Everyone's focused on carbon credit offtakes and Voluntary Carbon Market purchases, but the compliance markets represent the vast majority of carbon assets in circulation. How do these markets work, and how might carbon removal interact with them in the future?
Mike Azlen is the CEO and CIO of Carbon Cap Management LLP, a firm which trades within various compliance markets.
We discuss why private traders like his company can help price discovery in compliance markets, and address some common criticisms of market-based approaches to climate change (both VCM and compliance markets.)
Carbon removal is going to figure into various compliance markets in the future, but how exactly will that work? Might that be the demand boost that carbon removal needs to scale?
There is also bonus content from this episode about some of Mike's observations about VCM failures. It will be released on Saturday, May 24th. Become a paid subscriber to access it when it is published!
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:00):
Hey everyone, thank you for listening.
This is Ross Kenny, and I'm yourhost.
I have two sponsors that I'd like to tell you about today.
They're both organizations doingvaluable work within Carbon
Removal. One of them is a new sponsor of
the show and the other one has been with us from the start, so
I'm going to start with a new one.
I'm going to give them a chance to go first.
It's Climify. Personally, I think they produce
(00:20):
some of the best content within Carbon Removal.
Their reports are top tier. I always look forward to reading
them. I've learned a lot from them.
There's one in particular that Ilike that I referenced in a blog
post I wrote a while back calledBridging the Cdr Financing Gap.
The comprehensive guide. Just really powerful, great
work. If you're looking for good Intel
(00:41):
on carbon removal, check out theClima Fire reports.
They're really good. There are lots of intermediaries
within carbon removal. If someone wants to buy carbon
removals, many people will heed the call and try to sell them
some. Climify is a group that I see
almost more as a white glove service.
They're quite selective in what they choose to do.
(01:01):
The way that they put it is thatthey empower companies to
develop and manage robust, high quality, durable Cdr portfolios
that's built upon market intelligence.
They have a proprietary rating system.
You may have heard that they just gave Deep Sky in Canada a
very high rating. They're involved in the
procurement themselves of facilitating, sourcing and
managing RFPs for companies. So if you're looking to run a
(01:22):
carbon removal RFPA, request forproposal, so you could have
carbon removal companies coming to you with proposals for what
they might be able to do. Climify as a group that can very
much help you with that, performthe due diligence, structure the
portfolios, negotiating, executing transactions, that's
all something that they can helpyou with.
And then also just managing the portfolio of making sure that
(01:44):
the projects are monitored, warehoused appropriately, and
then when the time comes, retired.
Climify's project database covers about 95% of all the
durable Cdr projects globally, but out of the 500 plus projects
reviewed by Climify, only 15% meet their standards for
delivery and integrity that theylook for.
And eventually only 5% of those projects are included in client
(02:07):
portfolios. If you're looking to buy some
carbon removals, if you want to run an RFP, follow the link in
the show notes to learn more about Climify.
And of course, I'm also very happy that Arbonics is
sponsoring the show again. Arbonics connects European land
owners to corporate credit buyers in order to remove CO2
and protect biodiversity. They're very data-driven.
(02:30):
They're trying to turn degraded and abandoned land in Europe, in
the Baltic States back into biodiverse force.
That's a really impactful good thing to be doing for its own
sake. Outside of carbon removal, it's
a good thing to do but is also very much focused on how much
carbon can be sequestered while also pointing us towards the
importance of Co benefits and ecosystem services.
(02:52):
I think sometimes carbon removedpeople forget about.
We're pretty focused on the PPM,but the other stuff is really
important too. They're doing fascinating work
on the data layer side. I'm not sure if you've seen the
digital twinning of forestry, but they're making it.
It's exactly what it sounds like.
Our Bonics is on the cutting edge, trying to make forestry
(03:14):
work for carbon removals and turn your back into that
beautifully forested continent that it once was.
So if that interests you, the link is in the show notes to go
check out Our Bionics. Also, Lizette Louie, one of the
founders and COO of our Bionics,was on the podcast earlier this
year. Go check that out because we dig
into a lot of the role of temporary removals within carbon
(03:38):
removal. It's a fascinating big topic and
Lizette brings her a game to it,so I hope you enjoy.
Link to both sponsors are in theshow notes.
If you'd like to be a sponsor ofthe show too and hear more about
what that might look like, you can e-mail me.
The e-mail is in the show notes.And then also if you're
podcasting and you want to use Riverside for recording or D
(03:58):
Script for editing and transcription services, I have
affiliate links in the notes too.
And that also helps drive the show's financial solvency.
So thanks so much for listening.Here is the intro to your show.
Hello and welcome to the Reversing Climate Change
(04:20):
podcast. I'm Ross Kenyon, I'm an
entrepreneur working in carbon removal and climate tech and
I've been here for about 8 yearsnow.
Thanks for listening. I'm, I'm really glad you're
here. I have so much fun with this
show. It's a lot of work to make, but
I love it and I really don't want it to end.
I've been trying to get more subscribers to the show.
(04:41):
It's $5 a month. It's in Spotify.
You can also subscribe elsewhere, but Spotify is the
easiest. It comes with ad free listening
from the programmatic ads, bonuscontent.
In fact, a good chunk of today'sepisode is going to go into
bonus content because it's good stuff.
It deserves to be published, butjust doesn't fit into the rest
of the show, doesn't get a chance to be fully expressed.
(05:02):
And I know people like to have shows that are consumable that
are not these epic shows. So for shows that just don't fit
the theme as nicely, I'm trying to move a lot of that content
into bonus content. So if you want it, it's there.
If not, you get your learnings, you get your intellectual
stimulation for the day, and it can move on.
So anyways, link is in the show notes, $5 a month.
Thanks so much. Great rating and review in Apple
(05:24):
Podcast. Spotify also appreciated.
And now I'm going to tell you about the return of Mike Aslan.
Mike has been on the show once, maybe twice.
And Mike is the CEO and CIO of Carbon Cap Management LLP.
Mike is a trader of carbon assets within the compliance
markets. And my understanding he trades
(05:45):
within five of them. And we spend most of the day
talking about what he's learned from years working in these
markets, how he's thinking abouthow compliance markets will work
to drive parts per million of greenhouse gases in the
atmosphere down, why he thinks that's the correct way to go,
why he's been disappointed in the voluntary carbon market
space. I actually share a fair amount
(06:07):
about my experience. The first company I founded
within climate tech is called Nori.
Nori was a carbon removal marketplace, and I used to be a
much stronger believer in voluntary climate action.
I thought that there would be sufficient motivation outside of
compliance, the need to do something just because it's
(06:27):
required in order to make a dentin climate change and at least
start to get us towards a futurewhere the technology was
sufficiently developed. Or maybe we did such a good job
that government was not necessary for managing climate
policy. I'm realizing as I say these
words out loud, that it it sounds, it's a dream.
(06:50):
It may even be ideology and not necessarily merely a dream.
The idea that we would be able to manage the climate from a
purely market driven perspective.
We would not be where we are nowwithout some very generous and
far seeing employees and founders at companies that made
(07:14):
big bets on carbon removal, thatwanted to be there to support
this industry when it was reallyjust a twinkle in a bunch of
founders eyes. It was not what it is now.
I think that's a a beautiful thing and I'm really grateful
for all of that, but it's hard to imagine that we're going to
get to the scale of carbon removal without having some sort
of compliance regime in place. The numbers are just too big.
(07:39):
We need government to de risk a lot of this tack, and it's
probably just inappropriate to expect unilateral or mostly
unilateral action from private citizens and corporations to do
the amount of work necessary to drive the carbon removal
industry. If you're listening and this
sounds obvious, sorry. Yeah, that I suppose that is
(07:59):
pretty obvious, but for a long time I was resistant to the
idea. I've mostly experienced policy,
and I've spoken about this elsewhere, especially with Grant
Faber, as being a a sort of difficult, clunky process
policy. You can often feel boring.
It requires reading and the reading that it requires you to
read. Is.
(08:20):
Often times legalistic, hard to understand.
A lot of the mechanics of deal making within politics don't
happen in the open. You're reliant upon journalists.
Those journalists have differentperspectives and political
orientations and they may not have all of the facts.
And I found that to be a field that I I avoided because I
(08:42):
thought that was an inefficient way of making decisions and
allocating resources and just determining policy in general.
And then going through this process of trying to, I don't
know, make into a commercial activity, a line of work that
should properly be a government function.
(09:04):
I think one just runs up into barriers all the time.
I don't think I've told this story, but I had a meeting,
though, that cracked me up with one of the companies that is
involved in tax credit trading. And what's interesting about tax
credit trading, especially for something like clean energy
development, is that there's a customer who wants what the
(09:28):
seller is selling and they have a a need for it that is not
abstract in any way. The clean energy producer is
producing more tax credits than they can consume against the
profits that they're generating.So they have a surplus of tax
credits. They are selling them on the
market to someone that would like tax credits and could
(09:48):
consume more of them, and the generator of those credits sell
those credits at a discounted rate relative to what is on the
tax credit. So if it's a dollar's worth of
tax credit, they might sell it for $0.90, for example, and the
person buying it receives a discount on their tax bill.
(10:11):
That's pretty efficient. That drives more money to clean
energy development. And that sounds so nice to me.
You know, there's no sort of, well, this is going to help you
with talent retention and going to give you access to a future
where the supply of carbon removals is extremely limited
and you already have a relationship here.
You'll know how to do it. The marketing value that this
(10:33):
purchase represents is great. It'll drive more customer
acquisition, blah, blah, blah, stuff that you've all heard a
million times about the benefitsof carbon removal and voluntary
purchasing of carbon removal. And over time, they no longer
felt as true in my mouth. I have seen some data recently
about the types of carbon credits that are being purchased
in the voluntary market and how that's changing and how we're
(10:56):
shifting to higher quality. And within that type of very
high quality credits, there is more of a supply crunch.
And I'm, I'm glad to see it though.
I just no longer really believe a lot of that rationale that I'm
I'm hearing. I would be very welcome to being
proven wrong on that. I want to believe people will do
so many of these activities for their own sake and because they
(11:17):
care about why we're here for climate action and to make sure
we restore a livable climate. I I share that vision.
I would want that independently if my salary depended upon it or
not. But that's not true of all
companies and maybe we shouldn'tjust assume for that.
I've even been in job interviewson the demand side recently
where I know I shouldn't have said this but also just been
(11:39):
like I don't really understand why anyone would be buying this
right now. They don't need to.
That's bad. If they are prominent enough,
being a very vocal financial supporter of carbon removal and
climate action could conceivablymake them a political target in
the US. It's just not obvious to me that
(12:01):
this represents good value for companies to be involved with
right now. And that was not the right
answer for why you should hire me to generate demand for your
carbon removal company. Which is one of the reasons why
I like doing this show because right now I feel like I can
maintain a lot of independence. And it even previously when this
was a Nori podcast, I never feltmuzzled in any way.
(12:23):
I always spoke my mind. But it is nice to just be able
to zoom out a little bit and saysomething like, why are people
buying carbon removal? It's a sort of a wild way to
spend money in a time of erraticpolicy, trade war, geopolitics.
I like being able to just, you know, wonder those things aloud.
(12:47):
And that's why it's important tome that, hey, become a
subscriber, become a sponsor. I'm going to tell you what I
really think about this, about the world that we live in and
carbon removal and climate change.
And I'm a learner. I'm trying to be too ideological
or hold my position so strongly that I can't learn anything or
change my mind. In fact, this this podcast I
(13:09):
really like because Mike's helped me change my mind.
Mike's been very persistent in showing how effective compliance
markets have been. That being said, I've also read
criticisms of market policy justin general for both compliance
markets and for VCM. One book that made me think and
I'm still thinking about it years after I initially read it
(13:32):
as Danny Colin Word and David G Victor's making Climate policy
work, which is a quite critical of the political economy of
carbon markets for many of the reasons that we even talked
about in this show that the copsare often set, you know, pretty
high. They are subject to political
influence. The regulated entities that fall
under compliance regimes are often times powerful industrial
(13:57):
combinations that can make theirwill known.
There are also just alternativesoutside of markets for thinking
through what climate policy means.
And look, I'm someone that I remember being in high school
economics class and seeing a demand curve.
