Diving into a Carbon Conference
I recently attended the North American Carbon World (NACW) conference in Anaheim, California. The conference organizers describe it as “the place for carbon professionals working in North American carbon markets and climate policy to learn, collaborate, and network” – and it lived up to that tagline.
The conference had robust discussions on both compliance markets (e.g. California and European cap-and-trade markets set up by regulators) and voluntary markets (carbon credits used for offsets by corporations and individuals). There was a lot going on and plenty that will be processed over the next few months as we evaluate directly relevant and adjacent investment and learning opportunities. In the meantime, I wanted to share five takeaways for our stakeholders and the impact investing community.
I. Compliance markets are steadily covering the maps
There are at least 30 compliance markets around the world at national and regional levels, covering almost a fifth of global greenhouse gas emissions. Washington state is the newest addition to the set of compliance markets in the US. Importantly, the learning curve is exponential: Washington was able to learn from California and Quebec’s market to develop and launch its carbon market in record time, just under 18 months. While the reach of compliance markets is growing, there’s also risk of backslide. The Regional Greenhouse Gas Initiative (RGGI) comprises twelve eastern US states. Yet some of those states, in particular Virginia and Pennsylvania, are embroiled in politically-charged debates about the future of their participation. And despite the growth elsewhere, many feel it’s not enough: they’re calling on compliance markets to cover a broader set of industries beyond energy and certain manufacturing facilities, like aviation and agriculture, to regulate a larger proportion of emissions. They’re also calling for the markets to more assertively ratchet down the number of emission credits granted year by year.
II. Voluntary markets are on hockey stick growth plan
When individuals or corporations not included in regulated compliance markets, like tech companies, state that they’re purchasing offsets to achieve carbon neutrality, that’s most often through voluntary carbon markets. The surge of net zero commitments over the last four years have meant that demand for offsets is far outpacing supply. Many of the carbon professionals who came to the conference are working overtime to develop the “plumbing” needed to bring more high quality carbon projects online. Currently, avoidance credits (referring to projects that avoid greenhouse gases from being emitted, like avoided deforestation and more efficient production of cement) make up nearly 95% of the carbon offset market, whereas removal credits (referring to projects that remove greenhouse gases from the atmosphere, like tree planting and direct air capture) make up the rest. We can expect the availability of removal credits to increase and take a larger share of the market in years to come, as they command a higher purchase price and corporates are signaling a preference for removing emissions. Some conference participants lamented recent infighting between avoidance and removal climate professionals. Considering the speed with which the planet is hurling toward dangerous tipping points, it’s very evidently not a question of “either/or;” rather it must be a “both, and” approach.
III. In voluntary markets, quality is the key issue
Predictably, the quality of offsets was a hot topic considering the recent highly publicized critique of forest carbon projects (The Guardian’s controversial article and Verra’s response). The quality of carbon credits is defined by three characteristics:
Additionality - demonstration that, without the carbon credit, the carbon reduction or emission would not have occurred
Quantification - incorporation of a conservative buffer to account for the uncertainty in how much abatement the offset provides
Permanence - level of risk that the emissions reduced or avoided could be reversed later (ex: a forest generating credits today could be cut down in the future)
Additionally is perhaps the hardest to prove, as it inherently requires clarity on a counterfactual, a hypothetical scenario in which the carbon reduction/avoidance action would not occur. The Integrity Council for the Voluntary Carbon Market, an independent governance body, is hard at work developing global standards to ensure the integrity of the voluntary carbon market across these and other principles. Meanwhile, the sentiment at NACW in response to media critique was encouraging carbon market professionals to refrain from being defensive about the need for improvement and standardization, and instead to openly acknowledge that iteration is to be expected for this new industry developing much faster than any other commodity in history. There’s an evident parallel with the ESG industry undergoing critique. In both cases, outside scrutiny can help the industries plug gaps, ensure consistency, and strive for quality in advancing climate action and social equity.
IV. Corporate paralysis can be overcome with collaborative efforts
Carbon market professionals are not the only ones under attack from the media; so are corporates seeking offsets to meet their carbon neutrality goals. The way one NACW panelist put it, “If corporates are transparent about their climate commitments, they get criticized for greenwashing. If they’re vague, they also get criticized for greenwashing.” Another agreed: “Companies are safer doing nothing than doing something.” Conference participants called on one another to help educate the media so as to be more discerning in their reporting on corporate actions. They also called for a deliberate effort to make the offsetting process simpler and the language less jargon-y to help companies get up to speed and conduct offset due diligence more readily.
V. Impact investors have a role to play
In a conference hall full of specialists who work and live in the carbon world, it was fascinating for me to be one of the few generalists in the conversation. I asked those around me what impact investors can do to unlock the bottlenecks. The four things I heard were:
In compliance markets, impact investors can contribute to maturing these markets through purchasing physical or future carbon credits, thereby generating more liquidity
In voluntary markets, we can provide forward financing for jumpstarting projects in the $10-25m range
We can invest in technology that helps improve the quality of offsets, for example through drones that digitally monitor the permanence of forest offsets, or large databases of carbon projects that more accurately model additionality
We can responsibly become carbon neutral ourselves at the corporate and individual level by seeking out high quality offsets.
At Align, we’re excited to dig into these and other opportunities in the months to come. Stay tuned for ways our stakeholders can get directly involved.