Speaker 1: This is Data Perkins, and you're listening to Switch on
Speaker 1: the B and EF podcast. This is not our first
Speaker 1: episode on the voluntary carbon offset space, and it likely
Speaker 1: will not be our last. This is a topic that
Speaker 1: has been generating a lot of buzz lately, so this
Speaker 1: week we look at what might happen in the offset
Speaker 1: space in the longer term. Currently, there is a lot
Speaker 1: of price variability, a lot of different approaches, and frankly,
Speaker 1: a lot of concern about the additionality of some of
Speaker 1: the projects as well as how to go about verifying them.
Speaker 1: So what is clear is that the offset space is
Speaker 1: here to stay. With emission solutions for some of the
Speaker 1: harder to abate industries still in an R and D
Speaker 1: phase and companies announcing things like negative emissions targets, how
Speaker 1: does one get there without carbon removal or at minimum trees.
Speaker 1: So this week Switched On speaks with B and f's
Speaker 1: head of sustainability Research, Kyle Harrison, about a recent report
Speaker 1: he authored titled Long Term Carbon Offsets Outlook two. He
Speaker 1: looks at the supply side, demand pricing, geographic breakdown, and
Speaker 1: a bunch of other things. Any clients can access this
Speaker 1: analysis at B NF go on the Bloomberg terminal or
Speaker 1: at benf dot com. And now let's speak with Kyle
Speaker 1: about the future of the offset space. Kyle, thank you
Speaker 1: so much for joining today on switched On. Thanks for
Speaker 1: having me Dana. So, Kyle, you are a veteran of
Speaker 1: switched On. You've been on here to talk about voluntary
Speaker 1: carbon offsets before, and we just recently put out a
Speaker 1: report that it really is a forecast for this market.
Speaker 1: Why was now the time for us to have kind
Speaker 1: of an official, codified be enough forecast, because you know,
Speaker 1: these market outlooks are something that many of our analysts
Speaker 1: make for the industries that we cover in other parts
Speaker 1: of the business. For the carbon offset market, I think
Speaker 1: maybe to put that into context, So, the carbon off
Speaker 1: set market has been around for a couple of decades now,
Speaker 1: since the the late nineties, and companies have been going
Speaker 1: out and buying these offsets to reach sustainability goals since then.
Speaker 1: But it really has been only in kind of like
Speaker 1: the last two or three years that the market has
Speaker 1: started to grow at a level commensurate with how much
Speaker 1: interest companies haven't in carbon offsets. So really it's kind
Speaker 1: of this renaissance moment for not only the voluntary carbon market,
Speaker 1: but just carbon markets in general like the EU, E
Speaker 1: T S and of course other markets around the world.
Speaker 1: So being if you know, us covering what the carbon
Speaker 1: off set market looked like in the past has been sufficient.
Speaker 1: It's given people an idea of if they want to
Speaker 1: enter this market, what can they expect, Where does supply
Speaker 1: come from, where's demand coming from, things like that. But
Speaker 1: what we're increasingly seeing, as you know, I've spoken to
Speaker 1: so many people and the team has spoken to so
Speaker 1: many people about this market is clients are getting a
Speaker 1: lot more sophisticated on this topic, and as a result,
Speaker 1: b NF needs to get more sophisticated on where this
Speaker 1: market is going to go moving forward. And I think
Speaker 1: we could speak anecdotally to that over the past couple
Speaker 1: of years, but now to finally have some you know,
Speaker 1: cold hard data behind that outlook was really beneficial for us,
Speaker 1: and it's going to lead to a lot more again
Speaker 1: sophisticated discussions with our clients around how this market is
Speaker 1: evolving and how far out into the future are we
Speaker 1: looking the BNP special right. I think part of this
Speaker 1: is of course a short term outlook, and I think
Speaker 1: over the next few years. That's where there's kind of
Speaker 1: one element of the carbon offset market remaining similar to
Speaker 1: how it is today. That's where that's the most fertile ground.
Speaker 1: But what we wanted to do is to say, how
Speaker 1: can this carbon offset market evolve over time? You know,
Speaker 1: in terms of who's buying offsets, but also where's the
Speaker 1: supply coming from and who's regulating that market. And in
Speaker 1: order for us to really accurately have an idea of
Speaker 1: how that's going to change, we needed to look at
Speaker 1: the evolution of the market out and this is both
Speaker 1: regarding the compliance and the voluntary markets. For the report,
Speaker 1: we basically just call it a carbon off set. Were
Speaker 1: market agnostic in this case, and and that's a really
Speaker 1: good question. Actually, it's a very important point with this outlook.
