Diving into the carbon markets

Dominique Barker: Welcome to The Sustainability Agenda, a podcast series focusing on the evolving complexities of the sustainability landscape with a view on addressing current issues in a concise format to help you navigate and take action. I’m your host, Dominique Barker. Please join me as we explore today’s most pressing matters with special guests that will give you some new perspective and help you make sense of what really matters.

Julio Friedmann: Right now, there is no quality control. I will say this again. Right now, there is no quality control, in part that is again historical. This was created for a world 30 years ago in which people were trying to solve different kinds of problems.

Dominique Barker: We’re very glad to welcome Dr. Julio Friedmann, chief scientist and chief carbon Wrangler at Carbon Direct. Dr. Friedman recently served as principal deputy assistant secretary for the Office of Fossil Energy, which has recently added carbon management to its name at the Department of Energy, where he was responsible for the DOE’s R&D program in Carbon Capture and Storage, or CCS and carbon utilization. He was also senior research scholar at the Centre on Global Energy Policy at Columbia University SIPA, where he led the Carbon Management Research Initiative. I was connected with Dr. Friedmann after we recorded our podcast with Rob Niven. That will be a podcast that follows this one in our series. He is the founder and CEO of Carbon Cure. I asked him if he knew someone who could share some insights on the carbon markets. And of course, his first thoughts went directly to Carbon Direct and to Dr. Julio Friedmann, who’s one of the most widely known experts in the U.S. on carbon removal, CO2 conversion and carbon capture and sequestration. So today’s episode, we’re going to dive into the details about the global carbon markets. Good afternoon, Julio. Thank you very much for joining us today.

Julio Friedmann: It’s a real treat to be here. Thank you for having me.

Dominique Barker: Let’s talk about your firm Carbon Direct. What are Carbon Direct’s objectives? And maybe just talk a little bit about your own job as chief scientist and Wrangler on carbon.

Julio Friedmann: The Intergovernmental Panel on Climate Change has made clear something that a lot of climate scientists already knew, which is that if we want to get to anything close to near zero by 20 50, we must remove enormous amounts of CO2 from the air and oceans. We must also reduce enormous amounts of greenhouse gases from the existing energy and agricultural systems. That means we need to spend money. We need standards. We need technologies. We need services. We need all kinds of things. Carbon Direct was created to serve those needs to put money to work at companies that can deliver new solutions and to help advise companies and governments about the best way to remove, ultimately billions of tons of CO2 from the air and oceans. 

Dominique Barker: Great. Let’s talk about the markets because from our perspective, we believe that we need a price on carbon. But let’s talk about the difference between the voluntary carbon markets and the compliance markets. 

Julio Friedmann: Sure. Last year, the voluntary carbon markets were about a billion dollars. There was something like one hundred and twenty million tons of credits created and about one hundred and ten million tons of credits exchanged. In contrast, the compliance carbon market was eight hundred and fifty nine billion dollars, so the compliance market is way, way bigger. It is also the case that in the voluntary carbon markets, all kinds of things are traded in exchange that are quite different. But today we call those all pretty much the same thing. One of the pieces of work that our community will need to do in the coming years is to better differentiate the actual services that are provided through the voluntary carbon markets.

Dominique Barker: Ok, let’s talk a little bit. Historically, where did we come from and where are we today and how is the market developing?

Julio Friedmann: Excellent questions. Let’s start with recognizing that the voluntary carbon market is quite a different market than most markets because the primary product is an environmental service. It is not like a power market where you’re selling electrons through a heavily regulated system. It is not like a commodities exchange where everybody knows what gold is or everybody knows what crude oil is, and you have fully developed global markets that exchange these things quickly and easily. The voluntary carbon market, the commodities markets around carbon are fundamentally sharing an environmental service, and that environmental service is either reduction or removal of carbon emissions. This becomes immediately problematic because we don’t necessarily know how to monitor or document these things, and many people have different definitions about what they are. The history of these really came out of the U.N. IPCC process. This was born out of the Rio Framework Convention and was built on things like Redd, plus a U.N. offset creation and trading scheme, or things like the Clean Development Mechanism, which for many years traded abatement through various means. Those created the initial bodies that do certification or registration or set the standards, and those created the initial sets of market exchanges. It was part of the platform on which the European trading system was built.

Dominique Barker: Ok, let’s talk about the definition of carbon offsets. So what is a carbon offset and why do we need them? And I’d be curious if you have a preference for the term credit versus offset.

