You're listening to Redefining Energy. Your co hosts from Berlin Gerard Raid and from London Lawrence Seglent. Today on Realief an Energy r We're going to talk about a market which is half the size of the tungusk In market and yet as a politician and media all over it. Which one is it? Second hand cars? No? Okay, thank you? Another guess carbon, my friend, but voluntary car? Voluntary carbon? Right? Yeah, but first of the world from our new partner. This podcast is powered by AXPO, and
international leader in providing sustainable energy solutions for the future in an Ordix. AXPO has been a pioneer within trading and origination services for the last twenty years. People are get very passionate despite the fact that it represents less than zero point one percent of all investments in the energy transition. It covers less than zero point zero one percent of the world a mission. Now everybody seems to have
an opinion on it. The banks are writing reports on it, the regulators are getting very agitated about it. Wow, that's an extraordinary non market. Yeah yeah, And I think it's a very controversial market and I'm really looking forward to discussion on my friend yeah, because we have entitled the episode is carbon the New Crypto, Because there's been a lot of fraud. There's been a lot of reports. I don't know how credible they are that more than
fifty percent of the credits circulating are the fake or updated. And you always wonder if junk credits are a bug or a feature of the voluntary cabin market. You're absolutely right. Well, what's clear is they're not perfect. No, no, they're not perfect. And at the same time you've got five thousand blue chief companies. Is they want to be in that zero carbon neutral
and some are using those carbon credits to support their claims. Yeah, and some of them around are trying to do the best, but just are misguided, if I may say. And at the same time, because of bad press, we see that some of the early movers, whether it's a line companies or an essay or Gucci, are now exiting the market. So it's never a good sign that the pioneers leave the market. It's never arch but it's not looking forward to the discussion. So we should bring on our guests.
Our guest. This guide on our which I've loomed for twenty years, is being an expert on on to the markets. It was at the beginning of Bloomberg and energy finance and now is the CEO founder of trov Research, which is one of the best, if not the best specialists that are analytics firm focusing on corporate climate commitment and the global carbon market. Let's bring them on. Guy, welcome to the show. Lovely to be here. Thanks
for inviting me. Yeah, it's good to see against pill while definitely good to see you both. So we're going to talk about carbon carbon credits today. We did one episode last year with a nette from i CBCM, very popular or we thought it was time to revisit. There are a lot of talk about carbon markets. Of course you've got a confounds market. We're going to talk about the voluntary carbon market today. So my first question is who's
buying those carbon credits and why? Well, all roads in the voluntary carbon market lead to the door of the corporates. It's the intention of corporates. They can be large, they can be small, they can be medium sized
who are voluntarily trying to reduce their impact on their climate. They have looked at doing it internally and many companies have set very ambitious climate targets net zero, and the conclusion that they often come to is this is going to be really very expensive, and if they can achieve some of those aims by buying a credit or effectively paying somebody else somewhere in the world to take carbon out of the atmosphere or reduce it going into the atmosp much more cheaply, then
that seems like a good trade. And that's what they've been doing. And I understand it's so linked to the product they're gonna sell, So I don't really care if Gucci is carbon neutral. When I buy a Gucci bag, I probably don't really trust all those airlines companies who explain me that the flight is carbon neutral. On the other hand, you see oil companies who are really the big emitters, and I really wonder if they buy carbon credits are
not. So can you grade a bit the level of commitment that those people are doing and the amount of carbon credits they are buying before we go into what is a carbon credit. I don't personally buy Gucci handbags, but if I did, I actually might quite like the fact that the brand is associated with something good then not just luxury goods, but it could be a bottle of wine. It could be a flight, it could be something else. And well, you see is that some companies attach the carbon credits to individ
double products. So unilevera might look at say the Men's care arrange and the Dove soaps and they may say, well, we really want to sort of attach a carbon neutral brand to that because we think it's a good sort of marketing image. All they can do it at the corporate level, and it doesn't work so well for big companies because they're you know, if you're oil and gas or minerals, like an extractive company, because the carbon face is just so big, you cannot off so at at all of that in one
failed swoop. But for medium sized companies, you know, if you're a bank or a management consultant or an accounting firm, now your carbon footmanent isn't that big, and you can take the whole company's carbon neutral admissions and offset those, and they like to do that as part of their branding. It shows their good corporate citizens. It talks to the consumers, it talks to
other NGOs and stakeholders. Also, it also talks to investors. So a lot of the driver for companies climate activity now is coming from investor groups, trillions of dollars of fund managers now looking at corporates and saying, we're carrying a liability in the long term here because climate is a sort of as a systemic risk to every business we've got, but also in the short term, we want to see you doing your bit, taking action, showing that you're