Speaker 1: One of the big question marks around how carbon offset
Speaker 1: markets are going to evolve over time is will a
Speaker 1: bigger offset market or a global carbon market come in
Speaker 1: and swallow all of the existing markets that exist out there,
Speaker 1: right like again the EU e t S, the Corsia
Speaker 1: offset market for airlines, and then of course the voluntary
Speaker 1: carbon off set market. And this is a real possibility,
Speaker 1: you know, our our policy team at BNF has discussed
Speaker 1: this quite extensively, and you had a lot of world
Speaker 1: leaders discussing this at CUP twenty six a couple of
Speaker 1: months ago. So for this report, what we wanted to
Speaker 1: do is kind of just make it carbon off set agnostic,
Speaker 1: to tell clients that there is this distinct possibility that
Speaker 1: the voluntary market that we look at it today may
Speaker 1: very well be an entirely different type of market in
Speaker 1: the future. But we still wanted to give clients an
Speaker 1: idea of what that could look like. That was the
Speaker 1: longlined to answer, and the short answer is yes, it
Speaker 1: does look at all carbon markets essentially. So we're going
Speaker 1: to talk about the three different scenarios that you laid
Speaker 1: out in the podcast today. They are the voluntary companies,
Speaker 1: then the science based targets initiative, and then the hybrid ones.
Speaker 1: Let's start with the voluntary ones. So where is the
Speaker 1: demand coming from? I know that an increasing number of
Speaker 1: companies are making net zero and in some cases actually
Speaker 1: negative emissions claims for the future and targets going forward,
Speaker 1: and certainly the majority of countries in the world made
Speaker 1: a commitment to net zero. So where is the demand
Speaker 1: coming from on the voluntary side. So if you think
Speaker 1: about the voluntary market scenario that we looked at on
Speaker 1: our report, again, what it's assuming is that the voluntary
Speaker 1: carbon off set market remains the same as it does
Speaker 1: today out into I know we've talked about this on
Speaker 1: previous podcasts, as you mentioned, Dana, but just for all
Speaker 1: those listeners out there, the way the market is structured
Speaker 1: today is it's primarily used for corporations to go ahead
Speaker 1: and achieve their sustainability goals or to purchase offsets on
Speaker 1: a behavioral basis. And what I mean by that is
Speaker 1: they're not necessarily buying off sets in every situation to
Speaker 1: reach a net zero goal, and instead they might be
Speaker 1: going out and creating carbon neutral L and G or
Speaker 1: green steel or green aluminum, and I want to use
Speaker 1: offsets on an ad hoc basis in order to offer
Speaker 1: that type of product. In terms of the supplying the
Speaker 1: market today, it's all different types of sectors, right, So
Speaker 1: it's anything ranging from a four street projects in substerarent
Speaker 1: Africa to a clean energy project, say in India or
Speaker 1: China or the United States. So we basically said, let's
Speaker 1: keep all those assumptions the same and let's see what
Speaker 1: happens to supply demand in pricing. To your original question
Speaker 1: about this market, the first thing that we did to
Speaker 1: kind of assess demand for the voluntary carbon offset scenario
Speaker 1: is we looked at all the companies that are going
Speaker 1: out there and are setting those net zero targets as
Speaker 1: you mentioned, because what we can assume is that over time,
Speaker 1: companies are going to focus less on purchasing offsets for
Speaker 1: those behavioral reasons like I mentioned, and the demand is
Speaker 1: actually going to be classified more as fundamental. And what
Speaker 1: that means is that they need to be net zero
Speaker 1: by and they're going to have residual emissions no matter
Speaker 1: how aggressive they are in their own internal sustainability initiatives,
Speaker 1: and that's going to create some type of demand for offsets.
Speaker 1: So what we wanted to do is look at all
Speaker 1: the companies that we've tracked at BENF in our Corporate
Speaker 1: net Zero Assessment tool, but also some of the other
Speaker 1: tools that we have of all the largest heavy emitting
Speaker 1: companies in the world that have already set in net
Speaker 1: zero goal. What we can do is we can actually
Speaker 1: calculate the amount of emission reductions that are purely going
Speaker 1: to come from achieving those net zero goals. So that's
Speaker 1: basically the baseline that we need companies to achieve. And
Speaker 1: then what we assume is that companies are going to
Speaker 1: reduce their gross emissions to a certain amount as well.
