Integrity in the voluntary 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.

Chris Leeds: And if you’re buying carbon credits and using them to say that you’re carbon neutral or your net zero or making some other environmental claim, then there needs to be some kind of rules or guidelines around that because again, too many companies are perhaps using them in the wrong way or maybe not even doing that, but just not really thinking about what it is that they’re trying to achieve.

Dominique Barker: Today we welcome Chris Leeds, Head of Carbon Markets Development at Standard Chartered Bank in the UK. Chris is responsible for developing and executing their carbon market strategy. He sits on the Board of the Integrity Council on Voluntary Carbon Markets or the ICVCM, and he’s also a member of the Carbon Pricing Leadership Coalition. And I’m also proud to say a partner of CIBC’s. Standard Chartered is a partner, and he is a key member of Carbon Place. On today’s episode, we will be focusing on the need for increased integrity in the voluntary carbon markets. Good afternoon, Chris. How are you doing? Thanks for joining us.

Chris Leeds: I’m great, Dominique, and thanks for having me here on your podcast. I’m really looking forward to it.

Dominique Barker: Thank you. So let’s start with the theme of integrity. That word integrity comes across a number of organizations like the Integrity Council on Voluntary Carbon Markets. Why is that word so important and what does it mean for a market to have integrity?

Chris Leeds: So I think integrity is so important because it’s all about trust, it’s about believability, it’s about credibility. And whether we like it or not, the voluntary side of the carbon markets has lacked that somewhat over the last few years, and it’s been going for well over ten years. The voluntary carbon markets have actually traced it all the way back to the Chicago Climate Exchange back in the noughties. And it’s got some really great ideas behind it about putting money into projects that will actually help to reduce and avoid emissions and even remove emissions around the world. And that also helps to support local communities. It’s got some really great ideas around that, but unfortunately because it’s a very much an unregulated market, there lacks the standardization and the consistency around the rules, although they get better all the time. And it’s one of the things that you should say about this market is it is in many ways self-correcting. It has been perceived to have a lack of integrity. And it’s really, really important whether again, whether that’s true or not, it’s what people believe. And if people believe you lack integrity, then unfortunately, that’s all that matters. And so I think that it’s really important to show that there is that trust, to really establish the credibility of the market. And that’s what the Integrity Council is all about, but also a number of other initiatives that we’ll obviously be speaking about later on. What does it mean to be high integrity? Well, I can give you a little acronym that we put together at the Integrity Council, which hopefully will help people a little bit of an aid memoire. So we talk about it being CLEAN, C-L-E-A-N, so it’s catalytic, it’s going to mobilize finance towards mitigation and especially in developing countries, it’s going to accelerate innovation and market uptake of emerging breakthrough technologies. It’s going to be local, it’s going to create jobs and prosperity and local communities and deliver sustainable development co-benefits and protect and enhance those livelihoods of marginalized peoples, in particular Indigenous peoples. Empowering, accelerating implementation of NDCs and net zero commitments and paving the way for increased ambition. And then additional really, really important concept here. It’s going to be challenging finance that would otherwise not be available into greenhouse gas removals and reductions, those projects that wouldn’t happen otherwise. And then finally, it’s going to be nature positive, protecting ecosystems, particularly forests and natural habitats, promoting nature based climate solutions. So that’s really what we mean when we say integrity.

Dominique Barker: Okay. Well, thank you very much. So when we talk about integrity of the markets, we can really look at this from the supply and the demand side. And I guess when we think about the supply side, it’s the supply of the actual credits. And I understand that the ICVCM or the Integrity Council on Voluntary Carbon Markets are really looking to define high quality credits and they’re looking at creating something called the core carbon principles. Could you start with a bit of background on what those principles are? And I know you did answer a little bit in the previous question what constitutes high quality. But maybe just talk about those core carbon principles and actually maybe give a little bit of an update on when we can expect to see those come out from that group.

