Resources

• Center for Climate and Energy Solutions (C2ES)
• Calyx Global
• Integrity Council for the Voluntary Carbon Market (ICVCM)
• Harvard Salata Institute for Climate and Sustainability

Host and Guest

Host: Joe Aldy, Professor, Harvard Kennedy School (LinkedIn)

Guest: Nat Keohane, President, Center for Climate and Energy Solutions (LinkedIn)

Guest: Donna Lee, Co-Founder, Calyx Global (LinkedIn)

Guest: David Victor, Professor, UC San Diego (LinkedIn)

Guest: Carolyn Weinberg, Executive Fellow, Harvard Business School (LinkedIn)

Transcript

Editor's Note: The following was prepared by a machine algorithm, and may not perfectly reflect the audio file of the interview.

Joe Aldy:

So, welcome to our session on the voluntary carbon Markets. I'm Joe Aldy. I'm a faculty member of the Harvard Kennedy School. It's my pleasure to host this session. I think what we hope to do over the course of the next hour is to explore both the opportunities and the challenges when it comes to the voluntary carbon markets. How do we think about the opportunities perhaps for mobilizing more finance and decarbonization? What may be some of the challenges of ensuring the environmental integrity of the actions that underlie offset credits that get transacted in the voluntary carbon market? Think through a little bit about the institutional design, how it may interact with public policy. And I think the bottom line, one that we've talked a lot about today over the course of this conference, what role can the voluntary carbon market play in accelerating the reduction of greenhouse gas emissions here in the United States and around the world? So, to address these questions, I'm thrilled to be joined by four leaders in the business, the policy, and the scholarship of voluntary carbon markets.

We have with us today Nat Keohane, who is the president of the Center for Climate and Energy Solutions, also known as C2ES, a widely respected non-partisan, nonprofit organization that works with policymakers and leading businesses to accelerate the transition to a thriving, just, and resilient net zero emissions economy. Donna Lee, who is the co-founder of Calyx Global, our carbon credit rating agency. She's worked on climate change for more than two decades. Prior to Calyx, she was a US climate negotiator, an advisor to a number of governments and companies on climate finance. What I know about REDD+ and related issues is because of Donna Lee, when we worked together in the US government.

David Victor is a professor of innovation and public policy at UC San Diego, where he is a part of the School of Global Policy and Strategy and the Scripps Institution of Oceanography. He's also a graduate of the Harvard class of 1987, a class that includes many people now active on the climate challenge.

And Carolyn Weinberg, who was an executive fellow at the Harvard Business School until recently, Carolyn served as Chief Product Innovation Officer at BlackRock. She drove the product innovation, development, and commercialization of products globally for the world's largest asset manager, including in transition finance, digital assets, and fixed-income ETFs. So, I'm going to pepper them with some questions. They're going to give us some really wise answers unless I ask them uncomfortable questions, and then they'll dodge them. But first, Nat, I want to go to you. Okay, so just set the scene for us. Help us understand, when we talk about the voluntary carbon market, what do we have in mind, and how big is this market, and what is its potential, both when we think about it from a financing perspective, an environmental perspective, and a technology perspective?

Nat Keohane:

Great. Well, thanks, Joe, and thanks a lot to the Salata Institute and Harvard for hosting this, and thanks all of you for coming. I'm really pleased to be here on the panel with really perfect co-panelists, Joe. So, to set the stage a little bit, the voluntary carbon market is essentially the marketplace in which private entities, mostly companies, can go and buy credits that represent, ideally, real verified emissions reductions from a range of projects. This might be a carbon dioxide removal project that takes emissions out of the air and stores them underground. Or it might be a project that replaces dirty cook stoves with clean cook stoves, and so it reduces emissions while providing benefits. It might be ... Joe said REDD, which stands for reducing emissions through tropical deforestation and degradation. So, it might be a project to protect forests. There are other kinds as well.

These happen all around the world, and there are methodologies and approaches that are designed to measure, we'll talk about this, designed to measure the emission reductions and estimate the emission reductions that come from those activities. So, the voluntary carbon market is a place where companies can go and buy credits, ideally representing these emissions reductions. And why would they do that? Well, they might do that because they have a corporate climate commitment that says they're going to reduce emissions, or they're going to contribute toward net zero. They might do it often on top of steps they take internally to reduce their own emissions. Maybe they do this because their consumers are asking for it, or their investors are asking for it often because of their employees. We can talk about that too.

The voluntary carbon market is distinct from a regulated carbon market, so there are places, including Massachusetts and about a dozen other Northeastern states, California, the European Union, other countries around the world, that have a regulated carbon market often. So, it's a cap and trade program. That's a regulatory approach that's enforced by government and the state. So, we're not talking about that, we're talking about the voluntary approach. There are some of these methodologies you can actually use those credits. You might be able to use those credits in some of those regulated markets or the voluntary markets. So, there's some overlap, but when we talk about the voluntary market, we really mean the things that firms are doing voluntarily.

