Carbon Markets and CDR: What matters and what’s next? - with Alexia Kelly

Welcome to the CDR Policy Scoop, where we unpack carbon removal policy in 30 minutes or less. My name is Sebastian Manhart. And I am Evet Amme. We recorded this episode on Tuesday, the twenty seventh of January. Our guest today, who joined us for the second time, was Alexia Kelly.

The Managing Director for Carbon Policy and Markets at the High Tide Foundation, a guru for carbon markets. We covered a lot of ground in just 30 minutes. We discussed that while there is so much happening in the carbon markets governance today. How to cut through the noise? What really matters? Is there a future for contribution claims that we keep hearing about a lot? And what does all of this mean for removals? Enjoy the show.

Okay. Hi Alexia. Welcome to the C DR Policies Group. So happy to have you back here. Thanks so much for having me. Great to see you both. Happy New Year. Happy New Year as well. So we thought what about checking in and having a conversation around what is happening on the governance side of carbon markets? There's a lot happening on the VCM front, but not only. And also possibly, you know, dissecting what it means for removals and just looking at all the different initiatives and how to make

So broad brush, but I'm sure we'll end up uh digging into some interesting aspects here. Yeah. So you've been heavily involved with with the ICBCM, obviously. I've been uh involved recently in the in the SPTI work myself. And I'm looking at all these different developments and then I'm looking at all kinds of other initiatives coming up and Like if anyone was trying to make sense of like what to pay attention to and what is noise, like what is what is the general guidance from you, Alexia?

Yeah, it's a great question and great to be here. And also before we start, I just wanna take a moment to acknowledge what's happening in my country right now. We are going through enormous turmoil and governance challenges ourselves and I know you guys have a broad international audience. And I just wanna assure everyone, because I hear that it doesn't make the international news all the time that people are organized, they are peacefully resisting, they are not.

taking any of this laying down. And so we are fighting fascism in all of its forms with everything we have on the ground here. And we are not going down without a fight. So I just wanna send that reassurance because we see it every day, everywhere, and what's happening in my country is appalling and horrifying. And I know the world is watching with great trepidation. And uh we're gonna get through this.

So with that, back to our favorite regularly scheduled content uh around carbon markets, because I think you know, this sort of speaking of a market that's been through its own twists and turns over the last fifteen years, twenty years, a cover market is certainly that. And if it's your point, there is a huge amount of noise. I think there might even be more noise.

than there was, you know, even just last year with some of the new entrance to the greenhouse gas accounting and carbon measurement space and I generally am feeling like there is a path forward. I'm I'm feeling much more optimistic than I was even just a couple of years ago. I think people are getting a lot clearer about what it is that we need these systems to do.

And I think starting to recognize that there needs to be a comprehensive approach. And so You know, the way I think about the market and kind of segment the various pieces of it is you've got your supply side. sets of rules and regulations. And so that's everything from the standards themselves, the ICBCM as a meta standard, emerging international rules coming out of the UNFCCC around Article Six of the Paris Agreement.

So both six two and six four. And then all of the kind of domestic regulations that are in place for cap and trade and carbon markets and offset credit generation that are in various stages of maturity and promulgation. That's sort of one big piece. And there is a lot happening right there. I think the the moral of that story is really increasing convergence over time.

but also still a significant amount of balkanization and fragmentation. We're still seeing lots and lots of new standards setting different rules, but the market's come a really long way around consolidation.

on kind of a a fewer set of methodologies that are then informing and moving more fluidly from the voluntary space to the compliance space. So One of the things that we've seen happen in the last little bit is we've seen more and more countries come to the ICBCM and say, hey, help us understand.

you know, how some of these emerging frameworks that we're considering benchmark against the core carbon principles and think about, you know, okay, how do we actually become that truly global threshold for quality? across the board, recognizing that there's always gonna need to be geographic and country specific pieces that are implemented on the supply side.

So that's kind of the supply side. I don't know if either of you have anything to add on that. Yeah. And then we will definitely move to the buyer side as well. But on the supply side There's a lot to unpack there because I what I see is even in in my conversations with governments, for example, they in Europe, for example, now, the CSCF is, you know, gonna be published, I think, this week, the first three methodologies, right?

So there is kind of a reference framework that has been developed over several years. And now my situation is I'm talking to national governments. that want to implement their own, in this case, carbon removal policies. And they need a reference standard, right? Yeah. And now they are asking, should we use a C S C F? But you know, it's it's limited. We hear criticism about it. Should we develop our own? Should we go to ICBCM? Yeah. So what would you recommend today?

