Catalyst with Shayle Kann - The carbon market’s quality problem

Episode Date: June 8, 2023

Voluntary carbon credits are a lot like used cars; you really have no idea what their quality might be. Or maybe they’re more like expensive bottles of wine. Most people (or at least Shayle) can’t tell if they’re buying good quality wine. If it’s expensive, it must be good, right? That’s the logic that has plagued voluntary carbon markets for years.  A carbon credit can work in two ways. First, it can avoid 1 metric ton of emissions that would have otherwise happened by, for example, preventing deforestation. Alternatively, a credit can directly remove a ton of carbon from the atmosphere through methods like direct air capture or biochar. But widespread reporting reveals that most credits don’t do what they say they do. Just this month the CEO of the world’s leading certifier stepped down after an analysis by The Guardian found that over 90% of rainforest carbon credits were worthless. In May, a new $1 billion California lawsuit alleged that the credits that Delta relied on for its claim of reaching carbon neutrality claims were bogus. Carbon credits are in crisis at the same moment we need to massively scale up carbon credits to meet net zero goals. So what do we do about these quality problems?  In this episode, Shayle talks to Allister Furey, co-founder and CEO of Sylvera, a company that rates the quality of credits, akin to what agencies like Moody’s or Standard & Poor’s do for bonds. Shayle and Allister cover topics like: The history of the first voluntary carbon markets and their early problems, like producing fluorocarbons just to destroy them The state of the current market, including its size, segments and prices The wide gulf in price between the cheapest avoidance credits and the most ambitious engineered removal credits  Why Allister thinks we need to be on a “war footing” to reach to the highly ambitious carbon removal targets to meet net zero, such as growing the market from $2 billion to $1 trillion by 2050 Why high prices do not necessarily mean high quality  Recommended Resources: The Guardian: Revealed: more than 90% of rainforest carbon offsets by biggest certifier are worthless, analysis shows The Guardian: Delta Air Lines faces lawsuit over $1bn carbon neutrality claim Sylvera: Sylvera response to The Guardian’s Analysis of Rainforest Offsets Catalyst is a co-production of Post Script Media and Canary Media. Are you a utility or climatetech startup looking to understand how artificial intelligence will shape your company? Come to our one-day event, Transition-AI: Boston, on June 15. Our listeners get a 20% discount with the code PSPODS20. Support for Catalyst comes from Climate Positive, a podcast by HASI, that features candid conversations with the leaders, innovators, and changemakers who are at the forefront of the transition to a sustainable economy. Listen and subscribe wherever you get your podcasts. Catalyst is supported by Scale Microgrids, the distributed energy company dedicated to transforming the way modern energy infrastructure is designed, constructed, and financed. Distributed generation can be complex. Scale makes it easy. Learn more: scalemicrogrids.com.

Before we start, we have two events coming up in June that our East Coast and West Coast listeners should know about. On June 15th, PostScript Media is holding Transition AI Boston. It's a one-day conference in downtown Boston digging deep into the applications for artificial intelligence and the energy system. We're going to have panels networking and a workshop on chat GPT. Speakers include Priyadonti, the co-founder and executive director of climate change AI. Pamela Isam, who is the former executive director of AI and technology at the U.S. Department of Energy. Patrick Walsh, a general partner at National Grid Partners, and Savannah Goodman, the data and software climate solutions lead at Google. So if you're in the business of energy and climate tech and a better understanding of AI is important to your job, you should come to the event.

Again, downtown Boston, June 15th, our listeners, get a 20% discount. Follow the link in the show notes and use the code PSPOD 20 when you buy your ticket. And for those of you over on the West Coast, our friends at Canary Media are hosting their next live. event in Seattle on June 28th. It's going to be a good one. I can attest. I've done multiple events with Canary. And Canary Live, Seattle is going to feature some of the biggest names in our industry like Amy Harder, David Roberts, Rames Nam, as well as Canary's executive editor, Lisa Hymas. The venue is the legendary radio station, K-E-X-P in downtown Seattle, and you can expect some amazing panels in lively networking. Again, we've done multiple shows with Canary. The Canary

live events are incredible, so go check it out. Canarymedia.com slash Seattle to get your tickets today. Don't miss out on either of these events. From the studios of PostScript Media and Canary Media. I'm Shale Khan, and this is Catalyst. The biggest market we've seen from a top three broker this is, I won't name names because it's probably just a bit much, but it's 23 times. So somebody's buying a credit for 85 cents and selling it for like 20 bucks. Say it with me now. Carbon, credit, quality.

