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A transcript of the Future of Finance webinar ‘Can the carbon credit markets institutionalise and tokenise at the same time?’, with Jim Row of Capturiant, Deanna Reitman of DLA Piper, Sean Mullins of Northern Trust and Gbemi Oluleye of Imperial College, London.
What is the current state of the voluntary carbon credit markets?
00:19 Dominic Hobson: Hello, everybody. I’m Dominic Hobson, co-founder of Future of Finance, and welcome to our webinar on the future of the voluntary carbon credit markets. No novelty in the financial markets has attracted more attention in the recent past than voluntary carbon credits. They certainly look like that fabled unicorn, the win-win. They’re a tool for driving investment by firms that need to offset their carbon outputs into carbon reducing projects. All those projects have to do, whether they’re in place already or whether they need funding, is to issue carbon credits, each of which is equivalent to a tonne of CO2 avoided or removed. These are then recorded in a registry to maintain the integrity of the issue, in much the same way that a central securities depository maintains the integrity of an issue of securities. Carbon reduction claims made by the issuer are certified by ostensibly independent agencies. The carbon credits are then sold to businesses which use them to offset their own carbon emissions or to investors which are pleased to do something to save the planet. Once the offset has occurred, the carbon credit is then removed from the registry or, in the jargon, “retired” to ensure it cannot be sold again. All of which sounds absolutely great. It describes a virtuous circle in which the money generated from pricing carbon in the market gets reinvested in green energy and carbon sequestration projects, accelerating the shift away from fossil fuels. And indeed, a great deal of excitement was generated when this idea first achieved common currency. In January 2021, the Task Force on scaling voluntary carbon markets, the TSVCM, chaired by our own former Bank of England governor Mark Carney, predicted the global voluntary carbon credit markets would, if all went well, be worth US$180,000,000,000 by 2030. Morgan Stanley’s pushed that optimistic projection out a further 20 years and predicted it’d be worth US$250,000,000,000 by 2050. McKinsey, advisors to the TSVCM, estimated demand for carbon credits would increase by a factor of 15 by 2030 and by a factor up to 100 by 2050. Now, three years on, things look a bit less rosy than those projections. The voluntary carbon credit markets seem – it’s hard to get hold of a figure – but they seem to be stuck somewhere around US$2,000,000,000. So to reach that US$180,000,000,000 target set by the TSVCM three years ago, it’ll have to grow at a compound annual rate of 111% for the next six years. What went wrong? Or, more charitably, what failed to go right? It seems to be a number of things. First, there was scope for unscrupulous businesses to purchase the right to continue polluting at trivial cost. There was equal scope for unscrupulous promoters to exaggerate the benefits of the schemes which voluntary carbon credit investors were funding. The intermediaries charged with validating the projects struggled to distinguish between the good projects and the bad projects. The methodologies of evaluation were clearly inadequate to the task. Greenwashing became as evident in the voluntary carbon credit markets as it was in any other part of the ESG universe. Registries struggled to record ownership, it took weeks for retirements to be confirmed, and it proved very difficult to prevent carbon credits from being sold more than once. Nor, of course, have the carbon credit markets proved entirely exempt from the wider disillusionment with environmental thinking, which has set in since recessions arrived and warfare returned. So it’s not surprising that the voluntary carbon markets have so far failed to fulfil the most optimistic expectations. It’s an unmistakable case of buyer beware. The interesting question is what it will take to get the voluntary carbon credit markets back on course to that $180,000,000,000 size by the end of this decade. Clearly, greenwashing projects need to be eliminated and the shortcomings in the registration and certification of projects need to be fixed. Issuance and trading have to change too. They need to move from inefficient bilateral transactions to multilateral and probably global trading platforms. To help us understand how we can make that transition, its nature and its timing, we’re joined by four experts in the voluntary carbon credit markets. Jim Row is the founder and CEO of Capturiant, a global integrated, environmental asset validator, authenticator, registry and regulated exchange. And of course, the generous sponsor of our discussion today. Deanna Reitman is of counsel in the finance, energy and commodities practice at DLA Piper, the global law firm. Sean Mullins is a Senior Vice President at Northern Trust, where he’s led the Digital Assets and Financial Markets Product Implementation Group since 2021, where they look to identify new opportunities and operating models created by emerging technologies such as Blockchain and AI. Gbemi Oluleye is Assistant Professor at Imperial College, where she specialises in the uptake of clean technologies and fuels in cost effective ways as part of an effective decarbonisation strategy. Now, in addition to our panellists, we also have you, our audience. Our panellists are as eager to answer your questions as they are to answer mine. So I encourage everybody watching or listening to submit questions and comments throughout this webinar by using the Q&A functionality at the bottom of your screens. I will not be saving those questions and comments up to the end, but we’ll endeavour to get our panellists to answer them as we go along so that everybody can be an integral part of this discussion right from the outset.
06.00 Dominic Hobson: I’d like to kick our discussion off by asking each of our panellists whether they think the range of factors I’ve just referred to – the allegations of greenwashing, those inadequate registration and certification services, and possibly this wider weakening of support for environmental sacrifices in the wake of recessionary conditions and, of course, the war in Ukraine and now the war in the Middle East. I just wonder if those factors are now showing any signs of being brought under control. Deanna, I wonder if I could throw that question at you first. I’ve given rather negative picture. What’s your sense? Are we moving into more positive territory.
06:46 Deanna Reitman: I think it’s very easy to poke holes at the first movers in something. And I think, just like with everything else in life, when you do it and you do things more and more, you get better and better at those things, which is exactly what I believe is going to happen in these voluntary carbon markets. We’re going to learn from these mistakes, we’re going to learn from someone who was brave enough to move us even to the point where we can find mistakes in methodologies or in chain of title issues, as you had mentioned. Right. So you will find that those that are entering the market now, like Capturian and Northern Trust, they’re beginning to recognise that the buyer of the credit wants more. Let’s see, you mentioned efficiency. They definitely want efficiency. They want more confidence. And that’s why this panel is going to talk about, and I’m actually pretty glad you started pretty grim, because it gives us a point to tell you how this market will move and fix those things that were not working for the ultimate buyer, which is the market. Right. There has to be a supply and demand. So we’ll move into science-based credits, we will move into credit information and project information being moved to the blockchain. And every time we create and think of technology and use digital assets in this space, whether it be a token or not, any other kind of digital asset, we remove the lack of confidence the buyer has that what they’re buying is actually what they’re buying, and that it hasn’t been retired. As you said, you told everyone what consumption means here, it means retired and we’ll have more confidence and again, we’ll have more efficiency and then we’ll be able to move into a global market, one where the buyer is confident. So the buyer beware, as you had mentioned, will be reduced and hopefully the projections will be met, if not exceeded.