Chris Leeds: Yeah, absolutely. So all of these standards have their own set of principles and guidelines that they have to meet, and none of these are revolutionary. So you’ve got various standard setters, gold standard bearer, ACRCAR, and a number of others that are actually starting to establish themselves. And I like to think of them in a way as and I’ll probably be criticized by many of my colleagues for saying this, but it’s a little bit like a car manufacturer. They all make their different brands and varieties of cars, but they need to meet a certain standard. So if you’re going to make cars for the Canadian market or for the US market. There is a standard that they have to meet. This has to be a pretty high standard, right? Because you have to make sure that it’s got all the safety features that you need in a car. You’re not building this to the lowest common denominator. You’re building this to a particularly high standard. But that doesn’t mean you can’t have lots of lots of different varieties of those cars and lots and lots of different qualities within that. So a Rolls Royce still needs to have safety belts and all the safety features that you might see in a in a budget car. And again, we’re not talking about budget carbon credits here. We’re talking about creating a high quality threshold that everybody is going to have to meet. And that’s the point. That’s the idea of this high quality threshold that all of the standard setters have to meet. We’re setting the bar initially and then we’ll look to continually raise the bar. Now, as I said earlier, that’s one of the things that voluntary carbon markets does in many ways, because as technologies improve and as projects no longer are additional. And we’ll talk about that a little bit more later on. Then some of these methodologies and these recipes for creating a carbon credit will fall away and you won’t be able to use them anymore, but new ones will appear and we’ll be continually looking to bring new capital into these markets. So the core carbon principles really focus on things like this  additionality criteria that I talk about. They look at permanence, particularly when you’re looking at things like forestry related credits and what happens if there is a reversal of some sort. Carbon leakage, if you’re reducing carbon in one area and then actually carbon emissions in one area and they’re going up somewhere else. We’re ensuring that there’s no double counting and we’re ensuring that there is the standard sets of integrity that you really need around a carbon credit to understand what they are. But what we’re trying to do with the core carbon principles is go to another level and we set out these principles. But in many ways the important thing is what we’re going to also be setting out with them, which is what we call an assessment framework. And that’s going to allow the experts within our group to be able to go away and assess all of the different methodologies and the different standards. So we’re going down firstly to the standard level. So whether that’s there or gold standard or CAR, and then we’re going to go down to the methodology. So we’re going to be looking at methodologies for forestry or methodologies for renewables to say whether they do actually meet the criteria, these principles that we set out. And so by the end of the year or certainly beginning of next year, we’ll start to know which credits and which methodologies meet those quality threshold standards. And that’s really where we’re going with this at the moment.

Dominique Barker: So do you see them evolving over time? Do you see them changing over time?

Chris Leeds: Absolutely. I think one of the things that we’ll be talking about when we release these is that it will be signals to the market saying these are the things that we think are okay now, but this is where we see them, the trajectory of the movement, the momentum going and how we’re going to see these methodologies continually improve but evolve. It’s not just about improvement, it’s about how the market evolves, and therefore they will need to evolve with them. So for example, if you look at things like carbon capture and storage, we still don’t have a methodology for that yet. And once that gets into place, we’ll see carbon credits getting generated around those types of technologies. But there may be a time in the future where that becomes an adopted technology. It’s no longer additional, it no longer needs to support the carbon markets, and then we’ll move on from there and the bar will rise again.

Dominique Barker: Well, and that brings us to the next question. You’ve mentioned this word a number of times today and that concept of additionality and I gather from what you’ve just said, I did solar project development at one point. Solar energy, having carbon credits associated with them would have been additional because it wasn’t economic to produce a solar project without it. Maybe you can just talk through that concept and talk about additionality. And for many in our audience, in Canada, renewables is a large part of our economy and growing. Why renewables would not be considered additional? Or maybe they are? Maybe if you could just touch on that in particular and define additionality.