Speaker 1: So what that means is that they're gonna buy clean energy,
Speaker 1: or change their internal practices or purchase e vs, do
Speaker 1: things to actually reduce their own emissions, and they're gonna
Speaker 1: do that to a certain extent. And then again, that
Speaker 1: gap between how much they're reducing their gross emissions and
Speaker 1: that net zero trajectory I mentioned before, that's your potential
Speaker 1: universe for carbon off set demand. So we basically ran
Speaker 1: that scenario for a couple hundred companies, and then we
Speaker 1: extrapolated that to assume that more companies over time will
Speaker 1: set net zero goals um and that kind of gives
Speaker 1: us a good idea of what we're talking about in
Speaker 1: terms of long term demand, assuming the carbon off set
Speaker 1: market remains the same as it does today. Now for
Speaker 1: a very short break, stay with us. You brought up
Speaker 1: the building of clean energy as a way to do
Speaker 1: offsets in our prior podcast. If you did hear this one,
Speaker 1: you can go back in time and find Kyle and
Speaker 1: I discussing this specifically the voluntary market. We talked a
Speaker 1: lot about additionality. I think it's worth bringing up again
Speaker 1: here as we're looking forward. How hard is it for
Speaker 1: a company to, let's say, if they are generating clean
Speaker 1: electricity and then create a clean energy certificate, how hard
Speaker 1: is it for them to, you know, double count the
Speaker 1: saved emissions and is the accounting on this fairly straightforward
Speaker 1: or is it still quite blurry around the edges. It's
Speaker 1: very blurry and candidly it's not very well regulated right now.
Speaker 1: So all the areas of supply that we talked about
Speaker 1: in the report, and then we can certainly dive into
Speaker 1: this a little bit more later on. Clean energy is
Speaker 1: probably the most controversial, and there's a couple of reasons
Speaker 1: for that. The first one is this overarching topic of
Speaker 1: removal carbon offsets versus avoidance carbon off sets. When you
Speaker 1: have people on both sides of this kind of argument
Speaker 1: saying that one is better than the other, or that
Speaker 1: all types should be used or that only one should
Speaker 1: be used. If you think about a clean energy project,
Speaker 1: when you build a solar wind project, you're not actually
Speaker 1: leading to further carbon sequestration, right You're simply avoiding, say
Speaker 1: the emissions from a combined cycle gas plant or a
Speaker 1: coal plant. So clean energy is firmly classified as an
Speaker 1: avoidance offset, and you have a lot of skeptics and
Speaker 1: critics saying that type of offset should not be allowed
Speaker 1: for companies to go ahead and achieve an net zero
Speaker 1: goal or some other type of sustainability target. So that's
Speaker 1: kind of the first area of criticism around carbon off
Speaker 1: sets from clean energy. The second one is around the economics,
Speaker 1: and this is specifically where that term additionality is very important. Here.
Speaker 1: Additionality means how can I, as a developer or a
Speaker 1: customer buying carbon offsets, how can I incentivize and contribute
Speaker 1: to new added decarbonization that wouldn't have otherwise happened if
Speaker 1: those offsets weren't monetized, and you know, being when I
Speaker 1: hadn't actually just published are our latest levelized cost of
Speaker 1: electricity update, And what that report shows is clean energy
Speaker 1: is now cost competitive in most markets around the world.
Speaker 1: In some markets, solar wind is the cheapest source of technology,
Speaker 1: and even if they're not the cheapest, they're still in
Speaker 1: competitive range with a lot of fossil generation. Theoretically, in
Speaker 1: a perfect world, a developer, someone who's selling clean energy
Speaker 1: should only be monetizing carbon offsets if it's going to
Speaker 1: help bridge that gap and make that project competitive. So,
Speaker 1: for example, if the levelized cost of electricity for a
Speaker 1: gas plant is ten dollars a megawatt hour, and I'm
Speaker 1: building a solar project and I can only sell that
Speaker 1: power for fifteen theoretically that gap between those two with
Speaker 1: that five dollar per megawatt hour, that should be my
Speaker 1: cost of carbon. But in a lot of these countries
Speaker 1: around the world, since clean energy is already cheaper, the
Speaker 1: premise or the need to sell carbon off sets doesn't
Speaker 1: actually exist, So that right there is going to actually
Speaker 1: make it. So a lot of projects around the world
Speaker 1: don't meet that additionality criteria. And then the third point
Speaker 1: I just want to add on this. You mentioned the accounting.