To a government that wants to Allocate funding, say, this year, next year. And is looking at this fairly confusing ecosystem. Around C D R specifically or markets more about that? I guess C D R is the main topic of of this podcast, so I guess Uh yeah, if you could limit it maybe to that. Yeah, I so we've now in fact I just did a telly the other day and I think the A C B C M has approved like a dozen CDR specific methodologies to date, and we can share that list of what those are.

And so that is a good starting place for kind of where the international consensus is around what benchmark best practice looks like for methodologies related to various types of CDR, right? Both engineered and nature-based. So I think that we do know, and there's a few places where we have pretty strong international consensus and convergence around what right looks like.

Um, obviously I think there's a there's a need, I see a real need to bring into all of these decision making processes some of the the newer expertise around CDR that's come into the space in the last five years. Many folks tend to be earlier in their career or they're newer to these markets. And so they aren't automatically included in the conversation in the way that people who've been in the markets for a long time are.

but they bring unique perspective and and frankly knowledge sets to the table around the state of novel CDR technologies because as you know, things are moving so incredibly quickly. in the CDR field and there is so much iterative learning, experimentation, and kind of evolution of our understanding about what's working, what doesn't work. where we need further scientific research, where we actually feel like we're getting close to, you know, kind of being carbon credit ready.

And I'm really hopeful that we can move the field towards a more formal and structured process for understanding like when various types of technologies really are ready for crediting prime time and when we actually need to say, no, no, no, we really need further R and D.

Because we saw this in the early days of, you know, carbon market one point oh or whatever you want to call it, where there was a bunch of stuff that people were like, huh, this seems like kind of an interesting idea. There's no other way to pay for it besides the carbon market. And so we're just gonna shove it all into the carbon markets and issue credits, regardless of how confident we are in the legitimacy or efficacy of those credits.

And I think that's a real disaster for the market personally, because what you end up with then is the New York Times expose or the scandal, you know, in three or four years that was like, oh, actually this thing didn't deliver any of the environmental benefit that they sold.

And so one of the things that we've been doing a bunch of thinking about is, you know, how do we think about those early stage methodologies and make sure that they are really ready for crediting prime time prior to being issued actual omission removal credit.

I want to explore it from now a slightly different angle. And Sebastian, I might be kind of breaking the pattern you had in mind for the session. But it's just it's something that keeps coming up in in different conversations and I thought it would be good s to bring some clarity here is if we look at how especially on the voluntary market sides the governance is evolving and the guidance is evolving

It looks like we're building a lot for contribution claims. That seems to be kind of like V CMI is driven by that. I mean ICBCM is kind of neutral but still I would say I mean C is that I I feel like We're building for something that of five years from now, that should be the thing, but the in practice today

what drives the voluntary market is what are we called, you know, offsetting, compensation, neutralization, but like the offsetting claims. Mm-hmm. Yeah. And obviously the the removal's market is also largely relying on this. So how do you see where we are and where we're going when it comes to this?

I don't know if you've heard me rant about contribution claims. Um but I haven't. I mean my take is like everyone talks about them but no one is really seeing them. Yeah. So like what's your take? My take is that they aren't gonna work. We have had a very limited track record of success in sort of saying, oh, we should do the right thing because it's the right thing and just go out and like spend some money on some stuff.

And in conversations with the folks who were kind of early proponents of the contribution idea. And look, if we lived in a different world, I love the idea of contributions. It's so nice, right? But we don't. We live in a world that's driven by decision makers who are trying to optimize around a set of core objectives. And so that, you know, when I talk to people about a contribution claim, I'm like, first of all, there's no real specificity around how much money you're spending and

SBTI's latest version of like put a price on carbon and then spend the money on good stuff is a way to approach it. I don't think it's gonna be particularly successful, personally. And I think it's a really bad outcome for the environment. And here's why. If you say, okay, set aside, you know, a million dollars and spend it on good stuff for climate change, because that's what this is about, right? right now under a contribution claim, you can just like write a check to whoever you want and

There's no monitoring or verification about what happens with that money necessarily. There's no reporting on the outcomes of what you spent that money on. And if I'm a decision maker and I'm deciding where to spend a million dollars.