And I remember asking about Say's Law about how prices clear
markets and feel like I don't understand how anyone could see
(14:21):
a demand curve and just not wantthe intersection of supply and
demand and to have prices clear the market.
That seems to me so intuitively obvious that you would want that
for so much within society. And I remember my professor just
sort of chuckled at the, he's just like, well, that's a very,
you know, sort of orthodox free market position in it.
(14:44):
And I, I've never forgot the moment.
And I also remember someone in the class was looking at me and
staring with mouth agape, like, how could you, how could you
think that? I've never I, I remember exactly
where I was sitting and how it was, but it was such a light
switch kind of moment for me. It just always made really
intuitive sense. And there's a number of
interesting psychological reasons why that way of seeing
(15:05):
things is important. I think there are good reasons
for caring about markets and markets can do a lot of really
important work both in climate and outside of climate.
One thing for sure though, is that I'm no longer a purely VCM
booster. That's had me concerned for a
while now and you probably caught glimpses of it
previously, but here I am declaring it.
(15:28):
So I hope you enjoyed today's show.
Bonus content, by the way, for paid subscribers from this show.
So if you want to listen to Mikeand I talk about some of the
problems he's noticed in BCM, you can subscribe and check that
out. Thanks so much for listening.
And here is your show with Mike Aslan.
(15:48):
Mike, welcome back to the show. Thanks for being back on
reversing climate change. Hey, Ross, great to be back.
I'm glad you want to do this again, because every so often I
loop back around to thinking very seriously about compliance
markets. I come from a very strong BCM
voluntary carbon market background.
I used to think that voluntary carbon markets were going to do
(16:11):
the bulk of the heavy lifting, and I'm feeling a bit delusional
about some of my past ideological stances on this.
And you've been a nice little thorn in my side for a long time
talking about compliance markets.
So I thought it was time to comeback on the show, reintroduce
the topics to listeners. Why should they be caring about
compliance markets? And tell them a little bit about
(16:33):
your work. So why don't you reintroduce the
topic for everyone? Sure.
Just just a little bit, a littlebit of background, Ross, for
those who haven't heard about mebefore, I'm I'm a Canadian who's
been living in London for 30 years now.
I did my graduate degree at London Business School and
worked in the financial servicesindustry and mainly in the fund
management industry. And I was fortunate to build and
(16:54):
sell a business to a public company.
And that's when I took some timeout to think about the next
chapter in my career. And that climate change was
always something on my list. And this was about one year
before Greta Thunberg really broke onto the scene.
And because I'm an empirical person, I started reading the
peer reviewed academic research on the science of climate
(17:14):
change. And I was in a fortunate place.
I didn't have to work at that time so I could spend full time.
And I'm a bit geeky that way. I after about 3 or 4 months of
wading through learning the terminology, climate forcing,
etcetera, I spoke to a lot of climate scientists around the
world, in particular scientific skeptics.
I wanted to understand scientists who were skeptics,
(17:35):
their point of view, but I really came to the conclusion
that that we're in a terrible place, that that climate change
was much worse than than even many people who work in the
industry and and that it was definitely had a human
fingerprint. I was aware that, you know, the
the paleo climate records about the changes, but there's no
question it is a human fingerprint.
(17:56):
So I then enrolled at the LSE intheir economics of climate
Change program and that is whereI was first exposed to these
carbon markets. And you know, once I learned how
the mechanism worked, which tooka took a little while and a
focus, but, but, but I, I found it to be a fabulously
interesting and elegant mechanism to deal with carbon
(18:17):
emissions. The externality and the, and the
carbon markets were trading backthen in around 2018, about 10
billion a month liquidity. So I hired APHD student at that
time, brought him in. We then collected data on all
these carbon markets, wrote a full academic paper.
It has now become the Seminole academic paper on carbon as a
(18:41):
liquid and investable asset class.
It took three years in the peer review process, but it was
published in 2022. And the basis of that paper
allowed me to form my second business, which is an
environmental asset management company.
And our objectives are obviouslygenerating returns for our
investors, but also direct impact on climate change, which
(19:03):
is something I'm very passionateabout.
And so we we launched the company five years ago.
We're now the biggest in the world at what we do in
environmental asset management. And we're a small team, but a a
very successful five year, five years are behind us.
We, we manage over half a billion in assets under
(19:23):
management and the way we have achieved the impact on climate
change is we, we charge a performance related fee and 20%
of that fee each year. If indeed we perform, we use
that to buy compliance carbon, not voluntary.
We purchase compliance carbon permits much higher price of
(19:43):
course, as as we'll find out in a moment and we cancel those And
I'm very pleased to say that because we've had positive
contributions there that 1.7 million U.S. dollars thus far
has been used to to buy and cancel compliance carbon about
33,000 metric tons. So there's a nice alignment and
(20:07):
creating we believe real impact by by doing that in in the
compliance markets. And yeah, that's, that's quick
background. So I, you know, hopefully on
this, you know, I'm sure you're going to take through questions
on, you know, how do these carbon, how do these compliance
markets work and the history andsuccess of them.
And and I think it's a really interesting topic.
(20:28):
I have questions for you. I have loads of questions.
Let's just pick one. I imagine the the European ETS
is the place to start to have a conversation about this, but
maybe speak in general terms about what the goals of
compliance markets are and then how does the European ETS work
in layman's terms? Yeah.
So the the key there are two keyobjectives to an emission
(20:51):
trading system. The 1st is to cap and lower
emissions and the second is to achieve that reduction at the
lowest cost to society. Very important.
The second objective, we want toaddress climate change, but we
want to do it at the lowest possible cost and that is that
those are the two overarching elements of how an emission
(21:13):
trading system works. The background was originally
the Republican Party in the United States in the 80s under
the Bush administration launchedthe Sulfur Dioxide Emission
trading System to cover acid rain issues with sulfur dioxide.
It was fabulously successful. There are multiple papers on our
(21:34):
website if people are interestedin that, in tracking that
success independently. It was really successful and the
Europeans, Ross saw that and in 2005 they decided to adopt an
emission trading system, a cap and trade for Europe.
They launched the emission trading system in Europe in 2005
and since then emissions in Europe have declined by 1.1
(21:59):
billion tons per year. That's, that's a, an annual run
rate decline of that 1.1 billion, 900 million tons of
that has come directly from the entities that are covered under
the ETS. So it has been fabulously
successful both in sulfur dioxide as a Canadian, I
(22:20):
remember the acid rain issues wehad in in Canada.
And so it, it has been a very successful mechanism.
And I think because of that, we're now seeing it.
It's spreading around the world.When people conceptualize
compliance markets, they imagineI'm going to put myself in their
shoes. I think that they imagine
legislators and the regulated entities, the companies that
(22:44):
have to comply with the compliance regime.
But they aren't thinking about you, Mike.
Everyone should be thinking moreabout Mike Aslan here.
Where, where do? Private traders fit into this.
Why do we need your involvement here to make this successful?
Yeah. So it's really interesting.
So let's just go through the thethe key steps of how the how
these markets work. The first thing is it's called a
compliance market because you must comply.
(23:05):
So any entity in let's say the state of California or in Europe
or the UKUK now has its own emission trading system.
Any entity above 25,000 tons peryear, you are mandated.
You're in the market. You don't have a choice.
You're in. That means annually, Ross,
you're audited by the government.
So if you have a factory that emits 1.2 million tons by April
(23:28):
of the year following that year you must give the government 1.2
million permits. Where do you get them?
The government issues these permits, so they set a cap on
the total amount of permits. And normally these are sold in
auctions. So in the case of Europe, they
have an auction every single day.
In the UK it's twice per month and in California, it's four
(23:51):
times per year. They auction 50 million tons of
permits, 4 * a year in California.
So that's how the supply comes in.
But it's interesting that means that the total supply is capped
among those underlying entities.So let's go through a compliance
cycle. The supply 200 million, let's
say is issued the underlying companies, let's say their total
(24:12):
emissions, there's thousands of companies.
Their total emissions are also 200 million tons in in the state
of California and let's say so they they they're pretty smart.
These are big public companies that who are the sectors that's
the power sector, steel, cement,chemicals, glass, oil
refineries. It's these big, big companies,
right? So they, they forecast their
(24:33):
emissions. They know they have to comply.
If they don't hand in the permits, the penalties are
extremely severe. They're far higher than the
price of a permit. So we get 99.9% compliance.
That's very, very important. Now when the government, so
these companies hand the 200 million permits that were issued
by the government, they bought them at the auctions or they
bought them in the secondary market.
(24:54):
Now the companies have the permits, they give them to the
government. Government says OK, you
complied, no penalty. Second company, you complied.
The government has received all the permits back.
What do they do? They destroy those permits, they
tear them up. And that compliance period has
now completed. We go to the next year and
instead of 200 million, the government only sells 190.
(25:17):
Oh, the next year 180, then 170.So the total supply of these
permits become scarce. That means that each CEO is is
looking at not one carbon price,the permit price, they look at 2
prices. This is the beauty of the carbon
compliance markets. It forces the emitter to look at
(25:40):
the compliance price. Let's say in California it's
$30.00 US per ton. Or he calls in the head of
engineering and he says, Jim, we're emitting 4 million tons a
year. It's costing the company $120
million a year. I'm giving to the state.
I don't want to do that right? We're running a business here to
make a profit. Can you on the factory floor get
(26:01):
some new machines in and get my emissions down?
And the key question is the cost.
What's the cost of reducing my emissions?
So every CEO, you can bet your bottom dollar knows 2 carbon
prices. They know the permit price and
they know their internal abatement cost and when the
permit price is above their internal cost.
(26:23):
What would you do, Ross? If, if, if, if you could, if you
could cut your emissions for $20and the permits are 30, would
you pay 30 or would you cut for 20?
Yeah, obviously 20. Why?
Why would you do that? Because the cost of just
complying is better than having to go out on the market and.
Buy the credit. Yeah, because you're, you're
(26:44):
after profit, you're you've got your eyeball as a as a CEO of
profit. And here is the the the key
power of this mechanism. It takes the most powerful
motivating force in Business Today profit.
Let's we might not like it, but that is what short termism A
quarterly earnings and it focuses that profit motive to
(27:05):
achieve what to achieve. The three magic words least cost
abatement. These are the magic words we
want to achieve. Never forget those 3 words, not
abatement at any cost, least cost abatement O amongst those
thousands of, of, of, of CEOs when the California rice is 30,
some of those engineers come back to the success CEO and they
(27:27):
say, John, our cost is 90. And the CEO says, OK, well I'm
not going to invest and, and pay90, I'll just buy the permit.
But there are some companies where the cost is 20 or 25 and
indeed those companies abate, they cut now the next year
there's even less permits. So if you picture a merit order,
and this is called the marginal abatement cost curve.
(27:48):
And this really unlocks Ross A avisual image of how a carbon
market achieves the least cost abatement every year when the
supply gets lower and lower of these permits, it stimulates
some companies abate. And the only way we can get the
next rung on the ladder, if we lined up all the mitigation or
(28:09):
abatement methods from lowest price of, of abatement to high,
you have to climb that marginal abatement cost curve over time.
And, and so the expectation in carbon markets is supply is
reduced. And you, you let the invisible
hand of the market with the profit motive seeking the least
(28:31):
cost abatement. So every year when there is
abatement, because there must be, we're playing musical chairs
and we pull out a chair, there must be abatement.
We can be pretty confident that that it is the company with the
lowest internal abatement costs.They're the ones who choose
because they're profit motivated.
Now here's where the role we come in, Ross, you can only make
that assumption that the that the the the least cost company
(28:56):
will abate if there's two thingsthat hold very important
liquidity and price discovery. Now this goes back to
fundamental economics, lots of empirical evidence and academic
literature, particularly in commodity markets.
In order for them to function, you need liquidity and price
discovery. If no one knows what the price
(29:17):
is in California, no one will know what the gap is and who,
who should should I cut or so you want wide dissemination of
that price signal. The price signal is all and
therefore this is well studied. Now when you bring in a full,
how do you achieve liquidity andprice discovery?
Very simple. You bring in a full ecosystem of
participants. So you have the compliance
(29:39):
entities and they're very activein most carbon markets.
It's the compliance entities have sophisticated hedging, but
you also need financial investors like ourselves, short
term speculators, arbitragers who will arbitrage between the
futures price and the physical permit price.