Julio Friedmann: Right. So in my book, Offset is a four letter word. Try not to use the word because it is confusing. People don’t quite know what they mean when they say a carbon direct. We are very careful about our language, and I want your audience to understand how the atmosphere. Thinks about this as a way to frame their own thinking in terms of the markets. There’s three ways that you can manage greenhouse gas emissions. You can avoid making them, you can reduce them and you can remove them, removing them as pulling them from the air in oceans. Those are three very distinct things avoided. Emissions are based on a counterfactual, something like avoided deforestation. They might chop down a forest, but they don’t in function, avoided emissions are literally doing nothing. There is such a lot of question about the value of avoided emissions in actually managing carbon dioxide and greenhouse gases. Reduction is much more simple. You are emitting X amount, you then reduce those emissions, so you’re emitting x minus Y amount that can be done through lots of mechanisms. Efficiency gains, waste management. Displacement of fuels. Destruction of greenhouse gases like methane or nitrous oxide. Those are all reductions. They are straightforward to measure and validate. The third is removals in which you are doing something additional to remove CO2 from the air and oceans. The iconic one is creating a forest afforestation. You add a new forest to the Earth. It removes CO2 and something that would not have happened automatically. There are many other ways to do this. Direct air capture is another iconic way now of removing CO2 from the air in oceans. So when you think about the carbon markets, the first thing you should think about is what is that service? Are you avoiding emissions? Are you reducing emissions or are you removing emissions? That’s the actual value, because that’s the environmental service you’re trying to provide. There’s two other things you should be thinking about in this to make a good purchase to figure out whether what you’re doing is substantial or valuable. One of them is, is it additional? Is it something that nature would automatically have done on its own or not? This is problematic in many ways, but it’s straightforward enough conceptually, but it’s actually hard to institute in practice as a result. Again, the standards bodies are still working with how to define these things. Another question then, is it durable? So everybody agrees that if you avoid chopping down a tree for a week, there’s not much value in it. If you avoid chopping down a tree for 30 or 100 years, there’s much more value in it. But how do you truly put a price or a value on those services is not yet sorted. But the more durable it is actually, the more valuable it is. And different groups have come up with different ways to try to assess that.

Dominique Barker: Great. And so how big is the voluntary carbon market today and how big do you expect it to be?

Julio Friedmann: It’s going to be big. So it is the case that people are projecting by 20 30, either a five hundred percent to a nine hundred percent increase. So very, very large growth and a great deal of credits created and a great deal of credits retired again, because the Environmental Service is removing or reducing the emissions, the highest value comes from the actual retirement of those credits. They’re flying away. Crows. What are you going to do?

Dominique Barker: Okay. So I hear some birds in the background, so that’s excellent. I want to point out to our listeners that Dr. Friedmann is actually outdoors, so that adds some nice biodiversity to our talk today. Can you tell us who are the market participants and tell us a little bit about their various roles?

Julio Friedmann: Quick one on one is simple this all starts with project developers. Somebody is doing something on the ground. It might be they are adding a forest or managing a forest. It might be. They are changing their agricultural practices. It might be they are cultivating mangroves, but they’re all doing a thing and that thing avoids or removes or reduces emissions. Once they have set something up, they are in a position to create credits. Those credits are ultimately defined by standards bodies that have developed methodologies. And as long as you conform to those standards, then you can create what is called a certificate, and a certificate is basically worth a ton of CO2 avoided, reduced or removed that then gets moved into the market through buyers or through brokers. Sometimes brokers will serve as an exchange or as a marketplace will then move the credits to specific buyers. It is also possible that then those credits are resold or circulated through secondary markets before they are retired.

Dominique Barker: And can you describe the registries and their role in the voluntary carbon markets?

Julio Friedmann: Right. So registries are the ones who actually set the standards and then issue the credits. Once those credits are issued, they then move into the buyers in the exchanges. The ideally these things are set up basically on a ledger in the future. These things will be managed through the blockchain or something like that in which you have an indelible ledger, but essentially you’re creating a ledger where carbon credits accrue and those are held by the certifiers and by the registries. 

Dominique Barker: And what determines quality in the carbon markets. I mean, you talked a little bit about your ability. You talked about additionality. But what makes different credits trade at different prices?