Finally, in terms of size, to give you a sense, so the voluntary carbon market, and Donna will probably have a better latest number than I do, but a couple of years ago, 2021, it reached a total market volume of $2 billion in 2021, and that was about 500 million tons or credits of emissions reduction. So, you can do the math. That's a pretty low price for those emissions reductions. If we think all those emissions reductions are real, then that's a nice sizeable chunk, but $2 billion is still just a drop in the bucket when we think about the kind of finance we need to mobilize to address the climate crisis. It's in the trillions, so we're just a few orders of magnitude off.

There's also questions that we'll talk about the integrity of quality. Just for comparison, the European Emissions Trading System, which is the largest compliance market in the world, had a market value of $800 billion, so also very different. However, and this is the final point, there is a real potential here. So, there was an effort done, an exercise done a few years ago by something called the Task Force for Scaling the Voluntary Carbon Market. You have to get used to lots of hard-to-follow acronyms here, TSBCM by McKinsey and others. And they estimated, depending on the assumptions you make, that the market could grow to be 10 billion, 20 billion, even 50 billion a year, depending on the assumptions you make. And so that would be real money. It wouldn't be the trillions we need, but it would be an important contribution toward it. But that'll only happen if I think we get the integrity right. And so that's, I think, something we'll talk about today.

Joe Aldy:

Great. So, Donna, let me turn to you. You've worked in the international climate negotiations going all the way back to the 1992 Earth Summit in Rio de Janeiro, where we first crafted the UN Framework Commission on Climate Change. There had been discussions about the use of offsetting projects in international climate policy. We've seen offsets used for compliance purposes in domestic cap-and-trade programs, CBA credits that have been used in the EUETS through 2012, and a little bit after that. We have in California this ... The voluntary carbon market is different. What do you see as the role of the carbon market and the key role of the buyers in driving this market?

Donna Lee:

Yeah, thanks, Joe. Thanks so much for inviting me to this session on the voluntary carbon market fuel and the degree that these days, working with Calyx Global. So, I think, first of all, it's really useful for us to put the VCM in the context of all the things that we need to do in order to check climate change. I still believe that policy ... and you and I remember during the Obama administration, trying to get a comprehensive climate policy, putting a price on carbon that still is the fast and best means to tackle climate change. The voluntary carbon market is something that happens ... I don't want to say it second best, but it's something that we do in addition to that. And what I would really like to see is this comprehensive for the price of carbon. That really is the golden egg, I guess.

But in terms of thinking about the VCM in terms of comparing compliance versus voluntary markets because I think it's important to really make this distinction. And, Nat, you started to do this, which is great because the compliance market is policy, and policy, you can integrate lots of different interests into policy. So, in a cap and trade market, you have companies in California, if they're over 25,000 tons, they have a cap. And there is a regulated authority, a body, a government, elected officials that has this accountability that's creating that market. So, you have companies that are capped or under regulatory system, and then, in the case of California, like a resources board or some regulatory authority says, "And then you can buy these offsets." And when they craft that, they can integrate all kinds of different things.

So, you look at Columbia and the carbon tax. They wanted to use the carbon tax to also drive finance to indigenous lands. Or you think about the IRA, right? One of the things in the IRA, which is the climate change bill by a politically palatable name, caps oil wells, but they don't cap the most methane-emitting oil wells. It's the one nearest to communities. In climate policy, you can integrate all these different considerations. The voluntary market isn't like that. There's no authority. By definition, it's an unregulated market, and for that reason, it lives and dies by confidence and how do you build this confidence?

And the fact is the demand is coming right now today from companies that want to claim carbon neutrality net zero. They might want to sell a carbon-neutral product. And so, for that reason, on the other side, the supply side, you really need to have credits that are what they claim, and that's really important. And I think that's a distinction between the voluntary and the compliance markets. Interestingly, Nat, you mentioned the TSVCM, the Task Force for Scaling Voluntary Markets. That changed its name to the Integrity Council for the Voluntary Carbon Markets, and I think it-

Nat Keohane:

It didn't quite change its name, but we're going to-

Donna Lee:

It morphed. It morphed into the I-C-B-C-M, and I think it's because they have this original idea that we just want to create a market, standardized contracts, create liquidity, and scale, but I think they realize very quickly that you cannot scale without this integrity. And I think that integrity is absolutely important when we're talking about voluntary carbon markets.

Joe Aldy:

Okay, thanks, Donna. David, let me go to you. When I decide ... let's suppose I've not actually ever done this. Suppose I bought some oil. I'm going to get 1,000 barrels, West Texas Intermediate. It's going to be delivered on a certain date to Cushing, Oklahoma. I know when that actually happens. I can enter into a transaction with a counterparty, and then I actually know when I've got 1,000 barrels. Who knows what I'm going to do with it? I'm a professor, but I've got 1,000 barrels now in Oklahoma.

Nat Keohane:

You imagine the solution.

