Understanding the Voluntary Carbon Market
“Our carbon credit represents an investment in a carbon project somewhere in the world. So while your paramount interest as an emitter should be to reduce your emissions, parallel path investments in the carbon market, ensure that we can keep as many tons of CO2 sequestered or removed from the atmosphere as possible. If we look at forestry projects, landowners need the financial incentive to keep the trees standing, and the voluntary carbon market is one of the strongest mechanisms for that at the moment. There's no path to 1.5 degrees without protecting and restoring our forests and other natural carbon sinks. So continued investment in carbon projects is imperative.”—Tansy Stobart, VP of Strategy for BMO Radicle.
Michael Torrance, Chief Sustainability Officer, sat down with Tansy to discuss the voluntary carbon market, including some of the latest trends in what the future has in store.
Listen to our ~18-minute episode:
Sustainability Leaders podcast is live on all major channels including Apple
, Google and Spotify.
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Tansy Stobart:
Our carbon credit represents an investment in a carbon project somewhere in the world. So while your paramount interest as an emitter should be to reduce your emissions, parallel path investments in the carbon market, ensure that we can keep as many tons of CO2 sequestered or removed from the atmosphere as possible. If we look at forestry projects, landowners need the financial incentive to keep the trees standing, and the voluntary carbon market is one of the strongest mechanisms for that at the moment. There's no path to 1.5 degrees without protecting and restoring our forests and other natural carbon sinks. So continued investment in carbon projects is imperative.
Michael Torrance:
Welcome to Sustainability Leaders. I'm Michael Torrance, Chief Sustainability Officer with BMO Financial Group. On this show, we will talk with leading sustainability practitioners from the corporate, investor, academic and NGO communities to explore how this rapidly evolving field of sustainability is impacting global investment, business practices and our world.
Speaker 3:
The views expressed here are those of the participants and not those of Bank of Montreal, its affiliates or subsidiaries.
Michael Torrance:
Today I'm joined by Tansy Stobart, VP of Strategy for BMO Radicle. BMO Radicle provides carbon credit origination trading and advisory services. Tansy and I will discuss voluntary carbon markets, including some of the latest trends in what the future has in store. Welcome to the podcast, Tansy. Thanks for being here.
Tansy Stobart:
Thanks so much for having me, Michael.
Michael Torrance:
So let's start by telling the audience about yourself. Can you tell us who you are and what you do?
Tansy Stobart:
Yeah. So my name's Tansy Stobart, I'm a VP of Strategy within Global Markets. And so what that means in the day-to-day is that I'm part of a great carbon trading team, which came over from the acquisition of Radicle back in December. So in the day-to-day, I work in the voluntary carbon market. I work with brokers to secure supply for our end buyers and there's risk management in that and a few other things in between as well. So that's what it looks like on my end.
Michael Torrance:
That's very interesting. And so when you mentioned Radicle, just so for people who don't know, what is Radicle or now BMO Radicle?
Tansy Stobart:
Yeah. So since the early 2000s, Radicle has been enabling solutions to reduce carbon emissions. This takes a few different forms. We have an advisory team who helps clients measure and reduce their greenhouse gas emissions, as well as find opportunities for generating carbon credit revenue within that client's own sustainability practices. We also have a credit development team with strong technical expertise in carbon credit protocol development. We have a software team who props up both of these services with a SaaS solution for clients and project developers alike. And then finally, there's a trade desk that works with buyers to determine which carbon offsets are best for their ESG goals. And now we're super excited to be able to deliver this value to BMO clients and there's been a lot of traction so far.
Michael Torrance:
So what can you tell us about the VCM, the voluntary carbon markets? If you could give people some background on what that is and how did it come about and maybe how it differs from compliance markets?
Tansy Stobart:
Yeah, happy to. So you're right that the VCM definitely differs from compliance markets. Compliance markets are governed by regulators to manage emissions within their boundaries. So participation in a compliance market is non-optional for the regulated entities within those boundaries. So you can think of these as generally they're the heavy emitters, refineries, power generators, manufacturing plants, for example. The government will set an emissions benchmark and companies that exceed that cap can purchase credits, while those that reduce below the cap can sell their credits into the market. There are compliance markets around the world, a couple that our listeners might be familiar with are Alberta and California.