Speaker 1: There's really not a lot stopping a company now from
Speaker 1: selling power from a clean energy project, monetizing renewable energy certificates,
Speaker 1: which of course are similar to a carbon offset, but
Speaker 1: they pertain to a megawatt hour rather than a ton
Speaker 1: of carbon like an offset does. And then selling carbon
Speaker 1: offsets is that third stream of revenue. And of course
Speaker 1: there is a huge risk of double counting there. It's
Speaker 1: absolutely you know, there's a very high likelihood that a
Speaker 1: lot of the clean energy projects that are very active
Speaker 1: in this market today are guilty of that double counting,
Speaker 1: taking advantage of two commodities that really should be treated
Speaker 1: as one. So, Dana, it's a it's a really controversial sector,
Speaker 1: and we talk a lot about that in the report
Speaker 1: the Fate of clean Energy and it's importance in the
Speaker 1: overall offset supply moving forward well, and the real question
Speaker 1: also with this has to do with with these auctions
Speaker 1: and with these projects that are happening at scale and
Speaker 1: hopefully much more quickly. I mean, this is a conversation
Speaker 1: for another podcast, but in our new Energy Outlook also
Speaker 1: out to the year, we look at this hockey stick
Speaker 1: shape of needed implementation and building of clean energy in
Speaker 1: order to meet our climate goals. I would anticipate that
Speaker 1: these are at the scale where it's kind of hard
Speaker 1: to say that this was spurred by an offset, that
Speaker 1: it probably was part of the business strategy. To your
Speaker 1: point on how cheap these are, maybe I'm actually taking
Speaker 1: I'm taking too much of a biased stance. I guess
Speaker 1: we know where I lie. On this question in terms
Speaker 1: of the debate. So there's two sides to it, and
Speaker 1: I shouldn't pick one. No, it's a it's a very
Speaker 1: good point. And the last thing I'll say on this
Speaker 1: is that I personally am sure there are companies out
Speaker 1: there that are looking at building a clean energy project
Speaker 1: and the biggest chunk of that revenue is going to
Speaker 1: come from offsets. But I personally have never seen a
Speaker 1: project that is built on that premise. And a lot
Speaker 1: of the major registries, so that the two biggest actually
Speaker 1: VERA and gold Standard, they acknowledge this, and they've recently
Speaker 1: put forward changes that you can only issue carbon offsets
Speaker 1: from clean energy projects in the least developed countries. So
Speaker 1: all that clean energy offsets supply from the United States, India, China,
Speaker 1: like I mentioned before, that does exist today and is
Speaker 1: allowed in the voluntary carbon market, It's not necessarily going
Speaker 1: to be the case moving forward. We're going to need
Speaker 1: to rely a lot more on projects and say Sub
Speaker 1: Saharan Africa, which is where we of a deep dive
Speaker 1: for our report. Let's go into the Science Based Targets initiative.
Speaker 1: So what is the s p t I. So the
Speaker 1: science Based Targets Initiative is a group that allows companies
Speaker 1: to set a paras aligned climate goal. So you think
Speaker 1: about the Paris Agreement. You have all of these countries
Speaker 1: out there that are making their nationally determined contributions their
Speaker 1: paras aligned you know, climate goals. What the Science Based
Speaker 1: Targets Initiative operates under. What it assumes is that, let's
Speaker 1: say every country in the world dropped the ball on
Speaker 1: achieving their climate goals, and instead they rely on the
Speaker 1: individual private sector actors within those countries to go ahead
Speaker 1: and do the heavy lifting themselves. This assumes that every
Speaker 1: single corporation in the world goes out and plays their
Speaker 1: part rather than relying on those countries. Historically, the Science
Speaker 1: Based Targets Initiative would allow companies to go out and
Speaker 1: set a near term paras aligned climate target. Most of
Speaker 1: those goals actually ended in they're not net zero goals, right,
Speaker 1: and they only go to a certain extent, you know,
Speaker 1: maybe a company reducing its Scope one and Scope two
Speaker 1: emissions by for example, and under that group, carbon offsets
Speaker 1: are not allowed under any circumstance. If you are a
Speaker 1: member of the Science Based Targets Initiative and have set
Speaker 1: a regular parasol lined goal with them to achieve that goal,
Speaker 1: you can't use offsets. However, around top, the Science Based
Speaker 1: Targets Initiative put out a net zero science based framework,
Speaker 1: so that allows companies to take those science based targets
Speaker 1: I mentioned earlier and bring them out a step further,
Speaker 1: going to net and zero emissions by earlier. The key
Speaker 1: thing here and the reason why we call this an
Speaker 1: s p t I scenario in our report, which actually
Speaker 1: might be a little bit generous in giving them full
Speaker 1: credit for this push here, But what they're saying is
Speaker 1: that a company can use offsets to achieve a science
Speaker 1: based net zero goal. Now, however, they can only purchase
Speaker 1: offsets to achieve that goal that are in that removal
Speaker 1: category that I mentioned before. So any type of offset
Speaker 1: supply that simply avoids emissions, like a clean energy project
Speaker 1: that I mentioned before, or something like installing clean cook
Speaker 1: stoves in emerging economies which is another sector we modeled,
Speaker 1: or the biggest one, which is avoided deforestation, so actually
Speaker 1: protecting a at risk forest or vulnerable forest from being
Speaker 1: cut down. All those projects simply avoid emissions. They don't
Speaker 1: lead to further sequestration and As a result, spt I
Speaker 1: is saying that you cannot use that type of supply
Speaker 1: in order to achieve your net zero goal. In the
Speaker 1: spt I scenario, what we're saying is that the demand
Speaker 1: is still coming from all those corporations that I mentioned before.
