When Enough's Not Enough, Try Carbon Offsets

and heat pumps. Bit by bit, I drove down my carbon footprint, but never quite made it to net zero. So what's the girl to do to bridge the gap? Until I can figure out how to reduce emissions from the harder to abate parts of my life. I started buying carbon offsets. Many of you may be familiar with carbon offsets as the box that you can check on the online booking form for flights one selecting offsets. I wanted to make sure I was buying offsets that were

actually going to have a net positive benefit. I started using gold Standard who certified projects. Taking a look at their inventory just now, I spotted things like Ethiopian forest regeneration and clean cook stoves in Rwanda. I also decided to look at directly working with charities like Solar Aid, which provides solar lamps as replacements for kerosene lamps, and

by donating with them. While it isn't strictly considered a carbon offset, it's served the same purpose in my life on a microscopic scale, my journey to drive down emissions, only to find out just how hard it is to reach net zero and ultimately using carbon offsets to get me the rest of the way. There is what plenty of companies are doing on a massive scale, especially if they're in one of the hard to abate sectors where

the technological solutions are simply not there yet. With us today is Kyle Harrison, who writes about corporate sustainability for US at b NF, and he's going to speak with us about a piece of research he wrote titled Voluntary Carbon Offsets a Shortcut for heavy Emitters. This report has a great deal of detail on the different ways of offsetting and companies operating in this space, and if you're a client, you can access it at BNF dot com

or b NF go on the Bloomberg terminal. Just a quick reminder that B and F does not provide investment or strategy advice. And we've got a more complete disclaimer that you can listen to at the end of the show. I am here today with Mark Taylor, joined by Kyle Harrison. This is Dana Perkins. You're listening to Switched on the bn F podcast. Kyle, thank you for joining us today. Thanks for having me. So let's start quickly with a definition.

We're here to talk about the voluntary carbon offset market for companies and what is a carbon offset Effectively, it's a way that a company can invest in a project

that will indirectly go ahead and reduce emissions. So if you think about a company that derives a lot of emissions from air travel and that's a core part of their business and they can't necessarily remove those emissions, they can theoretically invest money in another project somewhere else in the world that will go ahead and reduce emissions in another way. But you actually, in the research note that we're discussing today describe carbon offsets as the black sheep

of missions reduction strategies. So why do they have a bad reputation because this seems pretty simple as a solution, is it not? It is? I mean other there is a sunk cost aspect to this. There's no opportunity for savings when you invest in a voluntary carbon offset project.

But the reason it kind of has this reputation as a fringe marketer, as you said, the black sheep of emission production strategies is for a lot of companies, when they go ahead and reduce their emissions, they'll actually go ahead and invest in some form of decarbonization that directly

offsets what they're doing. So if you think of a large technology company that derives a lot of electricity from its data centers, they'll go ahead and purchase clean electricity because that effectively reduces the emissions that they're getting from the grid. But at the same time, with a carbon offset, you can theoretically invest in any project anywhere in the world and it doesn't necessarily have to correlate with your business and where your emissions are coming from and your operations.

So as a results, you know, with our report, we actually called it a shortcut for a lot of companies, and as a result, some companies are a bit embarrassed to admit that they're using a shortcut to achieve their sustainability targets. Before we get into the companies that are actually doing this. Can you describe a bit about what kind of makes a good project versus a bad project? Yeah, And this actually is another reason data that you and I were talking about the fact that this is the

black sheep of emission reduction strategies. The pricing that goes into a voluntary carbon offset is very opaque, and it's really dictated by a bunch of arbitrary factors. And the biggest driver of quality in the voluntary carbon offset market is this phrase that we call additionality. And you've heard me previously discussed this when it comes to clean energy buying.