Julio Friedmann: Right now, there is no quality control. I will say this again. Right now, there is no quality control in part that is again historical. This was created for a world 30 years ago in which people were trying to solve different kinds of problems. I will say that the certifiers and the registries and the methodology bodies are in the process of improving their standards, certification process and methodologies. They realize that they want to get to higher quality. But in point of fact, it has been well demonstrated now that a great number of the certificates and a great number of the credits already made do not accomplish anything. It is also the case that it is very hard to figure this out. In many cases, you have to really dive into the details of specific projects or their management or their monitoring and verification to understand whether they’ve done what they’re going to do, whether or not that is additional or whether or not they have led to leakage. These are quite vexing issues. There is no Securities and Exchange Commission equivalent for carbon markets. As a result, it’s a bit of the Wild West out there. And so people are grappling with this question in real time and trying to figure out how to provide higher quality. One example of that Mark Carney’s group at the Task Force on Voluntary Carbon Markets has created the Integrity Commission, the ICE for the VCM to try to add some rigor and some improved standards to ensure that quality carbon management is what enters the marketplace.

Dominique Barker: Great. Maybe. Can you talk about how some carbon projects have changed over time and what the advantages of some nature based solutions might be?

Julio Friedmann: Right. Nature based solutions have grown in interest. A great deal recently. And part of the reason why is because they’re relatively cheap. And part of the reason why is because we know how to do a bunch of them today. And part of the reason why is because of ancillary benefits. Many people value ancillary benefits that come from what are commonly called nature based solutions. Those benefits can include improved water quality, greater biodiversity, soil health support for indigenous peoples. All of these are, in fact, real benefits. Many of our partners and customers at Carbon Direct seek those benefits actively. It is important to note, though, that those benefits don’t correlate to carbon. They are separate things. So if you want to get the carbon benefit from a project, you still need that. This is an area where the nature based solutions are still trying to do better and trying to improve in terms of the durability, the avoided leakage and the validity of their work. It has been clear through reporting, say, from Lisa Song or Rothi, where there are many instances now where people have identified projects that were in no way shape or form additional where literally people were doing nothing and claiming credits that does not solve climate problems. Nor does it help companies, nor does it sustain biodiversity. It just lines in people’s pockets. And increasingly, people are skeptical of this and have begun to label a bunch of offsetting initiatives as greenwashing. That’s not altogether wrong, but it’s also not altogether helpful. Ultimately, we know that we need nature based solutions and that there are good ones out there. We need engineered solutions. There are good ones out there, too. All of those need to scale, which means again, you need to really improve the methodology and the standards if you want to grow the market carefully and well.

Dominique Barker: Fantastic. One last question for you is a prediction one. Do you expect to see the compliance in voluntary markets converge someday? And do you have a sense of when that would be?

Julio Friedmann: I sincerely hope that’s the case. Ultimately, the voluntary markets cannot solve this on their own. They are just too small to the challenge. Many other kinds of voluntary markets like, say, fair trade for coffee or for cotton end up being three percent of the market size. That’s just not going to do it. So in fact, over the next decade, we are going to see the compliance markets grow, evolve and emerge. One example of that the European Commission has begun a process on sustainable carbon cycles specifically to set new standards for the compliance market. Things like the CORSIA Standard for Airlines, which is in fact trading and offsetting program for aviation mitigation, are in the process of again adopting their standards and moving from a voluntary to a compliance market. In Canada, we are seeing the growth of a clean fuel standard, which is going to become a compliance market modelled on the California Low Carbon Fuel Standard. We are seeing power markets moving to one hundred percent clean, which again creates compliance market obligations. Those are really going to drive the way that these markets emerge and the way that these opportunities land because they will ultimately be managed by governments. There will eventually be very little room for nonsense. People will begin to focus on what actually delivers the climate solutions and outcomes we want.

Dominique Barker: Well, Dr. Friedmann, this was great. This clearly was not your first rodeo. Thank you for joining us to explain the carbon markets and just to remind our listeners episode one where we speak to a climate scientist on. And why we need to care about these carbon markets and why this impacts all of us individually, we’ve now spoken about the carbon markets. In our next episode, we’ll be speaking with carbon cure. Rob Niven, CEO, So speaking about carbon reduction opportunities, and then we’ll be speaking about Carbon Place, which is a voluntary carbon market platform that of course we are involved in. Julio, thank you so much for taking the time today and for explaining in such a concise and very clear manner, a very complex subject. Thank you.

Julio Friedmann: My pleasure and thank you again for having me.

Dominique Barker: 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, Dominique Barker, and this is The Sustainability Agenda.

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