Joe Aldy:

Yes, yes. Yes, as we're taught to do. So, the challenge, though, when we think about offsets, we're often thinking about how we're reducing emissions from what they would've been otherwise. We don't actually observe or measure in a way like we often do when we think about, say, transactions and physical commodities. And that's one of the reasons why there've been these concerns about low integrity credits for activities that would've happened otherwise, credits for activities that may store carbon only for a temporary period of time in biomass and not for a permanent basis. So, how do we think about how serious this problem is, and how should we go about trying to address what appears to be this significant overhang of low-quality credits in the voluntary market?

David Victor:

Yeah, so I think it's an important question because this is a fiat currency, so it's only as good as people's confidence in the rules, the integrity of the rules underlying it. And full disclosure: I've done a lot in this area, and almost all of it has been critical. And it's not that I don't understand the theory behind this. And I think it's true. You cannot do serious climate policy without some kind of price on the emission. Without the price on emission, everything else is harder. It's harder to figure out where to allocate resources. And so, in a world that doesn't have a universal local carbon tax, it's called Imaginary World that has that universal carbon tax, the voluntary markets are a second best, but they might be a second-best that works, that works in particular for firms and governments that are highly motivated. So, I get the logic behind it.

Then, historically, the real world has gone through many experiences like this. We went through the CDM, which was compliance, but had some voluntary aspects to it because of the nature of the way international commitments were set. A lot of quality jobs of that. We've had this huge wave of many forestry projects that were basically garbage projects. Low prices because low quality since the markets are working, and so the real world has delivered a lot of low quality. And now we're starting to see a turnaround, and I think that's actually very encouraging. So, I just want to say just a couple of things about this.

First, what do you do about the overhang of quality? I think there are two overhangs that are a problem. One is the actual physical tons that are out there that are garbage tons that become zombies. If we get the incentives right, those will get priced to zero, and they will, poof, disappear on their own, especially in a world that does what Nat is talking about, where we get the rules right, and the markets scale because then they're going to be a tiny volume, 200 million tons max, of a big market that's getting bigger, and so that it'll get lost in the running. Although there is an overhang, and a lot of companies want to go buy these things, and they don't know why. Why Should I spend $20 a ton for credit when I can get one for two? Why not buy the $2 ton? Except it's garbage. That's why you won't buy the $2 ton.

So, there's the overhang of the physical tons. I think the much more important overhang right now is the confidence overhang, that that experience of garbage in the market makes people wary. And that's really important for the voluntary market because who's buying the voluntary credits? It's a lot of firms that are motivated to go do the right thing, as it were, and they're now leading the charge, not everyone, but they're leading the charge for higher quality. I want to clip into saying there's a tension. We start to get it right, and we create the centers for high quality markets, unlike H.R.87 colleagues that started a company that's just done a big offsets deal, higher quality offsets along the biodiversity benefits in Panama selling to Microsoft among others

And so you started to see these deals happen, and I think that's really very, very encouraging. But there's a tension because, on the one hand, the people who want to make this thing big and the traders who want to trade like this Pork Valley's, trading places moving to apply the carbon, but they all want common rules. But the reason we're getting higher quality right now, I think, is because we don't have common rules. And so I actually think the vulcanization, although it freaks out the traders because they don't like something with lots of different complicated rules, and so they want to see homogenization.

Joe Aldy:

Okay, thank you, David. Carolyn, in your time at BlackRock, you did a lot of work developing new financial products. In a sense, a carbon credit is something, at least it didn't exist when I started working on climate change. That's because I'm old, but it's one of these things where we're seeing this innovation in the financial space. We're seeing further innovation on different products, derivatives of carbon credits, insurance instruments for carbon credits, etc. So, could you reflect some on your experience with new products to talk about how you see where we are today with carbon markets and what you think the prospects are in the future for the carbon market?

Carolyn Weinberg:

Absolutely. So, let me first start by talking about there's a massive trend of investors looking to invest in this transition to net zero. And what I mean by that is that individuals like ourselves may say, "Gosh, I have a brokerage account, and I have a bunch of securities." And they have the S&P 500, and they have the ACWY and world in disease. But gosh, if it only could have a lower carbon footprint by investment perspective, that would be amazing. So, you have this trend of investors like us, like wealth investors, who all are individual. And you have big institutions who say, similarly, "Gosh, I would love to invest my public portfolio in lower carbon-emitting areas or emission areas." But how do you actually measure what that means? What is the carbon footprint of my investment portfolio?" Either public market, and then we can get more complex into private market.

But there's this giant trend of investors, wealth or institutions, saying, "Where am I at today? What am I doing today? How do I actually move this business forward? Or how do I move the market of investing in the transition?" We talked about the trillions of dollars needed. We all are going to have to finance that in different ways. We all have our pieces of the way to do that, but we need to be able to measure where are we today and where are we going. So, that's just a big trend from the investment perspective.

The carbon markets themselves play a really interesting role in that for any one of us who wants to buy a portfolio of investments, we could actually also include a carbon offset in that portfolio as one mechanism. Instead of divesting from some area, one could actually say going to invest in addition. So, as you think about the evolution of investment products, how does the measurement of carbon, the investment in potentially carbon markets, and how does the assessment of the whole portfolio over time, and the transition of it into your decarbonizing portfolio, how does that evolve, if you will?