Why don’t governments just tax polluters rather than rely on the market to develop solutions?
08:47 Dominic Hobson: Thanks, Deanna. Gbemi, you’ve heard what Deanna said. These are the natural growing pains of a new market. We shouldn’t be looking to kick the bottom brick out here. Solutions are coming. We’re going to get more and better information, we’re going to get a global trading platform, set of global trading platforms, which will lead us to accurate price discovery. But I wonder, looking back to my Economics 101, where were all brought up on Arthur Pigou’s insight that negative externalities like pollution, environmental damage, should be taxed, and yet I sometimes have the feeling that these large corporations and senior civil servants and world leaders like to go to these meetings. What they don’t want to talk about is taxing people. So they think, well, the market must have a solution here. Let’s set up initially these cap and trade emissions trading schemes, of which Europe was the leader and I think still the biggest. But there’s like several dozen, I think 48 in all of these cap and trade schemes operating around the world, and now we’ve got these voluntary carbon credit markets coming along as well. My question here really is, `Is there a fundamental problem here? Are we kind of ignoring what fundamental economics tells us? That you have to tax these activities out of existence, you can’t hope to trade them out of existence, and that if these trading schemes don’t evolve, as Deanna says, in this more positive way and start to set prices, be based on proper information, that we’re going to revert to taxes anyway, because this problem has become too urgent to do anything else. So is there a fundamental problem here, Gbemi?
10:28 Gbemi Oluleye: Thanks, Dominic. I agree with Deanna that they are growing pains. The market has potential to evolve and develop. I mean, the concept of just taxing everything is what most people want. If climate change is a market failure because of CO2, then just tax the externality. However, it’s difficult to determine what level of tax to give and for how long, because for some players in this space, it will cost them nothing to mitigate CO2. For some, it will be as high as $1,000 per tonne. So how do you determine the right level of tax? Another challenge is how do you incentivise the early innovators? So 5% to 10% of the market will invest in alternatives anyway, without requiring offsets. So how do you encourage them to make those investments? I think in the long run you want to tax the laggards, the late adopters, or in these early years, you want to encourage the innovators. So an emission trading scheme is a good way to do that, although it hasn’t been effective so far, whether it’s the EU or the remaining 47 emissions trading schemes. So the goal is to make them more effective for that period of time at least to stabilise some form of agreeable carbon tax. Now, these schemes are part of the compliance market, which we’ve seen the evidence that they’ve supported innovation activities in alternative technologies, but not necessarily in the optic of these technologies. Now, on the other hand, for the voluntary carbon market, the price of carbon is just too low. So I agree we’ll ultimately need a carbon tax, but how? We need to gradually introduce it just to encourage innovators to invest in alternative solutions.
Are the voluntary carbon credit markets changing fast enough?
12:34 Dominic Hobson: Jim, did you want to say something at this point?
12:37 Jim Row: Look, I’ll just add on a couple of things. I think any market, as Deanna was stating, is that it’s going to go through a lot of whipsaw, there’s going to be a lot of change. And if you look at the time period between really the start of this, which has been about 15 to 18 years, to really the beginning of this year, it was kind of a little bit of a party. And this year was like the year of rationalisation. You could combine it with a party or you could combine it with or equate it to what the Hype Curve is. So you had a lot of hype, effectively, between 1999 and the end of 2022. And now this year is kind of you’re on the backside, and I think we’re in the trough on the backside of the Hype Curve and we’re going to actually see is that you get real. There’s nothing wrong with questioning what’s going on. And I think that’s just healthy. And I think you’re going to see a lot of good things come out of it in the next year or two. You’re going to see a transition from more … to non-nature based activities, you’re going to see a different type of individual, you’re going to see a different financial innovation, you’re going to see things that are very different, you’re going to see more demand pull activities. It’s going to be a different market going forward than it has been historically. And if you look at how the crypto markets worked, there’s a lot of analogies here. Look at how the merchant energy business went in the early 90s both in the US and in Europe. I mean, you got a lot of things that were created that were good. Weather derivatives – these types of things are in the middle 90s and we’re about ready to enter that phase in the carbon business.
14:12 Dominic Hobson: Sean, you’ve heard what everyone said and I’m sure you’ve got comments to make. Could I throw at you two very unfair questions on top of that? You throw in whatever comments you want first. But my first question is what are the links between voluntary carbon markets and the existing cap and trade emissions schemes? When you’re thinking about building a platform here, how much attention do you have to pay to them? And I suppose secondly, both Deanna and Gbemi in their separate ways, and Jim, have looked forward to a global market in carbon credits developing. But it seems to me there is this fundamental split between the highly industrialised countries who are churning out most of these CO2 emissions, but also kind of exporting them to developing markets as a way of reducing their own. Is there a contradiction there between developing countries who think, `Well this is just … voluntary carbon credits are just another scheme by the developed countries to hold us back’. So two complex questions there, but do come back on what you think the others have said as well.
