Why everybody needs to understand carbon markets

Daisy talks to Tim Coombes, a carbon markets expert, about why carbon markets matter for reaching net zero and how to use them while protecting your corporate reputation.

Together they cover:

• What we mean when we talk about carbon markets
• Why the markets had a bad year in 2023
• How to use carbon markets effectively to augment your net zero strategy
• What the reputation risks are and how to mitigate them, and
• The big changes to expect in the next few years.

Find all of our episodes - and full transcripts for each one - at https://www.buzzsprout.com/1121639 

Transcript

Daisy Powell-Chandler   

Welcome to Why Everybody Hates You, an audio support group for reputation professionals. If you have any responsibility for how people talk, think, and feel about your organisation, then you are in the right place. I’m your host, reputation coach, Daisy Powell-Chandler.

Carbon markets, carbon offsets, does this all sound like dubious gibberish to you? As reputation professionals, we need to understand this stuff in order to protect our organisations and advise on comms. So I asked Tim Coombes to give me a crash course in carbon markets and why they matter. Full disclosure, Tim works for a big, international, publicly listed energy company, but he is here in a personal capacity, and I couldn't be happier to offer this whistle stop tour of all things carbon markets. 

Hi, Tim, thank you so much for joining me. It is a pleasure to have you on the show. Why do carbon markets matter? 

Tim Coombes  0:09  

Hi Daisy, thanks for having me on the show. It's great to be here. Look, carbon markets matter because climate change matters. I think to talk about carbon markets, we need to talk about the difference between the different types of carbon markets. Carbon markets are made up of the compliance markets, where a government or jurisdiction or regulatory body has set out rules that you need to comply with in order to meet your obligations under the law. And, of course, on the other side of that we've got the voluntary carbon markets, which is a market that people can participate in, voluntarily, as a way of addressing their organisation's climate commitments.

Daisy Powell-Chandler  1:04  

So is that the difference between the ETS and me paying an offset charge on my aeroplane? 

Tim Coombes  1:12  

Essentially, yeah. I think that's a good way of looking at it. So one of the biggest emissions trading schemes is the European Union emission trading scheme. And there are rules for certain companies that fall within that jurisdiction to comply with that obligation. But the voluntary carbon market is open to anybody, not just airline passengers. But that's one that people can identify with. Aviation is obviously a very difficult to abate sector. And so when you book your airline ticket, and you tick that little box, 'I would like to offset the flight', some of the money from that purchase will flow into a project that works to avoid or reduce an emission that takes place elsewhere.

Daisy Powell-Chandler  2:03  

Now, I feel like we need to tackle the elephant in the room, which is if you talk to focus groups about carbon markets, they are really dubious. They assume you mean tree planting for a start, they wonder if those trees survive, and they're not sure whether it's actually doing any good at all. 

Tim Coombes  2:23  

Yeah, look. So there are a lot of different projects and a lot of different methodologies Projects that fall within those methodologies around the world that can generate carbon credits. So, that can be for example, protecting rainforests around the world, it can be about tree planting and putting trees where there were no trees before or trees where there were trees before, but that land over time has become degregated. It can be all sorts of things right through to direct air capture, setting up some very expensive machinery to suck carbon dioxide out of the atmosphere. There are a range of different products and methodologies, which avoid emissions elsewhere, or capture emissions that are already in the atmosphere. I think tree planting is one that people can resonate with, they can visualize, they can understand that a tree through photosynthesis captures carbon dioxide, and then stores it in its trunks, roots and leaves where the carbon is stored. Now what happens if that tree dies? That carbon is re-released into the atmosphere. That wood, those leaves break down over time, carbon is released from the soil, and it re-enters in the atmosphere. And so, people dubious of some of these projects can say well look, if a tree is planted, but then the tree dies, then, you know, my money has gone nowhere, it's achieved nothing, there's still the same amount of carbon dioxide in the atmosphere. These projects that generate carbon credits, have to adhere to certain methodologies. So, certain rules around what they recognize as an emission reduction, or a captured emission and there are various rules around that, as dictated by various registries and governing bodies, about how that carbon is then recognized, accounted for, what measurement is in place, what management is in place, and how they look at the various counterfactuals.

Daisy Powell-Chandler  4:33  

It's been a rough year for carbon markets, though, hasn't it? The public aren't the only people thinking there's something a bit funny going on. What's happened? What did the nonspecialists need to know?

