Swiping right on carbon credits: exploring voluntary markets | Fast Forward podcast season 2, episode 5 transcript

You can read the full transcript of our conversation between Fastmarkets’ own Andrea Hotter and Williams Adams, including an interview with experts Enric Arderiu, global head of environmental products at Mercuria, and Stuart Evans, chief economist and head of carbon at Fastmarkets.

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Full episode transcript

Fast Forward, season 2, episode 5 transcript

Andrea Hotter [AH]: Welcome back to Fast Forward, a podcast by Fastmarkets. I’m Andrea Hotter, Fastmarkets special correspondent, and this is episode five of our second series on critical minerals, energy security, and the energy transition. I’m joined once again by William Adams, Fastmarkets’ Head of Battery and Base Metal Research. How’s it going, Will? 

William Adams [WA]: Yeah, hi Andrea. Very good, thank you. And yourself? 

AH: Yeah, I’m not too bad. What have you been up to since I last spoke to you? 

WA: Actually, I’ve been down to Perth in Australia. So I spent two weeks down there visiting some of the producers and our customers down there. So yeah, yeally interesting time, really lovely weather, nice city. I think it’s a hard time for lithium and metals producers out there. 

AH: A lot going on in lithium at the moment as well. Yeah, absolutely. I’ve been to New York for the Copper Seminar, which was interesting. The copper markets is off the charts. You might remember that I interviewed the CEO of Freeport McMoRan, Kathleen Quirk, last summer. I highly recommend our listeners go back and listen to that episode. It was season one, episode four, I think. The main themes have definitely not changed since then. 

WA: You’d probably agree the copper market is looking really strong, whereas some of the battery raw materials are at the opposite end of the spectrum. 

AH: Yeah, well, this week we’re doing something a little bit different. We are sort of leaving the metals market. We are going to decode the strange and surprisingly fascinating world of voluntary carbon markets. 

Carbon credits might sound like something out of an accounting textbook, but they’re actually at the center of one of the most ambitious global experiments in climate action, from rainforest protection to cutting-edge tech that pulls CO2 from the sky. This is where carbon meets creativity. And this week is actually the London Climate Action Week, so it’s a very timely podcast as well. 

I spoke with Enric Arderiu, the Global Head of Environmental Products at Mercuria, and Stuart Evans, who’s the Chief Economist and Head of Environmental Markets at Fastmarkets. So, Will, shall we hear what they have to say? 

WA: Yeah, absolutely. 

AH: Gents, it’s great to be with you both. Thank you for joining the show today. 

Enric Arderiu [EA]: Thanks for having us. 

Stuart Evans [SE]: Yeah, thank you for having us. 

AH: Alright, so to kick us off, I think it would be very helpful if you had to explain the voluntary carbon markets at a dinner party or to someone who’s never heard of carbon credits, how would you break it down? Enri, do you want to take that to start with? 

EA: Yeah. I would say volunteer markets from a carbon perspective are really like markets that are not currently covered by compliance, by direct regulation, that requires companies to comply with a certain regulatory scheme from a carbon perspective. So it really is about corporates and how they can meet their own goals from an emissions perspective using voluntary carbon markets for that purpose. 

AH: Okay. Stuart, anything you want to add here? 

SE: Yeah, I’d say that you’re probably familiar with many companies having net zero and carbon neutral targets and this is just a manner of trying to achieve that. So of course, companies need to reduce their operational emissions. They want to make changes in their processes and technologies over time in order to directly cut carbon. 

But there is almost always in pretty much all companies, some emissions that they can’t reduce. And that’s where carbon markets come in, where you can use credits to neutralize or offset compensate. There’s lots of different kind of thirds that you can use, but to offset the emissions that you have left over at the end. 

AH: Alright, so they’re buying and selling carbon credits, and this is done on a voluntary basis, meaning they’re not required by law to do it. And this is outside of all of those government-mandated compliance schemes. 

So, who is actually participating in this voluntary carbon market? Are we mostly talking about corporations, governments, project developers? All of the above. Something completely different. 

EA: I would say it’s really the whole ecosystem needed to develop a, a marketplace from the very supplied side. So that’s underlying opportunities where you can reduce emissions, and those are incentivized through voluntary carbon markets all the way to the investors that need to develop those projects. 

In some cases, you can also have technical resources required and then all the way to buyers who can be final users or can be intermediaries and companies that actually make a claim associated with those credits, and that’s the underlying corporate. Or in some cases it could be even the personal use for credits that have been retired. 

AH: So definitely all of the above. And just to clarify, Stuart, where do those carbon credits actually come from? What kind of projects we’ll be talking about here? 

SE: Yeah, so it’s a pretty broad range of projects and they can differ quite a lot in terms of their characteristics. So generally, when we’re thinking about different project types, the simplest way to break it up, it’s to say there’s nature and tech-based projects, and they can be avoidance or removal. On the nature-based side, you’re looking at things like avoided deforestation, planting trees, so deforestation and reforestation. You might be looking at changing agricultural practices in order to store carbon within the land or some of the emerging project types, things like the use of biochar or the use of bioenergy with CCS. 

Some of these ones start crossing across those categories. So, bioenergy with CCS isn’t a perfect example where you’re using a biological feed stock and then you are putting it in geological storage. But that’s generally how we look at it. On the tech side of things, traditionally a lot of this has been renewable energy projects. 