15:21 Sean Mullins: Yeah, I’ll comment on what the others said first before I try and tackle the two curveballs you sent my way, which I appreciate Dominic, thank you for that, but I think just to cover the I think the link Jim made to crypto is absolutely spot on, right? I mean, I work in digital assets and innovation and if you’re talking about an immature market with its bad actors and inefficiencies, things could be a lot worse in the carbon space. Just look over the fence to what’s going on in crypto right. But as you say, you learn a lot of lessons. We’ve been a big advocate for many years that the financial infrastructure and regulation and everything that’s our bread and butter with regards to transparency, records, reporting, so on, would really benefit this ecosystem and this market. So that’s the one plug I’ll give for Northern Trust. I’ll get back onto the subject now, but with regards to the compliance market and the voluntary carbon market, Dominic, I think you kind of hit the nail on the head that if the governments were willing to step in, and necessarily do what they needed to do and take the hit that would come with that. Because there would be costs that would be passed down. It would not sit well with the constituents and the voters and so on. There wouldn’t be a need for a voluntary carbon market. But I think really, you’ve got to look at it the other way around. The good that the voluntary carbon market does. It does feed a lot of money back into local communities, indigenous people. There’s quite the biodiversity angle as well. So really I think there is definitely a place for the voluntary carbon market. There’s no doubt there’s been bad actors and bad behaviour, but I do think there’s a lot of good beyond just allowing people to offset. I think with regards to your point around a global view of the market and the contradictions, I think it doesn’t have to be one or the other. All of those things are true. I think you do have your developing nations that will look. There’s a big push now that the sovereign market, for example. There will be developing nations that are looking at how they can not only be a recipient of these credits but create their own from protecting their rainforests and from utilising what is their nature-based projects. When you look at the developing nations, they obviously are probably a little bit more advanced in the science-based projects and they have them resources at their disposal and you’re seeing a lot of more of them crop up. But on top of that as well, they do have a lot of the infrastructure and the expertise where they can accept and put in the correct frameworks to really bring this market into a more mature, transparent and acceptable place. Really.
18:14 Dominic Hobson: Thanks, Sean. We’ve had a first couple of questions in. One is about what I’d call market infrastructure. One is about regulation. And we might as well just jump into those two topics straight away. If I take Mike Hallsall’s question here. How can carbon markets interoperate? Now, clearly the voluntary carbon credit markets began, as I said in my opening remarks, with this kind of bilateral trading. We’ve now got a variety of marketplaces and exchanges of various sorts coming into being who are looking to promote the multilateral trading on a global scale which both Deanna and Gbemi and Jim have referred to. I counted 14 of these various platforms. Mike’s question is, how can these markets interoperate? Sean, I can see you’re thinking hard, so why don’t I throw it at Jim first to give us how do you make these markets inter-operate? Do we need standards or what?
19:10 Jim Row: Well, I’ll take that Dominic. The answer to that is yes. If you look at the historical financial innovation that’s going to be our roadmap here is that you need standardisation. Look at in 1980-81 for the first swaps, right, between IBM and the World Bank, right. Those were clunky and it took a while to get things going. And then you had ISDA come along and once that was established from a standardisation, trading exploded. Right. It just went great and it ended up becoming a great way to create risk management tools. And you’re going to see the same thing here. It’s going to be more challenging here in this space because you’re going to have much different political pulls and tugs here than you did kind of just trading commodities back in the … basic commodities that you had in the early 80s etc. Because every government is going to have its own little issues and there’s not 14 registries or exchanges. There’s probably right around 250. So we haven’t reached the crypto level of 2000, but people are trying, but that’ll get rationalised out. A great deal of those exchanges, etc. are technically not exchanges. We use the word improperly in the word exchange. Most, I would say nearly 100% of exchanges, are really clearing houses. They’re not truly what this team would call exchanges under the true definition. So you have some definition issues there. You have definition issues everywhere, even in English between the EU definitions of things and the American definition of things. So there has to be a lot of standardisation, rationalisation to go before you have that true interoperability that you just mentioned. Additionally, when you start using things like DLT/blockchain – I’ll use them synonymously here – there’ll be some little gaps in being able to trade things efficiently or exchange things. Carbon credit trading is not going to be like other commodities or stocks or bonds. It’s very different because you’re using them to offset; they’re going to be consumed. Okay. So it’s a different item and product that you have. So you are going to get it. It’s going to take a little longer than what people think. It will be a lot clunkier and also you have too many cooks in the kitchen here when it comes to actually getting the standardisation right.
As far as regulators are concerned, are carbon credits a commodity or a security?
21:45 Deanna Reitman: Jim, can I just add on that a little bit?
21:48 Dominic Hobson: Yeah.
21:48 Deanna Reitman: So there’s standardisation and then there’s commoditising. Okay. They’re two different things. So this leads into your next question that you have up on that board. Is carbon a commodity or is carbon a security? So carbon is a commodity. Okay. Carbon is regulated by the CFTC in the United States. That was one of the questions. Is it regulated by the CFTC? You always have to think to know. There’s a famous case out there about when you’re buying oranges or you’re investing in the orange grove, right? When you’re investing in the orange grove and you want the orange grove to make a profit, that is the security. When you’re buying oranges, and oranges are oranges, you are buying a commodity. And so when you’re commoditizing this market, that is how I believe we will be able to become global. Because commodities are traded globally. Now, oil is traded globally, right? So our grain, that is a global market. Now, there are commodities then are standardised, right? So the grade of crude oil or the, let’s see, or the heat content in natural gas, okay, those are standardised so that you know exactly what it is that you’re buying of the commodity and then their value throughout the globe. And that is how, using what Jim had mentioned, the DLT or the blockchain will allow us to commoditise this very complicated, as he mentioned, commodity. Because each metric tonne of a carbon equivalent, like a carbon dioxide equivalent, comes from a different type of product or a different type of project. And all that information is important to the buyer, and that would be put on the DLT or the blockchain. However, if that one metric tonne is a commodity, then it is a commodity, it is a commodity, it is a commodity. If, as Jim says, it is standardised, meaning, you know, you’re actually buying, what you’re really buying one CO2 equivalent of carbon dioxide throughout the world. And I hope that answers your second question. I hope that answers the first. It builds upon what Jim said for the first question. And Sean made a really good point, which I think we kind of glossed over, which was, you know, the voluntary carbon markets are doing a lot for indigenous people. Right. Projects often are in places where they’re developing nations. Right. It is not in my opinion, and this is just my opinion, and I don’t know where this comes from, like this money grabber, this mercantile imperialistic market, right? A lot of these projects are in areas where money, jobs, and things are needed. And these projects go there, and they do that, and they invest. And you’re also finding that they not only invest in creating the carbon commodity, but they invest in the communities. I have some clients that will dedicate part of the funds from the stream of the sale of carbon to the community in which they’re in. Because they have an interest in doing that, it means their project would be successful. So I just wanted to make sure that everyone really heard what Sean was saying there, because there’s this notion that it’s almost like the mercantile trading system all over again here, and I just don’t see it. I know Sean’s shaking his head.