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Trillions of dollars are flowing into clean and critical infrastructure, but those investments aren't driven by technology alone. They're shaped by markets, by policy, by capital, and by the institutions that connect them. I'm Alfred Johnson, CEO of Crux, and host of a brand new podcast, Critical Capital. Each episode, I talk with people deploying capital, shaping policy and building the clean economy. Tune in as we unpack how progress is actually made. Listen to critical capital on Spotify, Apple, or wherever you get your podcasts. I'm Shail Khan. I invest in revolutionary climate

technologies and energy impact partners. Welcome. I think I've said this on the pod before, but one of my first jobs out of college way back in the mid-2000s was generating and trading voluntary carbon credits. To my bright young eyes at the tell of the time, it seemed like such an elegant solution to a market failure. We hadn't sufficiently priced carbon from a policy or regulatory perspective, so let's just let progressive companies introduce their own de facto carbon price by buying offsets or credits, and thus reaping the benefit of having done so by crowing about it to their shareholders and their customers and their employees and their regulators. And indeed, that is what happened a little bit. But then the market

basically fizzled. There were many reasons, but I think the biggest one was trust. The companies just didn't end up getting all that much credit for their purchases because nobody really trusted that what they were buying was actually real or that they were doing enough of the hard work to justify offsetting the rest in the first place. So fast forward to today, the voluntary carbon market is hot again, actually much hotter than it ever was back then, and it has morphed. Companies are talking about different kinds of credits, more companies are talking about purchasing carbon removals as opposed to carbon avoidance, and the types of projects being put forth are changing. but I would argue that the fundamental problems that plagued the market when I was a wee young analyst are basically unchanged today. We still have not yet figured out how to build enough trust in this market to see its scale. We still have questions about when and how much companies should rely on those credits,

and although a new class of resources to remove CO2 from the atmosphere have emerged, so too have a new set of questions around leakage and knock-on effects and energy intensity and so on. One thing I do like about the new voluntary carbon market is the emergence of players who are focused on ensuring quality and therefore trust. Among them is Silvera, which was founded by Alistair Fury, our guest today. If I'm going to talk about carbon markets, I'm going to focus on trust. And Alistair is just the person to have that conversation with. Here's Alistair. Alistair, welcome.

Pleasure. Thanks for having me. Great to have you here. Let's talk about the voluntary carbon market, such as it is. Starting with just kind of an overview of the state of affairs in the market. So how would you characterize where we are in the long arc of history of voluntary carbon markets today? Well, I mean, that's a really good question. What I would say is that we are at a transition point in the one of maybe a number of different evolutions of the market. So first of all, the carbon market in a voluntary sense comes from 25 years ago, really, post the Kyoto Treaty.

So originally you had the clean development mechanism. And that was the V1.0 version of carbon. And there was this kind of Wild West boom scenario, the whole thing took off. You could use those credits in the European Union instead of an emissions allowance. If I recall, that was like a, so the clean development mechanism was a mechanism for developed economies to finance carbon removing or carbon offsetting projects in the developing world, right? And it was, so it was sort of semi-compliance because in the EU you did have a compliance carbon market,

but you could use those credits to meet the compliance. compliance requirements. Exactly, yeah. So what happened was, craziness ensued because of a lack of governance and oversight. I mean, what you had is a system of incentives that basically said, if you do some stuff, then you can sell these credits regardless, really, of whether it made sense to do the stuff, right?

So, for example, you could destroy fluorocarbons, you know, the CFC, the things you'd have in your photo, which are very strong drivers of warming, and claim credits. But it didn't say that you had to, you didn't just start up a factory line just to produce the fluoricabom to destroy it. So this is what happened, right? People were like, wow, amazing, I can produce this and then sell it for how much, what? That's like free money. So I'm just going to produce this stuff and then destroy it at the end of the factory, in doing so producing emissions, right? But like, it would generate valid credits. So this was like, it was it wasn't the guardrails weren't there and the EU rightly so they they basically said

the market is going to be massively able to buy this is not going to have the net effect on the on the emissions trajectory of the world that it should and we're just going to focus on the emissions from the heavy emitting sectors in the EU and they closed the door and then the market went into kind of the kind of a winter and then over some years you got an emergence of a number of standards bodies that aim to do better than the original version of CDM. So Vera is the most famous one. Also gold standard, which then came maybe as a response to, again, a demand for higher quality. In the US, you have a couple of bodies that are especially relevant to US markets

and then those parts of the US market where you can use some of these credits still for compliance purposes, like in California, for example. but that tends to be a kind of a corner case. And then over time, a new use case really developed for these carbon credits, which I would characterize as storytelling. So you would have credits being bought to not meet a compliance obligation or to lower a tax bill, but to principally for marketing purposes. And this, you know, we spent a load of time in the early days talking to folk,

And really, that's the purpose, right? You bought the credits, you claim some kind of carbon utility status, you put it on your trucks and you're in your advertising on your product label. And that was the utility you got from the credit. So in that world, you had an enhanced set of governance, like the stuff that Vera put in place and Gold Standard, you say it's better than the CDM stuff in terms of like the guardrails, the audit, et cetera.