So, we talk about participants today are really companies. We talked about Microsoft, we mentioned. You said company. Everyone's talking about companies buying. But actually, in order to have a functioning market, you need more than just one type of buyer base, and you can't just have a buyer. You need buyers and sellers. So, how does that work without traders? In fairness, the more diverse participants in the market, the more you actually can create a market. At the moment, I'd say we don't have a market. What we have today is a series of projects and a series of data, if you will, that you can put into a portfolio, invest as a company, and retire. But we don't have a real functioning market from that perspective.

So, when I think about financial markets that I've built or products that I've built, transparency, data, all of that, what am I buying? What does it look like? Will it still be the same tomorrow as it was today from what I expect? All of that needs to actually exist. So, I imagine a world where investors like ourselves, investors like big pension funds, investors like the endowments will be able to say, "Gosh, my portfolio of all that I've invested today has the following carbon footprint. I expect it to look like this over time, and I may include either reduction credits or removal credits in that portfolio to achieve the goals I'm looking to achieve." That's where I see then a market developing because you'll have buyers, sellers. You'll have data that is measured, transparent, and doesn't have to be equal to each other from the perspective of lower common denominator but a standard by which people feel comfortable.

Joe Aldy:

So, we do see this kind of organization. In the last table I saw, there were 10 different standards that you could register your project in if you were developing a new project. We have a number of ratings agencies that are emerging as well in this space. In a sense, we have ... the Integrity Council has their set of principles. We just heard from the White House and a number of agencies a couple of weeks ago with their set of principles. So, there's, in a sense, where there's this evolution in, if you will, the institutions that govern this market. So, if we think that there's a potential here to leverage market forces to ramp up financing and de-carbonization, what do we think about the different roles of ratings, of liability, of factors that may influence prices? That gets us away from I may buy the $2 garbage because it's cheaper than the $20 quality and gets us actually moving towards quality projects. We have greater confidence about the environmental return. Go ahead, Nat.

Nat Keohane:

Thanks. I wanted to dig in a little bit on that question, and Donna mentioned the Integrity Council for the volunteer carbon market, which we've been part of helping to create, so that might be a good entry. And then Donna can talk a lot more about the details of ratings and that sort of thing. So, I'm an economist, and one thing I should say from the beginning as an economist is it's funny because we're talking about a market that, from a strict economic perspective, shouldn't even exist. Right? I mean, we're talking about purely voluntary market that firms are willingly forking over money for a public good. So, that's interesting. And so, we're talking about how do we spin that into something real.

But sticking within the economics frame, I think about this when we talk about quality, and I think David spoke to it really well. This is a classic "lemons problem". So, if you're not familiar with the "lemons problem," think about used car market. The lemon is a bad car. And in the absence of good information ... I guess this was before the days of Carfax and whatever. Joe said this one. I don't know the price on this. It was very hard for people who didn't walk around with a cannon all the time to tell the difference between a good car and a bad car, a lemon. And if you have a market in which you can't tell the difference between a good car and a bad car or a good credit and a bad credit, the bad credits will chase out the good. Right? Because the average quality is lower than the good ones, and people aren't going to buy the good ones. Why buy a $20 credit when you can buy a $2 credit? They seem the same. And that's the problem I think we've had in the voluntary carbon market.

It's been very hard for most companies that are interested in this to tell the difference. And companies have invested before this, but companies have invested huge amounts of money with teams of people doing due diligence in these projects in a very bespoke market. And there's two problems with that. One is that's a huge amount of resources going. You don't have that in other commodity markets, people investigating every single project. It's very hard to do well, and it also means you're never going to scale because you're never going to have just people who say, "Look, I want to buy carbon credit. Tell me what's good." I'm exaggerating a little. There are lots of programs out there that have done really good work. So these programs all administer methodologies, and they verify the credits, and they have validation and so on, but those are uneven too. And so some of the methodology is really good, and some aren't.

Okay, so how do we solve that lemons problem? One way we're trying to do it is, this is the mention of the Integrity Council, set a global benchmark quality standard. Okay, it's like a Good Housekeeping seal of approval for carbon credits. And the idea is there's a set of core carbon principles that came out last year. It's very simple. It's not granular. It's not a rating. It's just yes or no. Yes, you meet the carbon credit principles. No, you don't. And it's done at the level of these programs that administer the standards that administer these methodologies. So, you can go on the Integrity Council website. You can see what they do. You can see the assessment framework, the following assessment framework.