And this all brings liquidity and price discovery, which in
the end results in, in the magicwords of least, cost abatement.
(30:03):
And as I said, the proof is in the pudding.
Both in California and Europe now there's been quite dramatic
decreases in emissions while at the same time seeing very solid
economic. Growth.
Do the regulated entities see you as a beneficial force?
I could also see them seeing youas someone who's pulling profit
(30:24):
out for yourself but also raising prices for their
compliance costs. Like is that a thing or or maybe
not? So I, I think what's very, very
important with the primary objective of these markets is
abatement and to, to achieve theenvironmental objectives, right.
So it's very important that financial actors like in like in
all things have limits. So there are position limits,
(30:45):
there's maximum holding limits for the physical permits.
There are most of the liquidity in carbon is is futures, like
most commodities, gold or oil, it's the futures market.
There are also limits on the size of futures positions that
financial traders can take in these carbon markets.
So, you know, I think the regulator's been quite, you
(31:05):
know, quite good about sort of finding a nice mix between
allowing financial participants to bring liquidity and price
discovery, not allowing to like gain the market.
Perhaps you'll remember that when the Hunt brothers tried to
corner it, you know, the silver market and prices spiked.
We, we, we definitely don't wantthat.
At the other end of the spectrum, Very interesting.
In, in South Korea, they launched the carbon market over
(31:28):
five years ago and they took a different tack.
They said no financials, only the compliance entities can
trade the carbon. It was a disaster.
What happened is the day before the compliance deadline, they
went into the market and the price spiked.
And then the day after the compliance deadline when they
had had the price collapse and this happened every single year.
(31:50):
So they finally, these huge companies, Korean Kibo
companies, went to the government and said, look, can
you please bring some liquidity in?
So they brought in two rounds ofallowing financial actors,
domestic Korean actors into the Korean market.
Liquidity is picked up and things are stabilizing.
And next year, we believe they will open to international
investors like ourselves. That is so fascinating, thanks
(32:12):
for sharing that. I've seen various pitches before
and I've never fully understood how this would work for
political reasons. The case is that someone could
raise enough money to buy up allof the available compliance
assets. Retire them the musical chairs.
More chairs be pulled out. Then companies really need to
actually do business and not fail to meet their obligations
(32:34):
and be fine in some horrible way.
It sounds like that cannot happen, and it sounds like you
probably wouldn't even want thatto happen either, because these
companies need a glide path downto net zero.
That's like the best case of this, too.
I've also seen cynical interpretations of compliance
markets as well, which is that the regulators are subject to
political influence and that therate never comes down nearly as
(32:55):
fast as we needed to, and that there's lobbying happening that
we don't know as much about as the truth.
Somewhere in between these perspectives.
What do you think? So one nice thing we, we invest
in five different compliance carbon markets around the world.
They all have very similar structural design.
What do I mean the two key components they have a cap and
(33:16):
it and it declines each year. Typically it's between 3 and 5%
per annum. So we're this is a graduated
lowering of emissions. And the second thing that most
markets have in common is that asignificant or all of the supply
of the permits comes to the market through the government
auctions. And here's where the politics is
(33:37):
very interesting with the mechanism.
If you look at California, California auctions, about 200
million tons a year at at at $30.00.
So there's $6 billion a year of revenue into the California
coffers. Now in most carbon markets, 100%
of this polluters paying revenue, 100% is segregated and
(34:02):
it's used to reinvest in energy efficiency and low carbon
initiatives. But what do politicians love?
They love pork, they love that revenue stream, they get hooked
on that revenue stream. So it makes this policy, unlike
other regular regulatory policies, hard to cancel once
it's in place, right? Because they love being able to
(34:23):
go to the local community and say we're building this is the
new energy efficiency on the on the shopping mall.
Look at the solar panels we put on the roof, $50 million, right?
So there's some nice political elements and and when you study,
as I did at LSE, all of the climate policy mechanisms that
have been tried to pull be pulled by governments.
(34:43):
This not only has been, you know, by far the most successful
in raw emissions reductions, butit's been the most sustainable.
You know, the EUETS now has beenaround for 25 years, California
since 2012. So and there's some good
reasons. There's some good political
design into the mechanism. I think that that make it good.
The, the other final point, which no one talks about, but I
(35:07):
think it's very relevant. If you're in California and you
are a, a university professor, you're a tinkerer and you come
up with a new way to extract carbon dioxide at, at flue gas
at point, point of emissions, point sourced.
You go to AVC in California and you say, I, I look at this great
technology, I can extract flue gas emissions and very cheaply.
(35:28):
It's completely new technology that VC is going to back you,
you will raise capital Y becausein the state of California, you
know, you have a pathway to monetize.
So a carbon market, a liquid market that trades in the case
of, you know, these markets are now trading $70 billion per
month, means there's an ability to monetize.
(35:50):
And it promotes intellectual property development,
specifically targeting reductionin emissions.
And that's what we need, right? We need breakthroughs.
So there's a primary benefit capand lower emissions.
Secondary, we do it at the lowest cost.
Tertiary, we reinvest the proceeds into reduction.
(36:11):
And 4th, we stimulate intellectual property
development. It's just a smart, smart
mechanism. When you're at whatever industry
gatherings, cocktail parties that happen with people who are
regulated under schemes like this, are they contented?
Do they like? Being a part of this regime, do
they wish it were some other way?
Or are they glad for the transparency, the regularity,
(36:33):
the predictability of it? How do they feel?
So you get, you get the entire gamut of, you know, profit
motivated companies and boards of directors, you know, who have
put climate change and and any social commitment to one side.
They don't like it because they see it as an additional cost of
(36:55):
doing business. So they don't like it.
But but then on the completely on the other side, you have
major CEOs of companies, perhapsmore, more so in Europe today,
it's fair to say who are very aware of, of what we're looking
down the pipe at in terms of ourchildren's future and climate
change. And they recognize that there
has to be a mitigation mechanism.
(37:16):
And so they, you know, they, they, they may not 100% like it,
but they recognized we need to have some means of stepping
down. In the, in the EU, it's 4.3% per
year that, that cap comes down. And as I mentioned, it's been
over 25 years. All of a sudden you're down 1.1
billion tons a year. Not bad in a world of 4040 giga
(37:37):
tons. One phrase that is continuously
repeated within carbon removal is pre compliance and that
carbon removal is generally in apre compliance period.
I think there's been a lot of concern about monopsonistic
effects within carbon removal. The demand is quite concentrated
with a small number of buyers, people that you could name off
(37:57):
of your hand. And everyone in carbon removal
is looking forward to being ableto rely upon that steady demand
signal that you're talking aboutwith regard to California.
And we just do not have that yet.
There are various changes to law, coming primarily in Europe
but not exclusively, that may allow carbon removal to fit into
(38:18):
various types of compliance markets or other types of
compliance regimes. How do you?
See that impacting your work, either as a trader or as someone
who's just observing compliance from afar.
Yeah. So the the the first thing just
for coming to that is, you know,when we started our our research
on compliance markets, they weretrading in 10 billion a month.
(38:39):
Now they're trading 70 billion amonth.
China of course, in the interim has launched a car compliance
carbon market. South Korea's launched Mexico's
in the second year of their pilot.
Japan, the fifth biggest emitter, a western, a liberal
democracy, good financial infrastructure.
They are launching A compliance market next year.
(38:59):
They're they're morphing their GX league, which is in between a
compliance and a voluntary into full compliance next year.
We're really optimistic about that.
And then the big ones, Brazil and India are both moving
legislation through. So all the Asian tigers,
Indonesia, Philippines, Malaysia, Thailand, Vietnam are
all at some stage of launching Acompliance carbon market.
(39:21):
So today we have about 18% of global emissions that are in
compliance markets, but that is likely to rise significantly in
the coming five years. And, and this is good news for
climate change, right? The the Chinese carbon market,
to put some numbers on this, they've just added steel,
aluminum and cement to the market.
It's now 7 billion tons, 7 gigatons is the cap, Europe's
(39:47):
1.3 billion and California's 300million.
So just put that in perspective,right?
That is enormous. Now if you bring a 7 billion cap
down by 5%, that's 350 million tons in one year.
That's the entire emissions of the UK taken out.
So when people say to me. What's the quickest way we could
(40:08):
address and I have have a hope of a bending the curve anywhere
near what we need at the scale we need in the very limited
carbon budget time we have remaining.
ETS is one of the only mechanisms because it's so
scalable if Brazil caps and starts bringing that cap down,
these are big numbers. So I just wanted to reiterate,
(40:30):
you know, hopefully the growth of these markets and in my view,
if one would say, OK, let's lookat all the resources that are
being spent around the promotionand education of compliance
carbon markets to mid level bureaucrats in emerging market
countries. Here's the number tiny.
(40:51):
How much money is being spent onLidar for forestry Red Plus and
other, excuse my language, weirdcarbon abatement avoidance
schemes and cryptocurrencies linked to VCM.
This is a huge, in my view, misallocation of resources.
(41:14):
And one of our missions is simply to educate more people.
I'm sure most people on your show probably don't know
anything about these carbon markets yet they're the most
successful policy mechanism. I mean, it's crazy.
So, so anyway, I'm sorry, went off on a bit of a tangent there,
Ross, but the, the beauty, the beauty is coming back to your
question in, in any economy, we talked about the marginal
(41:36):
abatement cost curve. If you've got an industrial
process, you can probably get 7080% of the emissions out at
some reasonable cost, right? Maybe it goes up to 100, a
$150.00 a ton, right. But that last 10 or 20% of
emissions and I think this is what's dawning on European
policy makers that last 10 or 20% of emissions, maybe $1000 a
(41:57):
ton. Now, if I can prove to you, as
you know, when your listeners know that we could provide high
quality, durable carbon dioxide removal for 200 or $300.00 a
ton. What why would we force a
company to abate and pay 1000 and potentially bankrupt that
business when you could actuallyremove the carbon injected deep
(42:21):
underground for long term storage for let's say 300 now?
So there's a dead weight loss tosociety.
And I think this is the is the main again, we come back to
economics, don't we? As the, as the driver for these
decisions. This is why Europe and the UK is
even the front runner here are looking at integrating only high
(42:43):
quality Cdr very important the quality metric here into the
emission trading system. And and that would happen in
stages. So you know, instead of having
to submit 100% of permits to match your emissions, they would
allow you perhaps 5% could come from Cdr sources, but only
government approved sources and then the next year might be 7%
(43:06):
and then 10%. And we see this act of we call
this convergence whereby compliance carbon markets
instead of the permit being a permit that allows one ton to be
emitted, they will morph into markets where the actually what
gets traded represents the removal and permanent storage of
(43:30):
one ton. And this probably extends the
life of these markets by perhaps25 to 50 years because as you
know, we're going into massive overshoot and we're going to
have to be removing carbon for, for decades.
So I think, I think that that this is the, the what we call
convergence between compliance and Cdr.
(43:50):
It's very exciting. I think the issue is time
horizon and happy to tell you what the UK is doing and what
Europe is doing. Oh yeah.
I'd love to hear more about someof the specifics, although I do
feel honor bound to defend carbon removal people a tiny
bit. I think the way that you came
into carbon was a very interesting mix of first
principles thinking and empiricism.
(44:11):
Where you reviewed the literature, you saw that this
was the lever that you wanted tospend time pulling that had the
greatest potential impact, and you found your way there.
I think a lot of people come into carbon removal knowing that
carbon removal will be necessary, if for nothing else
for residual emissions. We just need to have this
technology. Ready to go?
And they come in from it that way and go from there.
You guys are looking at different ends of the telescope
(44:32):
I think is what happened. Yeah.
You know, as you know, Ross, I'm, I'm, I've done a very, very
deep dive on the voluntary market and I've I've, you know,
we came to a very strong conclusion that you just simply,
you know, should not be placing capital there.
We've got I can anyway, that's adifferent podcast, but many,
many no, no. No, it's, I think it's this
(44:53):
podcast too, but. But, but there's many, many
clients of ours that you know many have, have invested in very
large VCM projects had lost verylarge amounts of money.
