Criteria for high quality carbon dioxide removal (CDR)

Ryan Fan: Welcome to the Sustainability Agenda, a podcast series focusing on the evolving complexities of the sustainability landscape. I’m your host, Ryan Fan. Please join me as we explore today’s most pressing issues with special guests that will give you some new perspectives and help you make sense of what really matters.

Matthew Potts: We really wanted to codify the science, so as I expect to see in a few years, a challenge in space, but an important space given the global carbon cycle oceans, ocean acidification, seaweed sinking, all these things could see in the coming years, really, as those technologies begin to scale, providing more specific guidance.

Ryan Fan: Welcome to our multi-part series, profiling the Carbon Markets. The purpose of this series is to examine some of the most significant issues facing our clients in both the voluntary and compliance markets. On today’s episode, we will discuss the criteria for high quality carbon dioxide removal or CDR, launched by Carbon Direct and Microsoft. We’ll explore the current challenges facing CDR and how the new common set of shared principles will help project developers and purchasers scale the CDR market. I’m excited to welcome Dr. Matthew Potts, Chief Science Officer at Carbon Direct. Dr. Potts leads an international science team working to help decarbonize the global economy. He has over two decades of experience in resource management issues. Good morning, Matthew. Welcome and thank you for joining us on today’s episode of The Sustainability Agenda.

Matthew Potts: Good morning, Ryan. Really great to be here. Really super excited to talk about the Microsoft high quality principles. You know, really that grew out of our ongoing collaboration with Microsoft. I mean, I think it really addresses a critical need in the market. We urgently need to scale carbon removal in parallel with broad scale economy wide reductions in emissions. And I think the high quality principles provide a key need to the market because to get to the speed and scale we need, we both need to de-risk investments, provide sort of rules of the road which will help bring buyers in and mobilize the public and private market capital really to get this market going and having the impact it must have.

Ryan Fan: Yeah, I think we’re in agreement that mobilizing capital, getting scale in carbon dioxide removal is key. All right, so let’s dig in a premise earlier that CDR faces many challenges. Can you shed some light into some of those challenges and what they mean for buyers?

Matthew Potts: This goes back decades into my research. I was doing a forest management project in Malaysia and saw the emergence sort of of the Redd+ market, reducing emissions from reducing forest degradation and deforestation. And, you know, it’s a challenge to manage forests. And I think unfortunately the market, which is still a very, very small part of the market, this is carbon dioxide removal as opposed to avoiding emissions or reducing emissions is caught up in a voluntary market that has some real quality challenges. If we look since the beginning of the year, there’s been numerous newspaper articles. This has been backed up by many, many peer reviewed publications pointing out that many of the existing credits, which are mostly from the land sector or the renewable energy sector, are of maybe dubious quality and have real concerns. And so that’s sort of creating headwinds. But if you look at the IPCC report, we must scale carbon removal, as I said in my opening remarks, in parallel with reducing emissions. So just to give a few facts or statistics, if we look at the voluntary carbon market today, only 3% of the credits on the market are actually carbon dioxide removal credits as opposed to avoidance or reduction credits. The other challenge is even amongst those removal credits, very, very few of them are actually meeting the quality standards, the carbon direct sets or encourages our buyers to use on the order of less than 10%, maybe around 8% of the projects are only meeting that quality bar. There’s a lot of growth and improvement that’s needed. But if we sort of zoom back out, what does this mean for the market? What does this mean sort of going forward? What we’re sort of seeing happen and what we’ve seen happen this year is some stagnation in the voluntary markets, especially in the lower quality tons in opposition to that stagnation. We’re actually seeing growth in the high quality tons. It’s still, you know, a very, very small part of the market, but it’s growing 2x per year. So if it continues to grow at that doubling rate year over year, we’re going to get to the volumes we need. This is the challenge, we hope the principles exist in sort of getting, you know, educating the market is buying remains concentrated in a very, very small group of buyers that are buying high volumes. So it’s sort of how do we unlock and get more buyers into this market. Broad take is we have this market that’s going in two different directions, a lot of low quality tons, lower prices there, perhaps stagnating. The vintages are getting older and this growing, but small and very selective group of buyers that are buying these high quality removal tons. And so, you know, as I think going forward, there’s going to be these challenges, especially of sort of making sure you get high quality credits. But also we’re not going to maybe talk too much about this today, thinking about how you’re using the credits, the claims you’re making around those credits, the quality of the credits are essential if you’re going to avoid accusations of greenwashing or really incorporate those credits into a robust carbon management.