We're starting to now come out, and this is going to be really interesting to see. Last week was the first wave of methodologies that the Integrity Council said, "Okay, we approve. These are eligible for a label, a core carbon principle label, that will start showing up in the market." And it'll be very interesting, I think, to see whether that leads ... what we hope it leads to as a price premium for the high-quality credits versus the low-quality credits, over time, the scale growing and the good credits chasing out the bad. Maybe we can go back to the question about homogeneity. I think that'd probably differ from data on that. But this is an example of where the self-regulatory approach ... the Integrity Council is purely ... it's a nonprofit. It's funded by Philanthropy. It's not a regulatory agency, but we're trying to do it in a way that almost looks like a self-regulatory agency.

Joe Aldy:

I would say, then I want to go to you next, but I would say I feel like it's quasi regulatory, the entire process. You put out a proposal. You have public comment. You had some virtual town halls.

Nat Keohane:

And that's very deliberate. The chair is for two reasons. One is the chair is Annette Nassar, who is a former SEC commissioner. So, when she came in, she said, "Alright, we're going to do this in a really clear way." The other is, I mean, Donna said something really important, which I totally agree with, which is ... and David said it as well. Where this is second best, I don't even know if it's second best. It's well down the list of best. First best would be not necessarily the imaginary world. I mean, first best would be great if we had the imaginary world. But just having more policies out there and more carbon prices out there would be great, and so part of the reason we're being so transparent about that is in the hopes that maybe at some point we could say, "Hey, we've done all this work. Here's all the record of the public comments and all these things," and maybe that's the basis for governments to build on.

Donna Lee:

Yeah, there's so much to respond to. I feel like there's a whole buffet out there. Carolyn, something that you said that really resonated with me is that we're in a really immature market right now, and the one that you've operated in had a lot of maturity. We just don't have that kind of diverse participation that a mature market would have. And so, some of these new products that you mentioned I think are important to mature the market, and the ICBCM is definitely one of them. The reason why we started Calyx Global was because what we saw in the VCM ... so, the VCM is this really odd assortment of actors. They all come together voluntarily because there's no regulation again. So, in this ecosystem, what we saw was that everyone was there to make the market as of, let's say, three or four years ago. Everyone's business model who was within that ecosystem was tied to volume to make the market.

And so what we needed in that space to try to elevate it, to try to help it optimize, so the most mitigation possible was an entity, like a ratings agency. And we really try to make sure ... our mission is better carbon markets, we say for the planet and for people. We want to move the market into higher impact, and we really try to make sure our business model is disconnected from making the market, that our business model is aligned with the atmosphere. And I think the ICVCM is another entrant into this space that's very similar in that it's not trying to make the market per se. I think the difference I would say between the ICVCM and Calyx as ratings agency is that we do believe in this, that the market is highly diverse and light, that it's not black and white.

And in some ways standard setting bodies, the ICVCM creates a bit of a black and white world. They set a bar, a standard. Everything above it is in. Everything below is not in some ways. And I think what we see in the market is really differentiated assets that are being created. So, you can have an asset that has the durability of 1,000 years because it's a CCS where you're stuffing it down into geological storage. Right? That's very unlikely to be reversed. And then you have something that may be a protected area for a shorter period of time. You have some credits where you can measure things really well and others, there's going to be a little bit more uncertainty. So, I think there's a real differentiation, not on the carbon accounting side, but also on the other, what we call benefits beyond carbon. So, a lot of these credits, these assets that are created, also provide contribution, like wonderful contributions to sustainable development, to biodiversity, to human health.

They create jobs and employment, so that also creates ... again, we start seeing these assets are really different. And so I guess that's why we believe ... as a ratings agency, we're looking at all these different qualities and trying to provide buyers with the information that we hope they can use to make those choices, decide how much risk they want to take, decide what type of co-benefits or extra benefits that they want to support. I think the ICV ... if I think of just the bond market and ratings, in some ways, I feel that ICVCM sets that investment grade junk line, whereas we're creating this real differentiation from top to bottom.

Nat Keohane:

Really quick. I think they're very complementary. I think you can think about the ICVCM as yes or no, and it is a pretty crude but why it's better. And then, if you really want the detail, you go to Canada.

Joe Aldy:

I'm going to go to David and then, I want to go to you, Carolyn.

David Victor:

Sometimes, all these systems are as hard to follow as the Game of Thrones, a lot of different schemes. And I think that's the nature of the market that's grappling with the quality problem, and it's good right now up to a point. All these ratings efforts, standards, we should make sure that we set, if we set market-wide standards, they should be thought of and designed to be floors, not ceilings. Differentiation can be helpful to reveal information and so on. It seems to me that this is a high-transaction cost world, and so all at SQL. This world will take off more rapidly with big projects than small projects. There's a lot of political pressure to try and reward small projects. We need to be cautious about that because if we really want the market to take off for quality ...

I'm very concerned the systems are not designed for enough assessment. At least I will say the last few rounds have not been designed for enough assessment. They were opaque. Chuck Sabel and I have this book out on how society solved problems when it's a strong motivation to solve a problem that nobody knows what to do. And the answer is you run lots of experiments and you build institutions that can very quickly learn what's working and what's not working. So, I hope this alphabet soup of institutions will include some folks who are really actively trying to figure out, well, what's worked. What hasn't worked? REDD+'s activities and so on.