But the bar was very low to begin with, right? So it did not solve the problem in its entirety. No, and I will say that that world, though I think you're about to say that we're in a new phase now, that world definitely still exists. Like that is ongoing. As an example, I was on a flight yesterday. And if you go to the Oakland airport right now, there are signs that say offset the CO2 associated with your flight, $2 for every thousand miles that you travel. And there's literally no additional information. It tells you nothing else about what you're purchasing.

it has a little QR code you can go to to make the purchase, right? That's very much, in my mind, in the world that you're describing, of sort of like, it's storytelling. Yeah, yeah, 100%. And exactly, like you say, this is the transition point, the kind of cusp point that we're out. So it's moving from that world where what I need to be able to say is the buyer is, hey, I bought this credit, it's verified under some insured program,

I don't have to worry about or think about too much. And it allows me to make this statement about my product or service that's maybe going to make you more likely to buy it. And those days are kind of swiftly coming to a close, which is a good thing. We would say, of the credits on the market, the minority have like a strong environmental integrity. So you'd maybe say around, actually less than a quarter,

we would rate in our top three grades. and now you would have very high degree of confidence that a ton was a ton and that would be a ton for emissions removal or a ton for emissions reduction. We wouldn't consider them, you know, that's the biased kind of decision we can maybe loop back on some of that stuff.

But that's not a great ratio. And the thing is that the world is now demanding that a ton actually be a ton, which is not an unreasonable ask. And that's being driven by the framing of carbon instruments, like the offsets being one type of those, is really part of net zero. So net zero is actually, it's not a marketing thing,

it's an accounting equation, right? You have to have your emissions on one side balanced by removals on the other side, and you need to be sure that your emissions have been reduced, and you need to be sure that your removals are real and durable. And that way, on a global level, you can have all the accounting tally up and have some degree of confidence that the world is at the net zero state that intends to be and that it's not some, you know, because if you have that level of overstatement and the emissions reductions and the removals, then we wouldn't be at net zero, which is bad, right?

This is like, that would be really bad. It's kind of existential if you were to undershoot that much. So that's now putting a burden of proof onto the carbon markets that didn't really exist before. And the nice thing is, as we move towards a net zero transition, all kinds of normal sort of defense mechanisms or institutional mechanisms kick in, which is just kind of like good governance and materiality and risk management and like procurement rigour, which is like most companies can't spend $50 million, $100 million on this carbon thing without having some guardrail or some kind of process around that. And at that point, you'd normally want to check that the credits are real and the climate impact is that. And that's what we try and do. Certainly what we deliver into our customers is kind of a look at the underlying claim of what is under the hood of each of these credits so that they can make decisions and manage the risks and make sure that the climate action is real.

So this is the kind of transition in the cusp point we're at the moment. Yeah, so I think we'll come back to spending some time on like what actually. is how do you define what's real and what's rigorous and what's not? And how do you get trusted on that? But I think to just close out the market part, so it sounds like you're describing, we're in like, I think this is right. We're in sort of the third wave of voluntary carbon markets. First wave was a clean development mechanism.

Second wave was this wave that I was actually a part of sort of a decade ago. Like I was originating and trading carbon credits in 2007-ish, right? So this was like when the, that was the storytelling phase, as you described, which I think is accurate. And now we're in this new phase that's driven. I think you're right in part by net zero and the need to get there from an accounting perspective. But what I would say about the first two waves is that both of those collapsed ultimately. And maybe there were many other things going on as well. But fundamentally, I think they both ultimately collapsed because of a lack of trust, because it turned out that a lot of this stuff was not.

what it was claimed to be. There was a series of exposés. People got less credit for the storytelling, and then it sort of all fizzled. And so the question, I think the fundamental question that we'll come back to a bit later is like, how do we ensure that this time does not go that same way? Because that's the risk, right? If the same thing happens again, you could just have a third wave that looks like the first two. So we'll come back to that. But before we do, I just want to level set on like the market itself with, I guess, two I love questions. One, just how big is this market today, like how much is getting transacted in the voluntary carbon market as it stands today? And second, we should talk a little bit about pricing to the extent that there is market

pricing, to the extent that it's actually a liquid market of any sort. Where do we see pricing? How is it trending and so on? Yeah, both good questions. So the crazy thing about the voluntary carbon market, for all of the media attention it gets, It's tiny still. So a couple billion dollars last year of value in terms of the transacted value. So that's negligible really compared to the compliance markets, which are around $8.50 billion,

so nearly a trillion dollars dominated by the European emissions trading scheme. But for sure, yeah, this is a small market. It grew a ton over the last couple years, both in voluble. as in the number of tonnes traded and the value. It's been relatively flat over the last few quarters, well, driven by a few things. One, all of the renewed concerns about quality, two, the macro environment and three uncertainty around what you can claim