The voluntary market, however, is exactly what it sounds like. It's a market for purchase of credits for those who choose to offset their emissions. So if we look back to its origins, it was born in the late 80s, early 90s, and it was developed by some non-state actors who were looking for a way to certify and trade emissions reductions outside of the UN country to country trading scheme of the Kyoto Protocol. The first standards launched in the early 2000s. So you could say that the market's, say, 20 odd years old. Now, as part of their ESG strategies, companies are choosing to go net-zero. Many of them focus on net-zero by 2050, aligned with the Paris Agreement, and some of them are even more ambitious than that with goals of net-zero by 2040 or 2030. We call these interim targets.
And carbon offsets are often a big piece of those strategies. So the purchase of an offset by a company represents an investment in a project that either avoids CO2 from going into the atmosphere or removes CO2 from the atmosphere. And a buyer in the VCM, one of these corporations, can invest either by directly financing a project developer, purchasing spot or forward credits from a broker or intermediary or by trading a handful of standardized contracts on screen. If you want to look at size, the VCM is worth around $2 to $3 billion in comparison to the compliance markets which are valued in the hundreds of billions. So that's the context that we're sitting in when we talk about the VCM.
Michael Torrance:
Given the origins of the VCM market, what's the state of the market today?
Tansy Stobart:
Right now, I'd say we're facing a few challenges, but also a few opportunities. While we saw a major growth in '21 and '22, aggressive Fed tightening has made discretionary spending a real challenge for corporations. And yes, ESG is seen by many as discretionary. At the same time, higher interest rates have driven risk reductions by trading desks like the one that I sit on, and it's resulted in a lot of supply hitting the market. At the same time, negative sentiment in the market has further slowed actions by corporate buyers as headline risk about transacting in the VCM is a worry. But private capital has engaged in the market in a way that it has never been before with markedly more players in the space than we were seeing 24 months ago. So to sum it up, I would say the VCM is at a crossroads. It's got to go at a quicker pace than ever before to contribute to the global goals around net-zero, while simultaneously evolving to incorporate increased demand for rigor and transparency.
Michael Torrance:
And so you mentioned that standards are used in order to try to create some framework for how these markets work. Can you maybe elaborate on that? What are those frameworks and how do voluntary carbon markets preserve integrity and give participants assurance about what's being traded?
Tansy Stobart:
Yeah, so there's a handful of standards in the space who are tasked with ensuring that credits are integral, that they meet certain levels of rigor and additionality and permanence. There's many different attributes that a carbon credit needs to meet to be sold on the market. Some of these are Verra, Gold Standard, CAR, ACR. There's a handful that you'll see in the space when you start looking into it. The role of these is to make sure that we really have a strong market. So while there aren't government entities, there are standards that everybody looks to, which have set methodologies based on project types.
Michael Torrance:
And so where is that going? So you've mentioned a few of these standards. Is that sufficient in order to help scale these markets? Or do you see there being an evolution in terms of standards and expectations for voluntary carbon markets?
Tansy Stobart:
So what I'd say is while we expect that the standards that we have at the moment will be the ones that stand in the near future, there are many voices in the room regarding integrity and best practices. This year really represents quite a watershed moment with multiple bodies coming out with guidance on what makes a high integrity credit and what makes a high integrity claim by buyers using those credits. In the last few months, we've heard from the Integrity Council for the Voluntary Carbon Market or ICVCM, who's published their Core Carbon Principles. These are basically the attributes that all carbon credits should have to be considered high quality in the eyes of the ICVCM. We've also heard from the Voluntary Carbon Markets Integrity Initiative who have advocated for users to invest in offsets for beyond value chain emissions.
And so while the involvement of these groups is heartening because it represents a maturing of the market, reception to this guidance seems mixed to this point, and the confidence we need for real scale, I'd say hasn't yet materialized this year. Interestingly, while the market is certainly suppressed at the moment, we do still see buyers engaging in retiring offsets. BNEF does a really good monthly report. If you want to understand the month to month dynamics of the VCM, I'd definitely point our readers towards that. And the other thing to flag, we also see buyers building up portfolios now for retirement by 2030, so hedging against a future state while the market is currently at lower prices.