So, looking at how do you decarbonize the grid with things like solar, wind. More recently, I would say things like clean cook stoves in the developing world has been a big source of credits, and this is also where you might see on the removal side of things, some emerging technologies like direct air capture with carbon capture and storage, which is really one of the kind of darlings of the carbon credit space at the moment, getting quite a lot of interest and some significant spend from tech finance, business services firms. 

AH: Interesting. I’ve definitely heard CCS mentioned quite a lot, carbon capture and storage as you mentioned there. So Enri, I do also want to put in context why you are here today to talk about this. Obviously, you work for Mercurier, which has got a massive presence in energy and other commodity markets. 

So why voluntary carbon markets? How did the company get involved and how does that fit in with everything else that you are actually doing? 

EA: Yeah, we are covering broader environmental markets, so that’s really anything that puts value to an environmental attribute. 

In some cases, it can be carbon. In other cases, it could be things, for example, low carbon fuel standards. We want to be active across both compliance and voluntary markets. It’s the same skill sets, it’s the same mindset, it’s the same type of investments. 

It’s just really what the product is gonna come up. Whether it’s gonna have a use for one market or another. 

AH: And how do you decide which actual carbon project to support? ‘Cause we already heard from the description of what these markets are. There are a lot of projects out there. So how do you pick which ones to get involved in? 

EA: Yeah, it’s a good question. I think it’s a mix of what’s our view on these markets? Where do we think they’re gonna go? What do we think are the technologies that are gonna be there and are gonna be supported by the different markets over time? 

So for example, Stewart was mentioning around renewables and renewables used to be a majority of the market. 

As renewables have become more cost effective, carbon markets have evolved, and instead of supporting renewables across the board, for example, now they’re very focused on certain countries, the least developed countries, for example. 

So really technology evolves over time. I think it’s really thinking through what is the underlying cost of abatement. 

I think that’s an important metric for us is like how much is it’s going to cost to actually reduce an emission or remove an emission. 

It’s important to understand what the customer wants, especially in voluntary markets, it’s very customer driven. So, understanding the underlying cost of such activity is important to think, okay, how much size of demand do we think there’s going to be for that specific governmental attribute? 

And for us, it’s important to have size. I think these markets are still relatively small, so understanding where demand might be and at what price points allows us to then go upstream and start investing in the underlying activity to develop the supply. 

AH: That’s very interesting, and I’m just curious as well, you know, obviously we mentioned MACU is involved in trading a lot of different commodities. How do you think the voluntary carbon market compares to those markets? When you look at the regulatory backdrop, the verification steps that are involved, the maturity of the market, is there a comparison or is it still too nascent to make that? 

EA: I think it’s very early stage. When you think about size, I mean, it depends who you ask, but we call it around $2 billion market size. 

So, it is small compared to other commodities. I mean, there’s some metals maybe that are traded in similar terms, very small volumes. I. But I would say in generally, it’s a very early stage, so it’s evolving regulation. We’ve gone through a process now of, let’s say, self-regulation for a number of years. I think there was a lot of issues identified around 2000, 21, 22, there was a push to create some level of standardization. 

So, there’s been initiatives created around this to bring a bit of a common standard so that everyone understands what is the minimum required, how they should be thought through, how the market can grow. I think if there’s no trust in the market, it’s difficult to see that growth. 

So, we’ve gone through that exercise over the last two years, and we are emerging at the back of this now with a lot more visibility on how voluntary carbon markets are going to look like. 

AH: Interesting. And I’d also love to know the answer to this question. What is the weirdest carbon project you’ve ever seen make it to market? Because I’ve been reading about cow burps, kelp farms, mining dust, all of these kind of weird and wonderful things. What’s the strangest one you’ve seen? 

EA: Uh, I don’t know strange, but I think one that is kind of interesting is SF6 recycling. It’s basically used for high-tension lines. It’s one of those things that you would not think carbon markets can help, ’cause they tend to be less charismatic. It’s very industrial and there’s less images and social impact. But actually, they are, from a climate perspective, extremely interesting projects. 

And I remember years ago seeing a project developed under that. I thought, “That’s really interesting.” 

AH: Okay. Alright. Well, I’d like to bring Stuart back in now too, obviously. We are talking here about voluntary carbon markets, which are getting a lot more attention, especially with this focus on net-zero commitments. 

Stuart, in your own experience, what are the key drivers behind this growing demand for carbon credits? 

SE: When we look at demand, we break it up into two categories, right? So, on the one hand, as the voluntary market, which is basically companies that have made some form of commitment. It might be net zero, it might be carbon-neutral, and they’re trying to work out, okay, how do we actually achieve that? 

‘Cause quite often what happens is a CEO will go out there, say, “We are going to commit to net zero by a certain year,” and then they’ll throw it to the sustainability team to work out how to make it happen. 

So, what you quite often see is that, yes, there are opportunities to reduce emissions from business operations, but there are emissions that are left over at the end. 

And then companies want to identify, okay, how can we utilize carbon markets and different forms of carbon credits in order to make up that difference? 

The challenge that lots of companies have, though, is that they have limited budgets, right? And some of the companies that you’re talking about might have very substantial emissions footprints. 

So it’s really about working out, how can they achieve their objectives? How can they credibly move along in terms of their decarbonization trajectory, while also looking to source carbon credits that meet their specific needs? 

So some buyers will have very large budgets. So, we’re talking buyers like Microsoft, Google, JP Morgan, that really have a low emissions footprint relative to their profit, which means that they can buy some of these more novel, more interesting project types. 