Speaker 1: So again, we looked at all these companies with net
Speaker 1: zero goals, then we looked at how much they could
Speaker 1: produce their gross emissions, and we assume that the gap
Speaker 1: between the two is offset demand. But what we're doing
Speaker 1: here is we're actually shortening supply quite a bit. So
Speaker 1: instead of letting supply run unregulated, I mean you can
Speaker 1: i from anywhere, you can only buy from two key
Speaker 1: sectors that we modeled in the report, and that is reforestation,
Speaker 1: so planting new trees or a forestation, planting forests in
Speaker 1: an area where there's never historically been a forest. And
Speaker 1: then we also look at technology based removal, and in
Speaker 1: the case of this report, we use direct air capture
Speaker 1: as a proxy for all technology based removal. And the
Speaker 1: big takeaway from this is that really, until direct air
Speaker 1: capture comes into maturity, which we can't necessarily expect for
Speaker 1: another few decades, you're gonna have a huge shortfall when
Speaker 1: it comes to carbon off set supply. So what we
Speaker 1: say is that there's gonna be an undersupply of carbon
Speaker 1: off sets starting in the late and what that means
Speaker 1: is that the price for carbon off set is going
Speaker 1: to shoot up to very unsustainable highs. In this case
Speaker 1: over two dollars a ton starting around wow. Yes, very expensive.
Speaker 1: And to put that into contacts the current price or
Speaker 1: the average price in twenty around two dollars and fifty
Speaker 1: cents a ton well. And also to put into context,
Speaker 1: so our team that looks specifically at the E E
Speaker 1: T S compliance market, they're thinking that we're going to
Speaker 1: hit a hundred euros a ton by just before so
Speaker 1: around the same time that which is what is considered
Speaker 1: to be maybe one of the most if not the
Speaker 1: most mature carbon market, you know, around the same time
Speaker 1: you're seeing other spaces, maybe because it's such a complicated
Speaker 1: space with so much diversity across the world, they're being
Speaker 1: prices around two hundred. I mean that is um I know,
Speaker 1: we're talking US dollars to to euros. So there's a
Speaker 1: little bit of a difference there, but not enough to
Speaker 1: account for such a high price that potentially in the
Speaker 1: future it's very expensive, and just for context, so that
Speaker 1: that two dollars and it's it's around roughly actually two
Speaker 1: a ton to be specific, that price is from direct
Speaker 1: air capture, so that is the cost for direct air capture.
Speaker 1: Around that time. Our Aniable Materials team anticipates that the
Speaker 1: price for direct aircapture, of course will come down. We've
Speaker 1: seen that with the learning rates for solar and wind
Speaker 1: and so many other technologies that we've covered at VNF. Right,
Speaker 1: but I think the big takeaway is that you know,
Speaker 1: even in we anticipate that the cost for direct air
Speaker 1: capture is going to be around hundred dollars a ton,
Speaker 1: still still super expensive compared to what prices for carbon
Speaker 1: off sets are today, and there could be benefits to this. Right.
Speaker 1: One of the benefits to such extremely high prices is
Speaker 1: that this will function as effectively a carbon tax. All
Speaker 1: those companies that haven't net zero goal, they won't be
Speaker 1: able to rely on carbon offsets as a lifeline or
Speaker 1: get out of jail free card. They'll have to focus
Speaker 1: more on reducing their own gross emissions and rely less
Speaker 1: on offsets. And really that is the goal of a
Speaker 1: carbon market in the end. Right to incentivize companies to
Speaker 1: focus on cleaning up their own act as much as
Speaker 1: they can and then using offsets for any of those
Speaker 1: residual emissions. So there is a nice ben fit there.
Speaker 1: But I think the main takeaway year is that, you know,
Speaker 1: all those advocates for a removal only carbon off set
Speaker 1: market at least to cover again that fundamental demand. It's
Speaker 1: a it's a little bit of a flawed outlook because
Speaker 1: it kind of underscores how dire that supply situation could
Speaker 1: really be in a removal only world. We'll be right back, Okay,
Speaker 1: So we've been through these two scenarios and your third
Speaker 1: one is sort of not its own scenario because it's hybrid.
Speaker 1: So what is the hybrid scenario? The hybrid scenario is
Speaker 1: meant to represent a gradual evolution of the carbon off
Speaker 1: set market. So, just for a refresher, that voluntary scenario
Speaker 1: that assumes the market stays as it does today and
Speaker 1: you know, nothing changes in terms of regulation or who's
Speaker 1: buying in what types of supply exists. We take that
Speaker 1: voluntary scenario and we make a few little tweaks to
Speaker 1: it from now out until in our hybrid scenario. So
Speaker 1: what it's saying is that, yeah, sure, they're all a
Speaker 1: lot of critics to how the offset market works today.