But additionality and the voluntary carbon offset market means that the money that you're giving to one of these projects, or the revenue that that project is earning from you, is driving brand new decarbonization that wouldn't have otherwise have had been. When you think of certain sectors and the carbon off set space, some of them can make that

additionality claim better than others. Something with low additionality would be clean energy projects, which actually by sector or the biggest sector, but they're the lowest quality because those clean energy projects already have financial support, so if you think of a solar wind project in the United States, they already generate renewable energy certificates as an additional revenue stream, and at the same time they already have subsidy support,

so they have the investment tax credit of the production

tax credit. So is my investment into that clean energy project really going to drive additional decarbonization or would it have already been built without that additional carbon off set revenue either way, So it's hopping in on the cotails of something that already would have happened, exactly for a low quality project on the other end of the special project, and we call those red plus and that actually stands for reducing emissions from deforestation and forest degradation, but we'll

go ahead and use the the abbreviation moving forward. When you think of a project like that, you're investing into a company that's going to either a plant more trees or invest more resources into the conservation of a forest. So you can much more directly claim that additionality those trees would not have been planted without that carbon off set revenue. Are most of these organizations doing these reforestation or forest project of the companies or the nonprofits typically

it's a good combination for red plus. You do have a lot of NGOs that are functioning in this space, but in some of the other sectors you actually have private companies that specialize in carbon offset project development. Kind of a whole spectrum of different types of companies, but yes, very much so in these large red plus projects, you're looking at NGOs mostly. So when we look at the benefit of planting trees, let's say forty years, over the course of a tree's life, they're able to absorb x

amount of c O two from the atmosphere. I would imagine that actually guaranteeing that a project is going to be there for forty year time horizon is reasonably difficult to do. Given that these projects are taking place all over the world and a variety of different political environments. How do companies go about actually verifying that the project that they want to have done as their offset will

actually continue to exist. Yeah, that's a great question. Data and that actually that is a huge impact on pricing as well. Mark and it's actually one of the less arbitrary factors that goes into that pricing. So the actual measurability of an offset, so over time, if you have, say again a red plus project. I mean you plant that tree, you need to go ahead each year and verify the fact that not only is that tree still standing,

but it's going ahead and producing carbon offsets. Different projects are a lot harder to actually go ahead and verify. If you think of say a methane capture project, which is a very common voluntary carbon offset project, it simply involves installing a sensor at say a coal mining operation, and then actually it's measuring the methane that's captured and destroyed.

But with something like a forestry project, you actually need to use satellite imagery or physically fly over that site to make sure that that tree that you're specifically referring to is still standing every single year. And that's not only difficult to verify, but it's expensive to do as well. So that has a huge impact. I'm driving up that price and it's a huge factor in the market as well. So it seems to set up a whole value chain

for the offsets market. Right, you have the people that do the forestry, the reforestation, I guess, and those who will go out and verify the three still standing? Is that right? Yep? And unfortunately some of these project developers actually happened to double as verification agencies as well. So there is a little bit of objectivity that's thrown out

the window when it comes to the market. And I think that's another reason that this market's reputation has taken a hit over the years, is you don't necessarily know if you have a developer that's offering you a price. It's very possible that you could find a similar project in the same market and get an entirely different price. UM So a lot of that is up to the jurisdiction of the developer, right, So can you lay this to rest I in my notes when I was reading

your note, I just said, is it a racket? Is this a racket? There's even brokers here too, right, they'll help you find a project. You know, they might be selling this project to multiple buyers. I don't know. I don't know. Maybe it's fully legitimate, maybe it's not. Can you comment on that. I'm not going to go as far as saying that it's a racket, but I think that the market needs to see serious improvement for it to be a viable strategy for companies to achieve their sustainability. Goals.

So you're right, there is this angle of measurability, but all the factors that go into this, the opaqueness of pricing in the voluntary carbon officet market, all really mean that the reputation takes a hit. And moving forward, I think as you have more demand from harder to abate companies that are going to start looking at the voluntary carbon offset market as a lifeline for them, I think you're gonna need to start to see a little bit

more legitimacy when it comes to a delineation of companies. So, as we said before, specific companies serving as developers, nonpartisan, impartial companies serving as verification agencies, and everything in between. So you need that clear delineation, but then you also need a much more clear methodology into what goes into pricing and how you measure those offsets. How would I start doing my research to find a project that's worthwhile.