conscious of this risk and this decision and the problem the world faces. And carbon credits are part of the way of answering that question, Guy, can I ask practical questions I have? Next week? I have my own business. I'm a meeting with our sustainability officer and the reason we have is because what we're doing is we're offsetting our carbon and she's not happy about the way we're doing it because she says it's just not high enough quality. So what
should I do? Oh, that's a very interesting question because we're having the same conversations with Introve. We are just publishing our values because we've lived both and we haven't written them down so far, and they will be on our website soon. But one of them is we practice what we preach. We try not to preach. We try and provide information but there's a philosophy there that is, you know, we can't espouse the virtues of climate action if
we don't do it ourselves. So we're actually going down that same journey and thinking about our calculating our carbon footprint. And you know, I'm conscious I fly to conferences and I feel very guilty about it. I want to compensate for that. And it's actually a really interesting question, Okay, what credits would we buy as a company who's like in the center of this market, And it really just sort of boils down to what matters to you as an
organization. Sometimes it might be the counterparty you're dealing with. Do you trust them? Do you know what they're doing on the ground. We do have analysis of individual projects across four and a half thousand projects that try and sort of help those decisions that you're making. But sometimes you may think, you know, I really want to protect nature as part of my solution. I want to not just protect it, I want to enhance it. So you
know, you might go to an aforestation or reforestation project. You might think that personally protecting the ocean or regrowing mangroves or seagrass is really important to you. Other times, another person in the same situation may see, I want to really support these new technologies. You know, direct air caption machines. Do you know the science fiction solution that take CEO two out of the atmosphere?
Even though they're ridiculously expensive, it's something they feel passionate about, can prove that it's additional and it's going to be part of the journey to getting those things more cost effective. So I think it's a really personal decision.
At the end of the day. You introduce here the concept of good credit bad credit, And of course we've seen a lot of our stories in the past months, either about people using what I would call very very old credits or remnants of the clean development mechanism, or using a hydra build in China fifteen years ago, or using questionable baselines, which means that at the end of the day you calculate the carbon credit against the business as usual or what
you've seen, are you and blah blah blah blah blah. So what in your opinion are the criteria to make the distinction between what's a good credit to buy and what's the useless credit to buy. There's like four or five sort of criteria that generally are agreed on as being the main considerations that people look at. The obvious first one you mentioned laurent is additionality. There are millions and millions of activities going on all day, every day in the world that
reduce emissions. There are, unfortunately more than the number of those activities going on the increased emissions. But if all we were to do was cherry pick the ones that reduced emission and say that they are saving the planet, and then you could buy those credits as offsets, we would not be helping the planet at all. So it's really really important that the projects and the credits that you calculate off the back of them are additional to what would otherwise happen.
Though, this concept of additionality is super important and that affects every project type. So you mentioned some of these big and renewable energy projects hydro or win that were developed and say ten fifteen years ago. I agree with you. I think that the case that those project would not have been built in the absence of the carbon finance attached to them is pretty sketchy. But then
you can compare that to say a mangrove restoration project. Now that's being done in the Philippines or somewhere where it's unequivocally financed by the commitments to sell the carbon credit, and that's a much clearer case. The second issue is the quantification of the credits. So in many cases the project may be additional. That's fine, you get over that hurdle. The next one is, well,
how many carbon credits you claim it from this? And this is where where a lot of the criticism has come from in the media recently, and we've been quite vocal about it here at Drove. We said that, you know, for example, rolling out cookstoves in Africa, millions of cookstoves really doing a great job helping local people use wood much more efficiently in their homes
because they a lot of them. You know, three billion people around the world still use wood in open fires for cooking incredibly inefficient, and the fact if you can put a simple stove in their home improves their efficiency two or three times, and therefore they need less wood and therefore there's less pressure on local wood sources, which is good for the planet. But how many credits
do you claim from that? The key factor is what's the amount of wood that you're picking, you're taking from the forests to put into those things. If you get that factor wrong, the projects themselves may be really good, but you're just claiming too many carbon credits. So there's a quantification, there's permanence. So if I protect a forest, you know, the rates of global deforestation are increasing again unfortunately, and they really need protecting these really important
assets. But if I pick an area of land and then it burns down subject to pests and actually forest fires are increasing globally because the climate change, now that carbon's just all been released into the atmosphere, So what happens in that situation and leakage? So if I protect an area of forest in one area, but the area next door is cut down net net, we haven't made any difference, am I just cherry picking the bits that have been preserved.