Tim Coombes  4:44  

Sure. So it has been a bit of a tough 12 months for the carbon markets. I think we've seen a few things that have happened, over the past few months,  in particularly around what makes a carbon credit. Now, the definition of a carbon credit is the avoidance or removal of the equivalent of one metric ton of carbon dioxide, which is avoided or removed from the atmosphere, and captured, and safely stored. Now, within, for a carbon credit to be recognized, it needs to be verified by under a methodology which is overseen by a governing body, or a carbon registry. And,  it needs to adhere to those rules. Now, what's happened, is there's been some academic papers that have been published, that have indicated that, for some of these projects, perhaps, one tonne of carbon has not been sequestered or avoided per carbon credit. Some of the factors might have been a bit lower than that. 

Daisy Powell-Chandler  5:53  

How much lower are we talking? 

Tim Coombes  5:55  

It ranges from, from project to project from methodology to methodology?

Daisy Powell-Chandler  6:00  

But are we talking like it's 100? Or is it like you're only getting 90% of your carbon?

Tim Coombes  6:04  

Look, carbon credit, by its definition should be one time of carbon. You know, there are some factors that have had as low as 10 to 20% being of an actual emission. Now, those academic papers have been challenged and there's been a real disagreement around some of the things that have happened within this market, particularly around REDD+ and cookstoves. Now, REDD+ is a methodology that looks to avoid deforestation, and to recognize the carbon credit under a REDD+ type credit, you're essentially needing to budget for a counterfactual, you're needing to show that the activity is taken by your protection of a piece of land, a bit of ecosystem, has led to less destruction taking place, less logging taking place, less environmental degradation taking place. 

Daisy Powell-Chandler  7:02  

That sounds hard to prove. 

Tim Coombes  7:03  

It's hard to prove. But there is some impressive science, some impressive modeling that goes into this. And so I think we're some of those papers, also came some media articles, which really looked to undermine the value of the carbon markets in general. There were also some lawsuits that took place last year, where companies were challenged on their marketing claims; what they were saying about their environmental activities, and what they were underpinning them with. So, what this has done is this has eroded a little bit of sentiment, particularly around some types of credit that are widely traded within the carbon markets.

Daisy Powell-Chandler  7:46  

Is it recoverable, though, or has this fatally undermined the carbon market?

Tim Coombes  7:53  

Look, I think it is recoverable? I think last year, we haven't seen the rate of acceleration that we've previously seen in the voluntary carbon market. We haven't seen the same volumes of credit sold and retired, or it's plateaued a little bit. We've seen the price for some of these credits drop quite significantly. But, I think what we've seen as a result of this is the industry really starting to coalesce around quality and what that means. We've seen as a result of this, the standards bodies reviewing some of their methodology, withdrawing some other methodologies to say, you know, we acknowledge that, perhaps, there were some loopholes within this that we need to tighten. We've also seen standards bodies, and what we're calling meta standards, which sit above some of these. 

Daisy Powell-Chandler  8:45  

Oh

Tim Coombes  8:45  

So it's a governing body that seeks to improve the integrity of the carbon markets, such as the integrity Council for the Voluntary Carbon Market, the ICVCM, and the VCMI, which is the Voluntary Carbon Market Initiative. And these bodies look to oversee the carbon market in more general terms, and offer some markers of what makes quality, and what they wouldn't accept as a quality credit and I think this is really going to start to build out what that quality means.

Daisy Powell-Chandler  9:19  

So if you are working in a corporate, right now, and trying to work out whether you are exposed from a reputation point of view by the actions that your company has taken in the carbon markets to offset some of their unabated carbon, how should you be assessing the reputation risks that you face right now?

Tim Coombes  9:42  

I think the first thing companies really need to make sure they're doing is they're abiding by a mitigation hierarchy. We always talk about: first, avoid all emissions where possible, then reduce the emissions that you can't yet avoid, and only then you should seek to offset or compensate for those emissions, with things like carbon credits. And I think it's super important to focus on that decarbonisation needs to happen, fundamentally, at an organisation level, across the globe. Carbon credits cannot, and will not, be the silver bullet here. They are an additional factor that needs to come into this. We know that not all businesses can decarbonisation right now, the technologies is not there, in some instances, the scalability is not there, in other instances. I mean, we talked about aviation before, currently there is no commercial aeroplane that's regularly flying large quantities of passengers long distances that doesn't rely entirely on a molecular fuel. And generally, they're powered by fossil fuels. Now, in a world that we want to carry on flying, we need to look at how we can first reduce them. We can reduce how much we're flying, but we can also look at reducing how much fuel those aircraft use, by improving the aerodynamics of the aircraft. We can also look at reducing the carbon footprint of the fuel that goes in, there are things like biofuels that are starting to be manufactured from waste products that have a much lower carbon footprint than a fossil fuel. But they're not yet available at scale. And so the aviation industry is is largely, for its decarbonisation pathway, going to need to rely on carbon credits, and the carbon mitigation activities taking place outside of their value chain.