when you buy a credit and that's holding folk back. I think your question, I mean, if you want the voluntary card market, and I would include instruments like removals credits that are not, that are maybe like a direct air capture credit that's not sold through Vero or something like that. The problem with all these things is like we just need way more of them. We do need them to all be real and a ton to really be a ton, but the lift to get to scale, and maybe a nice way of thinking about this is if you just look at the removal side of the equation

and there's credits on the emissions reduction side and credits on the removal side, the plan A, the world's plan A, and when you start to vocalise this out loud, it's just so crazy. Plan A for the world is to get to 10 gigatons of carbon removal per year by 2050, so we're looking at less than 30 years now. To get from the first mechanically drilled oil well,

which was like 1858 or something, to half a gigatum, of crude oil took nine decades. So it's 90 years for half a gigatone, and we're supposedly going to go from zero to 10 gigatons, 20 times as much, in less than a third of the time. I want to also clarify that when you talked about the size of the market today, of that, you know, just under a couple billion dollars or whatever it is,

the amount of that, that is carbon removal is negligible. Almost zero. Yeah. Right. So it's not like we're going from a couple billion. By the way, at 10 gigatons a year, at 100 bucks a ton, if that's where we end up, that's a trillion-dollar-a-year market. Exactly. You know, to get from, we're not going from $2 billion to a trillion.

We're going from zero to a trillion, in theory. 100%. Yeah. I mean, so that is, so the problem is we just need a lot more. We do need this to be real, a lot more. And then your point are, but I think most people don't realize, like, how extreme that transition is. It's really, like, when you think about you, like, you'd need to basically see, you know, people talk about, know, wall footing or whatever, that is the level of intensity of, like, you know,

harnessing our industrial systems of production to deliver that transition. And that's, again, that's just on the removal side, not on the decarb side. So it's so much to do. The point on price is an interesting one. So, like, the price in VCM, and this comes back to, like, when we started the company, has always been absolutely crazy in terms of very little correlation between the quality of the credit, like the underlying substantiveness

of the carbon moving from the air to the ground or staying the ground, like the correlation was near to zero. And that basically meant that nobody could actually tell what was good and what was bad. And now that's changed. So you would see a credit

on the most liquid contract. So if you want to go today, spend 20 million dollars in carbon, the place you would go and do that would be on, and be able to transact that today, you would go to the CBL exchange and they have a standard contract there, or a couple of standard contracts, one which would be for a technology-based credit, like a renewables credit, one which would be a nature-based credit, which like a Red Plus credit, and those things would trade between one and two dollars as of today, so very, very low.

And these are both, those are emissions reductions, not carbon removal. We'll keep clarifying that, because obviously when we talk about pricing, there's going to be a big disparity there. It is. And then the lower quality, say, unrated removals credits would start five, ten bucks, possibly. But that would be like, I would, I personally would not buy this credits. Put it that way.

Now, if you wanted to buy a AA-rated emissions avoidance credit from Severa, not via some as a credit that we had rated, AA, we don't sell the credits, it would be about $12 to $15. So if you want a credit that is actually real, there's a huge spread, right, from the credit that we would say is like not really delivering any climate impact. And the same would apply for the removal's credits.

And even that is like a remarkably, to me, just a remarkably cheap credit, right? Especially when I think a lot of folks in sort of tech world now are paying a lot of attention to what's happening with with engineered carbon removal and seeing the purchases that like strike, Stripe is making and Microsoft is making things like that where they're paying, you know, there's a frontier fund just made a big purchase from charm industrial, which is for bio

oil sequestration. That's, I think, $650 a ton or something like that, scaling down to $500 or $400 or $400. It doesn't really matter because it's like way over an order of magnitude more than the numbers that you're talking about. So like one of the things that's always astounded me about this market as it's developing is just there's really cheap, really low quality. there's still very cheap, better quality. And then there's this like gulf and the difference in price between there and the like, what we are all saying we're gonna need gigatons of in 2050,

that delta is just enormous. And I don't know how that, you know, if you're a buyer, that's a tricky thing to think about. I mean, it's fascinating. Honestly, we would say that people, over time, have used really terrible proxies for quality. And part of what you see in this market is people saying, if it costs me 500 bucks,

it must be good, right? Because it's 500 bucks, right? So, and I'm probably not going to get fired, well, probably, for spending millions of dollars on something that's so expensive because it's got to be good, right? So we would say it's of high quality, if it's of high quality,

and the price doesn't actually guarantee that at all. In fact, at the beginning, when we first did our first kind of plots of the market price versus the rating, they were inversely correlated. So it's basically like the bad of the credit, the cheaper it was. And we were like, what that? This is really worrying, like what is going on? And what happened was people were using just the wrong proxy for quality.

So people were saying, hey, this project has a good brand. it's been around for a long time. And therefore, and the brochure is really nice, right? Because they've had time to put it together and they've had some revenue, so they've been marketing the project very accurately. Now, it turns out it's a really bad proxy of quality because the older projects had the most lax version of the very standard before they tighten the loopholes.

