaker 4: and about offset looks like, but it sets very strict
Speaker 4: science based that zero targets for companies and put some
Speaker 4: guidelines and restrictions on how many offsets they can buy
Speaker 4: and one but also if they should be avoidance or
Speaker 4: removal offsets, which is also another big debate in the market.
Speaker 4: So as of now, there are a bunch of different ones.
Speaker 4: But towards the end of twenty twenty three, and this
Speaker 4: became very clear at cop twenty eight when they all
Speaker 4: announced collaborations to be announced or to issue those new
Speaker 4: standards in twenty twenty four.
Speaker 2: And I would just add, when you look at the
Speaker 2: individual projects that populate this market, there's so much nuance
Speaker 2: that goes into measuring the value of a carbon credit.
Speaker 2: You know, Layla mentioned measurability before. You can have two
Speaker 2: forestry projects right next to each other, and one tree
Speaker 2: might be getting more sunlight than another tree, One tree
Speaker 2: might be slightly older than another tree, and so the
Speaker 2: roots and the soil are stronger. All of these factors
Speaker 2: impact the overall carbon that's being sequestered by a certain
Speaker 2: plot of land. And so as a corporate buyer, when
Speaker 2: you're entering this market, you're essentially flying blind. You don't
Speaker 2: know what a good nature based project looks like. You
Speaker 2: don't know why a clean energy project in one market
Speaker 2: is better than another. And as Leila mentioned, these registries
Speaker 2: and these standards, we're not doing a good enough job
Speaker 2: of clarifying and differentiating between individual projects. And so what
Speaker 2: these groups like ICVCM and VCMI are trying to do
Speaker 2: is set a bar or threshold for what does good
Speaker 2: look like, and theoretically anything above that bar that threshold
Speaker 2: should be buyable and tradable, and you should be able
Speaker 2: to do so without scrutiny.
Speaker 1: So it seems like there was a bit of distrust
Speaker 1: on the part of the public and then a bit
Speaker 1: of distrust on the part of the companies buying the offsets.
Speaker 1: And that then brings me to well direct air capture,
Speaker 1: because I'm thinking about the fact that that has become
Speaker 1: a more popular technology with more money flowing into it
Speaker 1: over the course of the last year. And it's essentially,
Speaker 1: and you can listen to our back catalog, there's essentially
Speaker 1: a machine that is sucking carbon out of the air
Speaker 1: and doing the sorts of things that trees do, but
Speaker 1: it's a machine. And the question I have for the
Speaker 1: two of you, as people who spend your time focused
Speaker 1: on carbon offsets, do you think that direct air capture
Speaker 1: has become popular because of this accounting issue essentially that
Speaker 1: you've brought up, which has to do with the fact
Speaker 1: that it's difficult to actually come up with the math
Speaker 1: of how impactful a forestry project actually. Is there any
Speaker 1: other project that's in a nature based solution category or
Speaker 1: do you think it's direct air capture? And the things
Speaker 1: that we are already doing from a nature based solutions universe.
Speaker 1: And then that's really what you're seeing from companies when
Speaker 1: it comes to their interest.
Speaker 2: It's definitely a end question rather than an or question.
Speaker 2: So you're going to need all of the tools in
Speaker 2: the toolkit, or companies are going to need all the
Speaker 2: tools in the toolkit to achieve their net zero targets.
Speaker 2: They're going to need nature based solutions, they're going to
Speaker 2: need technology based removal, they're going to need carbon avoidance,
Speaker 2: they'll need carbon removal. Everything is going to play a
Speaker 2: very important role. And what's important to note, and I
Speaker 2: think a lot of people don't necessarily connect these dots
Speaker 2: when they think about the interoperability of these different solutions,
Speaker 2: is that the primary vehicle for finance direct air capture
Speaker 2: is and will continue to be carbon credits, and the
Speaker 2: primary source of that financing is going to come from
Speaker 2: corporate buyers. And so BNF's current estimates put the cost
Speaker 2: of direct air capture today at around eleven hundred dollars
Speaker 2: a ton on average, which is incredibly expensive. Right to
Speaker 2: give you a sense of scale, the average price or
Speaker 2: the average cost of creating a carbon credit in nature
Speaker 2: based solutions is anywhere from five to fifteen dollars a ton.
Speaker 2: So direct air capture is prohibitively expensive for most companies today.