Ryan Fan: Thanks, Matthew. You’ve really set the stage for how the market is developing. Can you give us a little bit more insight into what Carbon Direct and Microsoft? Collaborated on with the annual report on the criteria for high quality carbon dioxide removal. What was the motivation behind creating this report and how has it evolved?

Matthew Potts: Right at the beginning of the pandemic, we started collaborating with Microsoft as they were beginning their carbon management journey, as Carbon Direct was beginning its growth, as a company. And we looked at this first initial set of projects. While there are protocols and methodologies out there, we all share the common characteristics of what a project needs to have. It needs to be additional in the sense the carbon finance needs to be actually enabling more of the emissions that would have occurred under business as usual, good carbon accounting, and we just didn’t see clear rules of the road or sort of we saw the existing protocols and standards as sort of floors, not ceilings. And we were asking ourselves, how could we really push this market and help it to grow? And sort of out of those conversations began this need to sort of how can we codify these things and how can we both inform two sides of the market, both the buyers and the sellers on what quality should look like. And I think there were two key areas or a number of things we were trying to achieve here. First, we were sort of saying there’s a class of things that are out there and this is, you know, remembering happening maybe in the background of the trillion tree study, planting a lot of trees. There’s challenges. I’m a forester that’s worked across the world thinking about how to manage and regenerate forests and sort of planting trees is just the beginning. What you need to do is monitor those trees, maybe go back in and reduce the risk of fire or other things during these first 3 to 5 years when the trees are getting growing. So we really wanted to come up with guidelines where buyers could say, Ah, this is an early stage project, but they’re on the right trajectory to where they’re going. Or to a seller, these are the types of characteristics or these are the types of things that are going to make my project likely to be more successful and have the climate impact it’s claimed. So that’s certainly true for these existing things. We’ve been planting trees for millennia really to get to the volumes of carbon removal. We will need over, you know, 2030, 2040 and beyond. We’re going to have to bring on new technologies. And many of these new technologies are just very much at their infancy stage. So the high quality principles were also designed and written around how can we begin to signal to the market, like what is this pathway to quality look like? What are the major challenges that need to be addressed and how can we continue to do that? And so it’s really become this living document that’s iterating over the years. We continue to add new areas to it. We continue to think about how to present the material, but we hope it’s just really a public service to both buyers and sellers to sort of say this is sort of the North Star you can look at if you want to begin to think about how I should design a project.

Ryan Fan: So the criteria specifically set forth must and should standards for project developers. So what’s the difference between a must do and a should do?