25:22 Dominic Hobson: Yeah. Just before Sean does, just to make sure we’ve answered Aimee Supp’s question here. You were pretty clear that carbon is a commodity, even if it’s produced from different industrial or other processes. Her question is, you’ve got the CFTC and the Senate Agricultural Committee saying we must have a task force to work out whether carbon is a commodity or a security. Now you’re clear it’s a commodity. Why do they need a task force to work out whether it’s a commodity or a security? Is this a turf war between regulators or what?
25:58 Deanna Reitman: It’s not. There’s already a construct in the United States for how securities are. You know, we’re based on common law, you’re based on common law. It’s a very familiar and popular and overly cited case. It’s called the Howey Test. Okay? Essentially, if you have a security, you’re invested in the overall profit of the investment of the project. Right. It’s very different than when you’re buying a commodity. Right. When you’re buying a commodity, you are buying something that is fungible. You are buying something that you’re going to consume. Right. There are traders, though, that trade commodities, and then they want to see whether the value of that commodity will be raised or lowered, based upon consumption, which is supply and demand fundamentals. Okay? That’s very different investment. And already we have the Commodity Exchange Act, which was amended by the Dodd Frank Act, which very clearly sets out how security-based swaps are regulated. They’re regulated by the SEC, so this will be the same thing. They just have to figure out how they’re going to split their jurisdiction. Right. Because there are things that can start out as securities, but then end up, you know, perhaps becoming commodities. Especially if we start talking about the digital asset space. It’s just a new place, it’s a new area, it’s a new frontier. And I think that it’s probably very good for them to be careful and make sure that the laws we have on the books cover all these questions.
27:35 Jim Row: Dominic, can I add to that a little bit as an individual who also owns a broker dealer in the United States? Look, regulators in the US, it’s their job to keep their job. So they need to kind of justify their existence on some of this. But as Deanna said, it’s pretty clear what the rules are. It just will happen and it’ll be done. Like we always think. We’re in a commodities business now. I can create securities out of it if we started doing pooling and these types of things – then it does create and get into the field of a security. So the rules are pretty standard. We know them. This is just a little bit, you know, typical politics that’s going.
28:15 Dominic Hobson: Sean, you, I think, wanted to say something on this issue as well.
28:22 Sean Mullins: Yeah, sure. I won’t comment on the regulator. Obviously. My Northern Trust tagline is we love the regulator. We stand by all of their decisions and points they raise. One thing I did just want to add on the back of Deanna’s point, I think. On top of the standards, I think education is key as well. I think the sooner that the buyers and the project developers as well get a better understanding of what it is they’re buying, what the differences are between the projects, the quality, the longevity and the security of the tokens that they’re buying, or the carbon credits. Sorry, we haven’t got to tokenization yet. I think then they will start demanding those standards, they will start to understand those standards and they will start to look for preferential standards over others and project quality and so on. So I think they go hand in hand just to add to that the education and the standardisation go hand in moving this market forward now.
29:24 Dominic Hobson: Thanks Sean, let’s move forward a bit. I think we are seeing evidence that larger companies are now pulling away from buying these offset projects and starting to fund projects directly. And Mike Halsall’s asked another question here, which is can major emission companies make their own carbon credits, for example by developing direct air capture, directly sourcing carbon capture and storage? He adds, I think as an afterthought there, that in my experience the locals get a very small share of the total investments, mostly greenwashing. But I’m interested in that question Mike raises and this phenomenon where these larger companies are saying, `Well actually we’re not just going to buy these things, we might start making them ourselves.’ Because – Jim, I’m confident you have views on this – because an awful lot of those carbon credits are these nature-based schemes where most of this greenwashing has occurred and maybe it’s a better plan to do these things in non-nature schemes which are more measurable, more scientific and more accountable.
30:27 Jim Row: I would answer that in two parts, Dominic, and that’s one of the theses and cornerstones of our operation is that we’re primarily focused on non-nature-based activities. So oil and gas, power mining, petrochemicals technology, etc., versus nature. We’re not anti-nature, we just focus more on the non-nature-based activities. And I think that’s where you’re going to see your flight to quality because of the issues you just mentioned, is that they are scientific, you can measure them, there is a lot less opportunity for fraud and for misallocation, etc. Now you are seeing bigger companies. It’s been announced, there’s been the Shells and other people that have already announced that they’re going to pull back from the actual offset side and actually invest in projects themselves to create those credits. In fact, we work with a number of those counterparties that are doing just that. So you’re going to see that as more of a trend and that has a couple of things to do with it. One is they’re tired of the egg on their face of buying some credits that go south and also they have greater control of whatever they can do. And their dollars or euros or pounds can actually go directly to something that benefits them. So they’re not just buying something to offset it, they’re actually investing technically in their own future.
31:45 Deanna Reitman: Right. And that goes right to what we were talking about earlier, Dominic, with commoditization. Okay, so what we’re seeing … The answer to the question is yes. Companies can create their own carbon asset. Let’s be very careful of what we’re calling carbon credit and a carbon asset. Okay? So just you have to think of it like any other commodity market. When you pull raw oil out of the ground, it is raw, all right? That is an asset that you own. If you want to commoditise it has to meet the standards. Then it becomes a commodity of carbon credit because then it’s traded, because it then represents your assets. It’s then changed into a standardised one CO2 metric tonne which can be traded and bought and sold as a commodity. Okay, so the answer to your question is yes. And then just to piggyback off of what Jim saying, and I’m sure Sean’s going to pop in here because he just came off of mute, companies are investing in projects to create their own assets, which is a carbon asset. And yes, this is happening and yes, it’s happening in direct carbon capture because it’s measured scientifically and these projects that come off of capturing it, the buyer is going to be more comfortable and confident that they are buying what they say they’re buying. And then you can use platforms like the Northern Trust platform where you take this asset and they make it a credit so that somebody can then buy it. This is a trend. Sean, did you want to add on because you came off mute?