Whereas other companies that might have more modest budgets will be looking through these portfolios and saying, “Okay, what do we think is credible? What do we think is quality? What has certain attributes that might be attractive to us given our actual business and how we operate?” 

They might be looking for offsetting opportunities within their supply chain or within certain countries where they’re operating, and they’ll make a decision based on that assessment of price, quality, and, basically, how it looks when they’re putting it in an ESG report largely. 

I do want to mention the compliance markets, though, as well, because it’s really hard to understand the voluntary market without touching on the role that compliance markets play, because, as Enri mentioned, they are basically the same commodity that they’re being used for different use cases. 

And we are seeing in the next five to ten years that compliance demand is likely to pick up quite rapidly. 

So, carbon credits can, of course, be used in certain jurisdictional compliance mechanisms like California, but we see in the next couple of years that mechanisms like CORSIA – so the international aviation offsetting mechanism – are likely to drive fairly substantial demand for carbon credits. 

And similarly, certain countries might be looking to source carbon credits or other types of mitigation to meet the pledges that they’ve made to the UN in terms of their climate commitments. 

So, we’re seeing new forms of demand coming online that will be competing with some of those forms of voluntary demand as well. 

AH: Enric, do you see this as a sign that businesses are actually finally starting to get serious about climate action, or is this more of a tick-the-box mentality? “We’ve done it, let’s say we finished it.” What do you think? 

EA: I think it’s still very much tick-the-box, is my feeling. It’s regulated, it’s compliance, so you just have to do it. 

I think there’s a substantial part of corporate emissions that are not covered by compliance programs, and that’s for a range of reasons. It might be geography. Certain countries don’t have those programs in place. It can be to the type of emissions that are not necessarily covered. 

So then the question is, what else with the rest? 

I think just by definition, when you think about the size of the voluntary market, let’s call it 150 to 200 million tons a year of emissions that are retired, that’s just a drop in the ocean. 

I think that’s really driven by a range of things. The environment for it is not necessarily settled on how you can claim these underlying emission reductions. 

I think, for example, there’s been a lot of debate around things like the SPTI – the Science-Based Target Initiative – and how carbon credits fit into that. 

I think things like the mitigation hierarchy, because it does say, yep, you should reduce your own emissions first and then offset. 

I think that’s one of those things. It’s easier said than done because then the question is, when actually do you offset? Is it in 2040s or is it now? 

AH: Mmm. 

EA: So I think we’re moving towards a bit more realism, is my gut feeling. 

I think there’s an interest now in encouraging action instead of having this very purist approach that could potentially lead to less action in the foreseeable future. And I think that’s a healthy approach. Let’s make it practical. Let’s make it real. Let’s get as many corporates as possible to engage in this journey now, start effectively putting a carbon price in their emissions, whether they are regulated or not, because when you have a price and you’re pricing that externality, then by definition, corporates would start acting and managing their emissions in a different way. And I think it’s in everyone’s interest to reduce their underlying emissions within the business. But it’s just getting there. It’s just pricing that externality as the first step. And we’re doing that just on a subset of a corporate emissions at this stage. 

AH: Well, that makes sense. And I think also the more seriously people take it, it will help to eliminate some of the controversy around it, because the credibility of carbon offsets in voluntary markets definitely varies a lot. 

So I just want to whiz through this part, but I do think it’s really important to talk about the reasons why that’s the case. 

So, additionality is something we hear about with carbon markets. That means that the offset project does make a real difference. It reduces that carbon pollution that wouldn’t have otherwise been reduced because that means the reductions are additional. 

So, Stuart, just very quickly, why does additionality matter in a world of carbon credits? 

SE: Yeah, so additionality is really fundamental to the credibility of carbon credits and voluntary carbon markets because it is about ensuring that the activity that you’re financing, free carbon credits, is making a difference. That it is not something that would’ve otherwise been done and that it is therefore driving additional emissions reductions. 

And there’s lots of different ways in which the standards that are involved here try to test for additionality. They might look at, okay, is the project financially additional? So do you need carbon incomes in order for this project to get off the ground? Is an activity common practice in an industry, or are there regulatory and legal requirements that would require you to take a certain action? 

So if you can start working through that list of questions that you need to ask to decide if something’s additional, and you can start saying, yes, this is additional, then you can have a good degree of confidence that this carbon crediting project is actually making a difference. It is actually reducing or removing emissions from the atmosphere. 

AH: Can you give us a quick example of a project that passes that additionality test? Maybe one that didn’t, but definitely one that does. 

SE: Yeah, sure. So, the good thing is that most projects within the carbon credits markets at the moment have gone through that assessment and do pass that test. 

But maybe the example I’ll point to is one that we’ve referred to already, which is renewables projects in the past, a large source of carbon credit generation, but as the economics of renewables has improved over time, as solar and wind have become cheaper and more cost competitive with traditional generation, then they no longer really passed the financial additionality test in many markets. 

And because of that change, and because that is the case, standards have responded by sunsetting certain projects and only focusing on renewables as a credit generation mechanism in very specific circumstances, reflecting that change. And it really is quite important, I think, for the future of the carbon credit market, that it remains flexible and that it can continue to adjust to these changing circumstances as they arise. 