The technology for the monitoring for the project was like the most old-school, antiquated, easiest to gain. And when you look at those projects, you're like, oh, no, it hasn't really done anything. If you fast forward, it's like the random project in like Peru, there's an NGO, they've been like used the latest technology. They've adhering to the very latest like iterated versions of the methodologies. And you look at those, you're like, yeah, this is good.

Like they've done everything as they should. They've been actually conservative. Maybe they could have sold 50% more credits than they have. And you're like, yeah, they've done a great job. Nothing to complain about here. And those have been penalized because it's like, oh, this is, this looks like, It's weird. Some NGO in Peru I've never heard of before. So they were trading cheap.

Now that's inverted and price and quality do correlate. But I think like what one of the other things we see is a kind of, you know, there's an anecdote, but it's kind of weirdly well conserved is there's a famous paper called the Market for Lemons by this guy called George Ackloff. He won the Nobel Prize for it. So really around market information and transparency and basically saying there are some markets where nobody can observe the underlying attributes of what's being traded. And in those, it's basically an incentive for fraud and misstatement,

and it's a penalty for good behaviour. So the example uses in the paper is like, used car, use cars. So like, use car market is kind of a market for lemons. Because if I have a great car, I'm going to say exactly the same words as somebody that has a terrible car. And it's impossible, really, for the buyer to figure out which ones are lemons. So if you have a good car, you get penalized.

and if you've got bad car, you get rewarded. And carbon credits have been like this for the longest time. Virtual power plants are becoming a reliable way for utilities to manage capacity. But enrolling devices is just the start. What really matters is confidence, knowing those resources will perform when dispatched and being able to prove it from the control room to the living room. Energy Hub's platform handles the full picture, from near real-time forecasting, locational dispatch, and the kind of rigorous verification that holds up

when regulators, grid operators, or leadership ask, did it deliver? Easy enrollment creates momentum, proven performance builds trust. That's why more than 170 utilities rely on Energy Hub to manage over 2.5 million devices delivering 3.4 gigawatts of flexible capacity. See what that looks like at energy hub.com. We're living through a profound economic shift,

and energy sits at the center of all of it. Trillions of dollars are flowing into power plants, transmission lines, battery factories, data centers, but the future of energy isn't shaped by technology alone. It's shaped by markets, by policy, by capital, and by the institutions that connect them. I'm Alfred Johnson, CEO of Crux, the capital platform for the clean economy.

Join me for my brand new show, Critical Capital, as I talk with people deploying capital, shaping policy and building projects. Together, we unpack how risk is priced, how incentives are structured, and how progress is actually made. Listen to Critical Capital Capital on Spotify, Apple, or wherever you get your podcasts. This effect has basically hindered the development of quality supply because you basically

now you basically like punish the people doing good stuff. Now, if you are good, you're strongly incentivized to be transparent because you should be like, hey, audit me, like the most in-depth possible audit. like we've had project developers share the bank statements of every transaction they've made to all of their suppliers to be like, be like, look at what we're doing here. Now, the ones who are a bit more problematic do you don't have that attitude. Like, not really that's surprising. Now, I think we should say, you can't cast it.

It's not broad brush, but from some of the technology-based, the newer entrance to the market, which are very expensive, we haven't seen a lot of transparency. So, for example, in the Biocar sector, we reached out to over 40 developers, and typically you can issue credits for Biocar without having to go through a very process where you'd have public documentation and a level of transparency.

Not a single one would share us any information at all. And we would consider that to be not the most positive leading indicator of quality for that segment, despite it being very expensive. Yeah, I think that's a key point. We'll come back to the new world of carbon removals, of which biochar tends to be a part, because I think there's an assumption that engineered by carbon removal is sort of inherently higher quality, and I'm concerned,

because I don't think that is, those are not necessarily linked to each other, and that can cause problems. But, yeah, as you were describing the sort of relationship between price and quality. I think of it as like when I go to the liquor store and I want to buy wine, like I don't know anything about wine. So I just assume a good bottle of wine is an expensive bottle of wine. And I'm positive that I'm buying like bad wine for too much money because I just don't know any better. And it's sort of a similar, at least it has been sort of a similar situation

in carbon markets. Let's talk about what actually good means and what quality means, right? And it's very different, I know, from depending on whether you're buying a reforestation, credit, avoided deforestation credit, a renewable energy related credit, a DAC carbon removal credit. Like, everything's got its own thing. But I think we're in a moment now where there's a reemergence of some skepticism and a bunch of exposés, particularly around some of the forestry-related credits. You know, we've seen some big exposés on some of the biggest projects. The CEO, Vera, actually resigned recently, I think in part because of this. So maybe we could focus on that for a minute just because that's, I think, where the, first of all, that's where those cheap, cheap credits