We estimate last year between 3 and 600 million U.S. dollars was
lost in voluntary investments. But but within the voluntary, of
(45:14):
course, carbon dioxide removal is a very tiny subset we know
and I love Cdr. Why?
Why do I love Cdr? Very simple.
I'm an empiricist. If I can feel it, touch it,
weigh it, liquefy it, transport it, inject it and cap that well,
I know that is long term durablestorage.
(45:35):
And that is a simple, yes, it's it's 300, it's 400, it's 500.
But if that makes sense to me, it has to be more expensive
because you're getting what it is on the tin, right?
I mean, and, and when you understand as I do the, the, I
mean, let's not even go into it.You should get Elias Airy on on
on your podcast to talk about, you know, the multiple methods
(45:59):
that you know, a lot of VCM, both methodologies and then
projects are are games, unfortunately, but but high
quality Cdr absolutely love it and it and there's no question.
I mean, just to give you what's happening in the space.
So the EU has now issued their carbon removal and carbon
farming regulation and they've broken down Cdr into really 3
(46:24):
categories. Carbon farming, which covers
farms and forests, a permanent removal.
That's of course DAC Beck's and bio CCS, right.
And then a third source just like sort of everything else
that you know sort of outside ofthose those categories.
So they they are looking very care very seriously.
(46:48):
This is going to move through legislation in the next probably
20-4 months with probably an implementation, earliest
implementation date when Cdr permits and and these would be
EU approved permits would becomefungible for a portion of those
compliance companies for a portion of their annual
obligation. And let's let's put a number on
(47:09):
it 3% in year one or something small.
Now the history of this is very interesting.
Back in the days of the CDM, theclean development mechanism in
2000 and and 5 to 2008, the EU allowed international CDM
(47:31):
credits from global projects to become fungible for a large
portion of obligations. And Ross, I can tell you have,
again, having studied that and knowing people have worked very,
who worked very closely in it, it, it, it really was a disaster
because you had very low qualitycredits being used.
It collapsed the price. And remember what stimulates
(47:54):
abatement? Does a low price stimulate
abatement? No, at low price doesn't
stimulate. When the price of, of, of carbon
removal is high, then people abate.
So they there was a very bad experience with that in the EU
and it left a lot of scars. And I think that's a good thing
because I think when they bring Cdr in now it will only my hope
(48:16):
certainly be very high quality methodologies that will be
allowed durable long term storage.
The EU even mentions A-1000 yeartime horizon reason for storage.
So you know, biochar and DAC are, you know, are definitely in
the frame, but you know, wonderful too.
I wish they would accelerate this a little bit, a little bit
(48:38):
further because we know, as you just mentioned, like Cdr needs a
kickstart. We need, you know, and we had
today we had the, the news of climb works, you know, you know,
going to be doing major layoffs,You know, unfortunately I, I
don't know all the details, but you know, Cdr is a tough game
and we need, but we need Cdr desperately.
So I'm, I, I think this is greatnews that the integration of Cdr
(49:02):
Int will bring liquidity and demand to the Cdr market do.
You think the price of allowances in the EU will become
high enough that carbon removal can compete with it or even be
lower cost than allowances? So I, I think it's possible to
be lower cost. So, you know, again, you get
(49:22):
into methodologies here. Now there are some methodologies
I like that are pretty low, low cost biomass, biomass burial for
for instance, is something that,you know, I like the simplicity
of it. Again, the devil's always in the
detail with these methodologies,but certainly it, it, it ticks a
lot of boxes depending on again and all, it's always about your
(49:43):
feedstock when you have a, you know, a bi, a biomass.
So it's very important to track that feedstock.
But that could certainly be a lot lower cost than where the
ETS price is going. Our forecasts are that
EUETS&UKETS prices are, are going to be well over 100 USA
ton probably in, in, in 24 months based on the supply
(50:04):
demand relationship that is thatis occurring now.
So, you know, I think it's very possible that you could have
very competitive Cdr methodologies, high quality
methodologies that could be, youknow, around that level.
It seems that we're entering a period of increased
protectionism. I hope not.
It might just be that the World Trade system is going to
(50:26):
reorient and maybe move around the US, which has become
increasingly erratic in terms ofwhat trade goals it even has.
It's hard to even know. I'm wondering if that's going to
stick, if it will jolt back. I'm an American, I have
predictability returns and tradecontinues to improve.
But even before the second Trumpadministration, there have been
(50:47):
various indicators that protectionism would play a role
in carbon markets. I know that there have been
carbon removal companies, project developers who have
received strategic investment from Japan, so they would be
eligible to participate in the Japanese compliance market.
I know the EU is exploring whether or not global S credits
will be eligible for the ETS andor even just carbon compliance.
(51:10):
They have various policies that all interact with regard to
carbon there, but it's unclear. Yeah, those are all up for
debate. Is the world going to a new
commitment to free trade? Is it going in a more
mercantilist or protectionist direction?
What do you think is going to happen?
I think, you know, I think the signs are very clear that we're,
we're moving towards a more, more insular national, national
(51:32):
interests, which is a shame, right?
That's, that's not good. It's also, you know, someone
who, who's saying this last night.
If someone who grew up, you know, in a small town very close
to the US border, of course you know, almost everything I
consumed in in TV and stuff was,you know, from the USA and don't
(51:54):
feel. Too bad it's because all your
comedians come down and it's allCanadian anywhere.
But but you know, when I hear the US national anthem, that's a
moving experience for me as a Canadian.
Now, of course, I love my country, Canada, and the
Canadian anthem is the anthem for me.
But there's no question that what the US anthem evokes and
(52:16):
what the US stands for and stoodfor, you know, to see it crumble
now internationally somewhat is,you know, it isn't, isn't great.
So, you know, and and then it's being repeated by other
countries. You see, they're turning more
inwards. They're saying, well, if the US
is, you know, turning inwards, then, you know, why should we
(52:37):
engage? So let's hope Ross, but you
know, let's hope that this is a temporary, a temporary thing and
not a permanent thing. With regard to Cdr specifically,
the EU certainly has made it very clear right now in the CRCF
framework that it will only be European based projects and the
credits that come from that, theCdr that comes from that, that
(53:00):
will initially be considered forfungibility into the EUETS.
And, and again, you know, I think with, because of what
happened in the past, I think a cautious, slowly, slowly
approach really makes sense. The UK is slightly ahead of the
EU in this regard. And of course, being the UK,
they have, they can't use the term Cdr.
That would be too, too. They, they use the term GGR.
(53:23):
So it's called grief gas removals, but it's the same
thing. And, but they're on a quicker
timeline and could see integration of, of GGRS into the
UK emission trading system as soon, as, as soon as 2, two
years from now. Again, it'll be a small,
probably a small integration. They've also made it in their
(53:45):
consultation document, they've made it clear that the, the
addition will not affect the overall cap.
So they won't increase the cap on emissions.
These, these credits will have to be part of the existing cap.
And I think, again, that that's the right way of going about it.
Interesting. I'm actually really curious
about the privileging, especially of Becks within the
(54:08):
EU. And it should come as no
surprise that Europe is quite good at Becks.
I think that should make you wonder which of those came
first. That's a very cynical way of
framing the question. Is there anything to that, or is
that a conspiratorial mindset? I think, I think, you know, to
summarize that, you know, you get cynical when you get old
(54:32):
like me and you've been in business for so many years.
And it's just very apparent to me now that if you don't have a
policy that interacts with supply, demand, price or profit,
you are not on a winner, you aregoing nowhere.
You are not scaling unless you're interacting with these 4
(54:54):
capitalistic levers. And it's sad to say that right?
But that is the ultimate realization.
It's all about the money. So you know what the the
financial incentives and the long term financial
sustainability of Cdr. And this is I think what
Climbworks has to get to grips with, right?
Can they find the funding to sustain the drop down that
(55:18):
technology learning curve to getDAC down to that hundred kind of
$150.00 a ton? And I certainly hope they they
can sustain that. But it really does come back to
the, the financial economics. So when we talk about Europe and
the and the it's a combination of regular regulatory stimulus
or lack thereof, and then the financial incentives, you know,
(55:42):
and there's been some real successes on the bio CCS as you
know that Microsoft, I think dida big deal with the the the
Norwegian or not Norwegian. Are they Finnish?
Can't. I can't remember but but when
you take. This They're all over the.
Yeah, that you take that projectapart it, it they receive debt
funding for the European Development Bank funding like
(56:03):
like it was a multi faceted funding source to put that whole
thing together. And it again, it's early days,
but it certainly looks like they're going to have a very big
successful CCS facility capturing hopefully a lot of
carbon. You're in the UKI hear more bad
things about Drax and Becks in the UK than pretty much anything
else about Becks. I mean some of the big Nordic
(56:25):
deals look nicer, but I know it caused a lot of controversy
where you are too. Yeah, I have to say I'm not a,
I'm not a fan of the Drax conversion to backs.
You know, I don't know how closeyou've been following it, but
there's been multiple investigative journalistic
reports now that, that have sourced the fact that the
(56:46):
pellets, the wood pellets that come from Canada, some of them
have come from Canadian old growth forest.
And you know, that's just wrong,right?
And then and then to, to claim that, that, that you burn that
and the emissions go in the atmosphere and it's it, it
doesn't count under the emissiontrading system.
So since those reports have comeout, there's even been a
television documentary here in the UK on that.
(57:09):
You know, Drax has been hit pretty hard.
There's an investigation ongoing, I think with the
government. And separate from that, they're
in a consultation in the UK about whether should bioenergy
with carbon capture and storage or so, sorry, should burning of
biomass and releasing the emissions really be exempt from
(57:32):
the emission trading system? Because the, the, the, the
argument is the trees grow back,they suck, sequester the carbon
and then it's, it's like a closed loop cycle, right?
It's a neutral, but, you know, Ithink they're on weak ground
there. And I certainly hope the
government does the right thing and tightens that up.
Mike, that was fascinating. I always appreciate you being
here and teaching me so much about this to feel like I slept
(57:54):
on this for a long time. And I'm now starting to nerd out
on it much more heavily. So I basically just need to go
through all of the resources that you've gathered on your
website. I'll put the link in the show
notes to that too. If people are inspired listen to
this conversation. That's a great place to start.
Thanks for being here, Mike. Yeah, I know great or great Ross
and I know I, I blab on and on, but you know, I'm just, I'm, I'm
(58:15):
very passionate about it and butI'd loved, I would love to get
into these more like I, I know these other topics when it's
less empirical, perhaps not saying you're not an empirical
person, but what I like about the way your brain works that's
that's different than a lot of other.
It's like you have this great way of bringing in, you know,
emotion and empathy and into conversations rather than just
(58:40):
like this one we had was pretty empirical, right?
And, and so, you know, when we talk about the social cost of
carbon and, and, you know, some of these other things, I'm, I
know you'll bring in, you know, a lot of these other aspects and
it'll be a much more like, I don't know, emotional
conversation. I would love to be to do
something like that too. No, we could definitely do that.
(59:02):
I tried to bring it there a little bit too.
Being like what happened in my own.
Mind that made me so skeptical towards compliance markets and
so supportive of VCM for so long.
I think part of it is also just a base level American nest where
the scariest words in the English language are I'm from
the government and I'm here to help as Ronald Reagan.
One question that's. Part of our.
(59:23):
National psyche, whether you like Ronald Reagan or not, with
their culture. And I think I think that can
drive Americans in a very specific kind of way that may.
Leave them to be. More supportive and more
skeptical in ways that are contrary to the truth and
understanding yourself and knowing when am I making
decisions for poor reasons or and motivated in some on ideal
(59:44):
way. I think it's really important.
I'm always trying to check that in myself because you can know
that is true and still fail to point it in yourself.
But I appreciate you giving me achance to explore those ideas
and we should just do more there.
We clearly didn't exhaust your subject matter expertise of this
topic, and it's really fascinating.
So more to come, listeners, if you want to hear more about
compliance markets and difficulties with VCM, you drop
(01:00:08):
that money lost on supporting VCM projects.
God needs to be unpacked. Let's do another episode, Mike.
OK, great. Excellent, Ross.
Well, listen, have a great weekend and thanks.
Thanks very much for having me on.
Hey everyone, thank you for listening.
This is Ross Kenny, and I'm yourhost.
I have two sponsors that I'd like to tell you about today.