AH: Okay. Well, thank you. Another big issue we hear about is permanence. Now that means basically some carbon removal, like tree planting, for example, isn’t permanent because trees can die, they could be cut down, they could burn in fires and so on. And if that happens, the CO2 goes right back up into the air. 

So critics would argue that not all removals are lasting enough to count. 

My question, maybe Enri, you take this. How do we ensure that the carbon stored by a project, whether it’s in a forest or carbon capture technology or something else, actually stays locked away for the long term? 

EA: I would say really each type of activity, by definition, has different permanence, and I think there’s different mechanism that the market has developed to deal with that. 

I think, for example, traditionally we’ve built these buffer pools within the standard themselves. They set aside a percentage of the credits, depending on the assessment of the different risks, to cover for that type of mentality. 

So that’s one approach. I think that’s an approach that, as the market also develops, it has been developed. 

So, there’s a constant evolution on that, and I think that’s good. And then also at the same time, now we’re seeing more innovation coming into this space. For example, around insurance mechanisms, third-party insurance mechanisms. There’s an ecosystem now developing of insurance companies looking to apply more traditional routes. 

Like, how do you control for those risks? How do you manage it? And effectively, what is the sort of compensation that the financial market, reinsurance, could give you to cover that risk? 

AH: Definitely sounds like there’s been a lot of work done on the accountability and mitigation strategies as well. 

Okay. Alright. Let’s run through verification as well. 

So, once the carbon credit’s issued, projects need to be verified to make sure we know that emissions reduction or removal actually really happened. 

So, what does verification actually involve and who’s doing the verifying? Who wants to run me through that process and why we need it? 

SE: Verification, I would say, is the step after you’ve done all that initial work, you’ve put together a project, you’ve actually invested in it. It’s up and running. You’re reducing emissions, or you’re removing emissions. You do your calculations, your assessments, all the different kind of reporting that you need. 

Then effectively you need a third party, an auditing firm that has been approved by the standards. So only a subset of companies are authorized to play this role. To actually come in and say, has all this been done? According to the rules set up by the standard. And it’s a whole process. These things can take from three months to two years. 

So, it depends on the complexity of the underlying project. Cost also can vary significantly. It can be anything from $25,000 all the way to $500,000. So, it really varies depending on the underlying program. And basically, that’s what standards rely on for that third-party assessment to make sure that rules are being followed and it’s a process that has evolved too. 

There’s more visibility now, companies that are approved to do that role constantly evolve. Different standards have different types of companies with real specialty in the sector, right? They want to know, is this company understanding the underlying activity? Do they have the sort of skills needed to understand what is actually going on in each one of those activities? 

AH: Alright. Very interesting. This leads us nicely to greenwashing, which is a term that gets thrown around a lot when people talk about carbon offsets in the context of voluntary carbon markets. It means when companies claim to be climate-friendly while still emitting tons of CO2, they’re creating a bit of a smokescreen, or they promote projects that don’t genuinely provide climate benefits. 

Some critics, and I’m only playing Devil’s Advocate here, say companies should focus more on cutting emissions at the source, not just offsetting them. In other words, don’t create emissions in the first place. What does this all actually look like in the carbon market? How can we tell the difference between a genuine project and really clever marketing? 

SE: Look, every company that is participating in voluntary carbon markets, so any company that’s adopting climate targets, they’re trying to benefit in some way, shape or form, right? They want some form of marketing benefit. They want this to be something that is beneficial to them because it looks good to their customers, to their investors or to their employees. 

I don’t think there’s anything bad about that. What the concern is when it comes to greenwashing is that they are saying things that they’re not doing or they’re misrepresenting their actions. And I think that almost all companies are very concerned about accusations of greenwashing. They’re worried about their credibility. They’re worried about how that makes them look. 

But there are a couple of rules of thumb that you can look at to assess if companies are on the level, if they are taking action like they should be in carbon markets. One is to think about their own processes when it comes to sourcing carbon credits. Are they actually doing the research, doing the work to make sure the carbon credits that they’re buying are of high quality? 

Are they utilizing things like carbon credit ratings to identify what are the better sources of credits within a particular niche of the market? Are they actually spending real money on buying carbon credits? So, if they’re only sourcing credits that are incredibly cheap, so say less than a dollar a ton, then this could indicate that they’re not serious about ensuring the climate impacts of a given carbon credit and project. 

And if companies aren’t saying what credits they’re using or what activities they’re supporting, that might also be a bit of a red flag. You might want to dig into a bit more detail about the actions that they’re actually taking and whether this is genuine action that is moving the needle, driving investment in emissions reduction, or if this is something that’s just going into their ESG report without much basis behind it. 

But I would say that for most companies, they really are serious about ensuring that their sustainability commitments are credible, that they’re participating in carbon markets in a reasonable way, and they just really want frameworks that allow them to do that without facing the risks that come with accusations of greenwashing. 

AH: Definitely the transparency piece is very important there. 

I do want to move on to trading. When it comes to trading these markets, they’re obviously much smaller, as you mentioned at the very start, than compliance carbon markets. There was some growth on the voluntary side with more companies than ever buying carbon credits, but we have seen that enthusiasm wane somewhat. 

I’m curious as to what drove that initial surge, whether it was a true shift in corporate responsibility or a bit of a carbon gold rush, almost. 

EA: I would say it was really a mix. I think obviously ESG was front, left, and center, and then the question is, when you set your own targets, whether it’s under existing frameworks or your own frameworks, is really thinking through how am I gonna get to that target? 