Michael Torrance:
So in my role, I oversee BMO's Carbon Neutrality Program and there's specialists on my team who are very knowledgeable about how to maintain carbon neutrality and purchase offsets, have diversification within that program, and to follow these kinds of best practices. What advice would you give to someone in my position or their position managing a Carbon Neutrality Program for a bank and looking to source from the voluntary carbon markets in the absence of clear oversight? I would imagine there's a lot of decisions that have to be made by market participants and particularly buyers of these kinds of credits. What are the best practices and the approaches that you would recommend those buyers take?
Tansy Stobart:
Yeah. So I think despite the lack of firm guidance, there is a pretty clear mitigation hierarchy that I think a lot of folks in the space are currently agreeing to as to how you can achieve net-zero. I'd say there's five steps. Number one, you've got to measure. Assess your entire value chain and identify sources of emissions across your scope, one, two, and three. Which I'm sure Michael, your team is doing constantly. Number two, set targets. So with a full picture of your climate footprint, you can develop targets to eliminate emissions on a timeline that aligns with the Paris Agreement, so up to 2050. Number three, and this is a biggie, commit, share and plan. So make your intentions public with clear interim targets. Think about setting that 2050 goal, but you also need targets for 2025, '30, '40, and share your plans for each of these. So if you were announcing today, I'd probably recommend that you are sharing the concrete ways in which you're aiming to get to that 2025 and 2030 target alongside your announcement.
Number four is really where the action happens. So get to action, reduce your emissions in your business and your value chain. Of course, it's easier said than done here. And as you reduce, invest in high quality offset projects for those hard to abate emissions. So when you pick your projects, I would say fulsome due diligence is critical path at this point, particularly with recent headline risk in the VCM. So if you don't have in-house expertise, work with an expert partner. And number five, I'd say report annually, of course, to your stakeholders, let people know what you're doing year after year.
Now being very realistic, few companies are going to be able to reach net-zero through emissions reductions alone. Which leads me to your question as to what you need to think about when you invest in offsets, when you get involved in the VCM. In the market, there are avoidance credits, so think deforestation or renewable energy projects. And there's removals. So these can be nature-based, like reforestation or technology-based, like direct air capture. Preferences range when we speak to clients, so jurisdictionally, some folks are looking for local solutions, others are really looking for great co-benefit stories like investing in cleaner cook stoves that burn less charcoal indoors, therefore reducing air pollution and improving the health of those who are using the stoves.
Finally, of course, when you're looking at offsets, you need to consider price. So do you have it in your budget to spend $200 to $800 per ton on technology based removals or are you in the $2 to $7 range for renewables? We see many folks opting for a blended portfolio that allows them a little bit of this and a little bit of that as they look at their whole five-step plan. These are many of the considerations that folks are looking at. So there's a lot of choice out there, which I think is great, but it does take some consideration, due diligence and advice to really pin down what your best investment would be, that fits in best with your ESG plan.
Michael Torrance:
So just a final question then, Tansy. You're in the weeds on carbon markets, what are you most optimistic about and looking forward to? And what should those of us who are interested in the development of these markets be on the lookout for over the next year, three years, five years?
Tansy Stobart:
So when I'm looking at the most interesting areas in the market to watch when it comes to the VCM at the moment, I start with removals, which are getting a lot of press at the moment. And for good reason, these are some of the most innovative projects out there. There's high demand for technology-based removals with major companies having announced recent investments. But the technology is still nascent and the volumes aren't there yet, realistically. So for example, on direct air capture, as of last year, there were 18 projects in the world capturing 10,000 tons a year. You can compare this to nature-based projects where we saw over 200 million tons traded in 2021. Progress is really exciting and I think in the next three to five years in particular, we'll see lots more progress on this front, but we just simply don't have enough supply right now for everyone to have access to these credits, even if their budgets allow.