They're both organizations doingvaluable work within Carbon
Removal. One of them is a new sponsor of
the show and the other one has been with us from the start, so
I'm going to start with a new one.
I'm going to give them a chance to go first.
It's Climify. Personally, I think they produce
(00:20):
some of the best content within Carbon Removal.
Their reports are top tier. I always look forward to reading
them. I've learned a lot from them.
There's one in particular that Ilike that I referenced in a blog
post I wrote a while back calledBridging the Cdr Financing Gap.
The comprehensive guide. Just really powerful, great
work. If you're looking for good Intel
(00:41):
on carbon removal, check out theClima Fire reports.
They're really good. There are lots of intermediaries
within carbon removal. If someone wants to buy carbon
removals, many people will heed the call and try to sell them
some. Climify is a group that I see
almost more as a white glove service.
They're quite selective in what they choose to do.
(01:01):
The way that they put it is thatthey empower companies to
develop and manage robust, high quality, durable Cdr portfolios
that's built upon market intelligence.
They have a proprietary rating system.
You may have heard that they just gave Deep Sky in Canada a
very high rating. They're involved in the
procurement themselves of facilitating, sourcing and
managing RFPs for companies. So if you're looking to run a
(01:22):
carbon removal RFPA, request forproposal, so you could have
carbon removal companies coming to you with proposals for what
they might be able to do. Climify as a group that can very
much help you with that, performthe due diligence, structure the
portfolios, negotiating, executing transactions, that's
all something that they can helpyou with.
And then also just managing the portfolio of making sure that
(01:44):
the projects are monitored, warehoused appropriately, and
then when the time comes, retired.
Climify's project database covers about 95% of all the
durable Cdr projects globally, but out of the 500 plus projects
reviewed by Climify, only 15% meet their standards for
delivery and integrity that theylook for.
And eventually only 5% of those projects are included in client
(02:07):
portfolios. If you're looking to buy some
carbon removals, if you want to run an RFP, follow the link in
the show notes to learn more about Climify.
And of course, I'm also very happy that Arbonics is
sponsoring the show again. Arbonics connects European land
owners to corporate credit buyers in order to remove CO2
and protect biodiversity. They're very data-driven.
(02:30):
They're trying to turn degraded and abandoned land in Europe, in
the Baltic States back into biodiverse force.
That's a really impactful good thing to be doing for its own
sake. Outside of carbon removal, it's
a good thing to do but is also very much focused on how much
carbon can be sequestered while also pointing us towards the
importance of Co benefits and ecosystem services.
(02:52):
I think sometimes carbon removedpeople forget about.
We're pretty focused on the PPM,but the other stuff is really
important too. They're doing fascinating work
on the data layer side. I'm not sure if you've seen the
digital twinning of forestry, but they're making it.
It's exactly what it sounds like.
Our Bonics is on the cutting edge, trying to make forestry
(03:14):
work for carbon removals and turn your back into that
beautifully forested continent that it once was.
So if that interests you, the link is in the show notes to go
check out Our Bionics. Also, Lizette Louie, one of the
founders and COO of our Bionics,was on the podcast earlier this
year. Go check that out because we dig
into a lot of the role of temporary removals within carbon
(03:38):
removal. It's a fascinating big topic and
Lizette brings her a game to it,so I hope you enjoy.
Link to both sponsors are in theshow notes.
If you'd like to be a sponsor ofthe show too and hear more about
what that might look like, you can e-mail me.
The e-mail is in the show notes.And then also if you're
podcasting and you want to use Riverside for recording or D
(03:58):
Script for editing and transcription services, I have
affiliate links in the notes too.
And that also helps drive the show's financial solvency.
So thanks so much for listening.Here is the intro to your show.
Hello and welcome to the Reversing Climate Change
(04:20):
podcast. I'm Ross Kenyon, I'm an
entrepreneur working in carbon removal and climate tech and
I've been here for about 8 yearsnow.
Thanks for listening. I'm, I'm really glad you're
here. I have so much fun with this
show. It's a lot of work to make, but
I love it and I really don't want it to end.
I've been trying to get more subscribers to the show.
(04:41):
It's $5 a month. It's in Spotify.
You can also subscribe elsewhere, but Spotify is the
easiest. It comes with ad free listening
from the programmatic ads, bonuscontent.
In fact, a good chunk of today'sepisode is going to go into
bonus content because it's good stuff.
It deserves to be published, butjust doesn't fit into the rest
of the show, doesn't get a chance to be fully expressed.
(05:02):
And I know people like to have shows that are consumable that
are not these epic shows. So for shows that just don't fit
the theme as nicely, I'm trying to move a lot of that content
into bonus content. So if you want it, it's there.
If not, you get your learnings, you get your intellectual
stimulation for the day, and it can move on.
So anyways, link is in the show notes, $5 a month.
Thanks so much. Great rating and review in Apple
(05:24):
Podcast. Spotify also appreciated.
And now I'm going to tell you about the return of Mike Aslan.
Mike has been on the show once, maybe twice.
And Mike is the CEO and CIO of Carbon Cap Management LLP.
Mike is a trader of carbon assets within the compliance
markets. And my understanding he trades
(05:45):
within five of them. And we spend most of the day
talking about what he's learned from years working in these
markets, how he's thinking abouthow compliance markets will work
to drive parts per million of greenhouse gases in the
atmosphere down, why he thinks that's the correct way to go,
why he's been disappointed in the voluntary carbon market
space. I actually share a fair amount
(06:07):
about my experience. The first company I founded
within climate tech is called Nori.
Nori was a carbon removal marketplace, and I used to be a
much stronger believer in voluntary climate action.
I thought that there would be sufficient motivation outside of
compliance, the need to do something just because it's
(06:27):
required in order to make a dentin climate change and at least
start to get us towards a futurewhere the technology was
sufficiently developed. Or maybe we did such a good job
that government was not necessary for managing climate
policy. I'm realizing as I say these
words out loud, that it it sounds, it's a dream.
(06:50):
It may even be ideology and not necessarily merely a dream.
The idea that we would be able to manage the climate from a
purely market driven perspective.
We would not be where we are nowwithout some very generous and
far seeing employees and founders at companies that made
(07:14):
big bets on carbon removal, thatwanted to be there to support
this industry when it was reallyjust a twinkle in a bunch of
founders eyes. It was not what it is now.
I think that's a a beautiful thing and I'm really grateful
for all of that, but it's hard to imagine that we're going to
get to the scale of carbon removal without having some sort
of compliance regime in place. The numbers are just too big.
(07:39):
We need government to de risk a lot of this tack, and it's
probably just inappropriate to expect unilateral or mostly
unilateral action from private citizens and corporations to do
the amount of work necessary to drive the carbon removal
industry. If you're listening and this
sounds obvious, sorry. Yeah, that I suppose that is
(07:59):
pretty obvious, but for a long time I was resistant to the
idea. I've mostly experienced policy,
and I've spoken about this elsewhere, especially with Grant
Faber, as being a a sort of difficult, clunky process
policy. You can often feel boring.
It requires reading and the reading that it requires you to
read. Is.
(08:20):
Often times legalistic, hard to understand.
A lot of the mechanics of deal making within politics don't
happen in the open. You're reliant upon journalists.
Those journalists have differentperspectives and political
orientations and they may not have all of the facts.
And I found that to be a field that I I avoided because I
(08:42):
thought that was an inefficient way of making decisions and
allocating resources and just determining policy in general.
And then going through this process of trying to, I don't
know, make into a commercial activity, a line of work that
should properly be a government function.
(09:04):
I think one just runs up into barriers all the time.
I don't think I've told this story, but I had a meeting,
though, that cracked me up with one of the companies that is
involved in tax credit trading. And what's interesting about tax
credit trading, especially for something like clean energy
development, is that there's a customer who wants what the
(09:28):
seller is selling and they have a a need for it that is not
abstract in any way. The clean energy producer is
producing more tax credits than they can consume against the
profits that they're generating.So they have a surplus of tax
credits. They are selling them on the
market to someone that would like tax credits and could
(09:48):
consume more of them, and the generator of those credits sell
those credits at a discounted rate relative to what is on the
tax credit. So if it's a dollar's worth of
tax credit, they might sell it for $0.90, for example, and the
person buying it receives a discount on their tax bill.
(10:11):
That's pretty efficient. That drives more money to clean
energy development. And that sounds so nice to me.
You know, there's no sort of, well, this is going to help you
with talent retention and going to give you access to a future
where the supply of carbon removals is extremely limited
and you already have a relationship here.
You'll know how to do it. The marketing value that this
(10:33):
purchase represents is great. It'll drive more customer
acquisition, blah, blah, blah, stuff that you've all heard a
million times about the benefitsof carbon removal and voluntary
purchasing of carbon removal. And over time, they no longer
felt as true in my mouth. I have seen some data recently
about the types of carbon credits that are being purchased
in the voluntary market and how that's changing and how we're
(10:56):
shifting to higher quality. And within that type of very
high quality credits, there is more of a supply crunch.
And I'm, I'm glad to see it though.
I just no longer really believe a lot of that rationale that I'm
I'm hearing. I would be very welcome to being
proven wrong on that. I want to believe people will do
so many of these activities for their own sake and because they
(11:17):
care about why we're here for climate action and to make sure
we restore a livable climate. I I share that vision.
I would want that independently if my salary depended upon it or
not. But that's not true of all
companies and maybe we shouldn'tjust assume for that.
I've even been in job interviewson the demand side recently
where I know I shouldn't have said this but also just been
(11:39):
like I don't really understand why anyone would be buying this
right now. They don't need to.
That's bad. If they are prominent enough,
being a very vocal financial supporter of carbon removal and
climate action could conceivablymake them a political target in
the US. It's just not obvious to me that
(12:01):
this represents good value for companies to be involved with
right now. And that was not the right
answer for why you should hire me to generate demand for your
carbon removal company. Which is one of the reasons why
I like doing this show because right now I feel like I can
maintain a lot of independence. And it even previously when this
was a Nori podcast, I never feltmuzzled in any way.
(12:23):
I always spoke my mind. But it is nice to just be able
to zoom out a little bit and saysomething like, why are people
buying carbon removal? It's a sort of a wild way to
spend money in a time of erraticpolicy, trade war, geopolitics.
I like being able to just, you know, wonder those things aloud.
(12:47):
And that's why it's important tome that, hey, become a
subscriber, become a sponsor. I'm going to tell you what I
really think about this, about the world that we live in and
carbon removal and climate change.
And I'm a learner. I'm trying to be too ideological
or hold my position so strongly that I can't learn anything or
change my mind. In fact, this this podcast I
(13:09):
really like because Mike's helped me change my mind.
Mike's been very persistent in showing how effective compliance
markets have been. That being said, I've also read
criticisms of market policy justin general for both compliance
markets and for VCM. One book that made me think and
I'm still thinking about it years after I initially read it
(13:32):
as Danny Colin Word and David G Victor's making Climate policy
work, which is a quite critical of the political economy of
carbon markets for many of the reasons that we even talked
about in this show that the copsare often set, you know, pretty
high. They are subject to political
influence. The regulated entities that fall
under compliance regimes are often times powerful industrial
(13:57):
combinations that can make theirwill known.
There are also just alternativesoutside of markets for thinking
through what climate policy means.
And look, I'm someone that I remember being in high school
economics class and seeing a demand curve.
And I remember asking about Say's Law about how prices clear
markets and feel like I don't understand how anyone could see
(14:21):
a demand curve and just not wantthe intersection of supply and
demand and to have prices clear the market.
That seems to me so intuitively obvious that you would want that
for so much within society. And I remember my professor just
sort of chuckled at the, he's just like, well, that's a very,
you know, sort of orthodox free market position in it.
(14:44):
And I, I've never forgot the moment.
And I also remember someone in the class was looking at me and
staring with mouth agape, like, how could you, how could you
think that? I've never I, I remember exactly
where I was sitting and how it was, but it was such a light
switch kind of moment for me. It just always made really
intuitive sense. And there's a number of
interesting psychological reasons why that way of seeing
(15:05):
things is important. I think there are good reasons
for caring about markets and markets can do a lot of really
important work both in climate and outside of climate.
One thing for sure though, is that I'm no longer a purely VCM
booster. That's had me concerned for a
while now and you probably caught glimpses of it
previously, but here I am declaring it.