And that’s where you end up defining, well, I’ll have a demand for carbon credits, and in some companies, you’ve done all the math and you already have a pretty good visibility on how that looks like. Once you get to net zero, you need offsets. There’s going to be removals and there’s going to be emissions. 

You’re always going to have those residual emissions. You will always need credits. And at that stage, when you get to that point, you’re going to need removals to balance those. So as a corporate, you had visibility on the role of offsets. 

So, if you were to take your climate targets seriously, you needed to start thinking, how am I going to procure this? 

EA: How am I going to manage this cost? And I think that’s where trading comes in to give you that visibility on pricing so that you can make decisions now and in the future. And I think it’s a little bit of the pendulum now that we’ve switched from a strong ESG to less of a priority that has impacted these markets because ultimately, they are voluntary, so they’re driven by corporates wanting to take climate action. 

I think it’s a temporary thing. It’s unavoidable that corporates need to take action. I think what we’ve seen also that is quite interesting from a pricing perspective, that has translated now after this pushback in terms of ESG targets, is we’re starting to see now much more differentiation, I would say, than in the past on pricing. We tended to move towards more like generic type of pricing, so avoidance had a certain price and removals had a different price. I’m simplifying, but largely those were the categories. 

I think we’ve moved away from that now. We’re really very project-driven, so each project has a different pricing. That complicates trading, right? When there’s so many different products, it’s difficult to commoditize the space. It’s difficult to come up with exchange contracts, for example, where people can hedge the risk. 

So, I think we’ve gone back now a little bit on how much trading there is in this space because it has been fragmented, so it’s still very OTC. But I think again, all this work that has been done in terms of defining what quality looks like, what are the right standards, what are the right activities, I think that’s going to help bring that standardization, which ultimately is what drives price formation. And you need price formation to drive capital investment in this space. 

AH: Yeah. Stuart, you’re nodding there. What are your views on price? Enri, there mentioned managing risk. I know Fastmarkets has launched some tools quite recently on this. Maybe you want to elaborate a little bit? 

SE: Yeah, sure. I would agree that pricing in this market has only got more complex over the last few years, and I would say that what we see in operating really is a bit of a two-speed market, right? 

So, a lot of the traditional project categories and projects that were capturing fairly significant prices three or four years ago have fallen by the wayside, and there’s only certain niches of the market that are seeing healthy pricing and significant deal flow at this point in time in the voluntary space. That’s very much focused on the high-quality segment of the market. 

So those projects that have gone through the rigor in terms of the different standards and have been assessed by independent third parties and found to be quite credible in terms of things like additionality, things like permanence, really demonstrating the environmental credibility. 

Now there are, of course, different types of projects and that interaction between quality and the types of project is quite important. So, a high-quality project of one type might still be trading at a much lower price than another project type. 

So, for instance, a high-quality avoided deforestation project might be going for $10 a ton, $15 a ton, whereas a high-quality deforestation reforestation project might be going for $30, $40, $50 a ton. 

So, there is still quite a widespread. Within each of those niches, the high quality is winning out. 

Secondly, I would say that where we are potentially seeing a bit more commoditization is in that compliance segment, where there are buyers who are focused on using carbon credits to meet their obligations. 

They might also have an interest in ensuring that it’s high quality for reputational reasons, but really, they’re looking at, okay, how do we meet this external requirement either from a government or from an international body? 

There we are seeing both additional trades to meet that compliance need, but in some cases, voluntary buyers are also piggybacking on some of those standards to say, hey, this third party has identified these credits as being of a sufficient standard to be used within their system. Therefore, we’re going to focus our purchasing in these areas as well. 

AH: Okay. And how are companies managing the risk of price volatility in this market as well? You mentioned that the exchange is not somewhere that they’re necessarily being able to turn yet, so what’s happening there? Stuart, do you have any thoughts on that? 

SE: Yeah, so in many cases, the risks of price volatility are being managed by people just trying to take the volatility out of the equation by entering into long-term contracts upfront before a project is even got off the ground. 

We’re also seeing, however, that there are an increasing array of secondary market support providers that are playing important roles. 

Players like carbon credit rating agencies that are acting as a validation mechanism for a given project, which really signals that they are of an insufficient quality to be traded, in which case you are seeing that there is demand and deal flow on secondary markets as well. 

So it’s happening on a project-by-project basis. And then project developers and investors are looking at developing portfolios of projects and credit types in order to manage some of that volatility. 

AH: Okay, so now I know that voluntary carbon markets might sound like something only policy wonks and corporate sustainability teams get excited about. 

So, I wanted to make it a little bit more fun and a whole lot more relatable for our listeners. So, it is time for everyone’s favorite climate nerdy game. Carbon Tinder. That’s right. 

We are gonna be swiping our way through the carbon offset world, deciding what’s hot and what is not. So I’m going to throw out two carbon credit projects. You have to swipe right on one that you love and swipe left on the one that you would ghost forever. 

So I’m going to give this first one to Enri. Do you swipe right on offshore wind farms or solar panels in the desert? A “windy” love affair, or soaking up all that desert sunshine? 

EA: Offshore. 

AH: Offshore. Alright. Any reason why? Give us a little hot take. 

EA: I think the technology is at an early stage compared to solar, so just think it needs as much help as possible, and carbon finance can bring that. 

AH: Alright, perfect. Now, this one I often wonder about because I’m asked this every time I try to book a flight these days: carbon offsetting with your flights. 

