Catalyst with Shayle Kann - Will this carbon market boom be different?

Episode Date: March 24, 2022

Carbon markets of all types – avoidance, removal, voluntary, compliance – are hot. Startups are sprouting up, looking to develop, broker and verify new kinds of credits. More than a decade ago there was a similar flurry of excitement around offsets, followed by a big crash in carbon markets. Experts blamed the Great Recession, but also a lack of trust and transparency in the offsets themselves. Will this time be different?  In this episode, Shayle talks about what’s changed with Nat Bullard, chief content officer at Bloomberg New Energy Finance. They review the persistent oversupply and trust issues in voluntary markets, and then examine the tech stack that could address them, such as web3, blockchain and regenerative finance, or ReFi. They also take a look at the new focus on removal, which is easier to verify and track than avoidance.  Also in the episode: What could carbon market prices look like in 2050? Will large financial institutions or new regulations spur companies to adopt transparent carbon accounting practices?  Catalyst is supported by Antenna Group. For 25 years, Antenna has partnered with leading clean-economy innovators to build their brands and accelerate business growth. If you’re a startup, investor, enterprise or innovation ecosystem that’s creating positive change, Antenna is ready to power your impact. Visit anten​na​group​.com to learn more. Catalyst is supported by Nextracker. Nextracker’s technology platform has delivered more than 50 gigawatts of zero-emission solar power plants across the globe. Nextracker is developing a data-driven framework to become the most sustainable solar tracker company in the world — with a focus on a truly transparent supply chain. Visit nex​track​er​.com/​s​u​s​t​a​i​n​a​b​ility to learn more.

from the studios of PostScript Media and Canary Media. I'm Shail Khan, and this is Catalyst. Like, we will not be in a successful place if we have 500 different ways to do a high-quality offset and 50 different ways to measure an account for it. That will not be a success. Success would be like thousands of ways to do an offset, and two to five maybe ways to actually measure, verify an account for it. I love talking about carbon markets.

That's all. That's the teaser. When utilities need flexible capacity they can count on, they turn to Energy Hub. Energy Hub works with more than 170 utilities, coordinating over 2.5 million devices to manage 3.4 gigawatts of flexibility built for the moments when utilities can't afford uncertainty. Energy Hub builds and operates virtual power plants that utilities actually stake their grid planning on, coordinating EVs, batteries, thermostats, and more through a single platform built for utility scale. predictive, verifiable, and designed to perform when it counts. Learn more at energy hub.com.

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'm a partner at the venture capital firm Energy Impact Partners. Welcome. It is so great to be back. First of all, thanks to Lara Pierpoint for filling in for me while I was out. Lara is, as you all now know, a rock star and was the only person who I wanted to fill my shoes for a few weeks. So now you all know why.

So thank you to Lara. We'll have her back on periodically, I think, because there is a lot to talk about with her. Okay, so my quick update to start. I now have a four-week-old son named Atticus. His middle name, alas, is not net zero, though nicknames are very much still on the table. And while I won't get into all the common tropes about parenthood and how it changes your whole perspective, I will say this. In the year 2050, by which time we need to have achieved global net zero,

greenhouse gas emissions across all sectors, Atticus will turn 28. And anything that's going to have a gigaton scale impact by the time he's 28 needs probably to be proven, commercial, and scaling by the time, I don't know, he gets acne and has his first awkward middle school dance. Not so much time, really. Okay, on to the show. So let's start with four numbers. One trillion, 851 billion, $1, $1,000, $5,59.5.5.5.5. million. These numbers are $1 trillion. That's the higher end of the size of the carbon removal market that is required by 2050, according to the IPCC, if you assume about 10 gigatons of carbon removal required at about $100 a ton. So it could be a trillion dollar market. 851 billion. That is

indeed the size of the global carbon market today, the buying and selling of CO2 credits, are actually in 2021, according to refinitive. So pretty close. Ah, but one billion out of that $851 billion, that's the entire size of the voluntary carbon market, the market outside what's regulated into existence, largely by the European Union. Still, a billion, not bad, but then there's this final number, 50 million. That's my honestly high-end estimate of the total voluntary carbon removal purchases last year. So within an order of magnitude or so, that voluntary carbon removal market needs to scale up something like 20,000 times by 2050 in order to reach those IPCC goals. Or it needs to no longer be voluntary.