There's four major volunteer a carbon offset registries that verify the legitimacy of a project, and when a project goes up on that registry, they list in annual capacity, so how much they actually can reduce emissions by on an

annual basis. And one of the key things that I would do is a buyer is first go ahead and look at what projects are issuing the most offsets relative to their capacity, because if you actually, you know, kind of peel back the skin a little bit, you'll see that maybe three quarters of the projects that are verified and registered in this market are not actually issuing any carbon offsets. They're they're lower quality projects, so they don't

have a buyer. So you want to find those projects that are issuing a lot of offsets relative to their capacity. The second thing I would do again is kind of

key in on the sector. So we talked about certain sectors of higher additionality and are considered higher quality offsets, So you want to go ahead and look at those sectors like forestry or red plus, but then also something like energy demand projects, So what I mean by that is either energy efficiency or something like clean cookstone distribution. So the sector is also key, but then the developer

as well. So you're gonna have a lot to developers that are fairly prominent in this space, but it becomes quite evident very quickly that they're using voluntary carbon offics as an additional revenue stream to what they're already doing with that project. What you want to do is go ahead and find those developers that specialize in voluntary carbon offset projects because they are building those projects and they're focusing on that additionality factor. So those are kind of

the main things. So there clearly is a lot that goes into ensuring the additionality. But then once you as a business have found the offset that you're going to use, and let's say you've gone through all the checks that you're happy with, then the question is are those that are purchased by companies is that looked upon favorably or negatively by the finance communities? For example, I'm thinking of E s G focused asset managers who might be invested

in these businesses. So I think the way a lot of companies would look at this is after they've tried to decarbonize in every other possible way that doesn't involve a holistic shift in their business model, then you kind of have this final lifeline of a voluntary carbon off set.

So I think if empties are going to use it, they're not the ones holding their hands up the highest in the audience, right, and they might keep it a little bit closer to their chest, and actually, you know, you can look at some of these registries and actually see what companies are purchasing and retiring offsets, and I think some of those companies are pretty tight lipped about it. So in a lot of ways, it's kind of viewed

as an end of the line strategy. But I think as you see more of these harder to abate sectors, so I'm thinking of aviation, thinking of oil and gas chemical companies, it's really challenging for those companies to decarbonize any other way. And as they're getting pressure from investors, I think the investment community will become a little bit more accepting of this market. And the last thing I would add is, you know, you have this whole world

of what we call science based targets. So these are emission reductions goals that are effectively in line with the well below two degree scenario and the Parish agreement. And for companies that have set a science based target, they're not legally allowed to use carbon offsets to meet those goals.

And one of the things that we highlight in the report is for this market to really gain more legitimacy and truly thrive, it needs to get acceptance from those third party sustainability commitments, otherwise it's going to continue to have that reputation as the black sheep. Let's talk a little bit more about the companies that actually do use these offsets and the hard to abate sectors. So one thing I'm wondering is what percentage of total greenhouse gases

do these hard to abate sectors really represent. If you look at data from the i p c C, some of the most heavy emitting sectors are ones like industrials and agriculture. You have oil and gas, but then you also have transport as well, and if you actually if you add all those sectors up, you're looking at probably four fifths of the emissions pie is coming from those harder to abate sectors and companies and all those sectors are leaning on this voluntary carbon offsets market as a

way to decarbonize. What countries is this popular in? Because it is more popular in certain locations and others if you look at the markets with the most projects, and I should clarify that doesn't necessarily mean it's the most popular from a demand standpoint, But on the supply side, the three biggest markets by quite a large margin are China, India,

and the United States. So in China, you have a lot of projects that were actually built potentially over a decade ago, and they are actually built for compliance markets. So China in the past years had initiated a cap and trade program, so a lot of these projects were basically built for the compliance markets, and they've earmarked a certain segment of those carbon offsets for the voluntary markets,

and generally those are considered much lower quality. So you have those projects that were built ten years ago and they don't necessarily need that additional revenue. It's not going

to drive additional decarbonization. If you look at a market like India or the United States, you see a much heavier focus again on those red plus projects, but also a mission abatement projects as well, so thinking of things that capture landfill gas and destroy it, but also projects that are related to potentially like capturing livestock and mission

and destroying those. So those are kind of the three biggest markets, and I would say from the demand side, it's very heavily focused on those European and US companies that are more forward thinking it comes to sustainability. So if you went ahead and pull data on pretty much any major sustainability commitment, and you looked at the geographic breakdown, it's going to be heavily focused on uk, US and some other European countries. Those are the companies that are

domiciled in those markets. Those are the ones who are leading on buying these offsets around the world. Are there any glaring omissions in project locations? I mean, as a concerned citizen, I would think I would want to see red bus projects in Brazil. Mark. I'll throw a question back at you, if you were a corporation and all of your emissions were coming from the United States, would you feel a little bit weird about purchasing offsets from Brazil?