And so it's a whole bunch of issues that all come together and combine to sort of get to this notion of a single word meaning quality. We've been doing a lot of work and I guess so you've been associated in the integrity and Seal for the voluntary cabin market, which kind of summarize with the care cabin principles what you've been explaining your company and others. You're providing much
more data than we used to have even five years ago. I'm also very encouraged by the fact that now you've got satellite data which allowed to have a much more accurate monitoring of what's going on, especially in forestry in places which are hard to reach. So would you say that we start having the tools and methodology to really establish trust on this market, and people who in good faith don't have your expertise to analyze in a very annular way could buy a
more standard cabin credits that at least they could rely on absolutely. And that's the role that we play. We try and we do achieve much higher level of transparency than was there before. There are judgment calls that need to be made in these projects. The methodologies that sort of underlie the standards will have interpretation aspects to them, and that has allowed there to be a variability in theory. We shouldn't need to create the quality of projects, which is why
your work at ICBCM is so interesting and so important. The bar that the ICVCM sets for what good looks like is going to be really, really interesting because our basic numbers are saying that very very few projects, from what I know of the work that the ICBCM is doing, would meet those standards as they are being operated and presented today. That doesn't always mean they are not good projects. It's just they haven't produced a documentation to prove they are.
So a lot of this is about the proof that is needed. But the key thing in the work of the ICVCM and it's counterpart on the buy side, the Voluntary Carbon Market Integrity Initiative the VCMR, which is trying to clarify how companies make claims about the use of carbon credits, is that the bars they set are high, but they need to bring the companies and the markets along with them at the right rate. If the bar is set too high, that there could be a reaction to well, it's not achievable, therefore
should we bother. If it's set too low, then it's going to be argued that it's not actually moving the needle in terms of quality, But it's the transition. How do we get from where we are today to where we need to be without putting off companies from this market and bringing them to the table and saying everything you're doing is great, but we can make it better,
rather than you shouldn't just pack up your bags and go home. I was on stage recently at Imperial College in London arguing the case against a certain media journalist who'd been quite critical of this space, and there's a misinterpretation of what companies actually are doing. The interpretation from the purists is that companies have set a net zero target or a climate have set a climate objective, and therefore they will spend an infinite amount of money to make that commitment work.
The alternative is if I try to achieve that target by using carbon credits, and those carbon credits are deemed to be unworthy, then the whole thing is a sham and the company's deserves all the criticism it gets. The binary world of do I make my emission reduction target at infinite cost or buy my way out with a carbon credit? Those are not the only two. The reality is there is are not the only two games in town. There is a
third, and that's do absolutely nothing. Companies are making these commitments voluntarily. Yes there's interest from stakeholders, but they do not have to do this. And if you look at the rhetoric now in the US around run de Santis, who's running for the Republican nomination, who says the business of business is business, and there should be the businesses to make profits for shareholders. Do not engage in ESG activities. If you do, you are not fulfilling your
fiduciary responsibility. If that movement takes hold, the risk is that companies who are trying to do the right thing on climate will just throw their hands up in the air and say, it's not my problem anymore. If you want us to do anything, regulate us, and the voluntary action will take a
backseat. So we have to be very careful about pushing companies too hard and too fast into this sort of like purest world guy, Can I just switch track a little bit and just to ask you about the whole the world of it. There's a whole pile of carbon emissions in the IT world that we
don't talk about. I could actually argue that the heavy industry of the future is all these digital companies, whether the Amazon, Googles, etc. And I know they're at the forefront of it in some respect in terms of going out there and trying to lead in this area. But I suppose. My question is, are they really leading what's your whole you're taking that whole digitalization
and carbonization. It's a really interesting area, and I am right in saying that something like two or three percent of world electricity consumption is coming now from data centers. It might be more than that. It maybe four or five percent. It's a large number, and it's growing. I can see why it's a very topical issue. The interesting thing about the IT industry is it's quite concentrated. How many cloud companies are out there that are household names two,
three, aws A zero for Microsoft, they're the household names. There's probably a whole plethora of others behind the scenes. But you can point your finger at some very very large and very wealthy company saying you are the problem here. But the interesting thing is that that impact is distributed to nearly every
human being on the planet. And when you look at the impact that we are having at an individual level my phone, the fact that I'm now doing this podcast with you, we're using electricity through the ether on my monitor, it's actually really very small as an individual level because there are so many people using it. And when we did our calculations on this. Two years ago, we did a big, big study and very very sort of comprehensive analysis
of digital carbon footprints. We found that the fact that you store your photos and send your Instagram pictures to your friends actually isn't the digital carbon footprint from those images isn't the problem. Most of the problem comes from the device you're using, the screen you're using, and whether you're using Wi Fi, hard cable or five G and also the time of day that you're doing it.