Speaker 2: But what you're starting to see is some of these
Speaker 2: more inelastic companies, these companies with higher profit margins and
Speaker 2: lower emissions, like Microsoft, like pharmaceutical companies. These companies are
Speaker 2: going out and they're signing forward looking contracts to guarantee
Speaker 2: a procurement of direct air capture credits over the next ten,
Speaker 2: twenty thirty years. And what that's doing is it's allowing
Speaker 2: a project to be bankable data. We've spoken on prior
Speaker 2: podcasts about corporate clean energy power purchase agreements. This is
Speaker 2: a very similar type of structure, and what it's going
Speaker 2: to do over time is it should hopefully bring the
Speaker 2: cost down for direct air capture, but all so other
Speaker 2: technology based removals like bio energy, carbon capture and storage,
Speaker 2: and that should make it more approachable or easier for
Speaker 2: other companies to get involved in this space at a
Speaker 2: lower price point. And so, going back to your original question,
Speaker 2: it's definitely an end question rather than an ore.
Speaker 4: But to add to all of that is, because of
Speaker 4: the emergence of direct air capture and buyers in general
Speaker 4: just throwing a lot of money into tech based removals.
Speaker 4: We're seeing similar buyers throw a lot of money into
Speaker 4: nature based removals, so you see them being valued because
Speaker 4: of their additional benefits beyond decarbonization. And that goes back
Speaker 4: to the end that Kyle was talking about, is that, yes,
Speaker 4: we can benefit from tech based removals because you can
Speaker 4: count those emissions and you can actively see and feel
Speaker 4: where that carbon production is going. But you can't also
Speaker 4: discredit the need for nature based solutions. So deforestation is
Speaker 4: still a risk, and avoided deforestation projects address that risk,
Speaker 4: but they also come with benefits for preserving biodiversity and
Speaker 4: creating sustainable jobs for indigenous communities. So it all comes
Speaker 4: down to us doing our due diligence, but also mobilizing
Speaker 4: investment into high integrity and high quality projects on both ends.
Speaker 1: So now, twenty twenty three saw a number of carbon
Speaker 1: offset retirements. Can you explain first of all, what a
Speaker 1: retirement is in this space and then secondly, really what
Speaker 1: the magnitude of it was when we look back at
Speaker 1: this year that's just gone by.
Speaker 4: A retirement is when an offset buyer purchases that offset,
Speaker 4: but also cancels it. So for an offset to be retired,
Speaker 4: it means that it's no longer circulating in the market.
Speaker 4: I can't pick that offset again and use it. If
Speaker 4: I was let's say Shell, and I bought one million
Speaker 4: tons of CO two in offset. Now they count towards
Speaker 4: my own emission reduction goals. Some companies can buy those
Speaker 4: offsets and choose not to retire them. They could maybe
Speaker 4: retire it later, maybe trade it at a higher price,
Speaker 4: and so on. So that is what a retirement is,
Speaker 4: is that you buy it, you cancel it, and then
Speaker 4: it counts towards your own emission reduction. In twenty twenty three,
Speaker 4: it was actually a turbulent year, so when we started
Speaker 4: off demand levels were suppressed when you compare to twenty
Speaker 4: twenty two, but then it's picked up massively towards the end,
Speaker 4: and we saw around thirty seven million offsets retired in
Speaker 4: December versus the fifteen that we saw month on month
Speaker 4: earlier in the year. And there at Broughte it up
Speaker 4: to around one hundred and sixty four million officets retired,
Speaker 4: and it's a six percent increase from the previous year,
Speaker 4: and it's a record year again.
Speaker 1: So let's talk a little bit more then about where
Speaker 1: the demand for this is actually coming from. And I
Speaker 1: want to start with you've already mentioned actually a couple
Speaker 1: of different companies. Are there specific industries you'd mentioned airlines,
Speaker 1: you mentioned oil on gas. Is it the hard to
Speaker 1: abate space that's really looking at this because they don't
Speaker 1: have a clear path decarbonization or are there simply trends
Speaker 1: that can't be explained? Really? Where is the demand coming from?
Speaker 2: The short answer data is that every single sector is
Speaker 2: going to need carbon credits in order to get to
Speaker 2: net zero. Companies can be as aggressive as they want
Speaker 2: in reducing their own gross emissions, but if they're serious
Speaker 2: about making a net zero claim, there's always going to
Speaker 2: be residual emissions somewhere along their value chain that they'll
Speaker 2: need to neutralize. Right, that's the itch that they can't scratch.
