Paying The Price: Can Carbon Markets & Offsets Be Effective Tools to Tackle Climate Change?

[Music] we have three practitioners uh of of a Dark Art the carbon markets uh these are very much in the news these days um but in fact there's nothing new about uh the idea of having markets for trading carbon we can go back several decades uh to the Kyoto Protocol uh which envisions these we saw uh even environmental trade going back to the trading of SO2 or sulfur dioxide acid rain uh pollution uh was in the Clean Air Act Amendments of 1992 in the United States uh what is perhaps the most successful environmental policy in American history involves environmental markets and trading which is that so SO2 trading program so these are not new ideas and at The Economist we have long advocated a role for trading and economic tools market-based instruments in dealing with climate change however Here We Stand today in 2023 with um hardly a weeker two going by without some kind of challenging headline suggesting that there's a problem in carbon markets uh whether it's scandals or whether it's lack of trust or whether it's corporate ambivalence or whether it's another expose uh there seems to be a problem the this is not the first time the plane has has failed to take off uh and Achieve 30,000 ft in altitude and so to help us figure out how do we realize that the clear and theoretical potential of carbon markets to be able to provide those transfer resources uh to be able to accelerate in the most efficient way tackling of climate change of delivering carbon benefits that we so urgently need um I want to ask our experts here um I might start with um Robin Robin your company Vera is very much at the heart of uh some of the uh discussions today can you give us your perspective your you're in the hot seat here um anyone who follows the news will know your company uh and will know that you in the midst of grappling with some of these challenges yourselves bring us up to speed tell us what do you think are the real challenges we need to overcome and what are you doing to overcome them thank you very much Fiji and and thank you very much for that introduction you're you're absolutely right carbon markets are the world's foremost tool for channeling Finance towards emission reduction removal projects around the world as well as sort of providing all sorts of development benefits for community uh what we're really seeing in in Vera right now of course is and Vera I should take a step back for those of those of you who aren't aware we've issued around 70% of carbon credits in the voluntary carbon market around 1.2 billion credits 2,000 projects around the world what we are seeing though is that despite that size despite that growth everything that we've done everything the voluntary carbon Market that has done really is still a pilot project we are still in a learning by doing phase we are at the cusp of what of many cutting Innovations uh to these such that it's it's um you know it's it's it's really a question of of sort of really repairing the plane as we're flying it and that's what we're we're seeing right now I'd like to sort of spend a little bit of time here is what I see is sort of the the the key things that are are confronting carbon markets right now one of them is is a crisis of supply and the other is a crisis of Demand on demand I think my colleagues are are really better place to see this we do see there is significant under demand out there governments haven't set the the the policy Frameworks for ambitious enough targets yet corporates are are shy and so forth but but colleagues will will go into that what I'd like to talk about right now though is really one of Supply uh Supply is one of the thing that consumes us the most and what we're working on right now is a set of different areas in which we're seeking to bring high quality Supply to Market one of that is reforming our project cycle this is still an analog creation for a digital age and so the use of Greater technology digitizing the project cycle that's sort of foremost among among that the second is that as we see I mean by definition carbon markets as as sectors decarbonized the the the the proposition that additionality proposition becomes less less less viable we need to look constantly towards new sectors what's what's Cutting Edge ccus blue carbon bioart these are the areas that we're looking at at next provide sort of that that source of Supply we have a lot of methodology work that's going on there another area really is one of integration with governments governments are coming online what does that look like how does the voluntary carbon Market integrate and feed into those and finally is one of registry systems the the the Vera registry is a is a trading platform it is one that we are continuously seeking to improve we recognize that that uh you know investors large scale ones need to to to have there's certain controls certain expectations that they have and we're looking to sort of meet those needs that's sort of a snapshot of what we're doing VJ happy to go into that a bit more yeah let's let's spend a moment on this I liked how you um sort of delineated challenges in Supply and we'll come to the demand of course the two are linked um if you had infinite supply of Highly reliable uh credits I'm sure people would be banging down the door to to to buy it um at least if it were at a reasonable price uh so uh