Chris Leeds: Yeah, I mean, I think it is a case by case basis and that’s actually the way most of the standards work. But the whole idea behind additionality is that it’s going to get capital and funding into projects that wouldn’t get it otherwise. It’s the whole idea behind a carbon credit is it’s creating that support to get money into projects that need it. So in a sense, it’s a subsidy, but it’s a way of doing that through other means than through a government actually or a local authority providing a subsidy market based. The subsidy will depend on supply and demand and it varies because of that, but it is about making sure that it goes into projects that wouldn’t happen otherwise. So if building a solar farm or erecting a wind farm is actually the most cost effective way of generating power locally, then why does it need any further subsidy? Why does it need any further support? Now that does depend. As I say, you know, it may be even in parts of Canada, it may differ from one side of Canada to another where you see different conditions. But certainly what we are looking at is most of the developed world, certainly the middle income countries and high income countries, don’t need support for these types of investments, least developed countries, which is actually a defined term within the UN, there’s a list of them you can go and see. We’ve kind of said, well, they need all the help they can get. And in most of those cases, it’s any support for any type of electricity generation is going to be welcomed. But what we want to do is try and tilt the playing field to ensure that rather than going off and building fossil fuel generation, then they can go down the route of actually make it very easy for them to go and put in solar and wind and other technologies like that that will support it. Obviously, batteries are an important part of that to ensure that you get the integrity of the system because of the intermittency of those other forms of generation. But this is all changing and this is all very much becoming much more easily available. But if we are putting money into projects that would already happen, then you’re not actually changing anything. You’re not making things happen that wouldn’t happen otherwise. This is why actually, when we look at forestry and some of the nature based projects, they are so popular at the moment because it’s pretty obvious that there isn’t much you’re going to get from a rainforest if you leave it there. As of today, the economics tell you that, well, the starting forest is worth obviously a lot less than a patch of earth that you can actually convert into some sort of agricultural land. And this is what’s happening in places like Brazil and Indonesia and elsewhere. These virgin rainforests have been converted into arable land, which we’re benefiting from in the West because we’re getting, you know, soya meal or palm oil or, again, food for animals and for meat products and suchlike. So this is where we’re trying to, again, change the economics and make it more viable for projects that will actually reduce and even remove emissions around the world.

Dominique Barker: Great. Thank you. So the key word for this podcast, the word additional. So I’m going to confuse our audience by introducing another acronym, the VCMI. I understand that the VCMI or the Voluntary Carbon Markets Integrity Initiative and I apologize, I know it’s a mouthful, that they’re looking to provide guidance on the demand side. So the folks who actually buy carbon credits, can you speak a little about what that means and why it’s important?

Chris Leeds: Yes. And while the VCMI is not directly related to the Integrity Council, the ICBCM. Many of the people who are working on both those groups are common. I know a lot of them and I work very closely with them and they’re doing some great work. But quite early on when we were looking at the TSVCM, which is where the Integrity Council came from, the Task Force for Scaling the Voluntary Carbon Markets, we decided that we were going to focus on the supply side, the quality of supply, but the quality of demand was just as important. In fact, if in many ways, if not more so, because it’s around, what is it that you’re going to do with that carbon credit? What is the actual claim that you’re going to make around that? And if you’re buying carbon credits and using them to say that you’re carbon neutral or you’re net zero or making some other environmental claim, then there needs to be some kind of rules or guidelines around that because again, too many companies are perhaps using them in the wrong way or maybe not even doing that, but just not really thinking about what it is that they’re trying to achieve and why are they using carbon credits. And what we’re actually trying to gain from doing that. As I said, it’s about getting money into projects that wouldn’t happen otherwise. That’s brilliant. But in many ways it’s obviously being able to give companies that environmental integrity themselves, that we’re carbon neutral, we’re net zero, but if they’re not doing other things to ensure that they’re actually reducing their emissions internally as quickly as possible, then all they’re using, all they’re doing is using carbon credits to be able to make some claim. Then that’s probably not what we want people to be doing. We want people to be committing to making those emissions reductions in the first place, to committing to be net zero, to committing to a science based target and going down that trajectory. But we also realize that actually going to net zero or even reducing your emissions to zero is going to take some time and it’s not going to happen overnight. And in fact in many sectors it’s going to take many years, particularly think about things like aviation or shipping, steel and cement. These are really hard to abate sectors. There isn’t a technology around today that can actually help us to reduce emissions quickly or certainly cost effectively. We could do it conceivably with some of these industries, but it’s very, very expensive to do so. Sustainable aircraft fuel is very expensive and very scarce, for example. And even then, you’re not actually reducing emissions to zero. So what’s the alternative? Well, it’s to say I’m going to put money into projects that will reduce emissions elsewhere. Now, in the olden days, we used to talk about offsetting. We still do. A lot of people talk about offsetting. So basically it’s saying, well, I can’t reduce my emissions, so somebody else will do so. And I think that still has its merits. I think it’s also very important to talk about the contribution that we’re making to reduce emissions somewhere else in the world, even if we cannot do so today. And that, again, is why we come back to additionality. Because it’s if it’s going to happen anyway, then you’re wasting your money. If you’re going to be putting it into projects that aren’t going to actually move the needle and to reduce those emissions, that wouldn’t otherwise happen. And so that’s why it becomes so important. But both sides of the equation are equally as important, the supply side integrity and quality and the demand side integrity around why you’re actually using carbon credits and what you’re using them for.