I wanna make sure that, you know, what I'm spending my money on is actually having a material impact on the problem I'm trying to solve, which is climate change. And so you probably wanna make sure that you're not funding something that somebody else was already gonna do anyways. e.g. additionality, and you probably want to measure the impact of the thing that you're funding so that you can determine whether or not it's really having an impact.

measurement and baselines. Like, so you just end up back at the carbon market if you actually care about a system that gives you accountability, visibility, and transparency into what you're spending your money on. And so I think part of what's been, just speaking frankly, as you know I do, you know, really frustrating for me in this last five years of conversations.

is that we're just reinventing what is functionally already in existence in the carbon market with new words and new approaches because people have decided that the old system is not worth trying to save or fix or leverage. And I mean, it's cost us a huge amount of time, it's cost us a huge amount of money, it's cost us a huge amount of political capital.

And most importantly, it's cost us a huge amount of missed opportunity in driving near term, real time emissions abatement. And that's what upsets me so much about where we are in this conversation today.

Because to your point, we need to spend the money now. I'm I'm with you on this, but I do feel like part of the carbon markets lives in a in a different reality and I hope they will come around. I think especially in Europe. Like I my sense is that, you know, because so much of the contribution conversation is being driven by European based NGOs and the conversation around standard setting.

And this has also been part of my frustration here is that, you know, companies in the US t today, especially, but even under the Biden administration. You know, we're just operating under a wildly different set of social norms and expectations than companies in Europe where, you know, the entire European economy is regulated to decarbonize. Everybody is participating and touched by a price on carbon in some way in Europe. in a way that is emphatically and dramatically not the case.

in most of the rest of the world. And even if they do have a price in carbon in places in the rest of the world, that price is generally quite low. And so that I think really presents a challenge for those folks who are trying to design global, internationally relevant and applicable standards. But I think it's one of the reasons why what SBTI is building. is going to be useful really only for the richest, most dedicated, and most committed.

companies that are willing to pay a green premium kind of across the board for things. And whether that gets characterized as a contribution or an actual compensation or offset, I don't know at the end of the day. And frankly, I don't even really care. As long as it actually drives real money being spent in real time on things that matter and we have a system for measuring the impact of what we're spending our money on. Can I ask you, what should the SPTI do instead?

Sure that like if you had a magic wand. Oh, I actually wrote a blog about this like three years ago. I I really actually think that we are going to need to move to something that is dramatically simpler. than what we are designing for today. And You know, I just want to be really clear, like optimizing for supply chain decarbonization is very important, right? Like we need to be pushing companies to do the hard, expensive work to leverage their purchasing power, their contracts, their influence.

to help push emissions abatement throughout their supply chains. And like I'm on the governing board of the AIM platform. We've just spent the last three years writing a standard and rule book, which will be released in March. around how you do supply chain tied intervention accounting in a credible and transparent way, because actually very little of that existed prior to

us kind of getting that that effort off the ground a number of years ago. And so, you know, we're getting those rules in place. But I think the challenge is that

Because we're so focused on making sure that every ton in your supply chain is addressed with a ton that looks exactly like the ton that's in your supply chain, right? We're creating a situation where we're making it incredibly expensive, very difficult to engage, and extremely difficult to execute for companies to do that level of granular matching, especially where you're putting really draconian restrictions on market-based accounting approaches. Because if you have a scope three emissions

you by definition do not control those emission sources. They are not your emissions. They are your customers. They are your suppliers. They are buried deep in your supply chain. Most companies do spend based emissions accounting for their scope three. Right. Which means that they literally have these huge, mushy categories of things that they spend money on, like purchased goods and services.

That's computers, paper, trucks. Like I mean literally everything that you buy gets lumped into this one category. You say how much you spend and then you you assign an average emissions factor to it. So my suggestion and I think where we're gonna end up I'm say five years from now is that people are gonna be like, Oh my gosh, this system is way too complicated. We need a ledger for responsibility. We need a ledger for what companies are doing.

And that just needs to be the thing. And we want transparency and insight into are you actually doing anything and is it moving the needle on global climate change? and show us what you're doing in a clear and transparent way. And I hope we can get there sooner rather than later and keep the best of kind of this incredibly complicated system we're building. because there's a lot of good in there. I think there's a lot of really useful insight into systems and tools we're building.

But if we say that's the only way, then the CDR market isn't gonna make it. Most of the tropical forests in the world aren't gonna make it. Like we're just not gonna have the pathways to purchasing and investing in those. system-wide mitigation interventions and transformation efforts that we know are fundamentally important to solving this problem.