Speaker 1: The market is rapidly evolving. Things are going to change,
Speaker 1: but those changes are going to take time, and that's
Speaker 1: kind of what we assume for this hybrid scenario. So
Speaker 1: the market remains very similar out to What that means
Speaker 1: is that prices, well, they do go up compared to
Speaker 1: what they are today, they still remain fairly manageable for
Speaker 1: companies and actually I would say in terms of overall
Speaker 1: market design that they're great right because they go up
Speaker 1: to a level where it's gonna price some companies out
Speaker 1: of the market, but it's still going to get to
Speaker 1: a level where it's gonna incentivize more supply. Traders are
Speaker 1: gonna get involved more, and it's going to create a
Speaker 1: more liquid market. Then will we assume from is that
Speaker 1: the market starts to resemble that spt I scenario that
Speaker 1: we just discussed. So there's some more regulation that's put
Speaker 1: in place, and there's more stringent kind of beliefs around
Speaker 1: how carbon offset should work, and the overall kind of
Speaker 1: market shifts towards a removal only world. So demand is
Speaker 1: still driven by companies, but it's removal only, and that
Speaker 1: leads to kind of similar issues that we saw in
Speaker 1: the s p t I scenario, and the market really
Speaker 1: quickly again becomes undersupplied and prices shoot up above that
Speaker 1: two ton of threshold. Again. The most interesting change though
Speaker 1: in the hybrid scenario from is something that I discussed
Speaker 1: at the beginning of the discussion today, and that is
Speaker 1: that those discussions at copy around a global carbon market
Speaker 1: where instead of companies as the main players, it's actually
Speaker 1: countries that comes to fruition and there's a very high
Speaker 1: likelihood that happens. The big question is how long is
Speaker 1: that get to take right, getting every country in the
Speaker 1: world to set an ambitious sustainability goal and then allow
Speaker 1: for the trading of verified emission reductions between countries is
Speaker 1: a very complicated process. So what we say that that happens,
Speaker 1: but it takes a little while for it to take hold.
Speaker 1: But when it does take hold, countries are again the
Speaker 1: main ones buying offsets. Corporations take a back seat in
Speaker 1: this market, but we still remain in a room moval
Speaker 1: only world. Again, prices still remain very high, but they
Speaker 1: come down a little bit compared to the spt I
Speaker 1: scenario because it's no longer direct air capture that's dictating
Speaker 1: the market, and there's some other technologies or offset sectors
Speaker 1: like reforestation that play a more prominent role in setting price.
Speaker 1: I realized that was kind of a mouthful, but I
Speaker 1: think that the main point here is that the hyde
Speaker 1: with scenario, it does kind of take a lot of
Speaker 1: liberties and it makes a lot of assumptions, but what
Speaker 1: it does encapsulate is that there's so much uncertainty in
Speaker 1: the market right now, and it's not going to stay
Speaker 1: the same way as it does today right It's going
Speaker 1: to go through a lot of changes, and we wanted
Speaker 1: to look at a scenario where that could potentially happen.
Speaker 1: So when did carbon offsets first start the market? At
Speaker 1: least in terms of the voluntary market that was created
Speaker 1: in the late nineties, But if you look at actual
Speaker 1: supply and demand even up until it's been pretty inconsistent.
Speaker 1: So if you look at a year, for example, we
Speaker 1: saw just over forty million carbon off sets retired by companies.
Speaker 1: What that means is that companies went out and they
Speaker 1: bought those offsets and then they effectively removed them from
Speaker 1: the market and use them to account for their sustainability goals.
Speaker 1: And that's the best way for us to kind of
Speaker 1: assess demand historically is to look at retirements. If you
Speaker 1: fast forward to we saw nine three million carbon off
Speaker 1: sets retired, so it's a little more than double what
Speaker 1: we saw. But you know, you know this better than anyone, Dana,
Speaker 1: any technology or market that we look at at benf
Speaker 1: it's kind of everything is moving up into the left,
Speaker 1: right or up into the right. I'm sorry, um, very
Speaker 1: different choice you're looking at exactly now. This is this
Speaker 1: is very much a positive one and it's moving up
Speaker 1: into the right. So that is the case here. But
Speaker 1: that type of growth over five years is nothing to
Speaker 1: write home about. And then it was again another record
Speaker 1: year for retirement when the market did come close to
Speaker 1: doubling in terms of demand, but it's still fairly small
Speaker 1: in the grand scheme of things. A company like Shell,
Speaker 1: for example, their scope three emissions which come from the
Speaker 1: say the use of their their oil downstream in jet
Speaker 1: fuel and plastics and cars. Their scope three missions alone
Speaker 1: or seven are several hundred million metric tons of c
Speaker 1: O two. So if they wanted to go ahead and
Speaker 1: purchase offsets to address just their scope three emissions. The
Speaker 1: market wouldn't be big enough today for comparisons sake. So