(15:28):
So I hope you enjoyed today's show.
Bonus content, by the way, for paid subscribers from this show.
So if you want to listen to Mikeand I talk about some of the
problems he's noticed in BCM, you can subscribe and check that
out. Thanks so much for listening.
And here is your show with Mike Aslan.
(15:48):
Mike, welcome back to the show. Thanks for being back on
reversing climate change. Hey, Ross, great to be back.
I'm glad you want to do this again, because every so often I
loop back around to thinking very seriously about compliance
markets. I come from a very strong BCM
voluntary carbon market background.
I used to think that voluntary carbon markets were going to do
(16:11):
the bulk of the heavy lifting, and I'm feeling a bit delusional
about some of my past ideological stances on this.
And you've been a nice little thorn in my side for a long time
talking about compliance markets.
So I thought it was time to comeback on the show, reintroduce
the topics to listeners. Why should they be caring about
compliance markets? And tell them a little bit about
(16:33):
your work. So why don't you reintroduce the
topic for everyone? Sure.
Just just a little bit, a littlebit of background, Ross, for
those who haven't heard about mebefore, I'm I'm a Canadian who's
been living in London for 30 years now.
I did my graduate degree at London Business School and
worked in the financial servicesindustry and mainly in the fund
management industry. And I was fortunate to build and
(16:54):
sell a business to a public company.
And that's when I took some timeout to think about the next
chapter in my career. And that climate change was
always something on my list. And this was about one year
before Greta Thunberg really broke onto the scene.
And because I'm an empirical person, I started reading the
peer reviewed academic research on the science of climate
(17:14):
change. And I was in a fortunate place.
I didn't have to work at that time so I could spend full time.
And I'm a bit geeky that way. I after about 3 or 4 months of
wading through learning the terminology, climate forcing,
etcetera, I spoke to a lot of climate scientists around the
world, in particular scientific skeptics.
I wanted to understand scientists who were skeptics,
(17:35):
their point of view, but I really came to the conclusion
that that we're in a terrible place, that that climate change
was much worse than than even many people who work in the
industry and and that it was definitely had a human
fingerprint. I was aware that, you know, the
the paleo climate records about the changes, but there's no
question it is a human fingerprint.
(17:56):
So I then enrolled at the LSE intheir economics of climate
Change program and that is whereI was first exposed to these
carbon markets. And you know, once I learned how
the mechanism worked, which tooka took a little while and a
focus, but, but, but I, I found it to be a fabulously
interesting and elegant mechanism to deal with carbon
(18:17):
emissions. The externality and the, and the
carbon markets were trading backthen in around 2018, about 10
billion a month liquidity. So I hired APHD student at that
time, brought him in. We then collected data on all
these carbon markets, wrote a full academic paper.
It has now become the Seminole academic paper on carbon as a
(18:41):
liquid and investable asset class.
It took three years in the peer review process, but it was
published in 2022. And the basis of that paper
allowed me to form my second business, which is an
environmental asset management company.
And our objectives are obviouslygenerating returns for our
investors, but also direct impact on climate change, which
(19:03):
is something I'm very passionateabout.
And so we we launched the company five years ago.
We're now the biggest in the world at what we do in
environmental asset management. And we're a small team, but a a
very successful five year, five years are behind us.
We, we manage over half a billion in assets under
(19:23):
management and the way we have achieved the impact on climate
change is we, we charge a performance related fee and 20%
of that fee each year. If indeed we perform, we use
that to buy compliance carbon, not voluntary.
We purchase compliance carbon permits much higher price of
(19:43):
course, as as we'll find out in a moment and we cancel those And
I'm very pleased to say that because we've had positive
contributions there that 1.7 million U.S. dollars thus far
has been used to to buy and cancel compliance carbon about
33,000 metric tons. So there's a nice alignment and
(20:07):
creating we believe real impact by by doing that in in the
compliance markets. And yeah, that's, that's quick
background. So I, you know, hopefully on
this, you know, I'm sure you're going to take through questions
on, you know, how do these carbon, how do these compliance
markets work and the history andsuccess of them.
And and I think it's a really interesting topic.
(20:28):
I have questions for you. I have loads of questions.
Let's just pick one. I imagine the the European ETS
is the place to start to have a conversation about this, but
maybe speak in general terms about what the goals of
compliance markets are and then how does the European ETS work
in layman's terms? Yeah.
So the the key there are two keyobjectives to an emission
(20:51):
trading system. The 1st is to cap and lower
emissions and the second is to achieve that reduction at the
lowest cost to society. Very important.
The second objective, we want toaddress climate change, but we
want to do it at the lowest possible cost and that is that
those are the two overarching elements of how an emission
(21:13):
trading system works. The background was originally
the Republican Party in the United States in the 80s under
the Bush administration launchedthe Sulfur Dioxide Emission
trading System to cover acid rain issues with sulfur dioxide.
It was fabulously successful. There are multiple papers on our
(21:34):
website if people are interestedin that, in tracking that
success independently. It was really successful and the
Europeans, Ross saw that and in 2005 they decided to adopt an
emission trading system, a cap and trade for Europe.
They launched the emission trading system in Europe in 2005
and since then emissions in Europe have declined by 1.1
(21:59):
billion tons per year. That's, that's a, an annual run
rate decline of that 1.1 billion, 900 million tons of
that has come directly from the entities that are covered under
the ETS. So it has been fabulously
successful both in sulfur dioxide as a Canadian, I
(22:20):
remember the acid rain issues wehad in in Canada.
And so it, it has been a very successful mechanism.
And I think because of that, we're now seeing it.
It's spreading around the world.When people conceptualize
compliance markets, they imagineI'm going to put myself in their
shoes. I think that they imagine
legislators and the regulated entities, the companies that
(22:44):
have to comply with the compliance regime.
But they aren't thinking about you, Mike.
Everyone should be thinking moreabout Mike Aslan here.
Where, where do? Private traders fit into this.
Why do we need your involvement here to make this successful?
Yeah. So it's really interesting.
So let's just go through the thethe key steps of how the how
these markets work. The first thing is it's called a
compliance market because you must comply.
(23:05):
So any entity in let's say the state of California or in Europe
or the UKUK now has its own emission trading system.
Any entity above 25,000 tons peryear, you are mandated.
You're in the market. You don't have a choice.
You're in. That means annually, Ross,
you're audited by the government.
So if you have a factory that emits 1.2 million tons by April
(23:28):
of the year following that year you must give the government 1.2
million permits. Where do you get them?
The government issues these permits, so they set a cap on
the total amount of permits. And normally these are sold in
auctions. So in the case of Europe, they
have an auction every single day.
In the UK it's twice per month and in California, it's four
(23:51):
times per year. They auction 50 million tons of
permits, 4 * a year in California.
So that's how the supply comes in.
But it's interesting that means that the total supply is capped
among those underlying entities.So let's go through a compliance
cycle. The supply 200 million, let's
say is issued the underlying companies, let's say their total
(24:12):
emissions, there's thousands of companies.
Their total emissions are also 200 million tons in in the state
of California and let's say so they they they're pretty smart.
These are big public companies that who are the sectors that's
the power sector, steel, cement,chemicals, glass, oil
refineries. It's these big, big companies,
right? So they, they forecast their
(24:33):
emissions. They know they have to comply.
If they don't hand in the permits, the penalties are
extremely severe. They're far higher than the
price of a permit. So we get 99.9% compliance.
That's very, very important. Now when the government, so
these companies hand the 200 million permits that were issued
by the government, they bought them at the auctions or they
bought them in the secondary market.
(24:54):
Now the companies have the permits, they give them to the
government. Government says OK, you
complied, no penalty. Second company, you complied.
The government has received all the permits back.
What do they do? They destroy those permits, they
tear them up. And that compliance period has
now completed. We go to the next year and
instead of 200 million, the government only sells 190.
(25:17):
Oh, the next year 180, then 170.So the total supply of these
permits become scarce. That means that each CEO is is
looking at not one carbon price,the permit price, they look at 2
prices. This is the beauty of the carbon
compliance markets. It forces the emitter to look at
(25:40):
the compliance price. Let's say in California it's
$30.00 US per ton. Or he calls in the head of
engineering and he says, Jim, we're emitting 4 million tons a
year. It's costing the company $120
million a year. I'm giving to the state.
I don't want to do that right? We're running a business here to
make a profit. Can you on the factory floor get
(26:01):
some new machines in and get my emissions down?
And the key question is the cost.
What's the cost of reducing my emissions?
So every CEO, you can bet your bottom dollar knows 2 carbon
prices. They know the permit price and
they know their internal abatement cost and when the
permit price is above their internal cost.
(26:23):
What would you do, Ross? If, if, if, if you could, if you
could cut your emissions for $20and the permits are 30, would
you pay 30 or would you cut for 20?
Yeah, obviously 20. Why?
Why would you do that? Because the cost of just
complying is better than having to go out on the market and.
Buy the credit. Yeah, because you're, you're
(26:44):
after profit, you're you've got your eyeball as a as a CEO of
profit. And here is the the the key
power of this mechanism. It takes the most powerful
motivating force in Business Today profit.
Let's we might not like it, but that is what short termism A
quarterly earnings and it focuses that profit motive to
(27:05):
achieve what to achieve. The three magic words least cost
abatement. These are the magic words we
want to achieve. Never forget those 3 words, not
abatement at any cost, least cost abatement O amongst those
thousands of, of, of, of CEOs when the California rice is 30,
some of those engineers come back to the success CEO and they
(27:27):
say, John, our cost is 90. And the CEO says, OK, well I'm
not going to invest and, and pay90, I'll just buy the permit.
But there are some companies where the cost is 20 or 25 and
indeed those companies abate, they cut now the next year
there's even less permits. So if you picture a merit order,
and this is called the marginal abatement cost curve.
(27:48):
And this really unlocks Ross A avisual image of how a carbon
market achieves the least cost abatement every year when the
supply gets lower and lower of these permits, it stimulates
some companies abate. And the only way we can get the
next rung on the ladder, if we lined up all the mitigation or
(28:09):
abatement methods from lowest price of, of abatement to high,
you have to climb that marginal abatement cost curve over time.
And, and so the expectation in carbon markets is supply is
reduced. And you, you let the invisible
hand of the market with the profit motive seeking the least
(28:31):
cost abatement. So every year when there is
abatement, because there must be, we're playing musical chairs
and we pull out a chair, there must be abatement.
We can be pretty confident that that it is the company with the
lowest internal abatement costs.They're the ones who choose
because they're profit motivated.
Now here's where the role we come in, Ross, you can only make
that assumption that the that the the the least cost company
(28:56):
will abate if there's two thingsthat hold very important
liquidity and price discovery. Now this goes back to
fundamental economics, lots of empirical evidence and academic
literature, particularly in commodity markets.
In order for them to function, you need liquidity and price
discovery. If no one knows what the price
(29:17):
is in California, no one will know what the gap is and who,
who should should I cut or so you want wide dissemination of
that price signal. The price signal is all and
therefore this is well studied. Now when you bring in a full,
how do you achieve liquidity andprice discovery?
Very simple. You bring in a full ecosystem of
participants. So you have the compliance
(29:39):
entities and they're very activein most carbon markets.
It's the compliance entities have sophisticated hedging, but
you also need financial investors like ourselves, short
term speculators, arbitragers who will arbitrage between the
futures price and the physical permit price.
And this all brings liquidity and price discovery, which in
the end results in, in the magicwords of least, cost abatement.
(30:03):
And as I said, the proof is in the pudding.
Both in California and Europe now there's been quite dramatic
decreases in emissions while at the same time seeing very solid
economic. Growth.
Do the regulated entities see you as a beneficial force?
I could also see them seeing youas someone who's pulling profit
(30:24):
out for yourself but also raising prices for their
compliance costs. Like is that a thing or or maybe
not? So I, I think what's very, very
important with the primary objective of these markets is
abatement and to, to achieve theenvironmental objectives, right.
So it's very important that financial actors like in like in
all things have limits. So there are position limits,
(30:45):
there's maximum holding limits for the physical permits.
There are most of the liquidity in carbon is is futures, like
most commodities, gold or oil, it's the futures market.