Speaker 2: If you look specifically at retirement activity today, while you
Speaker 2: are seeing it across pretty much every sector, there is
Speaker 2: a much more emphasis from oil and gas companies, from airlines,
Speaker 2: and from technology companies as well. But the types of
Speaker 2: credits that these different sectors are buying very significantly, and
Speaker 2: we've kind of gotten at this a little bit already. Today,
Speaker 2: those companies with perhaps lower profit margins but much higher emissions,
Speaker 2: those airlines, for example, they can really only afford to
Speaker 2: purchase cheaper carbon credits. In most cases they're going to
Speaker 2: pass that cost on to customers, and so as a result,
Speaker 2: they need to buy carbon credits that are five dollars
Speaker 2: a ton, four dollars a ton, or even cheaper, and
Speaker 2: that's why companies have gotten scrutiny in the past. You
Speaker 2: see very similar trends from the oil and gas sector,
Speaker 2: although the quality of the credits are purchasing are slightly higher.
Speaker 2: So Shell was the largest buyer of carbon credits in
Speaker 2: twenty twenty three, it's off to a very hot start
Speaker 2: in twenty four as well, and it's buying a whole
Speaker 2: range of carbon credits from energy generation projects to nature
Speaker 2: based solutions across Latin America, Sub Saharan Africa and Southeast Asia.
Speaker 2: And then on the other end of the spectrum you
Speaker 2: have the technology companies, the ones with those higher profit
Speaker 2: margins that will require less carbon credits in order to
Speaker 2: get to net zero, and these companies are really making
Speaker 2: those big icebreaker investments into technology based removal and I
Speaker 2: would specifically highlight Microsoft as a leader here. Microsoft has
Speaker 2: signed a whole slew of deals ranging from direct air
Speaker 2: capture to enhanced weathering to biochar in order to diversify
Speaker 2: its portfolio to neutralize those emissions.
Speaker 1: The different types of offsets that you just mentioned are
Speaker 1: actually things that have been coming up more recently, and
Speaker 1: I'm even thinking about you know, each year we do
Speaker 1: our Pioneers program where we look at a couple of
Speaker 1: companies that will actually several companies that are attacking a
Speaker 1: certain part of the energy transition and decarbonization that needs
Speaker 1: to be addressed. And within one of the previous years,
Speaker 1: one of the winners was a biochart company, so we
Speaker 1: got very familiar with that here at BNF. And I
Speaker 1: think I saw my first biotar in person at kop
Speaker 1: in Dubai last year because they had set up an
Speaker 1: area where you could actually see some of the agriculture
Speaker 1: solutions that actually were there. So they actually look a
Speaker 1: little bit like rabbit pellets. I want to say, they're
Speaker 1: quite tiny. I thought they would be bigger discs, but
Speaker 1: you know, there we are. Okay, So we've talked about
Speaker 1: the demand side of things, let's talk a little bit
Speaker 1: about supply, because you know you've come on the show
Speaker 1: and passed and talked about renoal Ble energy credits. What
Speaker 1: is popular at the moment, What has been popular in
Speaker 1: this last year.
Speaker 4: Well, the two main sectors that have always been popular
Speaker 4: and we see demand rising in them a lot is
Speaker 4: energy generation and avoided deforestation. There are mainly two reasons
Speaker 4: for that release. So energy generation projects are abundant and
Speaker 4: they're cheap, so they're low hanging fruit for buyers that
Speaker 4: want to offset before regulation and standardization kicks on. Avoided
Speaker 4: deforestation also is one of the more popular ones. They
Speaker 4: also come with what we mentioned before, the additional benefits
Speaker 4: beyond decarbonization, and depending on where that project is, it
Speaker 4: also could be very cheap. But usually for companies that
Speaker 4: are opting for a more of like a higher quality ones,
Speaker 4: they would go for avoided deforestation because it signature based
Speaker 4: solution and there's a more of a story to tell
Speaker 4: behind those offsets. So those two have been mainly the
Speaker 4: ones that are supplying the market and demand is mainly
Speaker 4: coming from there. But there are other sectors that are
Speaker 4: emerging and they're growing, and we saw that a lot
Speaker 4: between twenty twenty two and twenty twenty three, sectors such
Speaker 4: as energy demand and it's mostly of projects to install
Speaker 4: clean cook stoves in Africa, for example, and emissions projects
Speaker 4: and those are ones that reduce industrial emissions and they
Speaker 4: were very prominent in the US right now. It's a
Speaker 4: whole range of sectors, but it's also interesting to look
Speaker 4: at the geographic differences, so which sectors are more popular
Speaker 4: in which regions. But overall, up until now, we see
Speaker 4: most of the supply coming from Asia, Latin America and Africa,
Speaker 4: and most of the demand coming from the US and
Speaker 4: so North America and Europe. And that dichotomy between supply
Speaker 4: and demand did spur something in the market over the
Speaker 4: past year and made governments aware of the economic but
Speaker 4: also geopolitical benefits of sitting on potential to have a
Speaker 4: huge carbon offset market. So we saw more policy updates
Speaker 4: going on there, especially around Zimbabwe when they wanted to
Speaker 4: reap some of the benefits of carbon offsets and capitalize
Speaker 4: on their own forestry projects, and we saw other African
Speaker 4: countries do the same, depending on the sectors that they
Speaker 4: sit on.