But meanwhile, carbon markets, be they carbon avoidance, carbon removal, be they voluntary or compliance, are hot. Tons of new companies are seeking to develop new kinds of credits, broker them, verify them, put them on the blockchain. and more. Prices in the main compliance markets have shot up and come a little bit back down, but still remain above historical norms, and bilateral contracts in voluntary markets are popping up right and left. I actually have a long history in this world. One of my first jobs out of college, long ago, was originating and trading credits in the voluntary carbon markets of Yore. This was in like 2007, at which point there was actually a ton of excitement, not dissimilar from today's around the coming boom in at that time carbon offsets. It ended up being more like a

mini boomlet followed by a big crash and did not recover until pretty recently. And there are a bunch of reasons this time might be different. Better transparency, a focus on removals over offsets, more demand, and so on. But I think anyone involved in the voluntary carbon market today will tell you it's still very early days and there is much to be solved. And in the meantime, there is a very large liquid market for carbon that has been regulated into existence and should not be forgotten in the conversations around CO2 credits. So let's see if we could sort this all out. For this one, I brought on Nat Bullard. Many of you know Nat, but Nat is the chief content officer at Bloomberg New Energy Finance, and he writes a killer weekly column for Bloomberg that I really love, one recent edition of which was on this very topic. Let's go. Nat, welcome to Catalyst. Shale, thanks for having me back.

It's good to be here, and congratulations on the little one. Thank you very much. I appreciate it. If I start slurring my words in the middle of this conversation, then you have to pick up the slack for me. I know you can appreciate that as a father yourself. Every parent listening along will be like he's a new dad. We get it. Yeah, okay, good. Glad you're here to take it easy on me. And very excited to talk carbon markets with you.

I think, to start, there's a lot of terms that we may throw around that relate to carbon markets that people use for different purposes, carbon markets, offsets, credits, indulgences, I don't know, a bunch of other stuff. I think what we're trying to do here is, at least from my perspective, there's been so much interest and attention in carbon markets in different shades of late. There's like renewed interest in it that I haven't seen since, you know, I was working in carbon markets like 12 years ago. I know you were involved too at that time. So it's a new thing that it's back in the limelight. I think we want to try to clarify as much as we can to start what are these markets today? What do they look like? What are the contours of

them? What exists within them? And then maybe talk a little bit about what might be coming next. So let's start with the high level. Can you sort of distinguish between compliance and voluntary carbon markets and where do they exist today? I think this is actually a really important place to begin. If you were to listen to the discourse that sort of centers around where you are that originates, generally speaking, from the Bay Area, you would think that carbon markets are like wildly undefined, tiny, uncertain with a huge degree of not trustworthy, with a huge degree of technological innovation in them. The reality is that there is a carbon market that almost Nobody in the United States has anything to do with, but that is on the order of about $760 billion a year last year, and that is the EU ETS.

Globally, carbon markets are about $850 billion in 2021. And of that, almost the entirety of it runs through compliance. It runs through markets that have been set up for quite some time that work very well and that respond to, in my mind, and I think to the minds of most participants, fairly rational market signals. Like they work the way that big, and I wouldn't necessarily call them boring, but let's call them well-priced and reasonably efficient markets are meant to work. So I think I'm glad we're starting with this, I should say, because I think it's important to sort of give the contours of what today's market looks like,

but also potentially give a sense of scope and scale for what markets could grow into. But yeah, the EU ETS, the emissions trading scheme, and sorry Americans, they use the term scheme, which sounds to us like it's shifty and made up, but it's not, is $763 billion. In North America, the Western Climate Initiative and the regional greenhouse gas initiative, or Reggie, is about $55 billion. The UK, which now has its own baby carbon market because it's out of the EU, was about $26 billion. And then China has won two. China traded about 179 million tons in five months last year, but that is a market that for many reasons is all but inaccessible for others. And the EU ETS, for anybody who was looking at it,

they would have seen quite a lot of price action last year for reasons that are really quite fundamental and in many ways quite like good in the sense. So we had prices earlier this year, like we were first scoping out this discussion, approaching a hundred euro per tonne, which is quite a lot. That's the sort of numbers that, like, if you think about it, should inspire quite a lot of change in behavior. But that price is actually, in this case, responding to events, not used as a signal to then create change.

And what it was was gas prices went high. So the heavy emitters in Europe, which are, in many cases, large power generators, have a fuel switch to coal. And if you switch to coal, you are outputting more carbon for every gigawatt hour or megawatt hour generated. and so therefore the price to comply needs to go up.

It's been bouncing around quite a bit since then, but that's really like what a market looks like. The other thing I think is important to point out, as we talk about the compliance markets, whereas you said all the volume is, all the dollars are currently, is that they are cap and trade markets. Right.

And so what we see in the, we'll talk more about the voluntary markets, but most of the voluntary markets are some purchaser, specifically making a bilateral purchase to buy some credits or offsets or removals or whatever. We'll talk more about this later. To net their emissions to zero, ideally, or something like that.

What's happening in the E.ETS and all these compliance markets is a system wherein there's a total cap on emissions set. A big emitter gets a sort of allocation, and then can either meet that allocation via reducing their own emissions by, for example, switching to gas, as you said, or they can buy credits to make up for any excess that they've got. And so that's why there's like a tradable commodity that is a ton of CO2 equivalent in those markets, which we don't see yet in the voluntary market.