There are also limits on the size of futures positions that
financial traders can take in these carbon markets.
So, you know, I think the regulator's been quite, you
(31:05):
know, quite good about sort of finding a nice mix between
allowing financial participants to bring liquidity and price
discovery, not allowing to like gain the market.
Perhaps you'll remember that when the Hunt brothers tried to
corner it, you know, the silver market and prices spiked.
We, we, we definitely don't wantthat.
At the other end of the spectrum, Very interesting.
In, in South Korea, they launched the carbon market over
(31:28):
five years ago and they took a different tack.
They said no financials, only the compliance entities can
trade the carbon. It was a disaster.
What happened is the day before the compliance deadline, they
went into the market and the price spiked.
And then the day after the compliance deadline when they
had had the price collapse and this happened every single year.
(31:50):
So they finally, these huge companies, Korean Kibo
companies, went to the government and said, look, can
you please bring some liquidity in?
So they brought in two rounds ofallowing financial actors,
domestic Korean actors into the Korean market.
Liquidity is picked up and things are stabilizing.
And next year, we believe they will open to international
investors like ourselves. That is so fascinating, thanks
(32:12):
for sharing that. I've seen various pitches before
and I've never fully understood how this would work for
political reasons. The case is that someone could
raise enough money to buy up allof the available compliance
assets. Retire them the musical chairs.
More chairs be pulled out. Then companies really need to
actually do business and not fail to meet their obligations
(32:34):
and be fine in some horrible way.
It sounds like that cannot happen, and it sounds like you
probably wouldn't even want thatto happen either, because these
companies need a glide path downto net zero.
That's like the best case of this, too.
I've also seen cynical interpretations of compliance
markets as well, which is that the regulators are subject to
political influence and that therate never comes down nearly as
(32:55):
fast as we needed to, and that there's lobbying happening that
we don't know as much about as the truth.
Somewhere in between these perspectives.
What do you think? So one nice thing we, we invest
in five different compliance carbon markets around the world.
They all have very similar structural design.
What do I mean the two key components they have a cap and
(33:16):
it and it declines each year. Typically it's between 3 and 5%
per annum. So we're this is a graduated
lowering of emissions. And the second thing that most
markets have in common is that asignificant or all of the supply
of the permits comes to the market through the government
auctions. And here's where the politics is
(33:37):
very interesting with the mechanism.
If you look at California, California auctions, about 200
million tons a year at at at $30.00.
So there's $6 billion a year of revenue into the California
coffers. Now in most carbon markets, 100%
of this polluters paying revenue, 100% is segregated and
(34:02):
it's used to reinvest in energy efficiency and low carbon
initiatives. But what do politicians love?
They love pork, they love that revenue stream, they get hooked
on that revenue stream. So it makes this policy, unlike
other regular regulatory policies, hard to cancel once
it's in place, right? Because they love being able to
(34:23):
go to the local community and say we're building this is the
new energy efficiency on the on the shopping mall.
Look at the solar panels we put on the roof, $50 million, right?
So there's some nice political elements and and when you study,
as I did at LSE, all of the climate policy mechanisms that
have been tried to pull be pulled by governments.
(34:43):
This not only has been, you know, by far the most successful
in raw emissions reductions, butit's been the most sustainable.
You know, the EUETS now has beenaround for 25 years, California
since 2012. So and there's some good
reasons. There's some good political
design into the mechanism. I think that that make it good.
The, the other final point, which no one talks about, but I
(35:07):
think it's very relevant. If you're in California and you
are a, a university professor, you're a tinkerer and you come
up with a new way to extract carbon dioxide at, at flue gas
at point, point of emissions, point sourced.
You go to AVC in California and you say, I, I look at this great
technology, I can extract flue gas emissions and very cheaply.
(35:28):
It's completely new technology that VC is going to back you,
you will raise capital Y becausein the state of California, you
know, you have a pathway to monetize.
So a carbon market, a liquid market that trades in the case
of, you know, these markets are now trading $70 billion per
month, means there's an ability to monetize.
(35:50):
And it promotes intellectual property development,
specifically targeting reductionin emissions.
And that's what we need, right? We need breakthroughs.
So there's a primary benefit capand lower emissions.
Secondary, we do it at the lowest cost.
Tertiary, we reinvest the proceeds into reduction.
(36:11):
And 4th, we stimulate intellectual property
development. It's just a smart, smart
mechanism. When you're at whatever industry
gatherings, cocktail parties that happen with people who are
regulated under schemes like this, are they contented?
Do they like? Being a part of this regime, do
they wish it were some other way?
Or are they glad for the transparency, the regularity,
(36:33):
the predictability of it? How do they feel?
So you get, you get the entire gamut of, you know, profit
motivated companies and boards of directors, you know, who have
put climate change and and any social commitment to one side.
They don't like it because they see it as an additional cost of
(36:55):
doing business. So they don't like it.
But but then on the completely on the other side, you have
major CEOs of companies, perhapsmore, more so in Europe today,
it's fair to say who are very aware of, of what we're looking
down the pipe at in terms of ourchildren's future and climate
change. And they recognize that there
has to be a mitigation mechanism.
(37:16):
And so they, you know, they, they, they may not 100% like it,
but they recognized we need to have some means of stepping
down. In the, in the EU, it's 4.3% per
year that, that cap comes down. And as I mentioned, it's been
over 25 years. All of a sudden you're down 1.1
billion tons a year. Not bad in a world of 4040 giga
(37:37):
tons. One phrase that is continuously
repeated within carbon removal is pre compliance and that
carbon removal is generally in apre compliance period.
I think there's been a lot of concern about monopsonistic
effects within carbon removal. The demand is quite concentrated
with a small number of buyers, people that you could name off
(37:57):
of your hand. And everyone in carbon removal
is looking forward to being ableto rely upon that steady demand
signal that you're talking aboutwith regard to California.
And we just do not have that yet.
There are various changes to law, coming primarily in Europe
but not exclusively, that may allow carbon removal to fit into
(38:18):
various types of compliance markets or other types of
compliance regimes. How do you?
See that impacting your work, either as a trader or as someone
who's just observing compliance from afar.
Yeah. So the the the first thing just
for coming to that is, you know,when we started our our research
on compliance markets, they weretrading in 10 billion a month.
(38:39):
Now they're trading 70 billion amonth.
China of course, in the interim has launched a car compliance
carbon market. South Korea's launched Mexico's
in the second year of their pilot.
Japan, the fifth biggest emitter, a western, a liberal
democracy, good financial infrastructure.
They are launching A compliance market next year.
(38:59):
They're they're morphing their GX league, which is in between a
compliance and a voluntary into full compliance next year.
We're really optimistic about that.
And then the big ones, Brazil and India are both moving
legislation through. So all the Asian tigers,
Indonesia, Philippines, Malaysia, Thailand, Vietnam are
all at some stage of launching Acompliance carbon market.
(39:21):
So today we have about 18% of global emissions that are in
compliance markets, but that is likely to rise significantly in
the coming five years. And, and this is good news for
climate change, right? The the Chinese carbon market,
to put some numbers on this, they've just added steel,
aluminum and cement to the market.
It's now 7 billion tons, 7 gigatons is the cap, Europe's
(39:47):
1.3 billion and California's 300million.
So just put that in perspective,right?
That is enormous. Now if you bring a 7 billion cap
down by 5%, that's 350 million tons in one year.
That's the entire emissions of the UK taken out.
So when people say to me. What's the quickest way we could
(40:08):
address and I have have a hope of a bending the curve anywhere
near what we need at the scale we need in the very limited
carbon budget time we have remaining.
ETS is one of the only mechanisms because it's so
scalable if Brazil caps and starts bringing that cap down,
these are big numbers. So I just wanted to reiterate,
(40:30):
you know, hopefully the growth of these markets and in my view,
if one would say, OK, let's lookat all the resources that are
being spent around the promotionand education of compliance
carbon markets to mid level bureaucrats in emerging market
countries. Here's the number tiny.
(40:51):
How much money is being spent onLidar for forestry Red Plus and
other, excuse my language, weirdcarbon abatement avoidance
schemes and cryptocurrencies linked to VCM.
This is a huge, in my view, misallocation of resources.
(41:14):
And one of our missions is simply to educate more people.
I'm sure most people on your show probably don't know
anything about these carbon markets yet they're the most
successful policy mechanism. I mean, it's crazy.
So, so anyway, I'm sorry, went off on a bit of a tangent there,
Ross, but the, the beauty, the beauty is coming back to your
question in, in any economy, we talked about the marginal
(41:36):
abatement cost curve. If you've got an industrial
process, you can probably get 7080% of the emissions out at
some reasonable cost, right? Maybe it goes up to 100, a
$150.00 a ton, right. But that last 10 or 20% of
emissions and I think this is what's dawning on European
policy makers that last 10 or 20% of emissions, maybe $1000 a
(41:57):
ton. Now, if I can prove to you, as
you know, when your listeners know that we could provide high
quality, durable carbon dioxide removal for 200 or $300.00 a
ton. What why would we force a
company to abate and pay 1000 and potentially bankrupt that
business when you could actuallyremove the carbon injected deep
(42:21):
underground for long term storage for let's say 300 now?
So there's a dead weight loss tosociety.
And I think this is the is the main again, we come back to
economics, don't we? As the, as the driver for these
decisions. This is why Europe and the UK is
even the front runner here are looking at integrating only high
(42:43):
quality Cdr very important the quality metric here into the
emission trading system. And and that would happen in
stages. So you know, instead of having
to submit 100% of permits to match your emissions, they would
allow you perhaps 5% could come from Cdr sources, but only
government approved sources and then the next year might be 7%
(43:06):
and then 10%. And we see this act of we call
this convergence whereby compliance carbon markets
instead of the permit being a permit that allows one ton to be
emitted, they will morph into markets where the actually what
gets traded represents the removal and permanent storage of
(43:30):
one ton. And this probably extends the
life of these markets by perhaps25 to 50 years because as you
know, we're going into massive overshoot and we're going to
have to be removing carbon for, for decades.
So I think, I think that that this is the, the what we call
convergence between compliance and Cdr.
(43:50):
It's very exciting. I think the issue is time
horizon and happy to tell you what the UK is doing and what
Europe is doing. Oh yeah.
I'd love to hear more about someof the specifics, although I do
feel honor bound to defend carbon removal people a tiny
bit. I think the way that you came
into carbon was a very interesting mix of first
principles thinking and empiricism.
(44:11):
Where you reviewed the literature, you saw that this
was the lever that you wanted tospend time pulling that had the
greatest potential impact, and you found your way there.
I think a lot of people come into carbon removal knowing that
carbon removal will be necessary, if for nothing else
for residual emissions. We just need to have this
technology. Ready to go?
And they come in from it that way and go from there.
You guys are looking at different ends of the telescope
(44:32):
I think is what happened. Yeah.
You know, as you know, Ross, I'm, I'm, I've done a very, very
deep dive on the voluntary market and I've I've, you know,
we came to a very strong conclusion that you just simply,
you know, should not be placing capital there.
We've got I can anyway, that's adifferent podcast, but many,
many no, no. No, it's, I think it's this
(44:53):
podcast too, but. But, but there's many, many
clients of ours that you know many have, have invested in very
large VCM projects had lost verylarge amounts of money.
We estimate last year between 3 and 600 million U.S. dollars was
lost in voluntary investments. But but within the voluntary, of
(45:14):
course, carbon dioxide removal is a very tiny subset we know
and I love Cdr. Why?
Why do I love Cdr? Very simple.
I'm an empiricist. If I can feel it, touch it,
weigh it, liquefy it, transport it, inject it and cap that well,
I know that is long term durablestorage.
(45:35):
And that is a simple, yes, it's it's 300, it's 400, it's 500.
But if that makes sense to me, it has to be more expensive
because you're getting what it is on the tin, right?
I mean, and, and when you understand as I do the, the, I
mean, let's not even go into it.You should get Elias Airy on on
on your podcast to talk about, you know, the multiple methods
(45:59):
that you know, a lot of VCM, both methodologies and then
projects are are games, unfortunately, but but high
quality Cdr absolutely love it and it and there's no question.
I mean, just to give you what's happening in the space.