Speaker 2: Yeah, and I would just say one kind of unifying
Speaker 2: factor amount all the sectors that Laylor just mentioned is
Speaker 2: that the creation of credits from those sectors is almost instantaneous.
Speaker 2: Right a sector like reforestation, for example, you can make
Speaker 2: an investment in a reforestation project today, but you might
Speaker 2: not see those credits materialize for several decades because you
Speaker 2: need time for that forest to mature after you've planted
Speaker 2: those But sectors like avoided deforestation, like energy generation, those
Speaker 2: projects either exist today, which does bring up questions around additionality.
Speaker 2: But in the case of avoided deforestation, it's about using
Speaker 2: that investment to protect an at risk forest and as
Speaker 2: a result, those trees can continue to sequest your carbon,
Speaker 2: and so it's an instantaneous delivery of credits that's been
Speaker 2: really popular with companies and that's why supply in these
Speaker 2: sectors is much higher. And at the same time, that
Speaker 2: is why some of these governments are implementing these what
Speaker 2: we would call carbon nationalism policies to take advantage of
Speaker 2: investment into these instantaneous sectors.
Speaker 1: So thank you for getting me up to date on
Speaker 1: really what's transpired since we last spoke on this show.
Speaker 1: So now let's look into the future. We recently published
Speaker 1: a long term carbon offsets outlook, and we actually broke
Speaker 1: it down into different possible scenarios for us to really
Speaker 1: think about where this market could go. Let's go into
Speaker 1: those scenarios. So let's start with I mean, I don't know,
Speaker 1: do we start with the good news or the bad news.
Speaker 1: Let's start with the good news, which is the high
Speaker 1: quality scenario. What does that really tell tell us about
Speaker 1: what could happen in the voluntary carbon space and what
Speaker 1: would need to happen in order for this scenario to
Speaker 1: be true?
Speaker 2: I can jump in here. What we've done is we've
Speaker 2: highlighted three what we would call benchmark scenarios, and we
Speaker 2: think these are the three most likely scenarios that can
Speaker 2: occur in the market. And we've gone ahead and then
Speaker 2: we've ranked these benchmark scenarios in terms of likelihood. And
Speaker 2: as Layla's kind of gotten over the call, today, we
Speaker 2: are at a crossroads in the market. There's a lot
Speaker 2: of integrity initiatives, there's a lot of registries that are
Speaker 2: trying to standardize efforts to define what a good high
Speaker 2: quality offset looks like and the likelihood of that occurring.
Speaker 2: You know, I think it's really a coin flip right now.
Speaker 2: If those integrity initiatives were to fail, you kind of
Speaker 2: have a doomsday scenario for what this market can look like.
Speaker 2: We can definitely talk about that later on, but if
Speaker 2: they're successful, what we think it could create is a
Speaker 2: high quality carbon offset market where every single credit it
Speaker 2: doesn't matter whether it avoids or removes emissions, it doesn't
Speaker 2: matter whether it's nature based or technology based. So long
Speaker 2: as it's over a certain threshold in terms of meeting
Speaker 2: that additionality, that permanence, and that measurability, it's going to
Speaker 2: be considered high quality. And what we said is that
Speaker 2: in our long term outlook, if you create this high
Speaker 2: quality market, demand for carbon credits would be much more
Speaker 2: what we call inelastic, So companies would be willing to
Speaker 2: buy carbon credits regardless of their price, and they would
Speaker 2: form a very legitimate, reliable backstop in order for companies
Speaker 2: to get to net zero. And so in this high
Speaker 2: quality market, we estimate that carbonof set demand would reach
Speaker 2: five point nine billion metric tons of carbon dioxide equivalent
Speaker 2: on an annual basis in twenty fifty, so significant growth
Speaker 2: from what we see today, and what that would ultimately
Speaker 2: lead to is much higher prices in the long run,
Speaker 2: So carbonof set prices in this high quality market would
Speaker 2: peak at over two hundred and forty dollars a ton
Speaker 2: in the twenty forties, which is a huge investment signal. Right,
Speaker 2: there's a tremendous amount of opportunity for project developers, for investors,
Speaker 2: for policy makers, and then as a buyer, you need
Speaker 2: to be aware of these price rises as well. That
Speaker 2: gets you thinking should I hedge against this price rise
Speaker 2: today and lock into long term contracts in the near
Speaker 2: future at potentially cheaper prices. And so we think that
Speaker 2: this is a very realistic outcome for where this market
Speaker 2: could go.