So there's an actual liquid instrument, which leads to liquidity, obviously. This is very important because the market is bounded. The market is taken as a given. The emissions level has been set. And this is the price in order to comply. with setting that. So companies are not aspirational. Companies are not setting a goal. They have to do it. That is what creates the price signal, and that's what creates the price action and the trading they're in. So yes, it's very different than company setting goal, which could be open-ended,

doesn't necessarily have a timeline, can include all kinds of things, versus the mechanisms within the EU ETS saying, you have to do it. And now we're going to going to settle on the price that clears the market that makes that happen. Right. But it can spur change. Absolutely. It's certainly intended to spur change. And as you mentioned, this past six months has been an interesting kind of wild ride

in what was a fairly sleepy market before that, where we had this big run up in prices a few months ago. It has since paired back. I think you said it got to close to 100 euros per ton. Now, last I saw it was in the $50 or $60 per ton range. But then now we have this Ukraine situation. which is obviously causing more turmoil in gas markets. And so it's interesting to see how the carbon markets reflect dynamics in the broader energy

market in Europe because what's happening is companies are making decisions about what fuel to use and that impacts the price of their CO2 abatement. Precisely. And that's also not to say that there are not regulatory interventions within this market either. This is a little bit beyond. my deep realm of comprehension, but basically in earlier years, there was actually an oversupply. The market was in many ways more efficient than people were expecting at, you know, creating emissions of badmen and changing the emissions trajectory in Europe.

And so the prices were too low because there were too many credits. So there was an intervention to basically remove the number of credits that were there available in the market or the instruments of what you needed to make the market work. And those things do happen. So it's not that the market doesn't have some people stepping in here and there now and then to make things happen, but it's happening in a very, very regulatory way. All right. So this will be a transition to talking about the voluntary markets, but I just want to drive home this point that I think is a core distinction between the two that is not, as you said, in the sort of circles that I inhabit that are focused these days predominantly on action in the voluntary market is not. fully appreciated, which is one credit, one ton in a cap and trade-driven compliance market is, yes, representative of one ton of emissions, but because there is a system-wide cap, assuming you don't believe in too much leakage, it's not like you have the same kind of issues with like, is this a

real ton or not a real ton? Right? There's a fixed number of tons in the entire trading scheme, as you said. And if you buy one of those tons, you can be pretty confident that somebody else can't. That's correct. And so it makes it like all the issues around

trust and transparency and some of the issues around quality and stuff like that, they're less of an issue in these big compliance markets. And there's no, there is no fundamental questioning of it. You know,

there's no fundamental inquiry that people need to make, like, is this real or not? It's real enough. It trades on screens and you can see it within the company corporate and financial strategies of like all of the biggest emitters in Europe. So yeah, so there's no kind of like theoretical discussion that goes on within this market in any meaningful way compared to the sorts of things that we think about happening, you know, in your domain.

Right. Now, there are other issues, obviously, in compliance markets, you know, you can set the overall cap too high and then you achieve basically nothing and prices are super low. I mean, Reggie, I'm interested to get your take on Reggie, so this is the regional greenhouse gas initiative, as you mentioned, in the northeast of the U.S. I don't think it's been viewed as, like, the biggest driver of decarbonization in the power sector in the northeast, right? You don't hear that much about Reggie. No, I think that that's a correct assessment. There are other things, the economics of power generation, more localized policies, just a general shift towards what gets funded in terms of what gets built. But you'd have to have extremely high prices to actually send that signal. And I feel like none of the programs that we have in the United States are priced according to really send a massive market signal that wasn't already perhaps sent by something like a renewable portfolio standard. Yeah, I think the exception to that, though, it's not exactly the same thing as the low carbon fuel standard. That's correct.

In California, which has really high prices and has spurred a bunch of activity. Yes. But to your point, right, like the thing that ends up mattering in terms of how big a difference does a compliance carbon market make to induce technological change or fuel switching is what the market price ends up being. And so that's why people were all interested in what was happening in the EU ETS. Because if you get $100 per ton credits, like a lot of things become economic that were not before at $40 or $50. I'm sorry, euros per ton, especially. So whether those prices are sustainable ends up mattering a lot. lot. Precisely. The biggest question there is how durable is that price signal? So if this is, the other thing about these being traded in liquid is that they will move. So how much do they, how much do they reflect economic fuel switching of the sorts that utilities and other large emitters might normally do, versus how much do they incent behavior in the very, very long run? And of course, you know, my colleagues do run, you know, projections all the way out to like the middle of the, you know,