Just two last comments on this. One is I'm a huge fan of buyer liability and insurance. I think I understand why, for a long time, folks have resisted that because they want the market to have low transaction costs and lots of liquidity. You need to create an incentive to price delivery risk and an incentive to create a secondary market called insurance that can offset those delivery risks so that you can create this kind of dynamic that is a race to the top in pricing things, pricing things correctly.

I just want to close by saying one thing I think we have to recognize is that the firms that have the highest brand risk and are buying now a lot of these credits, they are scared. I don't know what the technical term is, but they're scared in a big way-

Joe Aldy:

It's a family program.

David Victor:

... about the quality problem. And so, when they're going out to the market ... Donna mentioned this just in passing. I think it's a really important point. When they're going out to market, they're looking at projects that aren't just carbon, but they're generating other things people care about Half the monetization value is ecosystem services, not carbon. It's in the compliance market, but the logic is the same. And so I hope that we make sure that our monitoring verification systems have a door open to all these other services that people are now increasingly seeking from these projects because they're so gun-shy given the previous experience.

Joe Aldy:

So, Carolyn, if we're going to be able to scale up finance here, you talked earlier about the need for data and transparency. We've already heard of a couple of examples here. And David, in a sense, was talking about we had this kind of experimentation. At some point, we should learn and then decide, and perhaps converge on what is a high-quality standard. When you think about this, is this enough for you to say, "I think if you did all this, yes, you could scale," or do we need more to build the institution of this market?

Carolyn Weinberg:

So, first, we've been here before with other markets. So, most of my career was in derivatives markets, particularly fixed income. For those of you who know about the swap market, IBM and World Bank did the first cross-currency swap 111 currency, one, one, the other. And we're like, "Oh, let's come together." That then developed this massive swap market. When I first started working in swap market, we would have two sides. We'd staple them together and bring them to the rescue. This does not exist today. Obviously, there are billions of dollars cleared. The world works really well. Everyone's like, "Well, I want this all back." So, we've been there before. The company's going to do some things, getting together, and it evolves.

Now, there's a lot of bumps that happened in the swap market. I think all of us remember Proctor & Gamble, Orange County, Gibson Greetings. Not great stories. They did derivatives, bankrupted the company, or some bad things happened. So, I'm not suggesting that it was all smooth moving. At the same time, we learned a lot from watching markets grow. Markets evolved from these seeds to actually something real, to actually driving great risk management and investments. There are many other examples, but the swap market comes to mind is I hear all these are seeds and small things.

One of the most important developments, if we go back to the swap market, was actually FAS 133. How do you account for these things? What's the market of these things? How does it work, and how do you evolve that? We're missing that here. So, for me, one of the most important elements is actually how do you account for it? If you're a company, how do you actually account for this asset you have? This one carbon ton that's a removal or reduction, what does it look like on your balance sheet? What have you done with it? And how does it actually flow through from that perspective?

That's probably one of the most important next steps to have an accounting standard that people recognize that is consistent and that actually could be almost globally used so that you actually have this global nature because the market is global. You're investing in a project wherever it might be, but there needs to be the same standard for that same exact credit or the identical credit traded elsewhere. So, I think that all of these elements of quality are critical. The rating agency is critical. Different standards actually is completely reasonable and fine. There are many ratings agencies that will say that bond's an A. That company's an A-rated credit, and someone may say it's actually a minus, or actually triple B plus. That's great. There's room for others. Both came out with one. Great. That's okay as long as people understand what they're reading and what they're doing.

At the same time, accounting, I think, is at the same level, if not above that from the perspective of actually developing standards and markets because people are ... as long as they can read it and do the math, they'll do it. I think Nat walked through a bit of one of the biggest issues of scale is that actually, all these companies like Microsoft or even from BlackRock, and many of you all know there are teams of people downing with each of these projects. That is not sustainable. That does not actually scale.

So, the ability to have ratings or have to trust that someone else has done that work is probably ... that might be related to rating, but it's a bit about how do you actually disclose the same amount of information to everyone so that you can actually have a standard, which, again, goes a little bit back to accounting because everyone ... if you list of the New York Stock Exchange, everyone's going to read their financials in the same exact way. So, how do you actually read the financials of whatever this project is the exact same way? It's all related to accounting, if you will, and then you can actually then do more work. So, transparency data, but accounting is, in my mind, a critical piece to scale anything.

Joe Aldy:

So, I think maybe it was Nat who noted that if you actually believe in the economics, this market shouldn't exist. So, this market exists in part because we have these companies that set voluntary goals. They've said they're going to reduce their emissions. More and more of them say they're going to reduce their emissions to net zero levels by some point in the future. And so that has created demand where they realize some of my emissions are hard to reduce in the firm. And there's this opportunity to buy offset credits outside the firm to make progress on that goal. We've seen, recently, the Science-Based Targets Initiative said originally, "We don't want you to the very, very, very end to use any offsets." And now there's been some discussion about whether or not you should allow offsets for part of the value chain that's hard to decarbonize, and that created a bit of a kerfuffle within the organization.