33:09 Sean Mullins: Yeah, I was just going to sort of extend a little bit of what Jim said there. We’re seeing as well that some big corporations as well are pulling back from the voluntary carbon market and not necessarily reinvesting that funds into creating their own carbon credits or their own infrastructure to do that. They’re actually reinvesting that into decarbonizing their operating model and their logistical operation and knowing that they’ve got a carbon neutral target in so many years ahead and they will try and decarbonise as much as possible up to the point at which they do need to offset that little bit remaining. And that’s a really positive step forward because essentially the voluntary carbon market should be a last resort. Organisations should be trying to decarbonise and then they should reach in and dip into that market to really offset that last little piece that they just can’t quite do. So through some of the conversations we’re having, yeah, we’re seeing that trend come up again, which is really positive – the decarbonisation angle.
How can the quality of the data about carbon offset projects be improved?
34:15 Dominic Hobson: Gbemi, you’ve been very patient listening to the observations made by the audience and by your fellow panellists. We’ve had a follow up here from Aimee Supp, who asked the question about the task force which is being set up by the Department of Agriculture and the CFTC to decide whether carbon is a commodity or a security. We’ve been pretty clear it’s not a security, not until at least you put it into a pool of some sort anyway. But she points out that actually the task was to protect against greenwashing. Commodity versus security is a kind of sideshow. They’re also going to be talking about that, and if we’re right, it shouldn’t take them long to talk about that. So they’ll spend most of their time talking about greenwashing. And clearly getting rid of greenwashing is a very important part of solving the integrity problem this market has created. That means you got to get more and got to get better data about these projects. We’ve just listened. One of the answers is going to be emitters, creating their own projects, so at least they know what they’re doing rather than buying somebody else’s. But if the market is to take off, we need data from these nature-based projects as well, these forests and these swamps and all the rest of it, so people can invest in carbon credits with much more confidence. What do you think needs to be done, Gbemi, in terms of … Maybe this is something where artificial intelligence can play a part in producing better quality data, but maybe you have other ideas about how we can get better data.
35:46 Gbemi Oluleye: My topmost is using AI, especially for nature-based solution. It will take a while to gather very good data to increase confidence in these solutions, especially because of the uncertainties that arise with them, what is considered to last, and the timelines with the solution. When it comes to technological solutions, whether it’s direct air capture, carbon capture and storage. So along the decarbonisation line, I think it’s easier to get data from those solutions because you can measure how much CO2 is reduced by looking at the emission factors of the technologies as well as the alternatives and trade these solutions. But I wanted to add to the discussion about CO2 as a commodity or security because I think it will affect the technological solutions for decarbonisation. Now, in some context, when it comes to carbon trading, carbon is seen as a commodity. I think when it comes to climate change and the transition to net zero it is seen as a security. So it’s really bringing those two together will be important. And I hope the task force can find some form of common language for carbon that goes through offsets to decarbonisation and to climate change.
37:17 Deanna Reitman: Okay, so I’m trying to follow. So you mean like when companies invest, like Sean was saying, in projects or invest in technology, that, you’re saying is more like investing like a security?
37:33 Gbemi Oluleye: When companies invest in technology to mitigate climate change or to support that transition, it’s often seen as a security.
37:43 Deanna Reitman: Yeah, no, that’s exactly what we all just said. Perfect. I just want to make sure I was good. Okay.
37:50 Gbemi Oluleye: I think the challenge for the voluntary carbon market is, at the moment, the carbon price is too low to offset the company’s investment in these technologies. Of course, it will increase in the future. I think with more companies participating in the market, the price will go up.
Can the voluntary carbon markets change fast enough to be credible mitigators of climate change?
38:15 Dominic Hobson: But I think we’re seeing also, are we not, the immaturity of the market? You’re seeing pretty wide spreads in carbon prices from sort of US$10 to US$1,000 with a sort of median price like US$20-25, which, as you say, is much lower than it needs to be for this to work, which causes me to worry that can voluntary carbon credit markets take off quickly enough to address this problem? What’s the speed at which we can create this global market in trading of carbon as a commodity, not as a security, with these interlinked, interoperating standardised contracts being traded investors and companies all over the world? I mean, how long is it going to take to build that? Will the planet catch fire before we get there?
38:59 Gbemi Oluleye: I don’t think the planet will catch fire before we get there, but I also think it depends on how the market is designed. So there are a lot of heterogeneous agents in the market. If you take the sources of the technologies of the different players, whether it’s offsetting or reducing CO2 emissions. And historically, we’ve not had markets with a lot of heterogeneous players. There are a lot of people, but they speak the same language. In this case, they will speak in different languages in terms of their carbon prices or their internal carbon prices compared to some form of an external carbon price which is set by the market. But luckily, we’re in the era of artificial intelligence and machine learning, so I see a future where we use those tools to design the market that accounts for this heterogeneity and shows a timeline of the different carbon prices.
39:54 Jim Row: Dominic, can I jump in on a couple of points here? So on AI, I think you can really bifurcate it between where you’re at on the verifying side of the equation versus the actual authentication in the registry. So there can be a lot done on the verification side. In fact, on the validation side and authentication side, we use AI already. And that’s how come we can guarantee activity under 30 days when we do something, because we do use it, and it enables us to do a lot of things. And there’s some great things in AI that are already out there that are really off the shelf that can expedite things quite quickly. The other point on the pricing issue is that what you don’t have or what you do have in this market is very different than others versus wheat or oil or something like that’s a standard commodity, is that you have the issue of local politics. So just in the United States, you have various states that put up things and then they put requirements that certain amount of the credits have to be locally sourced. Well, right then and there, you start putting impurities into the system that you can’t do. There’s going to be a lot of countries that basically say the credits have to be generated here in this country. So you’re going to have industries in the US, all the states are doing different. So you’re not going to have a pure convergence of pricing, you’re going to have these impurities based on local laws and local issues.
41:24 Dominic Hobson: Thanks, Jim. Now, we’ve had an interesting question here from Pedro Baiz. I hope I got your name right, Pedro. English people are famous for mispronouncing names. Great comments and views so far. Thanks for saying that. I’m glad you’re enjoying it. Your question to the panel is specific to the project from the World Bank Climate Warehouse project, which has now been transformed into the CADT Climate Action Data Trust. I confess I hadn’t heard of this. So I’ve just gone to the Climate Warehouse website and I see the Climate Warehouse programme prototypes, tests, develops digital infrastructure to foster greater transparency, trust and integrity in the carbon market. So it’s bang on in terms of its objectives. It’s pointing in the right direction. Sean, have you come across this World Bank project and in building your own platform, have you paid attention to the end-to-end digital ecosystem for carbon markets, which the Climate Warehouse is looking to build?