maybe maybe the problem is more on the supply side I would put to you uh uh is uh there is a concern about biologically based uh uh sources of credit um Bill Gates famously uh or at least infamously perhaps at during climate week in New York at un uh climate week I was there with him when um he said the following are we the science people or are we the idiots uh in talking about investing in trees for carbon credits is in his view that's a terrible investment um uh that's Bill Gates you know he's he's entitled to his view uh but there are some questions about integrity of the quality of credits and the kinds of credits you did allude to CC us and other forms of credits that may have uh geological time frames you didn't talk about Advanced minimalization or director capture but perhaps those are others that people talk about engineered solutions that have a different kind of carbon credits but this question of quality of credits really to step back um is it a problem that these are Project based and therefore uh every project is going to be unique and hard to verify uh fiddly and expensive that the transaction costs involved and the lack of transparency that there is in trying to figure out every single um project meet specs is different from other commodity markets right um take oil you know we're in the middle east of course there's a great oil power here in UAE yes there are grade differences between WTI and Brent or Venezuelan heavy and Maya heavy and some of the lighter grades but fundamentally a barrel of oil is a barrel of oil it's a fungible global commodity that's connected in a global marketplace with reasonable metri and and some variations that can be worked out and they're traded here as in other places in the world can we get to a point in carbon markets where the supply side can trade with the slightly proximate fungibility that we do with oil or is your instinct that we'll never get there that that's the wrong mental model maybe that's the wrong thing we're working on I mean I think that's a really good question and one frankly that I think the market itself is is very much split on this is a market with such transparency it is a market where you can go into any carbon credit and you can track down not just the country you can not just track down the type but you know which project it was the Vintage year and and everything like that and that's as you say it really makes it really different from a lot of other Commodities in terms of whether or not that is the better model versus one where there's sort of an aisc of of those underlying qualities I think it's an open question I I think perhaps what we will see is that market evolving to meet both needs and I I think it's not maybe an either or but I think there will always be be interest in sort of what we might call charismatic projects projects that have certain characteristics but I think as well we are going to probably see on you know as as we move towards more jurisdictional approaches and so forth especially in the nature-based area uh I I think we'll probably see a little bit almost by Nature standardization in that area well that's interesting so standardization is something you're putting on the table we'll we'll pick up on that when we come to our next speakers uh maybe we could turn to our next speaker let me ask you what your your perspective you have been handed the Joba talking about demand but I'll give you the freedom to talk about Supply if you want to comment on what we've already heard uh thus far well I think um I think what Robin's saying you know you you really need to understand that the process of taking a carbon credit from beginning to end involves many stakeholders it's incredibly transparent process arduous um and there really is no slight of hand um when when it comes to projects at Vera um so there is no big sort of conspiracy there are uh methodologies that haven't traveled well uh there are projects where the stakeholders at on the ground have done things that you know obviously fell through the cracks and and and Vera is is fixing all of those things but I think that you know you asked the question in terms of what is it that's necessary in order to make carbon fungible right you you compared it to indeed can we and my my answer is that it it absolutely can but it's not in the hands of Vera and it's not in the hands of the marketplace it's actually in the hands of governments right because today if you look at the market the ultimate buyer of carbon credits are corporates and when a corporate buys a carbon credit they also buy reputational risk right and there is nothing they can do to shed that risk that they've taken on with that transaction unless they are buying a carbon credit that's stipulated by their government so if the governments tell their companies these are the carbon credits that you should buy um then it's the government that's taking on the mantle of reputational risk not the corporate and this has happened before it works perfectly well during the first Yoto era when the uh European emission trading scheme came out uh there was a linking directive that stipulated what carbon credits from the CDM era could be traded in the EU and it was a rush to find the carbon credits that most efficiently priced so that the corporates could deliver them into the tax system that's what's needed in order to scale these markets if we sort of try and push that responsibility to