So I don't know if you guys agree with that or not. I mean it's a pretty unorthodox view, I think, given kind of where the conversation is today, but working with the non experts in the companies, to your point, like I think we need to start sort of being like, Hey guys, this is getting a little out of hand. Can we take a step back and really think about what the big picture is and what we're trying to get done here really for the environment and for climate change mitigation? Yeah.

A lot of complexity. But how do we move from where we are now to that? I mean I think we just say n we just say enough. But who says enough? Like the buyers. So the people who are actually purchasing But they can just leave the S BTI, right? Like it that they basically either it works for them or they exactly in droves. Yeah. I mean it's just, you know, the finance sector, the electricity sector, oil and gas. Most heavy industry.

have all been totally disenfranchised from that process. But they've left without saying, but we want this instead, right? Like so this is what I'm saying is they they either they stay or they leave, but without saying anything and not necessarily signing up to something else.

That's right. That I think is our biggest liability and and challenge at this point, right? Is that I think that we personally, I think in the I think the environmental community has failed in our governance obligations to the voluntary space in many respects on the demand side. I actually think we're doing a pretty good job on the supply side. There's a ton more that needs to be done, but on the demand side, like we are not creating a set of rules.

that both meet a high environmental integrity bar and solve the problem we're trying to collectively solve and work in the real world. And that from those are the three things that like are sort of my non-negotiables, right? It has to solve the problem we're trying to solve. And I think part of the challenge is that, you know, there's a a real almost tribal belief that's emerged now in this space that, you know, what is tied to your inventory are real emissions and are sort of sacrosinct.

And everything that's outside of your inventory is greenwashing garbage. And if you actually engage in greenhouse gas accounting for real you know, I mean, it's it's very obvious and evident that that is actually like really couldn't be further from the truth. And Sebastian, you wanted to tie into this conversation around consequential and attributional accounting. There's two sets of things that people are getting really confused about.

the idea that attributional accounting is the correct or best or right form and a real representation of emissions, and that impact accounting is made up garbage because you have to do it relative to something else. And we're seeing a huge conflation of inventory accounting and what it takes to sort of get that static emissions source together and intervention accounting and what it actually takes to like change things in the real world. And under Paris,

Right. Those are two very separate systems. They talk to each other, but they are not the same. And so SBTI is the first standard ever to attempt to do all target setting tracking only with the inventory. Right. So they're just saying that like if it's not showing up in your inventory, then it's not a legitimate reduction. And the problem with that approach is that it actually leads to a system that is less transparent.

less credible and less visible and rigorous because we've just got everybody now trying to turn what should be transparently accounted for. interventions that you think about using impact accounting, right? I made an intervention in the world, my emissions were A, now they're B. We're measuring that difference, we're having it verified, and we're reporting it through either certificate. or other kind of public and transparent systems.

The fact that we're saying this whole piece of the equation is no longer good. means that if you're actually trying to as a company make emission reductions in your supply chain, you have to do all of these crazy gyrations to try and say, okay, you know, our emissions profile was this.

Now it's this. And so we're gonna use this and shove it into our inventory over here, but it doesn't quite match. And so we only get credit for like five instead of the ten that we paid for. And so where does the other ten go? And how do I get credit for that? And I mean it's just creating a lot of

what I'm observing are kind of perverse outcomes when it comes to thinking about investing at scale, investing for efficiency, and investing in all of the places where the IPCC is really telling us we need to be focusing between now and 2030.

What it is doing is creating a lot of jobs for consultants. Right. Because in order to do this level of accounting, you need a small army, truly. Like the big tech companies have sustainability teams of 200 people. Right. And like a lot of those people spend their time doing data collection, analysis, measurement, trying to structure deals in a way now that look like attributional accounting when they really should be impact accounting.

And it's adding to your point earlier about all the noise, like it's really just adding confusion and noise because we now have the CEO of Exxon weighing in about greenhouse gas accounting approaches. Right. Like I don't I never thought I would live to see the day where like you have CEOs of major companies coming in and saying, What is happening and why is this system so broken? And that is such a liability for us because what happens is we're gonna lose our social license to regulate.

Right. Like nobody, we we all just kind of said, hey, we're the voluntary market and we're gonna stand up and we're gonna regulate this space because no one else is.