42:21 Sean Mullins: Yeah, we have come across it. We’ve taken a look and we’re very aware of the other options that are out in the market. And I think this kind of leads on nicely from Jim’s point, actually. I think the point he mentions, and just sort of putting my history in private equity in there. With valuations on private investments, there’s always going to be discounts or multiples that are added to the value of something. And I think that isn’t a problem in a transparent market. In an opaque market, it’s incredibly difficult because there’s no understanding there. You don’t have that price comparison. So I think the key elements you’ve touched on there, Dominic, that are in that little sales pitch you just read off, are exactly the things we need to tackle in order to move this forward. Right. We’ve already spoken about standardisation; we’ve already spoken about education. Gbemi gave a great outlook on data and how you can use that data to improve those factors. And the next one, yeah, transparency is key. How can you make sure that those standards are available? That the data you want to understand about what it is you’re buying, because you now understand how the market works? How can you make sure that’s available? How can you make sure that the credit you’re buying is genuine, exists and that when it’s offset, it’s destroyed, it no longer exists? So I don’t think there’s any secret into how an immature market becomes a flagship mature market and transparency is just part of that journey.
Where, if at all, does carbon “insetting” fit into the voluntary carbon credit markets?
44:02 Dominic Hobson: Pedro has a specific question for you, Sean, which is whether you … do you have views on “insetting,” which he says addresses some of the comments you raised? Insetting, I understand, is this kind of opposite to offsetting, where you as an investor or a company, I don’t know, start to reforest things or clean up rivers just as part of your normal course of business. So rather than carrying on polluting and then trying to buy something to offset it, you actually try and clean up your business processes directly. Has insetting been part of your thinking? I don’t whether or how you get that onto a platform.
44:37 Sean Mullins: Yeah, well, that’s not really our space. Whereas I think that comes into your sustainability reporting – when you look at your emissions targets and so on, it comes into that. I mean, insetting can be anything, right? I think it comes from … You look at McDonald’s, they reuse their frying oil and make biodiesel.
44:59 Dominic Hobson: Buying land to plant trees. It’s the same thing, isn’t it?
45:04 Sean Mullins: Exactly, yeah. And I think that, again, I hark back to sort of a point I raised earlier. That’s all incredibly positive. We’re only going to stop what’s happening if the green organisations become greener and the brown organisations become better. The answer to save the planet is not going to be the voluntary carbon market. That’s going to help, it’s going to add benefit. But ultimately, organisations need to decarbonise. Now, whether that be insetting or whether that be just reducing their carbon emissions, they’re all positive steps in the right direction. From our point of view, as I mentioned before, that voluntary offsetting really is the last resort. Yeah, insetting and decarbonising should happen before an organisation dip into that market.
45:55 Dominic Hobson: Jim, I don’t know whether you had any thoughts on how you make insetting tradeable. You don’t have to have any, but you might.
46:01 Jim Row: No, Sean pretty much said it. One thing I would like to bring up, though, is that whether or not you’re net zero or net this or whatever you happen to be, I think what you’re also seeing a trend in is the reduced villainisation of carbon and actually the concept of repurposing carbon. And I think that’s where you’re going to get some really interesting innovation. So, you know, everybody running around and saying, `Oh, we’re going to do this and we’re going to plant.’ All that’s gotten is scrutiny from regulators, and particularly the SEC in the US on saying, `Hey, you’re making fraudulent claims, etc.’ So what I see is actually the repurposing of carbon. So if you’re going to capture it, then it becomes things like green cement. There’s all kinds of other things that can be generated from that, and if you let the private sector innovate like it historically has, you’ll get really top quality solutions. And to me, that is where it goes. I mean, your body’s 15% to 18% carbon, right? You don’t want to decarbonise yourself. Carbon can be good. It’s an asset. Use it in the proper way. Manage it, don’t abuse it.
47:09 Dominic Hobson: Okay, thanks for reminding us we’re all carbon-based life forms, Jim. Don’t always feel like that, but, yeah ..
47:18 Jim Row: There’s more water.
Will there be any restrictions on the type of entities that can buy carbon credits?
47:19 Dominic Hobson: Rachel Mellor has asked an interesting question. Will there be any restrictions on which entities are allowed to buy carbon credits? No. You’re shaking your head there, Jim. I mean, I’m thinking about asset managers here looking at these as an asset class. At the moment it’s not the sort of market you want to get too heavily involved with, is it? Because the prices are all over the map, the projects are hard to police. No matter how optimistic your view is, we don’t yet have a global market trading standardised products, do we?
47:50 Jim Row: Well, I do believe it’s an asset class, so I think the first part of that question to me, it’s an asset class now. It’s how you manage it. I think you’re going to see different … Back to my thesis on financial innovation. You’re going to start to see more retail products. You’re going to start seeing pooling like mortgage-backed. You’re going to start seeing things that take away the credit risk, exposure of single sponsors. This is why I’m actually quite optimistic and that’s why I say we’re on the back side of the Hype Curve, because you’re going to start seeing some really innovative things when it comes to blockchain. You’re going to start seeing things on …. You’ll be much more at a retail level in some of this. You’re going to see massive amounts and the switch to demand side, because everybody’s been focusing on supply side. So I think Sean could probably opine as much, if not more than I can.
48:41 Sean Mullins: Yeah, I think just one point, really interesting question and I think yeah, absolutely, the buyer can be anybody. But what we’ve seen from our engagement with the industry is a lot of project developers are actually quite picky around who their buyers are for good reason. They don’t want their credits to be sold to a buyer that’s going to trade them on the secondary market and make money. They want their credits to be sold to buyers that are trying to decarbonise, that are insetting, that are making an effort to become better environmental actors. I think you have to remember that every actor in this marketplace has a different incentive and a different reason for being in there. Right. The project developer wants to do well. They want to make the planet a better place. The buyers have all different incentives. Right. And I think you just really need to pair together the people that are doing the right thing. And that’s really the angle we’re coming from. So not only do we look to provide transparency on the project developer and the credits that they’re creating, we also look to provide transparency on the buyer that’s buying those credits to ensure, again, that it is just to offset the little piece of emissions that they just can’t quite reduce from their operating model.
How do you expect the voluntary carbon credit markets to be regulated?