So, carbon offsetting your flight with tree planting, Stuart, or with biofuels. Which one? 

SE: That is a difficult one. I would swipe right on both of them, to be honest. They’re both legitimate ways to cut your carbon footprint. If you want to directly reduce your emissions, you need to go off the biofuels. But if you’re more cost-conscious, you might go the tree planting route. You’re gonna get more bang for your buck there. 

AH: Yeah, there you go. Well, two is just greedy, but I’ll let you have it. 

Okay, the last one we’ll do one, Enri. Feed additives for cows. Science that slashes cow burps/methane, or tree planting funded by a vegan food brand? So, carbon-neutral burgers, one tree at a time. 

EA: I would do the tree planting. I like trees. I like planting them, so I would do that. I think the other one is a valid way to reduce emissions. I think the question for me would be more like, is there a cheaper way to do it than maybe voluntary carbon markets? 

For example, can you regulate that? Can a country say from now on, all cows should take these additives because it’s going to reduce emissions? And I think that might be a more efficient way to do that. 

AH: Alright. Very good. Well, it just shows that carbon love can be a little bit complicated. 

And I know this might have seemed a little bit flippant, but Carbon Tinder isn’t actually that far from reality because behind every swipe are bigger questions like, is this real and is it allowed? 

So I think regulation, we should just touch very quickly on it because that is very much a part of this sector. The EU has introduced the Green Claims Directive. The USSEC has started to enforce disclosure requirements. International bodies like the UN are starting to develop more rules and standards. 

How are companies preparing for all of this, and is there resistance to this increased oversight? 

SE: Look, I think there’s a really mixed response to some of these different mechanisms. Of course, businesses quite often don’t like regulation. They want to be left alone to pursue their core business, to do what makes them profit. And quite often, regulation around sustainability is not that. 

But at the same time, a lot of businesses are also asking for some clarity on what are the rules at the gate. Because in many cases, that has been what’s been missing from voluntary carbon markets. 

Everyone is expected to work out what is credible, what is effective, and really, governments can play an important role in helping set standards, helping provide guidance on this is what is expected, this is what you should be doing if you are looking at making claims around net zero and carbon neutral. 

So, I think it’s actually a really positive development to have governments like the EU or in the US playing that role and helping herd the market in the right direction. 

AH: And technology is obviously a bit of a game changer potentially for carbon markets, as with many other sectors. From AI to blockchain and remote sensing, I’ve been hearing a lot about this in carbon markets. 

Enric, what’s the key thing we should know about technology and its impact on the sector? 

EA: I think technology should be about bringing more trust, and the way that technology can help that is really through different angles. One is, for example, remote sensing. What is going on on the ground? Is that activity taking place? Has a fire affected it? Therefore, do we have these planters up and running or not? 

That visibility is something we didn’t have five, seven years ago. So that definitely helps bring trust. 

I think then other things like, for example, how are financial markets going to support that? What are the different tools that can be created to bring that trust? I think, for example, blockchain, that’s been an element of development around that that is helpful to the market. 

It could also help bring carbon pricing down at the unit level, at the product level. I think that’s something that is key for companies who want to absorb the cost of carbon. How do you translate that into your customer offerings? Technology can help play that role, and I think that’s going to bring scale, trust and transparency into this marketplace. 

AH: Very interesting. I’m curious if there are specific improvements. You talked about the advantages of technology there and the need to improve trust. Are there any other specific improvements that would help increase the real-world impact of carbon credits? It could be that there are specific types of projects you think should be prioritized or something else. Stuart, any views on that? 

SE: My honest take is that we need more of everything, right? 

So, as Enri mentioned before, there is no world where companies meet their climate commitments that carbon markets do not play a substantial role. We need all different types of carbon credits. We need avoidance, we need removals, we need nature, we need tech and we need them at a larger scale than we have today. 

So really, what we need to see is the technology, the regulation, the coordination between different private sector bodies that supports the growth of carbon markets. Because this is a market that really needs to scale substantially if we’re going to hit our climate commitments and to enable businesses to meet the commitments that they’ve already made. 

So I think what we need is more, we need it faster and that’s the key thing. 

AH: Yeah. And it’s interesting you said “if we meet,” “if we get there.” Enri, do you think we will get to a world where we don’t actually need offsets anymore? We will meet all these commitments, and therefore, this market becomes irrelevant almost? Or not irrelevant, but redundant? 

EA: Well, as I said, I don’t think it will become redundant because in net zero you will need these markets. The question is, how do they look at that stage? 

And I think it’s all gonna be about the removals, and those removals, a lot of it is going to be technology at that stage. And we should encourage that. It takes time for technology to be able to develop these new activities. It takes time also to bring down the cost of abatement. It needs support to bring that underlying cost of abatement so that they can become competitive. 

So I think carbon markets can help deliver that, but it’s not the only solution. Especially for bringing down the cost of abatement, you might need direct policy interventions to encourage that technology development. But, but it’s not the only solution. Especially for bringing down the cost of abatement, you might need direct policy interventions to encourage that technology development. But definitely we will need to balance the system in a net zero world, and carbon markets can help deliver that. 

AH: Yeah, and as you said there, zooming out just a little bit before we finish, the voluntary carbon market is just one part of the puzzle when it comes to global climate action. 

How do you think these markets fit into the bigger picture of decarbonization? Presumably, carbon credits are not just a silver bullet to fix everything, right? 