2030 and beyond in terms of what those prices could be. And companies generally plan on that. But the near-term signal, the near-term signal, first of all, reflects things happening in the real economy, so to speak, of the big emitters of Europe. And companies have to respond to it very, very quickly. So I think in the long run, we do have it sending a set of indicators as far as where company strategies might go. But in the near term, it is very much the result of what's happening rather than a driver of what's happening. Right. Okay. So let's transition to talking then about the voluntary markets. As you said, far, far smaller volume in those markets. But because particularly in the sort of tech Silicon Valley world, there's a ton of attention being paid to

this new generation of carbon offset creation and carbon removals and all that, which we'll talk about, and all this Web3 stuff. That all exists inside the voluntary carbon market. So let's set the stage there. What's the state of the voluntary carbon market? Well, there's, I would say, a great deal of interest and attention, a great deal of uncertainty. And in a productive way, a lot of sort of questions that are attracting investor interest. I mean, there's so many different ways that we can look at it. One is what's happening just in like what people are choosing to use for their offsets. Like are they using the kind of things that are inexpensive, abundant?

And I think increasingly people will come to view them as sort of low quality ways of doing an offset for a ton of carbon. Are people going to pursue high cost very much? more technologically driven approaches to offsetting a ton of carbon that are, I can't really call them out of the money because the market in a sense doesn't really have clearing prices yet, but are very, very expensive ways to semi-permanently or permanently sequester a ton of carbon. There's just very, to my mind, nascent sense of what is and could be. in many different dimensions,

like what the best approach is going to be, what the best market structures are going to be, how to account, how to ensure that we're not double counting things, and how, to my mind, I think that's most important, if I look back at the EU ETS, to incentivize particular behaviors over time.

Because right now, these are entirely decisions that people are making, almost entirely. That's why they're called voluntary, after all, right? They wouldn't be called voluntary if they weren't people making decisions. But I guess I'm very interested to see over time how these sorts of things evolve.

What I can't say right now is my colleagues have done this work is that we have a couple of scenarios from looking at what prices could look like for carbon offsets all the way through the middle of the century. And just to give you an indication of sort of like how wildly divergent these are, if we stay in a world that's really very much like today, a voluntary market where all kinds of,

of things, avoided emissions credits, things like that. You end up with a very oversupplied market with what my colleagues would call largely worthless credits. And that not only drives down the price, it drives up the availability and you are left with quality questions. And in 2050, you'd have about a $47 a ton price for carbon. Now if you only look at removing carbon, which is another approach that I think is sort of much more rigorous in a sense, probably better to account for without quality questions. You can have

prices that spike up to like more than $200 a ton, but still settle in the range of like $120 a ton by the middle of the century. But as you can see, these are essentially completely different markets. Now, there's maybe some hybridization of those that comes in in between. But I think that this is actually like a really important sort of set of paths for us to consider that are really in no way kind of made certain at the moment. Yeah, I think, and let's like talk brass tax for a second here. Yes. Let's talk about these prices, right?

So as it stands today, there's a real bifurcation in the voluntary markets. There's some stuff in between, but let's just talk about the polls. The polls of the voluntary markets are on the low end, nature-based solutions, generally forestry, you know, reforestation, avoided deforestation, maybe some soil carbon stuff. And that stuff trades, to the extent that it trades, people sell credits in the $5 to $25 a ton range generally, right? Yep. On the other hand, you've got the high-quality, long-term, durable carbon removal stuff, direct air capture, mineralization, a bunch of other stuff like that, where currently the purchases that are getting made by Stripe and Shopify and Microsoft and things like that are, you know, in the high hundreds of dollars a ton. sometimes $1,000 a ton or more, all of those companies, every one of them to a name,

are targeting getting to $100 a ton ultimately, or some of them say they can get a little, you know, $50 to $100 a ton. None of them say they can get to $10 a ton, right? So there's this like real fundamental distinction and there, but there's not a lot of clarity in the market around the difference between those two things. It's not just a commodity, right? Because you've got particularly permanence as a big distinguishing factor, but there's not really really a way to like account for the ideal difference in price, for example, between a tree that doesn't get cut down and sequesters carbon for up to 100 years and, you know, and CO2 that gets direct air captured and put underground and stored for 10,000 years. And there have been a bunch of

attempts at this, this like tonne year accounting concept and a bunch of other things. But this is like where it is still totally the Wild West. A hundred percent. And without and without it. any market signal, it is completely incumbent upon the buyer and seller to both agree on a price, but also agree sort of almost metaphysically upon value. So it is extremely important what Stripe and Shopify are doing for this purpose, because they have essentially said it is of value to us. But it's also very defensible if I think a bit, I shouldn't say defensible. It's not completely defensible, but it is definitely justifiable for companies to be like,

well, actually, I can get all the tons I need at $5 a ton from this nature-based solution. Within that, of course, too, there are other questions about, like, how well is that accounted for? Is it being double, triple octupil counted? You know, like how is it trading hands?