Daisy Powell-Chandler  11:44  

So it sounds like if I'm a reputation professional, working in a company that uses the carbon markets to buy carbon credits, the first question I should be asking is, how can I reduce the number of carbon credits I need to buy each year?

Tim Coombes  11:58  

That is first and foremost. And then I think you need to look at what are the claims that you're looking to make? What are you looking to say about your decarbonisation pathway? I think you've got to do things like check the regulations within the markets that you operate. So for example, the European Union has just published a bill called the EU Green Claims Directive, which looks at terms like carbon neutral, climate positive, sustainable and offers a lot of regulation or restriction as to how those terms are used. I think you need to rely on third party verification for your data and your claims. I think due diligence always has to come back to companies who are looking to buy carbon credits. And, if we're seeing a lot of corporates actually employing in-house experts to assess the quality of those carbon credits, for example. And I think where companies aren't able to bring in those in house expertise, there are companies out there that will support that due diligence process. I think companies need to be really clear about the role of carbon credits within their holistic decarbonisation plan.

Daisy Powell-Chandler  13:13  

So don't just go out and buy a bunch of carbon credits, 

Tim Coombes  13:15  

Can't do it. 

Daisy Powell-Chandler  13:16  

It needs to be part of a broader strategy.

Tim Coombes  13:16  

I think it's really important that you talk about that as well. I think you can't just talk about 'we bought a bunch of carbon credits', I think you've got to talk about what other activities your organisation is undertaking in order to reduce their overall carbon footprint. What are they doing with their vehicles? What are they doing with the electricity that they buy? What are they doing with the emissions that are happening within their value chain? And then, lastly, I think it's about being transparent and clear. So, it's about understanding, really simply, what you're looking to do, and being as open and as honest with your customers, with your publics, about what is happening with your decarbonisation plans, and what role carbon compensation, carbon offsetting, carbon credits, play within that.

Daisy Powell-Chandler  14:10  

Now, as we've discussed, it's been a bit of a rough year for carbon markets. Hopefully, they will get back on track as this sort of international approach to coalescing around particular standards proceeds, but what lessons can other green industries learn from that slightly painful process that carbon markets have been going through?

Tim Coombes  14:32  

Yeah, look, I think it's important. I mean, carbon markets grew very fast. Partly out of necessity, right. We were faced with arguably the largest challenge that the world has ever collectively encountered, and will encounter together, and carbon credits and carbon markets are a lever. They are one of the things that we can do to address that. So, I think acknowledging that whatever green industry, you are part of the solution, you are one part of the solution, you are not the solution. So, growing fast is great, but you’ve got to maintain your focus on integrity, because it's very easy for things to erode, or things to become unraveled, have unhelpful conversations or unhelpful stalling of progress, important progress, due to conversations around integrity. Governance is important, having the right vocabulary, right definitions of what you're trying to do, having agreement around that, having an agreement as to what various terms can and should mean, and how they will be implemented. Collaboration is important, bringing the right people to the table at the right times and ensuring that everybody's facing the right directions. And I think incentives matter. I'd say it's super important to keep an eye on what kind of behaviours, and what kind of outcomes, are being incentivised. It's super important to maintain a lens on that as well.

Daisy Powell-Chandler  16:14  

Are there particular examples you can give us of that incentive point?

Tim Coombes  16:17  

So, I think when the carbon markets were growing particularly quickly, and perhaps there wasn't necessarily, you know, earlier days, you know, I often talk about, you know, we're on to carbon markets 2.0, 3.0, 4.0, because the carbon market has continued to reinvent and evolve over time, like most good products do. I mean, you think about, I think about my first computer, working on MS-DOS and gosh, I'm so glad that I'm still not working on it. I'm glad DOS wasn't, we've worked it out. We've got it right.

Daisy Powell-Chandler  16:53  

Yeah, let's stop there. DOS, that is the pinnacle!