the corporates what you get is in action because there's it's literally impossible for them to isolate themselves from that from that risk it's uh as you rightly say it's very it's the wrong place to play to put that kind of due diligence efforts abut asking uh every company on Earth to have a dedicated team to vet every possible carbon credit is ridiculous now a company like Microsoft or Amazon uh we know stripe and Frontier there's some buyers coalitions that have invested huge resources and have world class experts uh doing nothing but looking at Advanced uh blue ocean sequestration or or weathering projects uh good for them would and Microsoft can spend a thousand Euros a ton which is what they did to buy a carbon credits in Iceland from a pilot project as sort of a first mover like the people that bought the first Tesla let's say they overpaid uh maybe did a bit of virtue signaling or maybe they're helping buy down the market huzza let's we're happy they're doing that but that's not a a scalable model for everybody uh and certainly the Thousand or million companies that come after Microsoft and Amazon and stripe cannot afford to have teams internally doing that kind of vetting uh your suggestion is that it should be government or at least regulation of the sort we saw in Europe um I think Singapore might also come in on this there are others that would say maybe third parties maybe Auditors um third party V vetting could be a solution in some markets we see in commodity markets uh but I'm curious uh would would that satisfy if it were not a compliance Market regulated intrusively by government but instead having some other form of vetting do you do you see that as a possibility I just think that once if you leave any wiggle room you don't eliminate the reputational risk so it it is squarely on the shoulders of government okay uh your position is very clear yes let let's let's turn to our final speaker thanks for your patience I I think um for those of you in the in the audience thinking about investing uh in this market or how what the opportunity is I think it's really important to keep in mind what's being criticized about the market and what isn't what's not being criticized is that projects failed or that trees that were paid for weren't planted or forests that were supposed to be protected weren't those things are observable at low cost in real time we're having an argument about the the carbon additionality the carbon accounting Frameworks of those particular projects not whether those projects worked and VJ you used the word ridiculous I think this whole conversation is ridiculous for a couple of reasons if you think about the demand side or the Need side in the market to get to one point soundtrack for 1.5 degrees we've got to reduce emissions by 75 times more in the next 2,000 days than we've been able to do in human history it's a a colossal investment opportunity and a colossal Challenge and so what we have to be thinking about is not whether the the there's there's 30 million tons if you add up all the carbon credits in the world that are subject to some criticism of overclaiming you can offset Global emissions for six hours it's a non-issue what is an issue is the 99.5% of emissions that are not being offset at all and so we really need to focus on how we get more corporate parti the offsetting bill mentioned confidence and regulation I actually think it's much simpler than that at the moment companies risk getting in trouble if they use carbon offsets we need to move to a position where companies get in trouble if they don't and there are a number of Integrity initiatives underway that are making that true and when that corporate demand comes to the market because of those High higher Integrity standards there is no way no way we have going to be able to meet that Demand with Supply as we know it if there are just and just the science-based targets initiative 30 billion tons a year of emissions if you add up every single carbon project and existence and every single carbon project in the pipeline you get maximum supply of 1 billion tons a year something's got to give let me push back on you a little bit Rich the the U idea that we need much more uh in terms of offsets that we should flip the script as it were uh or the narrative um there are those who would argue and I think many of them will be arriving in Dubai on very carbon intensive Jet flights from around the world shortly I flew in on one of those right right exactly they weren't on the Virgin Flight that had sustainable aviation fuel that landed in in New York a couple of days ago uh they would say uh actually the offsets themselves are a problem uh you're having debates about quality of offsets and transparency and fundability it's that's an argument about how many angels can dance on the head of the pen uh we should not use offsets at all or use them minimally but rather we should actually reduce emissions offsets are um a bit like an Indulgence a Papal Indulgence from uh the centuries past uh we should actually minimize them and this is partly where the science based uh SP spti science based transparency initiative and so on uh take this view that you should do deep cuts at home do the first not use any at all if you can or if you must use only so-called high quality offsets and we can have a big debate about what's high quality what's not uh it sounds like you at least the way you framed