What happens if, for reasons outside the control of the originator, that credit of sequestered carbon in nature literally goes up in flames. Like there are many things within this that we are far from being able to kind of adequately price yet at the moment. And I don't say that cynically, but I think that's just the nature of the nature of the market as it is right now. Well, so, and this is exactly why in part there is a bunch of

excitement around this in tech VC land, right? Because on one hand, you have clearly growing demand. In fact, everybody will tell you the market is currently undersupplied, especially for the durable long-term stuff, on high-quality stuff. That's right. So there is growing demand for it. But everybody, I think, also recognizes all these issues that we're talking about now. And so it sort of seems at the outside like, oh, this is a solution that technology should solve. If we can create a tech stack that ensures that in every step along the way, there is no double counting, there is no leakage, there is permanence, there is verifiability.

and you build trust and transparency in the system via this tech stack, then maybe we create a market that can scale in the voluntary side up to what the compliance side is before long. And I know you've put some thought into like what should this tech stack look like, so I'm interested in what you think it should look like, but also what is going to take for that to solve all these problems? So I've been sort of wrestling with my heuristic on this. And actually the kind of the one-line version is, is that, when we look at all of the sort of capital T tech interests in carbon markets, the question we need to ask ourselves, is this tech is solving carbon markets problems or are these carbon markets solving tech problems?

Are we seeing people attracted to fundamentally, I want to solve the issues of the carbon market and Web3 and Crypto and ReFi are the regenerative. finance with the ways to do it, or MIA Web 3 crypto person by training and by inclination and carbon markets looks like a problem that I can solve using these. I think it's actually an

important kind of heuristic for us to think about is it like what's being used for what purpose here. But there's a whole bunch of stuff. Let's say that we do use technology writ large to sort of solve these problems, as opposed to kind of market instrument

like the kind of stuff that, you know, makes the EU ETS work. Well, there are all kinds of different layers that you could sort of solve technologically. You know, one is just, you know, project development and sourcing. And maybe this looks just like the sort of project development that you and I would be familiar with and many others would be familiar with in any kind of fundamentally land and asset-based origination. You know, this is the sort of thing that both people in renewable energy but also in real estate would be familiar with. Then there's, you know, kind of protocol layers, making decisions. Then there's

currency and transactability. Then there are marketplaces built on top of that. Monitoring and verification layer in terms of making sure that people are doing what they say they intend to do, whether, you know, and checking to see whether things fail due to, you know, just events and force majeure or whether intentions are not really aligning with reality. And then ratings that would layer on top of all of that in the same way that you would have ratings in financial markets. And, you know, in many ways, I don't think people think about typical financial markets, that degree of abstraction, because we've kind of internalized all of those things. But I feel like those are all sort of relevant to explore. And we can get to it in a minute, but I kind of see why it is from an investor

perspective, in particular technology investor perspective, those are probably attractive. 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 energyhub.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 on Spotify, Apple, or wherever you get your podcasts. All right, so you brought us into this territory, and we can't avoid it. Let's talk about the Web 3 crypto refi stuff. I want to say this is, you know, I think the bulk of the new activity, or at least what I see,

the bulk of what I see is a community that is being galvanized around the idea that we need a, I was going to say a ton, which is the wrong word, we need a gigatone. Actually, we need maybe 10 gigatons of carbon removals by mid-century. 10 gigatons is 10 billion tons. At $100 a ton, that's a trillion dollar market. So we need to start from essentially zero and create this huge market for carbon removal. And, you know, the only way to do that right now, because there aren't compliance markets

that support that is voluntary purchases. And so we'll back into how do we get these technologies up there? to scale. I just want to say that's like, I think that's where most of the attention is, is generally being paid, but there is this kind of insurgent community off on the side that thinks that the way to create, you know, trustworthy, transparent, fungible, you know, easily tradable carbon markets is going to be using crypto. And with this whole amalgam of other terms that go along with it, let's talk about that for a second, because there's a lot going on there. Give me the overview. What's the pitch for crypto as a solution to this problem? And then what do we

see happening there? So I think the pitch is fundamentally that these are very highly decentralized markets because they don't have exchanges in clearinghouses. And fortunately, there is a highly decentralized set of technologies that could help solve for that. That is basically Web 3, like a kind user-controlled and user-programmable internet in a way, or in this case, kind of framework in which for things to be considered. And then within that, you would think about blockchain being valuable as a way to track what is being happened specifically with each credit along the way that's being generated, such that you don't have double, triple octupil counting or whatever it is, because that information is indelibly recorded in a public ledger,

which I think is actually particularly important. And then another potential layer within that is that there's some composability within the nature of that contract. So you can specify essentially at the simple, in my case, not particularly technical level, sort of an if this, then that for when events happen. So that if something is being retired, so to speak, it is permanently retired, that is indelibly recorded, and it therefore cannot be,