So, how should we think about the buyers in this market? Should they have limits on how much they can buy? I mean, some of this conversation ... we see this. We saw it in the principles that came out from the White House just a few weeks ago, but we've seen this in other places, the Oxford Principles. It's do as much as you can within the corporate footprint and the value chain, and then, as a last resort, buy these offsets. It actually reminds me a little bit of the old supplementary debate in the Kyoto era of whether or not-

David Victor:

That did really well.

Joe Aldy:

... whether countries could go out and buy emission allowances from others. How should we think about the appropriate use of the offsets? How much is appropriate for a firm to use? And how do you actually operationalize, let's say, to echo a theme from this morning, hard to evade within a firm? David?

David Victor:

First, I don't think we should assume that the firm is the right unit of analysis for solving most of these problems. So, the idea that every firm individually should be some city-state and go up and solve the climate problem on its own is nuts. And when you say it that way, nobody could possibly believe that. But that's actually the way a lot of firms are talking about accountability, even the industry. Some industries will cease to exist or become much smaller. We just don't know what the boundaries are between different firms and industries, and that's one of the reasons I think that most of the SBTI stuff is a complete dead end. The idea that you could know from the beginning, sitting from the outside, what the right trajectory is, and so on is just crazy. So, I expect that most of that's going to collapse, and this discussion of that, what's the right rule of law sets, and so on is part of that.

But let me come back to your question about should firms have a certain number, have a magic eight-ball in the CEO's office, and turn over the number six. I think we don't know, but I think firms should explain. Why are firms doing this? A lot of the firms are worried about loss of license to operate. They're worried about future regulations. In some cases, they're trying to do things and show how to do it because they're going to try and change the rules for the entire industry for merits of human shipping. And all of that's good. So, firms should say, "Here's our philosophy on the role of law sets and why, and here's what we're going to do internally and why. And here's how we're going to know whether it's working or not and why." And that last step is also really important because the others are a function of that.

And we're about to see at some point ... I think it'll take longer than it should ... a lot of firms start blinking on their original net zero goals because they're not achievable. And you're going to have some firms that are going to blink, just run and hide and hope nobody notices them, and then others will blink responsibly if that's the right concept, that will say, "We couldn't meet our goal, but here's why. Here's what we're doing. Here's what we think is more achievable, less achievable. And here are the kinds of things we're going to do along the way. And here's what the right role for us, isn't it?" That's an honest dialogue where you focus less on top-level numbers or bottom-level numbers, depending on which discipline you come from, and more on the meat.

Joe Aldy:

Having a credible transparent process.

David Victor:

Yeah. Here's how we know because most of this is unknowable.

Donna Lee:

If I can follow up, I really like, David, what you're suggesting because, at the end of the day, this voluntary action, it is about almost social livelihood. And the reason why companies ... we work with a number of these companies like Meta and Salesforce, and even a couple of universities, and I think a lot of it is around this social license and wanting to be credible and to add to their brand in some ways by having really strong climate policy and following through. But there's no one number. We have seen companies blink. Sometimes, it's because they're scared to be the next front page of the Guardian for buying the right wrong offset, or they've had a tough year. You can't expect a thin margin or a company that's doing poorly and can't get that bottom line to be buying the $600 durable offset. It's just not possible.

So, I don't think there's a single number, but it's similar to what we always tell companies, or what I tell companies is to be transparent, to tell your story in a way that is credible for you and your company. And if you are transparent and you tell that story, and you talk about why is it that you did X, Y, and Z, I think that helps a lot. I do think it's important that companies, first and foremost, try to reduce their emissions. If they're not doing that, then it's not going to be a credible story. So, there are some basic rules, I think, to be credible. But after that, I think we have to allow some flexibilities for companies to act in ways that makes sense for them.

Joe Aldy:

Okay, before you jump in, Nat, let me just ... I'm going to go to the audience, so be ready for your questions. Nat.

Nat Keohane:

Yeah, so I guess I'll continue in on the economics vein. And I haven't thought about this before today, but I think we talked about the language problem, which is an adverse selection problem in economics. On the demand side, on the buyer side, I think the concern is a moral hazard problem. And what I mean by that ... so my friends in the environmental community to my left and my folks at SPCI that Joe mentioned, their overriding concern is that if carbon credits are available, firms are going to go buy them instead of making changes they need to make internally. And I'm going to try to do my best to envision how this argument could be made in the best way because I basically agree completely with David that the firm ... it's weird we're talking about that firm.

So, the traditional argument around carbon credits is a ton is a ton, wherever it's in. All of this is true, right? So, this is absolutely science-based, what I'm about to say. A ton is a ton. All that matters is the accumulation of greenhouse gas in the atmosphere, so we should cut as many tons as fast as we can, as cheaply as we can. That's what the market does. Why are we getting in the way? if firms want to buy 100 tons and grab 10 tons, that's great. And if they want to do that instead of doing something internally, why not? It's all that matters is the tons. That's very true, and it's missing something. So, there's another side to this, which is the other argument is, okay, but if we are going to get to net zero, which is a necessary condition for stabilizing the climate, we're going to need to transform our business models. We're going to need to transform industry sectors and how businesses do things. And the only way to do that is to start making investments in changes in those operations.