49:58 Dominic Hobson: Now, Deanna, following up Rachel’s comment here about will there be restrictions on which entities can buy this … This is not, at the moment, a market which any regulator is going to feel comfortable advising retail investors to get involved with, I’d have thought. Could I ask you to give us some future thinking about how you think the regulation of these markets is going to evolve? You’ve explained it’s a commodity. It’s more likely to be CFTC than SEC, for example. But what about these certification agencies who sort of popped up and by most accounts are not doing an adequate job for a variety of reasons? We’re starting to see some litigation, particularly from NGOs, about greenwashing schemes. So if I asked you to look ahead at how you think a successful global standardised marketplace in carbon credits going to look like, what will the regulatory infrastructure be? Who will be involved? Who will be allowed to participate?
51:04 Deanna Reitman: Yeah, so I think the infrastructure will be like you have today. So there are many phases and facets to this market. Right. So just to go back to the question that was asked about who could participate, Sean really is talking about the first phase of this market where you have the project developer and you want the buyer to buy the carbon credit and consume. But there are people, like my mom, who want to help the environment, and [inaudible] could probably tell you. And so what you’re seeing is you’re beginning to see institutional investors take this asset class, as Jim has said, and mix it into some of their portfolios so that it becomes more available to people like my mom, who want to figure out and help how to invest in climate change but don’t have the money or the ability to consume a carbon credit like Sean was talking about. So the market’s going to evolve and it’s going to allow all sorts of participation, whether it be retail and then like what Sean and Jim and everyone were talking about, institutional investors and buyers for consumption. Okay. Which is why you have to be super careful when you’re buying an airline ticket and they tell you’re buying a carbon credit because … are you? Right? I’m not sure. Okay, but to go to your question as to is there an infrastructure here as to how this is regulated? Yes, the infrastructure is here. I mean, you can’t commit fraud or market manipulation in a physical commodity market. So if you end up having a certification that is wrong or fraudulent or you find out that they’re taking money and they’re manipulating their report or what have you, the CFTC already has jurisdiction, right, because you manipulated or committed a fraud, even in the physical purchase and sale and delivery of a carbon credit. If you’re going to put this asset class into a mutual fund or into a commodity pool, then you have the SEC and you have the CFTC already with the tools to regulate here. Do they need more regulatory tools? Perhaps, and we shall see. But I don’t think that will hinder the growth of this market right now, because I do think right now the guardrails are there enough for this market to take off for all types of buyers. Because as Jim and Sean Emmy have mentioned, we are moving forwards now looking at the buy-side.
Why are so many carbon credit platforms using tokenisation models based on blockchain technology?
53:40 Dominic Hobson: Interestingly, Rachel says she is asking from a compliance perspective at an EMI who facilitates investments. She says `we’re expecting to see more of these. We want to understand the risks we need to cover off from a financial crime perspective, reputational damage aspect for our business.’ So it was a question which was really on the money about the need to clean up this market in general, I think. We’re into our last five minutes now and I think we should just at least touch upon the question of tokenisation and Sean. Jim, this is really your area. A lot of these platforms which we’ve been looking at are, including your own, are kind of blockchain -based. Why does that make sense?
54:23 Jim Row: Well, for us, it’s the provenance and the auditability and the transparency and trust factor that all come in that you can get with DLT and blockchain. So to me it’s pretty easy and it makes the transferring and also the retirement aspects a lot easier because then you don’t have double dipping, you don’t have double sales. And you know when something has been burned or retired. Those tokens, it’s very auditable.
54:55 Dominic Hobson: Is digital money a problem in this market like it is in the security token market? Do you need money on chain?
55:02 Jim Row: Not with us, but maybe I’ll defer to Sean if that’s their structure.
55:08 Sean Mullins: No, I don’t think it is at the moment, Dominic. I think there’s bigger problems to overcome before you start looking at sort of atomic settlement and the issues around that. I think when you look at other digital asset classes, that’s a different question because there’s settlement expectations already there. But with regards to this platform, no, it’s not. I mean, we’re a bank, so we can offer settlement as a bank outside, off-ledger, and we do that as part of the carbon ecosystem product. But we don’t see the atomic settlement piece being as much in demand in this area as we do digital bonds and things like that are also going on in the industry.
55:52 Dominic Hobson: Do you see in the very long term that all these environmental assets are going to be traded on a kind of networks of things? I’m talking here of green bonds, of these cap-and-trade allowances. Can you see a fully liquid global market taking place in what I might call environmental assets of all kinds? Is that part of the long-term vision or is that just looking too far ahead at this point?
56:18 Jim Row: Well, if you’re going to ask me, I would pull the word liquidity out. I think you’re going to be able to see transactions. The concept of liquidity …. You can tokenise something that does not create liquidity. So I think you’re going to see the ease of transferability in transactions. I don’t think you’re going to get the massive amount of price discovery you think you would get from tokenisation, because that’s a depth issue, right? How do you standardise it? Because if you’ve got one pool of investments and it only has a £50 million or $50 million kind of level, that’s not a lot to create liquidity. It’s just like, why do you have liquidity in high cap, large stocks, right? Your Apples, your Microsofts. That’s liquidity. But if you’re talking about a small little position that’s not going to have liquidity no matter how much you digitise or tokenise it.
Will tokenisation enhance transparency, integrity and trust in the voluntary carbon credit markets?
57:14 Dominic Hobson: Have we answered [inaudible]’s question here? To what extent do you see tokenisation of carbon credits as a solution to access another asset class which can also address transparency, integrity, trust? In other words, is tokenisation going to bring to the voluntary carbon credit markets the degree of transparency, integrity and trust which will encourage people to invest in and trade them as an asset class? Have we answered that, do you think? Jim?
57:44 Jim Row: I think it helps. It won’t answer it because the project is the project. It’s a fundamental. That is the important thing. Not in the way you’re measuring it, right? That’s not the point. That’s the false dream of what people thought tokenisation would do. Like it would just magically cure something. That’s not it. If you still have a bad underlying project, if you digitise it doesn’t make it better.