And if you want to watch your favorite Netflix film on a plasma screen at home, that's going to have a dramatically different live streaming rather than you storing it, downloading it to your hard drive and watching it on your iPad. Those two carbon footprints are dramatically different. So behavior makes a difference, but actually the images on a personal level, that not the major problem. I came into that conversation with a bit of a provocative title, which is is
carbon the new crypto? And of course with the high integrity credits and the others people have to follow. Really the work done around the best credits if I look at the prices, So I'm using here website called carbon credits dot com. I don't know how good it is, but it says aviation industry upset one point forty two dollar paton minus six to date natural base of st two point twenty nine dollar pat and even take base upset. I don't know
what that means, is your on point eight eight? So it doesn't look that there is much demand. We're just talking about something virtualois are there returns moving around? It's an interesting parallel that you say, you know is carbon and new crypto. There are parallels, mainly in the hype cycle. I think crypto has a genuine value, of genuine utility. The way those coins are created and exchanged, and you know, without government influence, can actually
be useful. The underlying technology, distributed ledger technology is very useful. But there was a hype. The market was way overbought. People were piling in because they thought it was a license to print money. People made a lot of money, and then they sold out, and then the new people bought in and lost a lot of money. The whole thing is unraveled. But underlying that, I think it will settle down into a useful market, a
much lower level and much more pedestrian. And I think you might see that happening in carbon There has been a bit of a hype cycle, a lot of money put into it. We're going to calculate just how much money has been put into carbon credits. It's now coming off the back of that hype cycle. But it will settle down. We'll get the rules sorted. Climate change is a huge problem. We need all tools in our kit bag to solve it. Carbon credits are one. It will grow. It won't be
booming at two hundred percent growth a year. It will grow more gradually and I think more sensibly as well, rather than the hype that we had a year or two ago. Yeah. One of the sector who has done the most work in relation to carbon credits is the avision industry. They've put out to a standout a few years ago called cost Ya and they start using it. But now you see companies like easy Jet to say, okay, we're
not going to use them anymore. And at the same time, we all know that in order to the carbonize the avision industry, there's not going to be any hydrogen plane. It's more going to be what they call staff. But it's going to take a lot of time. So in the meantime, the general thinking was the use of carbon credits could accelerate the net zero or introducing the soft while using carbon credits. What you're thinking about the aviation industry
in relation to carbon. Aviation industry relation to carbon has three different pieces to that question, three different answers. Firstly is what Europe is doing. Europe has included all aviation within its boundaries in the EU twenty seven to be covered by the emissions trading scheme, So the emissions from those flights are included within
the scheme, which is trading at about eighteen ninety dollars a ton. So those companies are having to make sure that they comply with those limits, the caps on the whole of the European bubble of carbon emissions, of which at the aviation is part of it. So that point one point two is the course of the International Aviation Carbon Offsetting Reduction Scheme for International Aviation at which aims to hold emissions for international aviation constant at eight five of twenty nineteen levels.
For any growth beyond that it needs to be offset. Now, that is quite a complicated scheme. The intention is well meaning, and the full compliance with that doesn't actually kick in until two twenty eight with US sort of like really ratcheting up towards twenty thirty. And the idea of that scheme is that it's all the offsetting that happens for that those international flights has to be in addition to what governments are committing to under the Paris Agreement, so that there's
no double counting. What we're doing now under that scheme is really in the early stages of sort of piloting, and so if there's any supply demand pricing signals, they're really very early stage. We yet to see that scheme fully fledged. Now. The third piece is what companies are like easy Jet or Delta are doing voluntarily to try and communicate to the passengers that they are not
putting carbon into the atmosphere or certainly offsetting some of it. And they have used a lot of carbon credits, easy Jet and Delta being the largest. Delta was the largest buyer of carbon credits over the last three or four years the US air line. They made those purchases in good faith. They genuinely thought, are we're going to buy carbon credits on the market that have been verified by independent bodies like VERA or gold Standard, and therefore we're doing the
best we can. They were quite cheap, but now they're being second guest about where those credits come from and did they actually do what they said they
were doing. But those are voluntary commitments, and you know, I think what you might see is until the ICVCM and the quality Standards start to come through with their higher standards, that you might see russ on retraction of airlines making those voluntary commitments, but all airlines inside Europe and under the AKO of the International Civil Aviation Organization would still need to make sure they comply with those