Tim Coombes  16:57  

Yeah, we're done. You know, evolution is important. It's super important. And so, the methodologies have continued to evolve, and will continue to evolve. There are some that are being withdrawn, there are some that will issue no new credits, there are some projects that are looking to be moved on to another methodology -  the project is a good quality project but the methodology might have had some issues with that we've since unpicked. And I mean, these methodologies, they didn't just result from somebody putting their finger in the air, there's a lot of science that went into this. But you know, some of these methodologies are hundreds of pages long with formulas that I don't understand. And where the carbon markets were growing so rapidly, it was easy for a project to go, 'well, you know what, if we sell more credits, than we've got more money that we can reinvest into this project, that we can work with these local communities, that we can invest in protecting this biodiversity. And I think that was an example of where that was, what was being incentivized. I've seen very little evidence that there were, sort of, cowboys running about going 'how can we make the most amount of money from carbon credits'. So, you know, most, if not everybody I've encountered within this market, has a genuine, passionate belief that they want to make the world a better place, they want to protect these ecosystems that are valuable and disappearing. But, looking at how the methodology gaps, where we didn't have knowledge before. I mean, we're doing better monitoring, for example, using satellite data to actively, in real time, monitor illegal logging, you know, we've got covariance flux towers, which is using science to actively measure the amount of carbon dioxide being taken in and out of various ecosystems, we've got ways of managing and measuring that's no longer wholly reliant on surveys and counterfactuals that sort of build upon that. And I think, you know, carbon markets 4.0, 5.0, 12.0, is going to be quite a fantastic, scary and wonderful place.

Daisy Powell-Chandler  19:18  

Sound, it sounds genuinely exciting. But, I can understand that as the science develops, that does mean that some methodologies will become outdated and it's right, in fact, it should give us all confidence in the future that we are retiring some of those as we go. But that is a level of complexity that is hard for people to understand and a lot of the companies buying from the carbon markets are not going to be experienced in doing a lot of this. So I guess we're all learning as we go. So, you've talked a little bit about some of the new science and the new monitoring that is coming down the line, what other big developments should we expecting over the next year or so?

Tim Coombes  20:02  

Yeah, I look, I think there's a lot of really important things coming down the line. We're seeing improved methodologies from the registries, we're seeing withdrawals of some of those methodologies, we're seeing introduction of new methodologies, which are really seeking to close some of those gaps. We're seeing projects invest their money in better monitoring, and better reporting, and better verification of the claims made by the project, to really prove that the  carbon sequestration and the carbon avoidance is real. We're seeing movements from governments, such as the EU Claims Directives, and offering consumers better protection from greenwashing and foul claims that don't quite stack up. We're seeing the evolution of the meta standards, which I've touched on earlier, and they're offering more confidence around the certainty of effectiveness, and offering various kite marks as well, which will start to denote an agreed definition of what quality is. We're seeing corporates review their strategies, and their reporting against their progress on those strategies and I think that level of transparency is also really important. 

And I think from a governmental perspective, we're going to see some really interesting stuff happen. Obviously, at COP (we all love a good COP!) Article Six and the rules of Article Six, particularly around 6.4 and 6.2, which really looks at the rules around transferring Internationally Transferred Mitigation Outcomes.

Daisy Powell-Chandler  21:49  

What is one of those...?

Tim Coombes  21:50  

What is an ITMO? That's a great question. So governments, as part of the COP process, have submitted their nationally declared contribution; what they think that they can do, what reduction in carbon the country as a whole will make. Now, there are potentially, opening up trade between certain countries around these mitigation outcomes. So what we might see with a healthy negotiation of an Article Six and some good structure within that, is countries being able to sell carbon credits from one country to another, and one country that is selling the carbon credits, accounting for it under their nationally determined contributions, and reciprocating on the other end of that transaction.

Daisy Powell-Chandler  22:44  

Right. 

Tim Coombes  22:45  

Take for example, a country like Singapore. Singapore has a really small geographic footprint. It's quite an energy intense country, they've got quite a high standard of living, a lot of high rise buildings, they don't have large areas of rainforest that they could reforest or protect. So for example, they could do a deal where a country like Brazil or Gabon, or Vietnam might agree to undertake an activity that sequesters additional carbon within the borders of a foreign country. And that foreign country would recognize, on international declared contributions, that they have sold a certain number of tons of carbon dioxide equivalent to Singapore. Singapore would also recognize that on their nationally declared contributions, essentially zeroing out the total, total sum

Daisy Powell-Chandler  23:45  

Makes perfect sense. Carbon markets at the national level, that's what we like to see. Thank you so much, Tim. This has been really eye opening, and I hope it has been really helpful for our listeners.

Tim Coombes  24:00  

Thank you, Daisy. It's, you know, I'm a massive fan of the podcast. I'm a massive fan of the work you do. So thanks so much for having me on the show.

Daisy Powell-Chandler

That’s everything from us. A big thank you to my guest, Tim Coombes, for talking to me about everything from tree planting to certification schemes. 

Listeners, how is your organisation interacting with carbon markets? Did the coverage last year make you wary? How are you reflecting that in your communications? I would love to hear about your experiences, so please, get in touch on Twitter or LinkedIn. And if you have enjoyed this episode, I hope you will tell your colleagues, and perhaps write us a review on your usual podcasting app, it really does help new listeners to find the show.

Thank you, as always, for listening to Why Everybody Hates You, and remember, you are not alone.