Dominique Barker: So I hope our audience understands. So to summarize so far, we’ve been speaking about the integrity of the supply side, and that’s defined by the core carbon principles that are coming out of the group that Chris is working on, the Integrity Council and Voluntary Carbon Markets and the integrity of the demand side. So that’s the corporates or consumers that are purchasing credits. I suppose it’s more the corporates and how they are disclosing and using those credits to negate or offset their operational emissions. So let’s end off with something that’s a bit bigger picture. Chris, how does the development of carbon market integrity help us move forward to a more sustainable or net zero future?

Chris Leeds: So I’ve always seen this market as being a stepping stone. It’s a bridge to something much bigger. Now, ideally, we would have a global carbon market that’s put in place by the UN. Now that’s been very difficult to achieve because of the politics around it. There was a big breakthrough that happened in Glasgow at COP26 in November last year and that was where they agreed the Article 6 arrangements. Now I won’t go into too much technical detail there. This is Article 6 of the Paris Agreement. I’m sure your audience, if they have time to go and Google Paris Agreement and Article 6, they’ll be able to find lots and lots about it. And if anybody wants to speak to me about that afterwards, I’m very happy to. But it did help to establish the start of an international carbon market that would allow the transfer of carbon credits between nations and that will potentially largely follow some of the principles that are laid down by the voluntary carbon market around additionality, around permanence. It would be great if we saw that those core carbon principles were adopted around the world, because if governments start to say, well, I’m willing to accept credits that actually meet the core carbon principles for some environmental tax that they’re imposing, which is what Singapore are doing and potentially what we’re seeing in China and Japan as well. Once you start to see that happen, you then start to see a fungible market develop. Once you see that fungible market develop, we start to see a global price for carbon emerge and a global price for carbon will then create the right signals across the globe to actually allow the right incentives to reduce carbon as quickly as possible. So we avoid the tragedy of the commons, the idea that basically there is this free resource out there, in other words, being able to emit CO2 without any penalty. In fact, there is a cost. There’s a massive cost both economically and environmentally. And that’s where I think I would really like to see things.

Dominique Barker: A poignant point, given that you’re calling in from the UK where we’re hitting not only record temperatures, but I think I saw 20 degrees above normal. It’s just out of this world. Chris, I want to thank you not just for today’s podcast, but I want to thank you for your leadership in the carbon markets and Bill Winters and your organization, Standard Chartered, that has been so important in terms of defining integrity and to work towards this common goal, we really need all of us. Collaboration has been a word that we’ve used across a lot of the podcasts we’ve used, and so I want to thank you very much for you and Bill Winters and Standard Chartered’s contribution to the carbon markets and thank you listeners for tuning in. Thank you, Chris.

Chris Leeds: Thank you, Dominique, and I appreciate the opportunity.

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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