Matthew Potts: I mean, a must do is, you know, I would recommend to a seller or likewise to a buyer, I wouldn’t create a project that doesn’t meet all the must. These are just sort of the minimum criteria that get well above the bars that are out there that look across these seven criteria in terms of how we review or think about or how you should think about designing a carbon project. Key things, how does it interact with people and communities, you know, harms and benefits. What is the environmental justice angle of this project? Is it really leading us to an equitable and just transition? And those issues are very site specific, location specific and really involve the need to engage communities across the globe, whether it be in the US and Canada or across the world. And these are kind of non-negotiable ones, especially in a voluntary sense. Is the project actually additional? Is it doing something that’s different than business as usual? And this is, you know, a difficult principle, and these musts and shoulds are really trying to get at that. And you know, what is the underlying counterfactual or baseline? What would have happened in the absence of the project to be able to measure the emissions differences or the removals that are actually happening, Then how do you count the carbon? What are the best practices for counting carbon? How can you use emerging technologies about sensors? And maybe this is a good example to get into must and should or remote sensing data. These are must things. What I think is different in carbon markets from say, 20 years ago is the emergence of big data, especially in the land space. We can all tap into Google Earth or other products and really monitor and see and evaluate, and it’s sort of revolutionized how we think about designing projects and how we judge the efficacy. But it’s also realizing these are nascent technology spaces or growing technology spaces. So must be, you know, this is what people could access today should is where the science is going, should is where the costs may be coming down, should will likely become must someday. So if you want to design a project that’s going to last or you know, you’re trying to get ahead of the curve, you should really be thinking to do as many shoulds as possible to kind of bring it full circle. Use other terms must or sort of minimum viable product characteristics to get to the quality bar. While shoulds are ideal product characteristics, if everything was unlimited, you could do whatever you wanted.

Ryan Fan: That’s a great explanation, Matthew. And as you mentioned earlier, this is an annual report that continues to evolve. Right? And it sounds like some of the shoulds will become must at some point in time as the data example that you use. That’s great.

Matthew Potts: I can also say that, you know, the other thing that happens is new pathways come in. If you go back and look at 21, 22 and I guess we’re now in 23, over the years, we very much enriched in the past report or this year’s criteria, the harms and benefits. The environmental justice aspects really dug deep, tried to give some more specific guidance there, but also added new approaches in terms of enhanced rock weathering. Mangroves, not a new one, but the one where we saw a market interest. We really wanted to codify the science. So as I expect you’ll see in a few years, a challenging space, but an important space given the global carbon cycle oceans, ocean acidification, seaweed, sinking, all these things I could see in the coming years really as those technologies begin to scale, providing more specific guidance.

Ryan Fan: Sounds like you have a lot of work ahead of you. So Matthew, how does this report help buyers of carbon removal and how can buyers help improve the quality in the market?

Matthew Potts: A number of things, the speed and scale. And how do you do that and what do you need? You need to bring in resources, financial resources. But when you’re talking about either parts of the market that have had challenges in terms of how you manage land, very, very site specific involves communities or scaling out these nascent technologies, you need rules of the road. You need something that everybody’s agreeing on. So this is where we hope the buyers come here and the buyers come here for a multifaceted reason or decide to sort of investigate or look at these principles. One is just to understand that the truth is for most of the emissions, most of the buyers are making, these are real emissions. They’re coming from, say, tailpipes or use of fuels or things where there are very clear ideas and clear estimates of the climate impact of that emission. And what the high quality principles are really trying to do is to give you the same confidence that the removal you’re buying is really cancelling out that emission. So I think that’s one thing and that helps sort of make more robust, more impactful, more authentic carbon management plans or climate action plans as a company and helps you bring removals in in a meaningful way as you think about reductions. The other thing is to build these at scale will require mobilizing traditional types of finance. You know, probably if we think back to the early days of solar, we’re sort of in that parallel world today getting a PPA off the ground, building a solar farm is a pretty turnkey operation. The contracts are standardised, everybody kind of knows what good is. You know, there’s challenges in permitting or that we’re not there with CDR. And it’s hopefully this is one point where you can sort of say this is a project that was reviewed or judged against these criteria and it makes banks, it makes financers more willing to give traditional forms of capital. You know, we can move away. I mean, we’re going to need for a while these blended forms of building out capital stacks. To your second question, how can buyers improve quality in the market? I think it’s sort of requesting or as they work with suppliers, they work with developers saying, are you using these criteria? How are they using these criteria, using them as a jumping off point for discussion? And in doing so, hopefully it both leads to more quality projects, but also a continuing robust debate about how do we make these actionable and meaningful criteria that more and more parties can use to scale carbon removal.