Speaker 1: it's growing, but it's right now still tiny and has
Speaker 1: such a long way to go to meet the demand
Speaker 1: for all these companies out there. So this is an
Speaker 1: industry that has been considered to be fairly nascent or
Speaker 1: small up until quite recently, even though it's had a
Speaker 1: couple of decades. You know, you're saying this up into
Speaker 1: the right. It really depends on what the severity is
Speaker 1: of how hot something is, and I think I have
Speaker 1: an idea as to why this might be a very
Speaker 1: hot space right now. So November copy article six came
Speaker 1: up again and this idea of global interplayer in some
Speaker 1: way embracing some version of carbon offsets came up and
Speaker 1: actually got traction for the first real time at a
Speaker 1: cop Yes, it had been discussed, but I mean this
Speaker 1: seemed like this was more of a triumph than in
Speaker 1: previous versions. Do you think that that is the primary
Speaker 1: reason why this is taking off or does it have
Speaker 1: much more to do with maybe different company and country
Speaker 1: net zero targets And really this is just being a
Speaker 1: necessity for some of these places and companies to actually
Speaker 1: reach those goals. It's a combination of both. Right, A
Speaker 1: lot of companies are again setting these these net zero goals,
Speaker 1: and every single day a major company goes out and
Speaker 1: either sets in at zero goal or ratchets up there
Speaker 1: existing one. So there a lot of it is again
Speaker 1: company driven. But what their discussions at cop did around
Speaker 1: this article six, like you mentioned, is I think you're right,
Speaker 1: it got a lot of public attention on the importance
Speaker 1: of having a global carbon mark get I think just
Speaker 1: the real question now is who's going to be the
Speaker 1: major player in that? Will it be companies? If you
Speaker 1: ask me, I think companies will be the major players
Speaker 1: for at least the next couple of years at an
Speaker 1: absolute minimum. But I think that's one of the big questions.
Speaker 1: And then the other one is what types of supply
Speaker 1: will be permitted. So that's why I think this offsets
Speaker 1: outlook that we've just produced. It. It comes out at
Speaker 1: such an important time because it allows us to kind
Speaker 1: of flex some of these assumptions and put to test
Speaker 1: some of the ways that people think this market should
Speaker 1: evolve and actually look at is it sustainable or not?
Speaker 1: The results are you know, of course, as we've been
Speaker 1: discussing here, you know, pretty shocking. So there are some
Speaker 1: bodies and organizations are out there that are aware of
Speaker 1: these limitations in terms of verification and additionality and just
Speaker 1: some of the things we've discussed around you know, how
Speaker 1: many where, When? Why? What are the bodies and the
Speaker 1: organizations that are looking to put some structure in place
Speaker 1: for the buyers. The first ones are the Registry is
Speaker 1: kind of oversee the market today. You can't see me
Speaker 1: right now, but if I were to say oversea, I'd
Speaker 1: be putting those kind of in quotations right because any
Speaker 1: project that wants to get verified to buy or sell
Speaker 1: a carbon offset should be on those registries. But beyond that,
Speaker 1: there's very little regulation that we're seeing in the market
Speaker 1: right now. That's changing though again those registries I mentioned before,
Speaker 1: like gold Standard and VERA, as well as ones like
Speaker 1: the American Carbon Registry and Climate Action Reserve, these groups
Speaker 1: are getting a lot more pressure now both from the
Speaker 1: media but also from investors in various stakeholders to ramp
Speaker 1: up the regulation. I mean, that's why we did see
Speaker 1: a change like limiting clean energy offset to apply to
Speaker 1: least developed countries. These registries are also now creating kind
Speaker 1: of a bifurcation to allow for a distinguishment of high
Speaker 1: quality credits compared to low quality ones. So VERA has
Speaker 1: what it's called its Climate, Community and Biodiversity or CCB verification,
Speaker 1: and that actually earmarks the carbon offset projects that have
Speaker 1: what we call CO benefits, so beyond reducing emissions, they
Speaker 1: will benefit communities or tech biodiversity, or improve water filtration
Speaker 1: or or all these different things. So the registries are
Speaker 1: going to have a big say in this. The other
Speaker 1: one that I would just mention is the Task Force
Speaker 1: on Scaling Voluntary Carbon Markets. So that is a group
Speaker 1: that has been run by Mark Harney as well as
Speaker 1: some other people for the past couple of years. And
Speaker 1: what the task Force one of the kind of major
Speaker 1: pieces of output from it was to create a governance
Speaker 1: body that's going to create things like core carbon principles
Speaker 1: for the carbon offset markets to basically determine, you know,
Speaker 1: if I, as a customer want to buy a carbon offset,
Speaker 1: I can guarantee that it's going to meet this level
Speaker 1: or this threshold of quality. Right, it'll meet It'll check
Speaker 1: you know, boxes X, Y and Z. So those core
Speaker 1: carbon principles and that governance body are going to be