So the EU has now issued their carbon removal and carbon
farming regulation and they've broken down Cdr into really 3
(46:24):
categories. Carbon farming, which covers
farms and forests, a permanent removal.
That's of course DAC Beck's and bio CCS, right.
And then a third source just like sort of everything else
that you know sort of outside ofthose those categories.
So they they are looking very care very seriously.
(46:48):
This is going to move through legislation in the next probably
20-4 months with probably an implementation, earliest
implementation date when Cdr permits and and these would be
EU approved permits would becomefungible for a portion of those
compliance companies for a portion of their annual
obligation. And let's let's put a number on
(47:09):
it 3% in year one or something small.
Now the history of this is very interesting.
Back in the days of the CDM, theclean development mechanism in
2000 and and 5 to 2008, the EU allowed international CDM
(47:31):
credits from global projects to become fungible for a large
portion of obligations. And Ross, I can tell you have,
again, having studied that and knowing people have worked very,
who worked very closely in it, it, it, it really was a disaster
because you had very low qualitycredits being used.
It collapsed the price. And remember what stimulates
(47:54):
abatement? Does a low price stimulate
abatement? No, at low price doesn't
stimulate. When the price of, of, of carbon
removal is high, then people abate.
So they there was a very bad experience with that in the EU
and it left a lot of scars. And I think that's a good thing
because I think when they bring Cdr in now it will only my hope
(48:16):
certainly be very high quality methodologies that will be
allowed durable long term storage.
The EU even mentions A-1000 yeartime horizon reason for storage.
So you know, biochar and DAC are, you know, are definitely in
the frame, but you know, wonderful too.
I wish they would accelerate this a little bit, a little bit
(48:38):
further because we know, as you just mentioned, like Cdr needs a
kickstart. We need, you know, and we had
today we had the, the news of climb works, you know, you know,
going to be doing major layoffs,You know, unfortunately I, I
don't know all the details, but you know, Cdr is a tough game
and we need, but we need Cdr desperately.
So I'm, I, I think this is greatnews that the integration of Cdr
(49:02):
Int will bring liquidity and demand to the Cdr market do.
You think the price of allowances in the EU will become
high enough that carbon removal can compete with it or even be
lower cost than allowances? So I, I think it's possible to
be lower cost. So, you know, again, you get
(49:22):
into methodologies here. Now there are some methodologies
I like that are pretty low, low cost biomass, biomass burial for
for instance, is something that,you know, I like the simplicity
of it. Again, the devil's always in the
detail with these methodologies,but certainly it, it, it ticks a
lot of boxes depending on again and all, it's always about your
(49:43):
feedstock when you have a, you know, a bi, a biomass.
So it's very important to track that feedstock.
But that could certainly be a lot lower cost than where the
ETS price is going. Our forecasts are that
EUETS&UKETS prices are, are going to be well over 100 USA
ton probably in, in, in 24 months based on the supply
(50:04):
demand relationship that is thatis occurring now.
So, you know, I think it's very possible that you could have
very competitive Cdr methodologies, high quality
methodologies that could be, youknow, around that level.
It seems that we're entering a period of increased
protectionism. I hope not.
It might just be that the World Trade system is going to
(50:26):
reorient and maybe move around the US, which has become
increasingly erratic in terms ofwhat trade goals it even has.
It's hard to even know. I'm wondering if that's going to
stick, if it will jolt back. I'm an American, I have
predictability returns and tradecontinues to improve.
But even before the second Trumpadministration, there have been
(50:47):
various indicators that protectionism would play a role
in carbon markets. I know that there have been
carbon removal companies, project developers who have
received strategic investment from Japan, so they would be
eligible to participate in the Japanese compliance market.
I know the EU is exploring whether or not global S credits
will be eligible for the ETS andor even just carbon compliance.
(51:10):
They have various policies that all interact with regard to
carbon there, but it's unclear. Yeah, those are all up for
debate. Is the world going to a new
commitment to free trade? Is it going in a more
mercantilist or protectionist direction?
What do you think is going to happen?
I think, you know, I think the signs are very clear that we're,
we're moving towards a more, more insular national, national
(51:32):
interests, which is a shame, right?
That's, that's not good. It's also, you know, someone
who, who's saying this last night.
If someone who grew up, you know, in a small town very close
to the US border, of course you know, almost everything I
consumed in in TV and stuff was,you know, from the USA and don't
(51:54):
feel. Too bad it's because all your
comedians come down and it's allCanadian anywhere.
But but you know, when I hear the US national anthem, that's a
moving experience for me as a Canadian.
Now, of course, I love my country, Canada, and the
Canadian anthem is the anthem for me.
But there's no question that what the US anthem evokes and
(52:16):
what the US stands for and stoodfor, you know, to see it crumble
now internationally somewhat is,you know, it isn't, isn't great.
So, you know, and and then it's being repeated by other
countries. You see, they're turning more
inwards. They're saying, well, if the US
is, you know, turning inwards, then, you know, why should we
(52:37):
engage? So let's hope Ross, but you
know, let's hope that this is a temporary, a temporary thing and
not a permanent thing. With regard to Cdr specifically,
the EU certainly has made it very clear right now in the CRCF
framework that it will only be European based projects and the
credits that come from that, theCdr that comes from that, that
(53:00):
will initially be considered forfungibility into the EUETS.
And, and again, you know, I think with, because of what
happened in the past, I think a cautious, slowly, slowly
approach really makes sense. The UK is slightly ahead of the
EU in this regard. And of course, being the UK,
they have, they can't use the term Cdr.
That would be too, too. They, they use the term GGR.
(53:23):
So it's called grief gas removals, but it's the same
thing. And, but they're on a quicker
timeline and could see integration of, of GGRS into the
UK emission trading system as soon, as, as soon as 2, two
years from now. Again, it'll be a small,
probably a small integration. They've also made it in their
(53:45):
consultation document, they've made it clear that the, the
addition will not affect the overall cap.
So they won't increase the cap on emissions.
These, these credits will have to be part of the existing cap.
And I think, again, that that's the right way of going about it.
Interesting. I'm actually really curious
about the privileging, especially of Becks within the
(54:08):
EU. And it should come as no
surprise that Europe is quite good at Becks.
I think that should make you wonder which of those came
first. That's a very cynical way of
framing the question. Is there anything to that, or is
that a conspiratorial mindset? I think, I think, you know, to
summarize that, you know, you get cynical when you get old
(54:32):
like me and you've been in business for so many years.
And it's just very apparent to me now that if you don't have a
policy that interacts with supply, demand, price or profit,
you are not on a winner, you aregoing nowhere.
You are not scaling unless you're interacting with these 4
(54:54):
capitalistic levers. And it's sad to say that right?
But that is the ultimate realization.
It's all about the money. So you know what the the
financial incentives and the long term financial
sustainability of Cdr. And this is I think what
Climbworks has to get to grips with, right?
Can they find the funding to sustain the drop down that
(55:18):
technology learning curve to getDAC down to that hundred kind of
$150.00 a ton? And I certainly hope they they
can sustain that. But it really does come back to
the, the financial economics. So when we talk about Europe and
the and the it's a combination of regular regulatory stimulus
or lack thereof, and then the financial incentives, you know,
(55:42):
and there's been some real successes on the bio CCS as you
know that Microsoft, I think dida big deal with the the the
Norwegian or not Norwegian. Are they Finnish?
Can't. I can't remember but but when
you take. This They're all over the.
Yeah, that you take that projectapart it, it they receive debt
funding for the European Development Bank funding like
(56:03):
like it was a multi faceted funding source to put that whole
thing together. And it again, it's early days,
but it certainly looks like they're going to have a very big
successful CCS facility capturing hopefully a lot of
carbon. You're in the UKI hear more bad
things about Drax and Becks in the UK than pretty much anything
else about Becks. I mean some of the big Nordic
(56:25):
deals look nicer, but I know it caused a lot of controversy
where you are too. Yeah, I have to say I'm not a,
I'm not a fan of the Drax conversion to backs.
You know, I don't know how closeyou've been following it, but
there's been multiple investigative journalistic
reports now that, that have sourced the fact that the
(56:46):
pellets, the wood pellets that come from Canada, some of them
have come from Canadian old growth forest.
And you know, that's just wrong,right?
And then and then to, to claim that, that, that you burn that
and the emissions go in the atmosphere and it's it, it
doesn't count under the emissiontrading system.
So since those reports have comeout, there's even been a
television documentary here in the UK on that.
(57:09):
You know, Drax has been hit pretty hard.
There's an investigation ongoing, I think with the
government. And separate from that, they're
in a consultation in the UK about whether should bioenergy
with carbon capture and storage or so, sorry, should burning of
biomass and releasing the emissions really be exempt from
(57:32):
the emission trading system? Because the, the, the, the
argument is the trees grow back,they suck, sequester the carbon
and then it's, it's like a closed loop cycle, right?
It's a neutral, but, you know, Ithink they're on weak ground
there. And I certainly hope the
government does the right thing and tightens that up.
Mike, that was fascinating. I always appreciate you being
here and teaching me so much about this to feel like I slept
(57:54):
on this for a long time. And I'm now starting to nerd out
on it much more heavily. So I basically just need to go
through all of the resources that you've gathered on your
website. I'll put the link in the show
notes to that too. If people are inspired listen to
this conversation. That's a great place to start.
Thanks for being here, Mike. Yeah, I know great or great Ross
and I know I, I blab on and on, but you know, I'm just, I'm, I'm
(58:15):
very passionate about it and butI'd loved, I would love to get
into these more like I, I know these other topics when it's
less empirical, perhaps not saying you're not an empirical
person, but what I like about the way your brain works that's
that's different than a lot of other.
It's like you have this great way of bringing in, you know,
emotion and empathy and into conversations rather than just
(58:40):
like this one we had was pretty empirical, right?
And, and so, you know, when we talk about the social cost of
carbon and, and, you know, some of these other things, I'm, I
know you'll bring in, you know, a lot of these other aspects and
it'll be a much more like, I don't know, emotional
conversation. I would love to be to do
something like that too. No, we could definitely do that.
(59:02):
I tried to bring it there a little bit too.
Being like what happened in my own.
Mind that made me so skeptical towards compliance markets and
so supportive of VCM for so long.
I think part of it is also just a base level American nest where
the scariest words in the English language are I'm from
the government and I'm here to help as Ronald Reagan.
One question that's. Part of our.
(59:23):
National psyche, whether you like Ronald Reagan or not, with
their culture. And I think I think that can
drive Americans in a very specific kind of way that may.
Leave them to be. More supportive and more
skeptical in ways that are contrary to the truth and
understanding yourself and knowing when am I making
decisions for poor reasons or and motivated in some on ideal
(59:44):
way. I think it's really important.
I'm always trying to check that in myself because you can know
that is true and still fail to point it in yourself.
But I appreciate you giving me achance to explore those ideas
and we should just do more there.
We clearly didn't exhaust your subject matter expertise of this
topic, and it's really fascinating.
So more to come, listeners, if you want to hear more about
compliance markets and difficulties with VCM, you drop
(01:00:08):
that money lost on supporting VCM projects.
God needs to be unpacked. Let's do another episode, Mike.
OK, great. Excellent, Ross.
Well, listen, have a great weekend and thanks.
Thanks very much for having me on.
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My Favorite Murder with Karen Kilgariff and Georgia Hardstark
My Favorite Murder is a true crime comedy podcast hosted by Karen Kilgariff and Georgia Hardstark. Each week, Karen and Georgia share compelling true crimes and hometown stories from friends and listeners. Since MFM launched in January of 2016, Karen and Georgia have shared their lifelong interest in true crime and have covered stories of infamous serial killers like the Night Stalker, mysterious cold cases, captivating cults, incredible survivor stories and important events from history like the Tulsa race massacre of 1921. My Favorite Murder is part of the Exactly Right podcast network that provides a platform for bold, creative voices to bring to life provocative, entertaining and relatable stories for audiences everywhere. The Exactly Right roster of podcasts covers a variety of topics including historic true crime, comedic interviews and news, science, pop culture and more. Podcasts on the network include Buried Bones with Kate Winkler Dawson and Paul Holes, That's Messed Up: An SVU Podcast, This Podcast Will Kill You, Bananas and more.
The Joe Rogan Experience
The official podcast of comedian Joe Rogan.