Ryan Fan: Thanks, Matthew. Let’s get into policy a little bit. Recent policy developments like the US bipartisan infrastructure law and the Inflation Reduction Act have created incentives for the development of carbon dioxide removal projects and technologies. How do policies like these intersect with the criteria that you’ve set out?

Matthew Potts: I think they’re a perfect complement. I mean, we’ve talked about you need standards to judge quality. You need to get the science right. That makes everybody feel like there’s a common language where you can decide to act. You need to bring in, you know, financial resources. I sort of think policy is the classic carrot or the stick. And so the IRA is a huge carrot. It’s giving lots and lots of tax incentives, lots and lots of direct grants. And this is very commonplace when you’re trying to get technologies off the ground or new areas where you want the economy to grow. So I think, you know, across Europe and the US, you see these investments that are fundamentally carrots in trying to get these technologies to scale, to bring down the first of a kind cost. I don’t know if I would call them sticks, but at least see them as regulatory rules happening. If you look at the draft rules from the Security and Exchange Commission or the Federal Acquisition Regulatory Council, these are beginning to require disclosure of your missions and sort of alignment with or the creation of climate goals or climate risk disclosure. So those are creating a regulatory space where it may be not a compliance market, it may be a disclosure space across the world. If I’m in France, I’m already disclosing my scope. Free emissions, we’re not quite there in the US. It will always be a little bit patchwork. This is sort of also a way to sort of say if I want to have something that’s going to in a very rapidly developing policy space, if I want to bring into my climate action points back to these principles as being robustly anchored in science, evolving to meet that science and that sort of maybe the third leg you bring the scientific community together, you bring the public corporations, private community together and the government. And we get those synergies to go back to getting up to speed. We need to scale these technologies.

Ryan Fan: Yeah, scale is everything here, isn’t it? What advice would you give to market participants now?

Matthew Potts: Don’t be afraid to act. I think most importantly, do your homework, do your diligence, but you really need to get into action now. We cannot wait. In the near term, there’s great needs and there’s great ability for nature based removal solutions, planning trees I’ve thought a lot about. We have a lot of degraded land across the globe. There’s a lot of potential there to plant trees that can help communities restore nature, create co-benefits. You know, there’s been a lot of work. Academics love to debate what is the exact number, but they can create a lot of near-term impact in terms of helping us sort of mitigate the worst impacts of climate change. Remember, we don’t really know if climate change is sort of going to have a smooth impact on the economy. It’s like, is it going to decrease our growth by a few percent if we don’t act? There’s catastrophic tipping points in a very complex atmospheric system that’s coupled to ocean currents, and this. And so part of this is, you know, beginning to act to reduce the probability of these irreversible, catastrophic events. And the other half of it is beyond the nature based part going back and this has been a recurring theme to scale. Scale takes time. You can’t build a plant tomorrow. And so it’s beginning to sort of putting those investments in those very early investments, you know, properly de-risk with proper milestones to reward developers for scaling the technology or overcoming the difficulties. So when we arrive at 2030, 2040, and I think the final thing is really making sure you have a coherence in how you think through your carbon management goals go after those abatable emissions. And you know, for the short term there are unabatable emissions or not unabatable emissions or there’s emissions that you’re going to always have challenges with. So part of it is recognizing that that’s why we’ll have carbon removal, but it’s also meeting the challenge on those.

Ryan Fan: Dr. Matthew Potts, thank you very much for your time today. Thanks for joining the show and thanks for your leadership and the leadership of Carbon Direct. And thank you to our listeners for tuning in. If you’d like to learn more about how your business can navigate the carbon markets, join us for CBC’s Carbon Summit on October 26th in Toronto. The summit will bring together experts in carbon market structure, project development and policy. To register, please contact your relationship manager. Please join us next time as we tackle some of Sustainability’s biggest questions providing different perspectives to help you move forward. I’m your host Ryan Fan, and this is The Sustainability Agenda.

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