That's the way the carbon market has operated on a voluntary basis since the beginning. Right? Because governments mostly just weren't paying attention, except in a few notable instances like the EU. And even then, right? And so I think we have a real I personally see a crisis for us coming, which is that, you know, we've tried really hard to create a super complicated, very granular, beautifully designed system that drives

funding into supply chain decarbonization. And I think we're pretty close to that. Honestly. Like I think we, you know, there's a rule set. It's hard to implement, it's expensive, but it's doable. And I want to acknowledge it's driving real impact in hard to abate sectors and places where people are just not going to spend the two or three hundred or four hundred dollars a ton that it's gonna take. to get the green product in instead of the fossil based incumbent. Even there.

you know, we still without flexibility are just gonna be bumping up but against a variety of constraints around deliverability. around, you know, whether or not there's a product that matches exactly that piece, that subcomponent in your inventory, whether or not you can find the right kind of calculations to do, whether or not there's any transparency around those calculations. So

You know, I I think that uh I think that SBTI still has a long way to go to div design a standard, a functional standard that that really actually drives money where it's most impactful. And what we had said to them originally was like, look. Do what every other target setting system in the world has done and have companies set a target.

give them flexibility about how they meet that target. I would love to see, oh, I don't know, you know, deliver 75, 50, pick a number percent of that from stuff using this like very granular supply chain matching requirement so that we can keep driving the money into internal decarbonization. And then let them make up the difference with other stuff that we know is also verified and credible and vitally important for.

stabilizing the climate like CDR, like investment in tropical forests, like investment in new renewable sources that don't touch a supply chain, which is a huge problem, right? That we're trying to solve for in this current construct.

And all of those things, like we need all of those things and we need money to be flowing into all of them. And really we just need to sort of come up with something that folks are comfortable with that says, here's how much you use, where and go to town. Like they could have solved this problem so easily.

And, you know, w I mean it really It's easy to say. It's it's I mean, it's been unnecessarily complicated in my opinion. Yeah. as we started out looking at you know, the the governance and the noise. And uh I think you already well articulated how there is a lot happening on the supply side or regulating that, but uh there is yet plenty to be done on getting demands out there.

If you look at the governance in general and all these different initiatives and there are many overlapping initiatives, Do you still see any specific gaps as well. Because I mean we keep seeing new initiatives coming up in like every single year, which means that there are still gaps. Like where are still the gaps where we will see that something coming will be great?

I think there's two places I see a big gap. One is just in resolving this question around how do you build a credible demand side governance structure that actually works. as we've been discussing at length. The other big gap is what I call kind of the missing middle of the connective tissue of the market.

Right. So there's a lot of work that needs to happen this year and next around just the fundamental sort of pieces of the market that are going to need to be in place in order to move it out of its awkward adolescence and into full-fledged functional adulthood. And those are things like standardized legal contracts, interoperable registries, a universal data model so that we can actually compare and track.

Credits as they're moving around the globe, pricing transparency. You know, there's there's just some really fundamental parts of this market that are not done yet. And if we're serious about getting to scale and we're serious about crowding in institutional capital, we have to address that missing middle.

And we have to do it in the next two years because all of those systems are now being built for Article Six implementation around the globe. Yeah. And so there's a lot of work to do, I see, in the next couple of years is just like actually getting that kind of connective tissue of the market so that we can have a truly global, interoperable

you know, regulated and compliance market that is existing in harmony and in ways that are complementary and not contradictory. Yeah. So that we can we can leverage every single penny we can unlock. And we can move fast and transparently and at scale. Yeah. So those are the the big gaps that I'm seeing right now. Are you guys seeing anything else major that I'm missing? I mean, very well laid out

Anything, Sebastian. I think Alexei you've got your work cut out for yourself for the next two years then. Because if you're not gonna do it, I don't think anyone can. Yeah. We are setting expectations here and it's all on record. So just these small problems. Just those few little bits that I'm missing. Yeah, right. Small small little things. Alexia, thank you as always.

when we have a great guest on the show, thirty minutes are never enough and we could have spoken two hours. We just got started. But I think there was a lot of really interesting stuff in there. So thanks for joining us again. And uh yeah, a lot of food for thought, I'm sure. And we'll have you back on to talk about how we're progressing on these fronts in the future. That sounds great.

Join the VCM Plus Coalition because that is the place to measure where we're bringing the market together to work because we certainly can't do it alone and it is going to be an all-hands-on-deck movement. So I'll send through info on that and um really appreciate. Great conversation as always.