tend to come from. And it's also where the, I think, collective eye of the skeptics is being pointed at the moment. So in the context of forestry-related credits, how do you define what is actually quality? Like, what meets a standard that you would buy? Yes, that's a great question. The fundamental pillars, or like the main themes that you'd want to see in terms of, metrics for quality are actually transferable across all different project types, which is helpful because it lets you then compare across types that are kind of,

they're fundamentally like, you know, a direct-to-air capture machine and a forest restoration or protection look like quite different activities. But actually the kind of principles are the same. So like we'd say they're threefold. One has the carbon accounting, and I'll unpack these in turn, has the carbon accounting been done correctly in terms of like, the number of credits being issued, is that the correct number? Two, the credit's additional, and I would normally describe that as like, is people talk about additionality. The simplest way of think about that is causality.

Did the flow of funds, the purchase of the credit, make the thing actually happens being claimed? Like, is there a causal connection? And then the last one would be permanence, like, is there a meaningful storage period for that carbon dioxide or equivalent outside of the atmosphere? And that goes back for decades, back to the Kyoto Protocol and the CDM. Those principles, additionality and permanence are kind of enshrined. The kind of carbon accounting is like the, is like core to the amount of crediting coming out. So that's what we're trying to test for.

And then for a forestry project, the easiest thing to think about is probably just planting. And actually, because it's just very easy to relate to, you or I could go out by a field and start to plant trees. So the accounting question there would be, like, given the trees you've planted and their growth, how many tons of CO2 is now in that woodland, maybe above the ground and below the ground in this biomass that would otherwise have been in the atmosphere? So that would be some number, maybe 20,000 tonnes because it's a big field or something. But that will change over time. you could only issue an exposit after the fact.

You can only issue the credits that have been removed over that accounting period. So there is a question there, like already, well, did you plant all the trees? Were they of the correct species? Did some of them die? Trees often, there's a mortality, like a bunch of them die? Was there a wildfire?

This is a big thing. I'm in California, right? And so there's been a bunch of other exposés here about carbon credits awarded to forestry projects in California that ended up burning. in a wildfire. 100%. And you see different causes of mortality.

Fire is one. You'd also see mangroves die a lot when the sea, well, they're exposed to storms, like the salinity of the sea can kill them if they've not been laid out correctly. Insects can kill trees as well.

So you do have all those kind of questions about the accounting. And then the second thing would be this additionality question, which is like, Okay, look, maybe you planted acres of trees, they've grown, they've not died. So the number of credits you issued was correct. However, did the carbon accounting, sorry, did the carbon project actually make you do that?

Maybe the field report was in China, and the Chinese government paid us fully to do that project as part of its regional reforestation initiatives five years before the project even started, right? And this is not a theoretical example. This is something we see, like, just strangely, strangely frequently. Well, there's a fundamental, there's good reason for it, but I've always thought there's an interesting fundamental challenge, which is you need to simultaneously prove additionality, which is to say that, as you said, the thing would not have happened but for this flow of funds.

But you can only award that credit and thus unlock the flow of funds ex post facto once the thing has already happened, because otherwise you're not certain that the thing actually happen. So on one hand, you need to say this wouldn't happen without this money. The other hand, you need to say, we're not going to get this money until the thing has already happened. And so there's kind of a chicken or an egg problem there that introduces a layer of complexity in financing. There is, and this is actually really helpfully being resolved now as carbon projects look a little bit more like renewable energy projects or something like that, which is like, hey, I'm not going to build the solar farm until I have a power purchase agreement.

somebody lends me the money. And this is kind of the way carbon market is going. You're not going to have a massive, like, multi-million hectare land restoration program unless I have tens or hundreds of millions of dollars of financing for CAPEX. And that I would look to make sure it's bankable by having some off-take agreements, some carbon purchase agreements, similar to that. So, like, those are things that we look for. We're like, hey, where did the funds come from?

Like, is there a forward agreement to purchase? because that will usually provide, that will like make, give comfort to whoever's providing their debt or equity finance for the project. So if there's not any money being spent, then you have to question what activities are being undertaken. So that's a flag. So we all test for those kind of things in our analysis of the project for sure. But yeah, so that's a fundamental question. You want to say, hey, is this project actually having an effect on the world? And you kind of have to do that.

Otherwise, if you don't do that, then you're basically saying all activity, whether it's passive or active, should be wrapped into carbon crediting. And that's a completely different system entirely. So you have to have either one or the other. I was just going to ask how you think about, on the account, I think the accounting question, your first of the three characteristics, that basically encompasses measurement and verification within it, right? Because if you measure and verify, then the accounting is being done properly.

I'm curious how you think about inferring volume versus measuring. This has been one of the other areas that has received a bunch of attention of late. So you plant a tree, just to continue that example, you can either attempt to actually measure the biomass from that tree. You can use satellite data or drones or whatever it might be. You can put sensors on the tree. Or you can infer it by saying, well, I planted a tree here. I planted a forest here.