you know, magically popping up in some other registry and purchased for somebody else's sort of low quality offsets program. I think that actually there is a lot of virtue in these attributes, and I think there's also a lot of potential within it. I'll give you another wrinkle on it, And I say this, you know, coming to you from like a very high finance kind of world of really massive volumes of things. And actually, you know, by the standards of like global finance, blockchains don't really scale the way that's a swift, which everybody has now heard of thanks to Russia's invasion of Ukraine, which processes 42 million financial messages a day or Visa, which does 206 billion transactions a day. And I can't even think of how many how many. pull requests and hits global capital markets get every day. Blockchain is not at that scale, but that's okay because we're not talking about that kind

of scale yet in terms of particular things in the offset world. So, you know, blockchain does not operate at the scale that Visa does, but it would be okay in this case that it doesn't because I think composability and transparency are probably like a more important attribute right now. going to end up with a carbon market that has 206 billion annual transactions like Visa does? I don't think so. So we kind of like don't need to worry about that quite yet. The other thing that I think, the other part of the promise to using Web3 and all the associated tools for the purpose of carbon markets is, I guess this goes to composability, sort of,

but it makes it a little bit easier. It removes friction around clever financing and clever aggregations. So as you said, you can write into your smart, you can, it makes it a little easier in theory to say, okay, I want to create a basket of credits and those, that basket has to have a bunch attributes. I only want the stuff, it's like anything you can do out of a database, right? I only want this, the permanent, you know, thousand year plus permanence. I want it to be, I want it to have all these other characteristics.

It's really easy to create that basket. It's, you know, immutable. And then you can do clever financing stuff off of it and sign a long-term contract. or a forward strip or something like that. So, you know, to me, I view crypto potentially as a way to unlock more capital for carbon markets, more capital for carbon removals in particular, that is more flexible and can do a bunch of creative things. If, one, that capital, you know, is interested in playing with crypto assets,

And two, if the physical assets, meaning the things, the tons that are getting removed, only exist there. Because again, you know, your avoidance of double counting thing that you've mentioned a couple times is key. And blockchain is nice to solve that if that credit only exists on the blockchain. If on the other hand, so that's where the role of these standards or the ratings agencies or things like that. Like somebody has to do that verification probably off-chain first, I think. Right. But what you're actually steering towards is the set of questions that I've been asking myself, which is how, like let's work backwards.

If this stuff works, we're at gigatons of scale, how is this fundamentally different than any securitized market? Because everything that you just laid out sounds an awful lot like the way, in a good way, securitized markets work in general. You know, that they're trusted. They trade on exchanges. They're rated. They're verified.

That they're all within a place where we've kind of abstracted counterparty trust to a level that people will freely trade and transact within them. And ideally, to my mind, we need to use all of the tools available to get there. You know, to get to that point where it's like the EU ETS and you're like, okay, well, because it's the EU ETS, I'm going to do it. I'm not going to, like, sit back and agonize about whether or not these things work before I get involved in the market. I trust the market.

A, exists. And B, serves the purpose that I need. And C, I'm therefore comfortable to really get in and go for it. So I think maybe I'm kind of like thinking way ahead towards the level. the big, boring, but global and working market side of these things, and trying to figure out how all of these tools inflect into that at some point. Like, at what point could we actually get there? I guess I have this view that the purpose of scaling the voluntary markets today

in an ideal world is to eventually spur compliance markets. Like, do we end up with a gigatone scale voluntary market? you know, are companies in aggregate spending hundreds of billions of dollars voluntarily on carbon removals? Or at some point, does it get big enough and the politics get good enough that we say, okay, like, let's, now let's create a scheme that's, that makes sure all of this stuff is, is trustworthy. I mean, I guess the argument for a crypto-driven future of this is that you never need to do anything centralized. You don't need to set a centralized cap. For example, if you've got a really well-organized,

crypto-driven carbon market. But I guess I'm skeptical that it scales to that level without the cap getting set. Do you remember the last time that we spoke, and we talked about the business model and the profit pool in direct air capture? And one of the things that you and I settled on as the sort of first principle of talking about it

was the challenge is that it is definitionally a cost. like it is definitionally a cost to remove carbon and therefore like creating a market around that is a challenge which is what you know the EU ETS did away with that by regulating it you know rather than sort of let people kind of get involved in the metaphysics of deciding whether or not this is meant to be they've just sort of done it so I actually agree with you that I think it needs to steer it needs to actually have that as part of its taxes its direction in the long term is like

we want to be a real global market because people have to do this over time. And that actually will further drive all of this, whether it goes through the world of Web 3 or not. But I think that that's actually like a really important attribute of it, is sort of where's the driving towards that? Now, that's different than people saying, I can't get a market going without a price on carbon. It's more saying, we want to create. this, we want to create a market that makes us do this in the future. And it's a little bit, intriguing as an approach, but I think that there's something to it. I actually agree with you. The other thing that I want to see happen, not to keep harping on the cap and cap and trade,