So I think in the interim, nature-based removals such as reforestation and afforestation are good options and a lot of those projects can be purchased as spot volumes. The other thing that we're watching is private capital in the VCM. We've seen more investors enter the market in the last 24 months than ever before. At BMO, we're developing various financial products for our clients looking to gain exposure to the carbon markets. So I think it's definitely an area to watch for scale in the next couple of years. And I would also say an interesting area, which might come with challenges, but also I think lots of opportunity is the convergence of the VCM and compliance markets. So bear in mind for governments, carbon markets are a tool to help them achieve their targets too. And in the Article Six piece of the Paris Agreement, which I imagine many of our listeners will have heard of, they specify how countries can cooperate in achieving their targets.
The VCM and Article Six are independently governed markets, but we are likely to see more convergence of these markets with time. We've already seen a little bit of blending when it comes to adoption of methodologies from one market to the other. In future, we're also likely to see buyers from both markets accessing the same pool of credits and potential fungibility of credits between markets. So I think this convergence comes with some short-term concerns, but eventually it'll lead to more trust, less confusion, more action, hopefully in that timeframe that you outlined there over three to five years.
Michael Torrance:
That's great. Is there anything else, Tansy, that we didn't get to that you'd like to raise?
Tansy Stobart:
Michael, in its simplest form, our carbon credit represents an investment in a carbon project somewhere in the world. So while your paramount interest as an emitter should be to reduce your emissions, parallel path investments in the carbon market ensure that we can keep as many tons of CO2 sequestered or removed from the atmosphere as possible. If we look at forestry projects, landowners need the financial incentive to keep the trees standing and the voluntary carbon market is one of the strongest mechanisms for that at the moment. There's no path to 1.5 degrees without protecting and restoring our forests and other natural carbon sinks. So continued investment in carbon projects is imperative.
If you're a corporate ESG leader, reducing emissions, deciding where to allocate limited budgets, determining what you can abate and what will be a challenge, we understand that these are really big issues and big challenges that you're facing. My best advice is to seek out a trusted advisor if you don't have the internal expertise. BMO, of course, stands ready to help via the Radicle acquisition. If you're looking for advisory support, GHG analysis, if you think you've got an initiative that may be able to generate revenue via carbon credits, if you're looking to invest in the market or you just don't know where to start, definitely give us a call and looking forward to talking to some of our listeners soon. Thanks.
Michael Torrance:
Very good. Well, thank you for your time today, Tansy.
Tansy Stobart:
Thanks so much, Michael, for having me.
Michael Torrance:
Thanks for listening to Sustainability Leaders. This podcast is presented by BMO Financial Group. To access all the resources we discussed in today's episode and to see our other podcasts, visit us at bmo.com/sustainabilityleaders. You can listen and subscribe free to our show on Apple Podcasts or your favorite podcast provider. And we'll greatly appreciate a rating and review and any feedback that you might have. Our show and resources are produced with support from BMO's marketing team and Puddle Creative. Until next time, I'm Michael Torrance. Have a great week.
Speaker 4:
For BMO disclosures, please visit bmocm.com/podcast/disclaimer.
Michael Torrance
Chief Sustainability Officer
Michael Torrance is Chief Sustainability Officer of BMO Financial Group and is passionate about sustainability, especially as it pertains to corporate governance an…(..)
View Full Profile >“Our carbon credit represents an investment in a carbon project somewhere in the world. So while your paramount interest as an emitter should be to reduce your emissions, parallel path investments in the carbon market, ensure that we can keep as many tons of CO2 sequestered or removed from the atmosphere as possible. If we look at forestry projects, landowners need the financial incentive to keep the trees standing, and the voluntary carbon market is one of the strongest mechanisms for that at the moment. There's no path to 1.5 degrees without protecting and restoring our forests and other natural carbon sinks. So continued investment in carbon projects is imperative.”—Tansy Stobart, VP of Strategy for BMO Radicle.
Michael Torrance, Chief Sustainability Officer, sat down with Tansy to discuss the voluntary carbon market, including some of the latest trends in what the future has in store.
Listen to our ~18-minute episode:
Sustainability Leaders podcast is live on all major channels including Apple, Google and Spotify.
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