SE: No, carbon credits need to operate alongside other policy mechanisms, other incentive mechanisms. They can’t do all of the heavy lifting on their own. 

They are a useful tool, but they aren’t a sufficient tool. They need to get bigger, they need to scale, but we’re going to need lots and lots of other interventions and incentives to make the technological, the business, the process changes that are implied by the decarbonization trajectory that governments around the world have signed up to. 

AH: Yeah. And Enri, I’m gonna give you the last word on this. What are your thoughts on the role of voluntary carbon markets in the biggest grand scheme of decarbonization? 

EA: I agree with Stuart’s comment. I do think it’s a set of tools. I think everything is required, whether pushing companies to adopt climate transition plans, pushing R&D in the tech space to reduce the cost of removals, creating new types of removals, policies, both at the country level but also how do you bring that to companies. Everything is needed. Carbon markets will be a tool, and they can be a very efficient tool in some cases, but at different stages, at different parts of the equation, we’ll need different tools. 

So it’s just as this evolves over time, carbon markets have to evolve to adapt to what is needed at that point in time to connect the system. 

And if we connect the system, I think the clear outcome of this is reduced cost for everyone. Because you add transparency, flexibility, and that’s going to bring down cost, which effectively is what everyone wants. Try to meet your goals at the lowest possible cost. 

AH: Yeah. Well, I think we’re going to have to wrap things up. 

I think we could probably go on and on. We’ve been whizzing through some of these topics. I think maybe we’ll have to do another episode in the future, focusing on the compliance side as well. 

So, I just wanted to thank you both so much for joining me today. This has been really interesting and very new for me as well, so I really enjoyed getting stuck into some of these topics with two of the great experts on this as well. 

So, thank you for coming. 

EA: Thank you so much. 

SE: Thanks so much, Andrea. 

AH: Interesting, huh, Will? 

WA: Yeah. Very interesting. It’s a fairly new world, isn’t it, as far as I’m concerned. 

AH: So, figure, what was the biggest takeaway? Because for someone like me who knew very little about carbon markets before, it was definitely a really interesting new area to learn about. What was your biggest takeaway? 

WA: Yeah, so I’m in the same boat. It is a new area for me. I didn’t really understand just how many different sort of projects there are and how such a big area it is. You’ve also got sort of the voluntary market, you’ve got the markets which are as a result of regulation as well. 

It’s quite a diverse market, and I think it’s also a market which is obviously going to grow very fast. 

AH: I agree. And my takeaway probably is the idea of carbon as a bit of a bridge whilst we decarbonize. But as you say, it’s really complicated. Voluntary carbon markets are full of ambition, I think, but they’re also full of complexity. 

WA: Yeah. 

AH: So, on that note, Will, I’m going to give you a little bit of a test here. 

WA: Sure. 

AH: So, I’m going to ask you, having listened to that, what is a carbon credit? 

WA: So, it is a tradable certificate that represents one ton of carbon dioxide or the equivalent of other greenhouse gases. And it represents removing or avoiding or reducing that one ton of carbon. 

AH: Very good. Well, that was impressive. You passed the test. 

I think it’s really good, as you said, to differentiate between voluntary and compliance. The way I’m thinking about it now is it’s a bit of a layered system, with the compliance setting the floor, but the voluntary action playing a role on top of that. 

We can get into that, but that kind of leads to that question, what is the point of the voluntary carbon market if it’s voluntary and not required by law? 

WA: Yeah, so I think a lot of companies are conscious that they realize they do have a carbon footprint. 

So, the voluntary carbon market gives them the opportunity to be able to do something about that so that they can actually go and buy credits from a company that is creating carbon credits and thereby they can offset their carbon footprint. 

I think companies are deciding to be responsible in that area by doing it ahead of time. And in time, it’ll probably become more and more compulsory to do these things, but these companies are taking the lead. 

AH: You know, that conversation made me think about the airline carbon offsets that you get at checkout when you buy a flight, and they’re part of that CORSIA scheme that was mentioned. The Carbon Offsetting and Reduction Scheme for International Aviation. A bit of a mouthful. 

I hate to admit it, but very often I’ll think about it when I see the option to tick it, and then I skip it because I don’t necessarily trust that the money I’d be paying actually contributes to lowering CO2 emissions. 

I’m sure it does, but that trust element is key. Isn’t that? Creating that legitimacy is really important here. 

WA: Yeah, it must be. And I think it’s only going to get more important. But there are so many different schemes and projects, and the regulation isn’t there necessarily yet. 

But that’s why these schemes need to be certified. There needs to be good accountancy for these schemes, and there needs to be transparency as well. 

But yeah, like you, I see how many kilograms of carbon dioxide I’m using, or sometimes when I take the train, it also says on the ticket by taking the train rather than taking the plane, you are saving 25% of your carbon dioxide that you would’ve used had you taken the car or something. 

So yeah, it’s all good to make people more aware of these things. So that’s another important aspect, I suppose, to this. 

AH: Yeah, exactly. As you say, it’s starting to creep into our daily lives. It is an industry that’s in its infancy, a bit like the battery raw materials markets. 

You are very involved in those sectors. Do you see any similarities, and does the voluntary carbon market face the same kind of hurdles that we might see? 

WA: Yeah, I think you can draw a lot of parallels. I think the battery raw material market is more advanced, probably, and at a further sort of stage of evolution than the carbon credit market. But both markets are obviously going to grow very fast. 