but what you ideally, I think, want, so these corporates, right, who are setting net zero targets, getting a lot of pressure to do so, and then getting further pressure to then actually, like, take actions that comport with those net zero targets. So that's great. And they need, need to then do a currently fairly complicated calculus where they need to figure out exactly what their current emissions levels are or where they come from. And then they need to make some decisions. How much can we reduce? And what we can't reduce, we should remove. And that will do that by purchasing carbon removals. And then there's the credit. You know, very few companies, I think, currently are doing that kind of sophisticated calculus where there's like a tradeoff between

reduction and removal and it needs to net out to zero, which a, a, you know, a, you know, cap and trade system sort of forces upon them. Now, maybe it's a bit of a blunt instrument, right? But it says, here's your total. Now, you figure out how to stay beneath that total. You could buy credits if you need to, but you could also just reduce your missions. The voluntary market doesn't quite enforce that decision-making. And that, I think, you can already see this starting to bubble up a little bit where there's, like, this like emergent debate between people who are saying, we're paying too much attention. to removals because we need to do all the reductions first.

And then other people who are saying we're spending virtually nothing on removals today. We need to start this market from zero. It shouldn't be an either or. It should be this decision around what is the optimal way to get to net zero, which is really hard to do on a company-by-company voluntary basis, I think. It's incredibly hard. And I would say, to put another way, it's within the history of, markets that need to account for externalities and costs, it's kind of unfair.

Like, it's a really big thing to force upon companies to saying, like, there's this important thing. We think it's societally a cost. We have no idea what it is. Figure it out for yourself, but we're not going to help you. Now, like, I have a sort of like inter-rim thing, which is, Like, imagine that, you know, the world's biggest institutional money managers say, listen, we think that you need to be doing this, and we're going to give you the kind of like air cover to do really high quality offsetting at $50 or $60 a ton. Like, that's sort of what we expect you to be doing as part of the kind of fiduciary compact that we have

with not only our clients and customers, but sort of with society. Like, that's a kind of like a half measure set on the investor demand side that would then force companies in the same way that like a compliance market does to kind of fill in what they need to do to make that happen. You know, without the SEC mandating that, it's just companies saying, I've made a commitment across my portfolio. I understand that it will have some costs occasioned. in the process of doing that.

And therefore, I'm going to, you know, I've decided that this is the price and you'll go out and, you know, multiply, go forth and do what you need to do in order to make that happen. Right, right. Yeah, what I'm imagining in my head is like every company should have a stacked area chart, not to get into Microsoft Excel territory, though I know you'll appreciate this. Every company should have a stacked area chart. that the total, the y-axis is that company's total net emissions, and the stacks are, you know, actual emissions and then removals, removals being negative on there. And it should net out to zero,

ideally starting today, because there's no reason you can't, I mean, with the exception of sort of availability of high-quality credits, right? But you, with that aside, you could net out to zero any time. And then what should change over time is two things. One, the total amount you need to net should go down. Right. And so, and then the share of your, of your, the delta between year to year should change between how much you're getting out of reductions and how much you're getting out of removals. But every company should have that plot from today out to whenever their net zero target is, or beyond, and be able to show, like,

here's our plan. We think we can get from the current, you know, five megatons, that we emit to two megatons, and here's how we're going to do it. In the meantime, we're going to remove five megatons, and by the end, we're going to remove two megatons. Seems like fairly straightforward, albeit super complicated underneath the hood. And it's an interplay of price signals and behavior that makes that happen. Like, it would be very weird if a company was like,

actually, I have a kind of, you know, I have a sort of like a kind of, like a contango forward cost curve for carbon, and I'm going to be emitting more. That would be really weird. The whole idea is that, like, ideally, you kind of, you are in the position where, like, okay, costs are going up, and therefore I'm going to do less of this thing that costs me money. And so actually, ideally, I change my behaviors at the point where I need fewer offsets. I need less kind of carbon market action in order to, to, to, to, to, to, to, to, to, to, satisfy the net zero that I'm that I'm aiming for. Right. All right. So I guess to wrap up here,

I know, you know, Bloomberg has come up with a bunch of scenarios for future sort of progression of the of the market. For you personally, if you're sort of taking a guess as to the next five to 10 years, how do you think this plays out? I think that I think that I'll start with, like thinking about it from an investor perspective. You're the investor, not me, but insofar as like an abstract this. It's like, why are people interested in this, you know, in terms of backing companies that go after this? Well, it's because these markets have a high degree of uncertainty today and a high degree of significance in the future. But more to the point, and this is something I haven't seen talked about yet a lot, is that there are dynamics in play. There are definitely probably

power law economics involved in these kind of particularly software-driven platforms, but also are there software kind of margins for many of these layers, which is also why people are interested in doing them, you know, protocols and things like that? And then are there winner-take-all network effects? That, I think, is extremely important. Is there a case in which we have dozens of different ways to do accounting? And you and I talked about this the last time we spoke, too.