your conversation was it was the opposite I just want to poke at you with that that is completely backwards tell me explain why why are those people wrong the the fundamental principle should be if you pollute you pay every ton every time this is an emergency and you do not get to emit one ton of CO2 without paying a price for that ton in my view and so what we need to get to point is absolutely yes you do not get to use carbon offsets instead of decarbonizing you have to use those as well and so if we followed the science-based targets initiative Guidance the the company who has residual missions left over after they've uh you know decarbonized what they can do internally doesn't have to start paying a price for their pollution until 2050 so go and tell that to the communities in Africa that they need to wait 27 years before a big company will decide to invest outside their own business in a global climate emergency we have to do everything everywhere all at once decarbonizing internally and offsetting externally what do do you think about this question Robin if I can ask you to step in here um about the role of offsets so I mean I agree with Rich uh at heart fundamentally the issue is that not enough emissions around the world are covered by pricing whether that's government set or whether it's uh through you know corporate normative for normative forces that sort Drive corporate behavior and this is a real issue I mean fundamental problem is that the atmosphere is agnostic about emissions don't get me wrong we absolutely have to be committing I think every one of us to reducing own emissions first and that does have to come first but the question of residual emissions emissions that remain this is something that I think everyone should be taking an active interest in and it's something that people should be looking to sort of fully neutralize and I I do feel a little bit that we've lost our way a little bit I think as Rich points out quite well that if the the balance sort of excluding too much of a role for for for offsetting and for neutralizing what remains I think that can get l in trouble and results in in missed opportunities not just for the climate but for development as well this raises one one question in my mind I mean the idea of paying for pollution uh is uh music to my ears right the we have long advocated at Economist externalities pricing carbon is external to the market right it's an externality and the nerdy talk of economists and so some form of carbon pricing carbon tax would be ideal economy-wide globally harmonized but absent that other ways of getting at uh the poit pace principle is absolutely the right first principle uh we've been banging the drum for a very long time I think I wrote my first leader more than 20 years ago an economist arguing this was treated as something of a parai at dinner parties and but now almost a quarter approximately of the world's economic activity is covered by some kind of carbon price often it's a insultingly low price but it's a signal it's a start it can be ratcheted up over time uh China has a big chunk of that at a very low price but nevertheless the trend line is going in the right direction if we were to get to a world where we have 100% of economic activity somehow miraculously covered um by a meaningful greenhouse gas price we can say CO2 equivalent price because there are other greenhouse gases of note methane for example will be a topic of attention in cop this year um if we get that pricing why do I need offsets why do you make me pay twice that that is a great question and a carbon tax controversial statement coming up a carbon tax is less effective as a climate tool than a carbon market and the reason for that is a carbon tax is still just a theory of change the theory says if there's a tax a company will be motivated to change its Behavior to avoid the tax what a carbon credit is is one ton of proven climate impact so in order for the carbon tax to be true two things have to happen one is the company has to change its Behavior and then the tax that's collected has to then go to be used to reduce emissions because by definition the company hasn't reduced emissions itself in a carbon Market that impact has already been proven and is being funded in a Reas uh and so you jump over that step of having to collect the money and then the government goes and finds a project to invest in the project's already been done andov and and I would add that what the carbon markets also do is they bring Market efficiencies right so basically you have capitalistic motivation to go and find where can I reduce one ton of carbon the most efficiently and then once that is satisfied then you go to the next project and the next project and so forth um so there is no more efficient way or ecosystem to reduce a ton of carbon than through the carbon markets go ahead and I would just add I mean a tax does not guarantee an outcome I mean we can get into questions of elasticity and so so forth but simply making something more expensive sure might influence behavior but it can't guarantee it uh whereas the market is all about quantifying impacts and and that real that that that direct correspondence between pollution uh and and and and impact and I think that's a lot more powerful in many ways on the shocks so you you make a good conceptual argument that the proof in the pudding is if you can develop a carbon Market that actually has