Speaker 1: I mean, this is essentially the scenario where we move
Speaker 1: beyond greenwashing and we get to a place where we
Speaker 1: can verify all of the credits and it's really more
Speaker 1: about the market than about what's.
Speaker 2: Actually in it, exactly. That's exactly how I would define it. Really.
Speaker 2: We think the biggest factor and where we put the
Speaker 2: most emphasis in this year's long term out look is
Speaker 2: around carbonovs at demand, right, and we say, as demand goes,
Speaker 2: that's where the market's going to go. If demand falters,
Speaker 2: the market will folter. If demand surges, the market will
Speaker 2: search but really whether or not that demand rises or
Speaker 2: falls is going to depend on whether or not they
Speaker 2: can buy high quality credits. And at a certain point,
Speaker 2: when you have demand exceeding billions of tons of carbon
Speaker 2: dioxide on an annual basis, companies are not going to
Speaker 2: have the time to suss out specific projects and figure
Speaker 2: out well, that's good quality and that's bad quality, or
Speaker 2: that one has certain co benefits and that one doesn't.
Speaker 2: What they need is a bar, and if a project
Speaker 2: is above that bar, it's good to buy no strings attached.
Speaker 2: And that's really where we think a high quality market
Speaker 2: can get to if these integrity initiatives are successful.
Speaker 1: So let's go to another extreme. Let's talk about the
Speaker 1: removal only scenario. What does that mean.
Speaker 4: A removal's only scenario is a voluntary market where we
Speaker 4: only see offsets that come from projects that rely on
Speaker 4: removing carbon dioxide from the air. Now, this can be
Speaker 4: in the form of technology based removals. It can also
Speaker 4: be in the form of nature based removals. They both
Speaker 4: play a role and they come in at different times
Speaker 4: depending on my supply and demand dynamics. Really, but in
Speaker 4: a removals only scenario, what we see is that prices
Speaker 4: will rise to unsustainable levels, exceeding two hundred and four
Speaker 4: dollars per ton in twenty forty, and they reach around
Speaker 4: one hundred and seventy two dollars per ton in twenty fifty.
Speaker 4: So such high prices could risk companies not meeting their
Speaker 4: net zero targets. But also the limited supply raises the
Speaker 4: question of can we sustain ourselves with only removal based offsets.
Speaker 1: And what do you mean by sustain ourselves?
Speaker 4: Supply would be quite limited. So right now, most of
Speaker 4: the carbon offset market comes from avoidance credits, so the
Speaker 4: forestry ones and the energy generation they make up more
Speaker 4: than seventy eighty percent of the market. In a removal's
Speaker 4: only scenario, we're cutting all of that down and they're
Speaker 4: just going to be shut down, all of these projects,
Speaker 4: and we will only have the removal ones, so reforestation, agriculture,
Speaker 4: and a tech based one like direct air capture and
Speaker 4: bio energy with carbon capture and storage. And that is
Speaker 4: a quite limited amount relative to how much we actually need.
Speaker 4: But in that scenario, what we think companies will do
Speaker 4: is that they will pit those offsets against other decarbonization strategies.
Speaker 4: So now we've got the quality issue out the window,
Speaker 4: and they will be comparable to other decarbonization alternatives, and
Speaker 4: the way companies will opt for them is on a
Speaker 4: least cost basis, So that's the least cost decarbonization demand outlook,
Speaker 4: and they'll be competing with clean energy, for example, or
Speaker 4: electrifying transport at different times of the scenario.