And, you know, on average, trees like this should grow a certain amount, maybe with some field-wide or forest-wide measurement and then estimation within that. How much fidelity do we need on measurement to feel comfortable with these credits being minted? Yeah, that's a really good question. And there's a big rabbit hole kind of beckoning us in at this point, because it can go pretty deep. So, like, I think the – and actually you can connect this to some project that isn't forestry

because the same things apply there. But just in the forest example, like, the only way of being sure how much biomass there is is to cut it down and weigh the biomass. Then you would be sure, and that would be self-defeating, right? So that's not going to happen. There are ways that you just use the power of large numbers, right? So if you want to monitor an area that may be like, you know, 20 times the size of Manhattan, it's a significant area. You cannot cut down all the trees. You can't even measure all the trees because there's just too many of them.

So you're going to have to use a sample-based method, right? So by the time you get a certain number of plots, you know, the size of roughly like four tennis courts would be like a sample size or maybe even one tennis court, that would be a sample plot. You'd go, you know, you can extrapolate from those plots as long as they're stratified well, you know, according to the representative of the upland areas, the lowland areas, the valleys, you know, that you want to have your samples kind of sample the mix of forest you might see in the area well.

Then you start to get a reasonable idea of like the forest cover and the growth if it's a restoration project. And that's kind of how they've worked now. You always have some residual uncertainty. So you've got basically an error bar. And the methodology usually says just cut your error bar off and you're just going to issue credits of the lower end of that bar. So you actually see it like the way that the those accounting,

methods have been set up is actually pretty good. The problem is they've left some loopholes sometimes. So you'll say there'll be things like, here's the sample pots, but the sample pots don't change for 30 years, right? So now you have some very strong incentive

in a massive, massive area in the size of like a small state to protect a tiny subset of it because everybody knows that that subset is the thing that's going to be monitored over time and therefore you might have like a deviation between those little tiny plots being monitored and the area as a whole. So you see that quite often. And we've seen that,

for example, in a mangrove project where we were asking the auditor who's doing the verification, the MRV, hey, you know, what was going on in the project? We knew that most of the mangroves were dead, right? And they were saying, yeah, well, look, the sample plots, which is what's determined in the methodology, they're all good. And we're like, yeah, but you looked around you. And they were like, oh, yeah, I know what you're saying, but like, we're not required. The methodology is the methodology, right? Yeah, exactly. But you also have that, so just to like map this, so people think,

oh, if you have a machine, everything is now solved, right? But you can imagine, like, say you have a direct air capture project and it's in France, right? And you've moved it and you're like, hey, we're going to do like 100 million tons of direct air capture in France. Why in France? Because it's nuclear power. So now how many credits are you going to sell for each time that you put in the ground is going to be a function of the carbon intensity of the grid in France, right? So that's very low because of all the nuclear power.

However, they have droughts and the nuclear powers need to be cooled and the stations break down and stuff. So maybe in your methodology you say, hmm, what number am I going to use for the intensity of the French grid? Last five years average, right? Now we have a situation like in the last year where the capacity of those plants collapses by a factor of two, maybe you are selling 800 kilos in the ton, you know, 8.8% of every, you know,

so 80% of all the carbon you put in the ground, you monetize. Maybe that now goes to 40%. But under your methodology, you can still use the five-year rolling average. So what's correct now sort of thing? So like there's always loopholes, right? And it just being a machine or a forest doesn't stop there being loopholes. You can't perfectly anticipate all these situations, right? Yeah, I think that's a really good point on direct air capture.

It's one of the things I think people often don't appreciate is that what you're selling for, so I guess we're switching over here, but I wanted to do this anyway, from the kind of old school forestry-based carbon credit to the fancy new engineered carbon removal type credit. And there, what you're actually selling is a credit based on net tons removed, importantly. Because otherwise you would think, as you were alluding to, you could capture a ton of CO2 from the atmosphere, inject it underground, and you sell a ton of a credit. But that's not what you could sell.

You could sell a ton net of the emissions associated with the process. Now, emissions associated with the process are a function of mostly, in that case, the energy required to capture the CO2. And that is a complicated question, as we are currently facing in a different context, but with exactly the same question, which is hydrogen production, where there are battles going on in both Europe and the U.S.

over how do you measure the carbon intensity of green hydrogen production? It's a function of not just how the grid overall emissions on the grid, but how are you matching your load to what kill-out hours you're taking from, the timing of that, is it from additional resources? So the France nuclear example is a good one. If you diverted existing nuclear power to a new direct air capture plant and then replace that existing nuclear power with new fossil generation, then that has emissions impacts.