Speaker 1: really essential and essentially building a you know, a carbon
Speaker 1: market two point o or a carbon office at market
Speaker 1: two point oh. That's going to function much more like
Speaker 1: a traditional commodity market. And of course, if you're a
Speaker 1: trader or you're an investor, you know you're seeing dollar
Speaker 1: signs when you hear that, right. That as a tremendous
Speaker 1: opportunity for traders and banks to get involved in this
Speaker 1: space kind of help boost that liquidity and help suppliers
Speaker 1: offload their offsets and help all these corporations and again
Speaker 1: maybe one day countries to achieve their climate goals. So
Speaker 1: on that functioning like a commodity we have this forecast
Speaker 1: where we're looking out into many years in the future
Speaker 1: and where the price may eventually go. And you know
Speaker 1: you had mentioned essentially two U s dollars a ton
Speaker 1: by the year. Are you also seeing a good amount
Speaker 1: of volatility? Will this be something that is actively traded
Speaker 1: and the traders themselves have an opportunity to make quite
Speaker 1: a bit of money if they're they're looking at the
Speaker 1: vets correctly, because you know, one of the things we
Speaker 1: saw in the uts market is that for a long time,
Speaker 1: it didn't have the volatility. Now that of course has changed,
Speaker 1: and this is now a very hot space to be
Speaker 1: in again, but for a while it wasn't absolutely and
Speaker 1: that's the goal I think a lot of traders, you know,
Speaker 1: we get a lot of questions now from energy companies, utilities,
Speaker 1: from banks. They're all setting up trading desks specifically to
Speaker 1: capitalize on the volatility in the carbon offset markets. So
Speaker 1: we do expect more volatility today's market, you know, as
Speaker 1: much as we keep referring to it as a market
Speaker 1: today's discussion, it's really anything but a legitimate commodity market. Right,
Speaker 1: Like I mentioned, pricings is not driven by supply and
Speaker 1: demand fundamentals. It's much more driven by behavioral decisions like
Speaker 1: a company waking up one day and saying, I think
Speaker 1: I'll buy offsets today. Right. That type of behavior or
Speaker 1: that type of supply demand is not sustainable long term
Speaker 1: in this market. And again that's one of the outcomes
Speaker 1: of that voluntary scenario we looked at. If the market
Speaker 1: stays the same as it does today, prices will will
Speaker 1: make unsustainably low and the markets basically get to die
Speaker 1: out before it even gets going. What we need to
Speaker 1: see is is again an increase in price in And
Speaker 1: again I think traders are banking on that increased amount
Speaker 1: of volatility. So there's gonna be a huge business opportunity
Speaker 1: for them as supply and demand increase over time. And yeah,
Speaker 1: we do. We do make a very big assumption in
Speaker 1: this report that this does start to resemble a more
Speaker 1: traditional commodity. That may not necessarily be the case, but
Speaker 1: it's going to be what's needed in order to scale
Speaker 1: the market up. You do have some critics for that,
Speaker 1: but I think that is kind of the cold hard
Speaker 1: reality of it. Final question, just to put into context,
Speaker 1: keeping in mind that I think an individual living in
Speaker 1: Western Europe where I am, generates about ten tons of
Speaker 1: c O two a year, and I believe where you
Speaker 1: are in North America it's about twelve tons a year
Speaker 1: last time I checked. So, just on an individual basis,
Speaker 1: how many tons of c O two have been offset
Speaker 1: to date? If you look at the amount that's actually
Speaker 1: been retired, So of course there is issuance of carbon offsets,
Speaker 1: that's how much supply has come into the market. I
Speaker 1: don't necessarily think that's a next a great or accurate
Speaker 1: picture because a lot of those offsets are just out
Speaker 1: there floating around um. A lot of them probably didn't
Speaker 1: need to be verified for an offset anyway. So I
Speaker 1: think something like a retirement is a much more accurate
Speaker 1: way of looking at this. And if we look at
Speaker 1: the the amount of carbon offsets retired, since it's around
Speaker 1: four hundred and fifty million metric tons of carbon dioxide
Speaker 1: equivalent and that is collectively, so again that sounds like
Speaker 1: a lot. But in the grand scheme of things what
Speaker 1: we're talking about again with with NEO and with some
Speaker 1: of our other reports about large scale decarbonization, it's tiny, right.
Speaker 1: I think the exciting thing if if again, if you're
Speaker 1: stakeholder and you're listening to this podcast today, I think
Speaker 1: the exciting thing is about where this market could go.
Speaker 1: Because we could see kind of you know, large gale
Speaker 1: significant growth in the immediate future. Let's hope that we
Speaker 1: see some really creative and constructive ways for us to
Speaker 1: think about removing carbon from the atmosphere, not omitting it
Speaker 1: to begin with. On that note, Kyle, thank you very
Speaker 1: much for joining today. Thanks so much. Always fun to
Speaker 1: talk about this market. It's like the wild West. Today's
Speaker 1: episode of Switched On was edited by Rex Warner of
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