Speaker 2: And to elaborate that on that a little bit more,
Speaker 2: there's this big question that always gets asked in the
Speaker 2: voluntary carbon market, and is the question is is a
Speaker 2: ton actually a ton? Right? If I buy a carbon
Speaker 2: credit from an avoided deforestation project, does that have the
Speaker 2: same impact, for example, as a corporation signing a power
Speaker 2: purchase agreement or electrifying its vehicle fleet or doing something else.
Speaker 2: And the answer in most cases is no, it's not
Speaker 2: because of some of these quality questions that emerge in
Speaker 2: the voluntary carbon market. What we did and the exercise
Speaker 2: that we did in this removal only markets, we said,
Speaker 2: a removal only market is the closest that we'll ever
Speaker 2: get to a ton of carbon removed being equivalent to
Speaker 2: a ton of carbon reduced by some other form of decarbonization.
Speaker 2: And so what we did and Leila mentioned this before,
Speaker 2: is we created marginal abatement cost curves for companies, and
Speaker 2: we said, as a corporation, if you're trying to achieve
Speaker 2: in that zero goal, you no longer need to take
Speaker 2: the approach of reducing your emissions as much as you
Speaker 2: can and then neutralizing any residual emissions with offsets. Could
Speaker 2: we ever get to a world where you look at
Speaker 2: your suite of options available and you prioritize those options
Speaker 2: purely based on cost. So, as a company, if I
Speaker 2: set in at zero target for twenty fifty, and I
Speaker 2: set it yesterday, for example, and then I look at
Speaker 2: what's available, and the cheapest option is an offset, all
Speaker 2: invest in offsets rather than buying clean energy, for example.
Speaker 2: And this was a really interesting dynamic, and this changed
Speaker 2: the outlook for carbon offset prices significantly. Leyla mentioned those
Speaker 2: highs that you see in a carbon removal market, right,
Speaker 2: But what's unique about this removal scenario is those price
Speaker 2: rises come much earlier than that high quality scenario that
Speaker 2: we talked about. Before they come in the next couple
Speaker 2: of years, they come by twenty thirty because there's so
Speaker 2: much early demand for carbon credits. Because they tend to
Speaker 2: undercut other forms of decarbonization in terms of cost. So
Speaker 2: I think that's really the key dynamic to keep in
Speaker 2: mind here is that it would really change the way
Speaker 2: that companies buy carbon credits if we prioritized strictly removals
Speaker 2: in this market. And I think that's a very important
Speaker 2: dynamic for companies to consider as they follow guidance from
Speaker 2: initiatives like SPTI.
Speaker 1: If we prioritize strictly removals and we're actually moving towards
Speaker 1: a proper net zero by twenty fifty, would they're in
Speaker 1: this scenario, be enough supply of this type of carbon
Speaker 1: credit in order for it to actually work.
Speaker 2: In early years? Definitely not right. So in early years,
Speaker 2: as Leila mentioned, there was a massive reliance seventy to
Speaker 2: eighty percent on carbon avoidance credits, and part of that,
Speaker 2: again is their instantaneous nature. The readily available credits that
Speaker 2: can be created the moment investment comes in. Technology based
Speaker 2: removal is not readily available at scale yet. So I
Speaker 2: mentioned those high costs for direct air capture, but supply
Speaker 2: is also really low as well. You have the first
Speaker 2: major pilot projects that are getting closer to commercialization, but
Speaker 2: they're not even fully proven yet, and so what you
Speaker 2: would run into in a removal only market is a
Speaker 2: huge shortfall in supply in early years and supply would
Speaker 2: have eventually catch up to demand in later years. But
Speaker 2: that leaves a lot of question marks around the near term.
Speaker 2: And so it does beg the question of do we
Speaker 2: transition from one of these markets to another? Do we
Speaker 2: start with a high quality market where you can buy
Speaker 2: all types of credits, because again, we're going to need
Speaker 2: every single available tool for companies to decarbonize, But then
Speaker 2: slowly but surely, as costs come down and supply scales up,
Speaker 2: do we transition more to technology based or nature based removals?
Speaker 2: And I think that's what a lot of stakeholders in
Speaker 2: this market are starting to lean towards in terms of
Speaker 2: how they think this market should evolve.
Speaker 1: And then that brings us to the middle of the
Speaker 1: road scenario, which is essentially that the norm that we
Speaker 1: currently are experiencing right now. But if we continue on
Speaker 1: the path that we're on now, where does that lead prices?
Speaker 1: And really what does that do to the future of
Speaker 1: this market?