Right, that's leakage. And so in this new world of engineered carbon removal, there's just as much risk of leakage, I think, or maybe not as much, but there's certainly risk of leakage, just as there is in all this older school, or at least the nature-based stuff, which is much maligned. 100%. And it's kind of like, yeah, actually, you know,

the more you look at the methodologies for the forest stuff, you're like, well, they did a good job considering it's really hard and messy to do this stuff. You know, the implementation in reality is like maybe left something to be desired. But the, yeah, these things all apply. And I think definitely if you're building direct air capture in, say, Iceland or in France, these things are going to be easier to resolve. If you're going to build it in, say, Kenya, where, you know, there's a lot of geothermal, for example, you're definitely going to be much more in a competitive situation with, you know, the other uses for that geothermal power and there's a greater risk of displacement. So the geography, actually, and the local energy market is actually going to be a

really important factor there. So if you have your one-size-fits-all situation, hey, your last five years rolling average is going to, might give you a benefit in France. It might penalise you in Kenya, but the risk of leakage in France is very low, but the risk of leakage in Kenya is like very high. Which, these are all manageable, right? But you just, but they don't manage themselves, basically. They need like close attention because, you know, if the history of the market is, you know,

and you've seen this from back in the day, it's shown where there's an incentive for the number to be high and there's no legal consequence for you putting an extra zero on the end. People tend to put an extra zero on the end, which is just like human nature. And people want that. They believe in their projects and they want them to run. So they're like, hey, well, look, under the methodology, I can do this. And therefore, hey, I'm just going to do it.

And some people hold the line and they don't do that. The problem historically is nobody's been able to tell, which is which. Right. Okay, there's so much more to dig into here that we don't have time for now. So I think there's another conversation to be had. But I guess the final question I have for you now is, as you think about what the value chain for carbon credits looks like and should look like. I'm curious what you think the value chain should be. This is a market where even despite its small size historically, there have been

a lot of middlemen in the market. There are the originators, the project owners, the broker, various levels of brokers, then the ratings folks or the certifiers. Then there's usually somebody else, like a consultant who ends up recommending something to a buy. It feels like it's a market with a lot of layers, despite being very small. And theoretically, it's a commodity market that shouldn't have super high margins, so there shouldn't be that much room for that many middle players. Curious what you think the sort of ideal state of the market is. Like, who should be in the value chain?

Yeah, that's a really good question. So, hey, look, when I buy electricity at home, I don't want to go and negotiate with a power plant myself. and as a severe as a business, we don't want to necessarily have a PPA. So, like, those middlemen can create value. But I guess the question really is, like, what's the appropriate amount that they should take from the value in the chain? Historically, the carbon market's been tiny and hyper opaque. So in that situation, the intermediaries have benefited from the information asymmetry.

Like, they knew what the buyer is willing to pay. They know basically what the people who are. selling will take, and we've seen markups, the biggest markup we've seen from a top three broker this is, I won't name names because it's probably just a bit much, but it's 23 times. So somebody's buying a credit for 85 cents and selling it for like 20 bucks. Yeah, I mean, just like insane, right? And that's like not defensible at all. If you want to buy stocks or shares, right, on the market, you're going to pay a spread. And that's going to be like in a few base, you know, it's a fraction of a percent.

And that is, most people consider reasonable. Like, I'm happy, you know, the exchange has got to manage fraud, it's got to do the clearing of the transaction. Like, if I can get the, if I can do my trade and I'm only going to pay like 0.1% or like less than that, that's just pretty good, right? So I don't think people mind having intermediaries per se. Actually, they can provide a super useful service.

They mind them taking like an unreasonable share of the value. I think this is one of the reasons why we exist is like if you give people information, then you can correct that information asymmetry and people can transact and they can go to more of a commoditized approach. So they can go to the exchange like CBLs, for example, and they're like, well, I can see all the prices for A rated credits and I can see the premium for the AA and I can think about value and then you're going to have a more efficient market and then more is available to go to the people on the ground. And that's definitely something that you see with buyers.

They want the highest possible portion of the proceeds to go to the people on the ground. And that's totally reasonable, right? I think that would be a good thing if that was a North Star metric for the market over time, right? Yeah. Okay, Alster, this was a fun one for me, and I'm confident I'm going to want to do it again. So I'll say goodbye for now, but thanks again for taking it. the time today. Thanks so much. It's been a pleasure.

Alastair Fury is the co-founder and CEO of Silvera. This show is a co-production of PostScript Media and Canary Media. You can head over at Canarymedia.com for links to topics on today's show. PostScript is supported by Prelude Ventures, a venture capital firm that partners with entrepreneurs to

address climate change across a range of sectors including advanced energy, food and ag, transportation and logistics, advanced materials and manufacturing, and advanced computing. This episode was produced by Daniel Waldorf. Mixing by Roy Campanella and Sean Marquand. Theme song by Sean Marquand. I'm Shale Khan, and this is Catalysts.