Integrity right um that is what you say this is a credit it really represents a ton of carbon remov we can prove it it's bulletproof transparent the problem is we haven't been able to get there right it's been 25 years since we've gotten to I mean it's it's your point right the the the whole Integrity question is centered around a handful of projects right the famous sort of Guardian article is in fact sort of guilty of doing exactly what they claim the projects that they that they mention um do which is cherry pick your studies right they cherry-picked certain studies and then they painted the entire Market in a certain color um you know if you look at the market as a whole there's significant amount of Integrity significant amount of of of good projects out there let's let's talk about um efforts to uh build trust uh because short of uh government regulation which is not going to happen in the short term although it may in individual countries like part of Europe and Singapore we talked about um there are efforts that are uh bar Carney and other kubas of the the global uh uh you climate leadership world are working on uh bringing together some transparency some commonly agreed rules standards benchmarks um one if you want to take that talk about which of those initiatives is uh looking most promising and what might be more we need to see on that front I'll have it go and then I'm sure Robin and Bill will as well the different initiatives serve different functions so the science-based targets initiative is trying to hold companies to account for setting and meeting a a goal that is consistent with 1.5 degrees of warming and then in order to do that they're going companies going to need some level of carbon offsetting and the demand side of carbon offsetting Integrity is managed by an entity called the vcmi the voluntary carbon Market Integrity initiative who for the first time this week came out and said it is okay to use carbon credits to meet part of a science-based target for scope 3 emissions which is by far the biggest category of emissions the emissions from lighting stuff on fire and then on the supply side it's the Integrity Council for the voluntary carbon Market which makes sure that projects like the ones that are issued by Robins uh uh organization Vera meet a very high standard so it's not I don't think that which one of those will succeed they I think they'll all succeed but they're providing different function functions into the ecosystem what do you think me yeah I mean we're we're the iccm is is as we said the Integrity Council for voluntary carbon markets uh we see that absolutely as something that will help to bring greater consistency confidence and Trust uh it is a it is an initiative that at first we had some questions about but one which uh you know through work and cooperation we've gotten very comfortable with uh we put in just recently our submission to the iccm to have our our program uh submitted for for assessment as well as various categories of different project types we're we're very confident and we're looking forward to seeing how that work goes on uh otherwise we are you know strong supporters of the vcmi and frankly any other initiatives that are out there trying to sort of increase Integrity confidence and scale uh any any thought on this I mean could we head toward let me put it to you more pointedly is are we headed to a world like us Gap let's say is for accounting rules and international Gap might be just one or two systems that that that are broadly agreed accounting principles I again you think it's going to be a h Podge I I I just see bcmi and iccm and anybody else um as data points um they are not sufficient to scale the markets they are they provide guidelines they provide um you know show us where the gold posts are uh but they don't eliminate the reputational risk that I talked about initially so very Valiant efforts they really taken on a big bite of the Apple but um I I just don't think they're enough to scale the voluntary carbon markets but they might be stepping stones in the right absolutely they to and and crucial yeah um I have one minute left so I'm going to give one of you the chance to put forward a big idea to our audience on what we need for demand to come back to this Market in in a big way at the moment word is that we've had a bit of a retreat because of some of the concerns expressed what would you like to see in the next uh 12 months to bring it back um I think an understanding actually demand is not in Retreat 50% more companies this year have offset their emissions than did last year um and this Market has grown by 400% since the Paris agreement was signed so it's growing it's just not growing fast enough and I think what I would like people in this room to understand is there are billions and billions and billions of dollars being invested all with the same thesis the price of carbon has to rise by multi if we're going to solve climate change we agree so buy the carbon and just do it in a way that as we've said before has the Integrity of the ivcm the vcmi this is the biggest investment thematic of the next 30 Years and so we need these Integrity initiatives but for us we think this is It's ABW fing this week after all a highly compelling opportunity for all of you all right well you get the last word uh thank you very much Gentlemen please give them a nice round of applause for taking the have questions