Speaker 2: So I would refer to this scenario as less of
Speaker 2: the middle of the road scenario. And more of the
Speaker 2: doomsday scenario. If we continue on the path that we're
Speaker 2: on today, if we continue to follow all the trends
Speaker 2: that Leila and myself have mentioned that we saw in
Speaker 2: twenty twenty three, this market is heading for failure and
Speaker 2: most companies will clean miss their net zero targets. Right now,
Speaker 2: the carbon offset market is heavily oversupplied, and that's supply.
Speaker 2: There's a lot of questionable quality that populates that supply mix.
Speaker 2: If that were to continue moving forward, we think demand
Speaker 2: would be very different from those other scenarios and it
Speaker 2: would be more elastic. And when we talk about elastic demand,
Speaker 2: what that means is that as the scrutiny for purchasing
Speaker 2: carbon credits increases and as the price increases, demand will
Speaker 2: simply drop, especially for those sectors that we were talking
Speaker 2: about earlier with lower profit margins and high emissions, So
Speaker 2: those airlines, for example, those oil and gas companies. If
Speaker 2: they need to purchase tens or even hundreds of millions
Speaker 2: of carbon credits but they're going to get sued for greenwashing,
Speaker 2: the simple answer is they'll stop buying and they'll abandon
Speaker 2: their net zero goals. And that's a very realistic outcome
Speaker 2: for where this market can head if these integrity initiatives
Speaker 2: don't sort out some of these standardization issues.
Speaker 4: And it's also important to mention that those prices of
Speaker 4: offsets in that scenario will remain very, very low. So
Speaker 4: in the other scenarios we spoke about them exceeding one
Speaker 4: hundred dollars perton, but in a voluntary scenario, the market
Speaker 4: value would pick at only thirty four billion dollars. So
Speaker 4: prices would reach thirteen dollars perton twenty thirty, and then
Speaker 4: fifteen dollars per ton twenty thirty eight, and only fourteen
Speaker 4: dollars priton in twenty fifty. And that's nothing if you
Speaker 4: compare it to let's say the EU carbon price, it
Speaker 4: has reached around one hundred dollars per toon over the
Speaker 4: past year, and even against the other scenarios. So such
Speaker 4: low prices also do not give investors any reason to,
Speaker 4: let's say, invest in the tech based removals that we
Speaker 4: need to standardize or maybe raising integrity in this market.
Speaker 1: Now, I know each type of carbon credit has its
Speaker 1: own price in the voluntary market because of well the
Speaker 1: costs it actually go into creating that offset but do
Speaker 1: you think that there will be a long term gravitational
Speaker 1: pull towards kind of one consistent price and that everyone
Speaker 1: will try and work towards that, and if you aren't
Speaker 1: cost competitive in that way, perhaps you'll get pushed out
Speaker 1: of the market.
Speaker 2: There will never be a single price for carbonof set.
Speaker 2: We don't see that in any other commodity market of course, right,
Speaker 2: so we'll never get there with carbon. But what you
Speaker 2: will start to see is some homogenization in terms of
Speaker 2: the products that are trading in this market and that
Speaker 2: the prices that they fetch. And so, as you mentioned
Speaker 2: data every single carbonof set project, I think there's maybe
Speaker 2: nine thousand different major registered projects in the market today.
Speaker 2: Every single project offers a different price. What we would
Speaker 2: like to see is that price start to standardize into
Speaker 2: maybe single digit amount of products out there. And so
Speaker 2: I think that is the necessary direction of travel, and
Speaker 2: there's a lot of exciting work on the horizon to
Speaker 2: go ahead and standardize these prices. I'm going I'll let
Speaker 2: Layla chime in on this, but we've written extensively about
Speaker 2: the exchanges and the derivative products that now exist in
Speaker 2: the carbonof set market. To get to this homogenization.
Speaker 4: We do see that. So over the past couple of years,
Speaker 4: you see that the voluntary carbon market is becoming more
Speaker 4: and more of a commodity, and that you see it
Speaker 4: very clearly when you look at that activity on exchanges.
Speaker 4: So we saw exchanges coming up and saying, well, we
Speaker 4: want to create something called standardized contracts. So you, as
Speaker 4: a buyer, you would just opt for this bucket of
Speaker 4: offsets that meets a certain criteria, but you don't really
Speaker 4: have visibility on where those officets come from. You just
Speaker 4: know that they're nature based. You just know that they
Speaker 4: have core benefits, and you can trade them against other
Speaker 4: standardized contracts. So this sort of bucketing of offsets and
Speaker 4: trying to ask said the homogenize them within certain buckets
Speaker 4: makes the market resemble more and more of a commodity.