58:11 Deanna Reitman: That question kind of mixes the things, right? The tokenisation of the underlying carbon credit makes it perhaps more tradable maybe. But I don’t know if that’s true, because we have a lot of markets that trade pretty well, and they’re not tokenised. But it’s the underlying data from the blockchain that’s attached to that asset that then is attached to the token that creates integrity and trust and transparency, not necessarily the token. Although the token is a cool way to maybe package it, I’d say.
58:46 Dominic Hobson: We’ve had an interesting observation from Ian Hunt. I know you’ve addressed it already, Deanna. He draws a parallel with what’s happened in cryptocurrency and security token markets where courts and regulators have kind of thrown a lot of sand into the machine about, is this a commodity? Is this a security?
59:07 Deanna Reitman: No, not really. [Inaudible] in that case.
59:10 Dominic Hobson: I think Ian is making a point that maybe we need to move beyond these old-fashioned categories and start thinking about all these digital assets as streams of income, streams of value. And in fact, some of the confusion we’re seeing among lawyers, judges, regulators, is because we’re still thinking in these old categories rather than these new categories of digital assets as purely digital objects in which issuers are making promises to each other and investors are expecting those promises to be fulfilled. Like it’s something new. And I think he’s saying carbon credits should fit into that. But we’re into our last minute and so we probably can’t go into the philosophical discussion.
59:52 Deanna Reitman: Happy to talk to him about that. I don’t think it’s philosophical. Happy to talk to him about it. Right. The digital asset is a digital form of something, so happy to talk to him about that. No problem. Just send mean email.
01:00:05 Dominic Hobson: So you’d be happy to pursue that with Ian.
01:00:09 Deanna Reitman: No problem.
01:00:11 Dominic Hobson: So I think we should be looking to wrap this up now. And I think I’d like to put to each of you just one final question, which is what should people be thinking about as they move away from this webinar? Mike Halsall’s final question to us, for example, is “Is there a roadmap for global standardisation?’ I think we’ve been clear in this discussion that standardisation is going to be important, but how are we going to make that happen? Is a good example of something which maybe people could take away from this event as something to think about. But you may have other ideas. Why don’t I start with you, Sean? What do you think is the thing that the people listening to this webinar should focus on over the next 12 months as being the most important thing to get this market working properly?
01:01:00 Sean Mullins: I think it’s just education, right. I think when you look at how real change is driven through industry, it’s always from the end user, it’s always from the purchaser, the buyer. And I think the more everybody becomes educated not only on their own carbon footprint, but also on the industry and the market itself, and they start driving that change through where they put their money, then that will filter through and that will in the end force the hand for standards for globalisation. So, yeah, all I’d say to anybody listening to this today is take an interest in the subject and take an active role in learning more and understanding your own carbon footprint and the industry.
01:01:48 Dominic Hobson: Deanna, I’m going to give the last word to Jim. So why don’t you have the second to last word? Deanna?
01:01:53 Deanna Reitman: Yeah, sure. So I’d say if you’re going to take anything away from this webinar, I would take away that you need to keep an open mind that this is developing and that what we say today can change tomorrow. And as long as you are willing to be a part of the solution and not a part of the problem, we will find a solution here.
01:02:16 Dominic Hobson: Just actually there’s a last comment here from [inaudible]. Blockchain is a rather cumbersome tech that doesn’t scale well. Are carbon credit units available in other transaction frameworks? So you’ve got a blockchain sceptic there to deal with. You might want to dispense with that before you go.
01:02:33 Jim Row: Well, I think there’s plenty of great successes on blockchain and DLT, which they are not the same, but blockchain is a form of DLT. But I think there’s a lot of success in that category, so I think it’s going to continue to grow. I think the Hype Meter of digitisation back a few years ago is going to take a lot longer than the people that are promoting it and it’s just going to take a while to find some use cases that really set it apart. And my belief is that actually carbon credits are one of those use cases for digitisation and tokenisation. So to me, I think there’s a bright future there as far as the actual voluntary carbon market and the tracing and trackability, I think this is all positive for every one of us, so I think there’s a lot of growth ahead, but I think there’s going to be some still bumps in the road. I think financial innovation is going to take over, I think you’re going to see a different level of innovation. I fundamentally believe this changes from a professionalisation too, because you had a market that was really driven by people with passion versus some financial discipline, so I think you’re going to start to see a different type of risk manager come into play. So all of these are positive and I think you’re going to see some really interesting instruments that get created out of all of this. So I think it actually ends up being a robust market. I think it shrinks, though, I think it shrinks in the size of who’s all involved and it does become more professionalised. It’s a little bit like a forest, if we can bring in the nature-based thing. We have a lot of underbrush that’s grown up around it, so we need to thin a lot of things out. The market will thin it and it’ll let the strong trees grow and that’s what’s going to happen.
01:04:23 Dominic Hobson: I’m being greedy here, but Mike Hallsall’s point: `Is there a roadmap for standardisation?’
01:04:29 Jim Row: Well, in my belief there is.
01:04:31 Dominic Hobson: You mentioned the ISDA example, for example, where people working in the swaps market came together, they created this very successful voluntary association which created standards, right?
01:04:41 Jim Row: Dominic, you and I, we’re multigenerational here. So the point is that people think they create something and they think it’s the newest thing ever. If you look back 25, 30 years, it’s already been done. We’re just changing the names here. So a lot of this … There’s a roadmap. It’s ISDA. It’s the merchant energy business. It’s, surprisingly, crypto. DeFi. I mean, there’s already roadmaps out there and you can use them for a positive thing and try to use them to avoid problems as well. So, yes, there is a roadmap.
01:05:15 Dominic Hobson: With that, I think we must stop. We have run over time. I’d like to thank our panellists, Jim Row from Capturiant, our sponsor today, which made this discussion possible. Thank you, Jim.
01:05:25 Jim Row: You’re welcome.
01:05:26 Dominic Hobson: Deanna Reitman from DLA Piper, Sean Mullins from Northern Trust and Gbemi Oluleye from Imperial College, who had a hard stop at 3.00 pm, so she left us, but we’re grateful for her involvement. Our next webinar will take place same time, same place at the end of this month, Wednesday 30 November. And in it we will be exploring the future of digital money. By which I mean CBDCs, tokenised deposits, Stablecoins, all that sort of stuff. I hope that many of you will be able to join us then. But for now, it’s goodbye from the five of us. Goodbye.
01:06:00 Sean Mullins: Thanks everyone.