They are, to some extent, reliant on government, either regulation or government support, and that changes with the time. 

It changes with what government is in power. So, they all face those sorts of hurdles. 

A lot of these systems or mining projects need to raise a lot of money. So, there’s demand for finance out there. And the banks and people need to sort of understand these markets more. 

So yeah, there’s a lot of similarities, I think, in all these things. 

Governments are also having to make those decisions. Do they invest in these schemes? Do they help support a mine or a battery raw material processing operation, or do they need to put that money into healthcare or into defence? 

There’s a lot of different demands for these funds, and I think all these battery raw materials, carbon credit markets, voluntary carbon markets are all going to be competing for funds. 

AH: Yeah. And within the sector as well, there seem to be a host of different types of projects that provide the carbon credits. 

I mean, what’s your take on that? There are so many different schemes. 

WA: So, I think one way to look at it is that there are two different types of projects. You have the nature-based schemes, and you also have the tech-based schemes. And then within both of those sorts of projects, you can break them down. So, there’s the nature-based avoidance schemes, and then there’s nature-based removal schemes. 

And on the tech side, likewise, there’s the tech-based avoidance and the tech-based removal. So, nature-based is all to do with nature. So, it might be planting a forest or planting woods. It could be not deforesting a current forest. And then tech-based things would be more like generating energy by building a renewable energy plant rather than a fossil fuel plant or tech-based removal. 

Then there are various things like direct air capture, carbon capture technology, which is used to remove carbon from the air as well. 

AH: There’s also those legacy or low-quality credits that are often old or poorly verified, which are included as well. I mean, it’s really fascinating because another aspect of these markets is that prices for carbon credits vary wildly. 

When you ask someone what a carbon credit’s worth, the answer can be somewhere between $1 and $400 or $500 or $600. I mean, it’s incredible. Different project types have different costs, as we heard. 

So, we’re not comparing apples to apples here. 

WA: No, and I think that’s where what Fastmarkets is doing is providing more insight into that, more transparency into that. 

We’re doing 22 price assessments, I think, at the moment, and those will cover different regional schemes, different types of schemes as well. And I think there’s also how long a scheme has been running or how large a scheme is, and things like that, that will all affect the pricing of these various markets. 

So, yeah, there are a lot of different price assessments that need to be done to provide that sort of transparency in the market. 

AH: Yeah, well, that’s great, and if you are interested in these products, you can find out more about them on our website, under the market section. 

I think the fact that Fastmarkets has moved into carbon prices is honestly a big deal because it’s a bit like somebody’s finally shone a light into the sector. 

It’s bringing in actual benchmarks, as you said, real transparent pricing data, which is based on the project type, the quality, the location, all that good stuff that the industry needs to build that trust. That might encourage me to tick that box when I buy a flight. 

I’m curious. You fly a lot, Will. Has all of this made you start to think of your carbon footprint and the carbon footprint of the various airlines that you use? 

WA: Yes, it has. And as I said, it’s not just airlines, it’s trains as well. Train companies. And it makes you think, do I catch a train to go to London, or do I drive up to London? 

It’s probably not my governing criteria at the moment, but it’s something I am looking at. 

But I also noticed when I flew to Australia recently, on there it broke down exactly how much CO2 I had used in each leg of the journey. And on the app, it also gave you the option that you could actually buy credits to offset your carbon footprint from that journey, or you could contribute to sustainable aviation fuel as well. 

So, it does look like the industry is getting on board, some more than others. And I suppose transportation is one of the big ones. 

AH: And I admit for myself as well, knowing more about it, it does make me look at it and say, well, I know what the CORSIA scheme is now. I understand that it is used appropriately, and I do trust it more now. So, it will definitely make me rethink how I look at that. 

Will, you know, I can’t let you go without playing another round of Carbon Tinder, so I’m going to give you two choices. You got to swipe right for the one that you like the best. 

So here are your options. It is solar-powered EV charging stations. So, the cleaner energy enabler for electric vehicles. Or carbon capture at a power plant. So, the technology that’s aiming to trap emissions before they escape into the atmosphere. 

Who wins your vote? The solar-powered EV charging station or the carbon capture at a power plant? 

WA: Yeah, I think the solar panel at an EV charging station, ’cause the way I see it, it’s killing two birds with one stone, really. You’re using the sun to generate the energy, and then you are also facilitating the use of EVs as well. So that’s a double plus in my book. 

AH: Yeah, there you go. 

Well, I mentioned the copper episode earlier, and we have lots of other interesting episodes from the first and current series you can listen to. 

If you haven’t already, just go to fastmarkets.com/podcast for details. 

I know, Will, that our lithium event is happening this week in Las Vegas, so that’s all going incredibly well from what I understand. 

WA: Yeah, I think it’s a great opportunity to meet with the industry, to hear what other people’s views are. 

As I said earlier, you know, the market is in a tough situation at the moment. Prices are very low, so there’s a lot of interest in what lies ahead. 

AH: Yeah, definitely. 

And our next podcast is going to be a lot less studio-based and a whole lot more on the road… and on the rail as well, ’cause I’m going to be in Africa. 

So, stay tuned for that episode coming up in July. 

Will, it’s time to wrap things up. Thank you, as ever. It’s been really fun to catch up. 

WA: Yeah, my pleasure. Thank you once again, and I look forward to the next one.