Speaker 4: And the volumes of those standardized contracts or the traded
Speaker 4: volumes of those standardized contracts also increasing significantly, and that
Speaker 4: mainly is because one you see traders seeing investment opportunity
Speaker 4: in them. But also now buyers will need to have
Speaker 4: access to humongous amounts of offsets instantaneously. They will no
Speaker 4: longer have the time to look after each offset and
Speaker 4: where it came from, but they'd rather rely on such
Speaker 4: readily available products.
Speaker 1: So here we are a quarter into twenty twenty four,
Speaker 1: and while I know that we haven't done our outlook
Speaker 1: on the year yet, I want to know if you
Speaker 1: think that we are in the same situation as twenty
Speaker 1: twenty three, or if there have been any signs that
Speaker 1: the market is starting to correct itself.
Speaker 4: It is correcting itself. In my view, I'm usually more
Speaker 4: optimistic and sometimes I'm let down by the end of
Speaker 4: the year. One cop turns around. But looking at January
Speaker 4: and February so far, we saw one and uptaken the
Speaker 4: demand levels, and we saw project developers being more aware
Speaker 4: of what's to come. So previously we would just see
Speaker 4: a pump of offsets populating the market, regardless of whether
Speaker 4: they're good or bad. But now with standardization coming around
Speaker 4: the corner, project developers are now taking a step back
Speaker 4: and they're waiting for those standards. And this basically indicates
Speaker 4: a heightened level of awareness in the market where we
Speaker 4: are waiting for standards and want to apply them. So
Speaker 4: uptake and demand supplies becoming more re in the bill,
Speaker 4: and we're seeing some standardization, but also interestingly, policy and
Speaker 4: other sectors also playing a role. So we have something
Speaker 4: called CORSA, which is the scheme that is intended to
Speaker 4: decarbonize the aviation sector. Part of it is using offsets
Speaker 4: for that decarbonization, and they come with another slew of
Speaker 4: regulation and standards and strict standards around offsets, and people
Speaker 4: are looking towards them, and they're also being traded at
Speaker 4: higher prices. So the short answer is, I'm more optimistic
Speaker 4: around twenty twenty four relative to twenty twenty three.
Speaker 1: With the caveat that you are just generally a more
Speaker 1: optimistic person.
Speaker 4: With the caveat of I'm generally a more optimistic person,
Speaker 4: but we do have the numbers and data to pack
Speaker 4: it up this time.
Speaker 2: I would also just add we talked about a lot
Speaker 2: of the criticism that we saw in twenty twenty three,
Speaker 2: and I think it is worth mentioning, wen't We haven't
Speaker 2: explicitly said this yet. All of that criticism was valid.
Speaker 2: All of the projects that were scrutinized for creating low
Speaker 2: quality credits, all of that scrutiny and all of those
Speaker 2: accusations were true. Right, those projects should have never been
Speaker 2: creating carbon credits in the first place. And to me,
Speaker 2: thinking about this from an optimistic standpoint, what that's leading
Speaker 2: to is a much more mature market.
Speaker 4: Right.
Speaker 2: We're trimming some of the fat, if you will, from
Speaker 2: kind of the outskirts of this market, and you're leading
Speaker 2: to more sustainable growth moving forward. And as Leila mentioned,
Speaker 2: I think a lot of that scrutiny and a lot
Speaker 2: of the fixing that was done in twenty twenty three
Speaker 2: it's starting to materialize in more activity and more investor
Speaker 2: optimism in twenty twenty four.
Speaker 4: And on that investor optimism, now we're seeing more funds.
Speaker 4: So like as Kyle mentioned before, you have people like
Speaker 4: Microsoft targeting other projects and funding removals and high integrity projects,
Speaker 4: and activity in that area has also increased a lot.
Speaker 4: And it just shows you that now companies with big
Speaker 4: wallets or companies that can afford it will go the
Speaker 4: extra mile and offset in high integrity projects and that
Speaker 4: will drive investment and scale the technologies that we need
Speaker 4: for a more mature, more balanced market as well moving forward.
Speaker 1: So Kyle, Laila, thank you very much for getting us
Speaker 1: up to speed on what's happening in this space and
Speaker 1: is the wild US actually turns into a much more
Speaker 1: verified and solid market and something that more similarly resembles commodities.
Speaker 2: Thanks so much, Dana really appreciate it.
Speaker 3: Fun chat, Thank you, Dana.
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