requirements. Guy, you've been working this space for twenty years at this point in time, so I think there's nobody better equipped to talk a little bit about the future. So Carbon Markets two thirty give us an overview. What's it look like? I think one of the really interesting things is the way this whole global sector is shaping up. I mentioned the European emissions Trading scheme that is the pinnacle of, or the sort of poster child of a cap
and trade scheme which bounds the emissions within a fixed area. And there's also one in California, there's one in South Korea, and in an Australia growing now as well. So these are cap and trade schemes, but been running. The European has been running since two thousand and six. These are difficult to get right. And China is also developing one as well, so these
are growing. And interestingly, those ideas of cap and trade schemes are bubbling up in many other countries now, not just developed countries, but developing countries Indonesia, Vietnam, Mexico, Thailand, Kazakhstan of all places. And what we could start to see is an interconnectiveness of those schemes. They trade at very different prices. Europe's about eighteen ninety dollars a ton, China is two
or three dollars a town. South Korea somewhere twenty dollars a ton, And what we could start to see is an interconnectiveness of that, which would be extremely exciting. And then you've got the carbon credit world sitting outside that, which is volun reaction individual projects creating carbon credits from those. This is what
we see in the voluntary carbon market today. We do need to sort of work on the standards, both on the supply side and also on the demand side in terms of corporate claims, and that's what the ICBCM and VCMI are doing. That should grow. I don't think it's going to grow at the rebels of hype we've seen over the last couple of years. Will be more modest, but it will still grow. By twenty thirty, we'll certainly see
a much larger market. A lot of company commitments, by the way, are geared towards twenty thirty, so they're sort of looking towards what they need to do by those days. And then we could see into connectedness between those carbon credit markets and the compliance markets. And really, if you strip all of this jargon back compliance, voluntary credit, CAB and trade, whatever, what the world's carbon markets are trying to do is use capital, use financial
resources where it is most cost effective to do so in the world. So a company or a country that's got a high cost for reducing as it makes so much logical sense to place somebody else to do that where they can get better bang for their buck, and that's the ultimate objective of all this jargon. Well, guy, thank you so much for coming, and this is a very open discussion. It's great to see that beyond the headlines of horror
stories. There are some serious people an organization working to also on that front make the energy transition, and that zo on his way. Guy, thank you very much, thanks for giving me the microphone. Oh great, great having you guy, Lauren was great having Guy on. And I also know listen you're also an expert in this area and you've been involved in the carbon area for twenty years at this point in time. I have a question for
here, and it's a provocative but the Guardian ran in June. They ran an article where it's a destruction of world's pristine rain for a sword in twenty twenty two, despite Cop twenty six pledge. That was what they wrote.
Let me say what I think. I think the reason that the rainforest destruction sword was because of the Guardian, because the Guardian was the one that kicked off all this area of criticism in and around the carbon markets last year and the result of it was that a whole pile of player has just said, well, we're out of this and we're not even going to get involved in
Have I been too provocative? Thinks you're to teen years guided? I took years ago to Brazilian forest the expert and you know We're already looking about carbon credits for the Amazon forests. Look at that piece of the Amazon forest. If I trip, I make one million dollar. If I put carbon credits, I make ten million dollar. So what am I going to do? And I don't treat the guardian Okay, right, I don't correctly. It's economics. It's economics, okay, But they are good people in that market.
The good thing is, as you know, two weeks ago, were released finally the Integrity Council of the recabon market guidelines to separate what we can call the good credits, which we are respect to core carbon principles, so the four principles which are additionality permanents. So they say four years, we need to verify that the credits are ad for four years quantification and leakage.
We put the links in the show notes to the CVC, and so at least going forward, if people want to engage, they will have the certaintiest that those credits are not junk. And even if the buys eye like guy says, yeah, okay, fine, So there's hope that carb markets in the future. Basically there's hope. But let's face it, it's when I used to do carbon. Twenty years ago, it was the only game in town. And now everything's bigger. He pumps are bigger. If he's bigger,
saw as bigger, it's bigger, batteries are bigger. A lot of talks, but it's going to remain a very niche instrument. So jah. In conclusion, it's a market with complexity is inversely proportional to its size. Okay, I'm glad it's not just me good all right, And I really love those guys, so I wish the best for the CVCM, but we're going to put our ship in a different bucket. Okay, my friend. And that positive note, we thank ASKSPO for powering the show. Guys,
thank you very much. I love you. We talked into weeks time on another controversial subject, which is going to be your term. Oh I looked forward to. Thank you for listening to Redefining Energy. Don't forget to rate the show and subscribe on Apple, Podcast, Spotify, or the platform of your choice.