You can't outsource that. So, if you want to figure out how to go to low carbon, you have to step up. But if you're thinking about Andrew Forrest and forestry, you're trying to figure out how to get the low carbon industry, you can't do that by planting trees somewhere or even by high quality CER carbon dioxide removal. And so that's the tension of how do we give firms a tool to do this in a high integrity way without giving them a free pass, as it were in, and not having progress on that internal transformation. I agree with both Donna and David that there's no one single number. I'm intrigued by David's suggestion, but I think ultimately, for better or for worse, I think the NGO community, the nonprofit community, is going to want it. It's a social license that partly gets created by social actors.

So, I just wanted to point out there's another effort here that's a different arrangement of the letters ICV and M, so VCMI, a different organization entirely, but a sister organization to the Integrity Council, is the voluntary ... I told you there are going to be a lot of acronyms. It's the Voluntary Carbon Markets Integrity Initiative, and it's trying to get some sort of standards on the demand side. So, it's just worth saying one answer to Joe's question is, well, we should try and create consensus just like we're trying to do on the supply side. What does a good credit look like? We should try to create consensus around what companies can do. And VCMI is coming up with ... it's like LEED. Everybody knows LEED for buildings. There's platinum, gold, and silver. And so VCMI is trying to come up with their platinum, gold, and silver ratings for companies. How many offsets can you use? I don't know if they'll succeed because it's hard to create that consensus, but it's another group.

Carolyn Weinberg:

So, first is this license to operate. I would actually go one step beyond a consensus, like a social license to operate. I think that as we move forward, it is just a license to operate, and it's a license to do business. For those who have responded to our phase one clients, there's always a whole section on how is your business transitioning in this lower carbon world. What is your business model? How much investment? What's your CapEx? Whatever it might be ... what are your commitments? And if you don't have any, you will not win an RFP, like full stop. So, it's more than just a social license environment. It's actually like there is a demand that is around this world, maybe less so in certain parts of the US, but, for the most part, you have Asia, Europe, and every single RFP will have elements of sustainability and climate reduction and decarbonization.

So, if you are a company and you are trying to sell goods and the only people who want to buy your goods are only going to buy if you actually are transitioning and reimagining your business models to that's point, well, gosh, you're going to do that. So, even if you actually hated the concept of decarbonizing, if you only were money making, you're going to do it because you have to do it because the people who want to buy your goods want you to do it. So, I feel like that tide is moving fast, and it's in all elements. You go to the supermarket, and you could buy a plastic cup, or you can buy a bamboo cup. People are buying more bamboo, and they want to. There's a demand for that. There's becoming lots of things that are more eco-friendly that people buy. That is not because they don't want to buy it. People want to buy it, therefore people are making it. So, for me, there's this whole just massive demand wave that's taking place.

What happens is these companies who are reimagining their business models, well, they are actually going to finance the transition. As much as we could say these individual companies, they shouldn't, in reality, they will, and they are because as they reimagine their business models, they're reimagining the supply chains. And they're saying, "Gosh, I really want green electricity to power all of my whatever it is, my factories, or whatever it might be because gosh, I want to tell my clients that I've done this in this way." So, in that reimagining or rewiring the business model, you have lots of off-takes that these companies are able to do. So, whether or not you're a car manufacturer or whether or not you're a Walmart, you're going to want to start reimagining your building, therefore you're going to want to secure greener off-takes from whatever the companies are, therefore they themselves will be financing these new projects.

So, ultimately, as I see the world, there's a demand that is making companies evolve. Those companies need to evolve. And in that, what's happening is they will, therefore, finance to secure their ability to evolve these off-takes. And part of that will require some elements of carbon markets because, ultimately, I think these markets should exist because it's really about allocation of resources around the world. That is what markets do, whether or not it's a commodity market, you're supplying demand of that oil needs delivery at that point. Ultimately, who needs delivery of that carbon offset? Assuming the accounting works and you can actually use it. Gosh, that's great. If someone in one part of the world is able to generate something that someone can use in another part, it is a functioning making sense global market. So, I guess for me, I think one is about more demand. Two is about actually off-takes in the role corporates have to play to de-risk some of these investments as well as actually to reimagine the supply chains and the entire business models, and lastly, get a classic reallocation of resources using markets.

Joe Aldy:

In closing, let me know. I know you have a lot more questions. I have a lot more questions. My colleagues here at Harvard on this issue are also asking a lot of questions about the voluntary carbon market and voluntary corporate emission reduction goals and the projects supported by the Salata Institute. If it's something you're interested in, let me know. Follow up with me.

Joe Aldy:

And with that, please join me in thanking Carolyn, Nat, Donna, and David. Thank you.