And I'm not saying your question was wrong. There actually is quite a big portfolio of projects in Brazil, so it was a good question. But I think that is one of the reasons why some of these markets that make logical sense from a oh you could use the conservation there, we could use the emission reductions don't necessarily add up as the best voluntary markets because maybe the demand isn't there, maybe the policy isn't in place, but you do have a heavy reliance on I would say

emerging markets. Those energy demand projects I mentioned earlier, so clean cook stove distribution that's heavily focused on Latin America, Southeast Asia, and Africa. Same for these forestry projects. You do actually have some big forestry projects in California. I'm

sure that excites you, Dana, being a California native. But the spread overall back to your original question is I mean there's over a hundred markets that these projects exist in that have been implemented already, and at a certain point, again, as demand goes up, I would suspect that portfolio of markets and countries that you can buy these from is

going to continue to grow. So as an individual, I've looked for carbon offsets in the past, and what immediately comes to mind is your online You're buying a flight and it asked you whether or not you want to participate in the scheme that the airline is presented to you. So my question is in this voluntary offset space, is this largely a game for large corporations or is there a critical massive individuals that are out there offsetting their emissions.

I would say it's for both. So I think from the airline standpoint, airlines are among the most vocal sectors about purchasing carbon offsets, and again, they fit squarely into that harder to abate sector, right because all their emissions come from flight, and how do you go ahead and reduce those emissions if your core business is flying. It's

nearly impossible, right. There's a few ways that you can reduce it, but overall, offsets are huge for the airline industry, and it's actually a great way for airline companies to go ahead and pass on those costs to customers and make it. Obviously we're talking about a voluntary market as it is, but actually add another level of voluntary into that, right, because customers can actually go ahead and pay that additional

premium for those offsets. I mean, airlines are a particularly interesting one right now because we're talking about this, but social distancing has caused their industry to change massively overnight. Extrapolating out from that, what do you think the COVID nightteen social distancing is going to do to the voluntary

carbon offset market. It's a great question. One of the long term impacts of the pandemic potentially is that you have shifting consumer behaviors, so you might have customers that are less keen on flying moving forward or less keen on using transport moving forward, and both of those factors are going to have an impact on aviation demand and transport demand. So those companies, longer term, their emissions profiles

could look very different. So I think the one thing we can guarantee is in the immediate term that COVID will have an impact on demand for voluntary carbon offsets. In the long term, we still think that it's going to be a prominent way for companies to de carbonize, but you could see that shift in some way, shape or form as we're in a recovery period. So our last question for today, what is the most interesting project

that you've heard of? That's a tough one. I would say that there's some really cool redwood conservation projects in northern California. But one of the big things that I think is interesting about those projects is that they tout the secondary environmental benefits. So if you keep those trees in the ground, you're also looking at healthier ecosystems for wildlife, but also things like improved water filtration. So I think the ability for a project to really tell that full

environmental story. I would say that impacts my perception of the project, and I would say it also impacts the way corporate buyer would as well. When those redwood forests, beyond being super cool and really grand and having the ability to reduce emissions a lot, they tell that story really well, so I would say I'm a fan of those. Well, Kyle, thank you very much for joining us today to talk to us about the voluntary carbon offset market. Yeah, thanks

for having me. And I'll just one final plug. Take a look at the Voluntary Carbon Offsets Data Viewer when you get a chance. That's a great way to identify keep projects for buyers to look at. Thanks Kyle. Bloombergin EAP is a service provided by Bloomberg Finance LP and its affiliates. This recording does not constitute, nor should it be construed as investment advice, investment recommendations, or a recommendation

as to an investment or other strategy. Bloombergin EAP should not be considered as information sufficient upon which to base an investment decision. Neither Bloomberg Finance LP nor any of its affiliates makes any representation or warranty as to the accuracy or completeness of the information contained in this recording, and any liability as a result. This recording is expressly disclaimed