Like, there's a couple of ways to do globally recognized financial accounting. You know, like, we will not be in a successful place if we have, if we have, on a good way, 500 different ways to do a high quality offset and 50 different ways to measure an account for it. That will not be a success. Success would be like thousands of ways to do an offset and two to five maybe ways to actually measure, and account for it. And then finally, what's the level up to interface with really big markets, markets that institutional investors want to be a part of just as markets in general.

And so that's what I'm very curious about, is that like when do these things get to the point where they're at the like perito optimal of like composability and transparency, embracing lots of different effects, but being trustworthy enough that a big exchange is willing to fold it in. And then what? I mean, like I work. I'm sitting in an office today. sort of at the heart of how global financial markets work,

and none of these things run on blockchain. There are companies that do them in a way that's fairly esoteric, but that's not necessarily something that will have to persist through that. I would be disappointed if some of the really cool technological things here don't end up reaching that scale. But they may inevitably end up needing to interface with, you know, the kind of boring but highly interoperable and very durable stuff that is like, you know, the cobal back end of like bank programming or the way that great big

accounting firms do their work. And then finally, I guess my question is like, I want to know what instruments get built on top of this that come from traditional markets. Should we get futures and forwards, options, derivatives? Will there be indexes built out of these things? Are there going to be on exchanges? And if they're on exchanges, will we get like ETFs? Will we have exchange traded funds that incorporate all of these?

things. And then finally, what institutional roles that do not, bear in mind, really originate from Silicon Valley might go along with these things if these markets are a really big scale and are essentially securitizations? Do we have custodians, fiduciaries, overseers, are there going to be institutional asset managers that get involved, portfolio managers? Are there going to be market makers? You know, are you going to have people that do alternatives, special situations groups, a lot of ARBs, will there be, you know, the equivalent of payment for order flow in these markets that kind of arbitrages big company, capability, and small company interest. So that's me probably looking way beyond most of the kind of discussions that are happening

today. But those are my curiosities, I guess, for the future. All very good questions. I will say on my side, the thing that I think the most about is having lived through a cycle, not quite like this, but lived through a cycle. of excitement around carbon markets that then didn't really go anywhere, at least in the U.S., and having some fear that some of the same things that took down the first wave, namely lack of trust and transparency in the fact that it was all voluntary when the market overall, the macro market went down, worrying about the same things this time around. One of the things that I feel like is an absolute necessity, and I don't exactly know how it's

going to get solved in the near term. Maybe this is through the ratings providers or something like that is just clearer understanding in simple terms for everybody of the differences in quality and the differences in value of one ton of CO2 equivalent and another ton of CO2 equivalent. I mentioned those two poles, but there's a lot in between those poles, right? Take biochar, right? Which is longer durability than most of the nature-based stuff, not as much as the permanent stuff. And there's going to be more, right? There's this Cambrian explosion of carbon removal companies. coming to market right now.

And so it's only going to get more complicated. We really need simplified heuristic ways to talk about this stuff and to understand the value of these things. Otherwise, I just fear the market is not going to be trusted by anybody outside of the Vanguard who's already involved in it. So it'll be, you wanted to get to Vanguard, the asset manager, not just the Vanguard. Not just the Vanguard of, not just the Vanguard of. early adopters. But that's right. It will

rattle around in a world of esoterica otherwise. And that would be a shame in every possible way if that happens. If that's the result. But I think people don't, I think people want to steer beyond that, but it's going to involve some it's going to involve some grown-up conversations

along the way. Let's say that. And some coordination, which we're all collectively pretty bad at. Nat, thank you so much. Always great to chat with you. This is a nice easing. back into podcast land for me. Well, welcome back. Thank you so much.

And we'll have you on again to talk about who knows what, but no question. Thanks, Shail. It's a pleasure. Nat Bullard is the chief content officer at Bloomberg, No Energy Finance. This show is a co-production

of PostScript Media and Canary Media. You can find the show on Twitter at At CatalystPod. You can find me, PostScript, and Canary there too. Please tag us to send feedback on this episode or suggest future topics. And if you like the show, go over to Spotify or Apple Podcasts and leave us a rating and review.

Still early days for Catalyst, so we really do appreciate it. Or just share the episode with a friend. It helps other people learn about the show. You can find links for this episode's topic and guests in the show notes on canarymedia.com. PostScript Media is supported by My Buddies at 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, manufacturing and advanced computing.

Our producers are Daniel Waldorf and Stephen Lacey. Theme song and mixing by Sean Marquand. I'm Shail Khan, and this is Catalyst.