Exploring the future of the voluntary carbon market

Title: Voluntary Carbon DSzt Edit v1

Duration: 63:38 minutes

Description:

Panel discussion on the future of voluntary carbon markets following the developments at COP26.

Voluntary Carbon DSzt Edit v1 Transcript

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Welcome

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Katie Sullivan, Managing Director, IETA.

Katie Sullivan

Hello everyone, and welcome from wherever you are in the world. Thanks for joining today's timely webinar, co-hosted by Shell and BCG. I'm Katie Sullivan, Managing Director at IETA, the International Emissions Trading Association. For over 20 years, IETA has been the business voice for the intersection of markets and climate change. On behalf of our 200 members across the carbon value chain, I lead efforts to inform market solutions to address climate across the Americas and with my team, globally.

I'm honoured to moderate today's session, where we'll explore highlights from the UN climate talks in Glasgow and the rapid evolution of the world's voluntary carbon market.

Before we begin, a little housekeeping. On your screen, you'll see links to download the new Shell/BCG voluntary market reports. You'll also see more information on our panellists, and the ability to enter questions. We'll have an open Q&A session at the end, so don't be shy. Feel free to send questions over the whole course of the discussion. Also, you can make the Media Player full screen by clicking on the top right of your Media Player widget.

A quick security moment. Make sure that you're joining us from a safe place throughout the event. For those at home, make sure your workspace is ergonomically friendly, and in case of emergency, you have an evacuation plan. For those at the office, note the location of the closest emergency exit. If you hear an alarm, leave the webcast and follow instructions of your safety wardens.

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Katie Sullivan, Managing Director, IETA. Bill McGrath, GM Global Environmental Products, Shell. Anders Porsborg-Smith, Managing Director and Partner, BCG. Chris Webb, Global Carbon Markets Director, The Nature Conservancy.

Katie Sullivan

Now, I'm delighted to introduce our fantastic speakers. We have Bill McGrath, General Manager of Shell's Global Environmental Products Division. Since 2012, Bill has expanded the business from only London to now four global hubs serving 14 environmental markets. We also have Jasper Nielsen, Managing Director and Senior Partner at BCG, where he leads the group's social impact practice.

We have Anders Porsborg-Smith, Managing Director and Partner also at BCG, where he's global lead for commodity trading and risk management. Last, but certainly not least, we have Christopher Webb, Global Carbon Markets Director at The Nature Conservancy, or TNC, where he focuses on market solutions for natural climate solutions.

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Katie Sullivan

So, let's get things started. I'll first hand it over to Bill to provide a quick introduction and share context on how Shell and BCG partnered on their new voluntary carbon market reports. This will be a really great starting point for today's discussion. Bill, over to you.

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Bill McGrath, GM Global Environmental Products, Shell.

Bill McGrath

Thank you, Katie and welcome to everyone. Thank you for joining us in this discussion on the voluntary carbon market. Tackling climate change is an urgent challenge, and while businesses are looking to play their part in developing strategies for reducing and avoiding emissions towards zero, for many, reaching zero simply isn't possible with the available technologies and solutions. Indeed, in some sectors, practical alternatives have yet to be developed.

Carbon credits can help close the gap. That they can. But let's be clear. Carbon markets and offsetting are not a substitute, not a substitute for avoiding or reducing emissions. Yet, the world cannot simply wait and allow cumulative emissions to grow while businesses develop the solutions for the future. Carbon credits allow businesses to act now and make a difference now. As such, they can be a vital part of the decarbonization solution.

As more businesses turn to carbon credits, we all have an interest in ensuring that the credits used are the highest quality. To do that, we need a carbon market that provides more high-quality carbon credits while retaining credibility and consumer confidence. The market needs to develop and mature if it is to meet the needs of a growing number of customers.

Working with BCG, we wanted to better understand what a successful market might look like in the future. BCG in turn sought the views of 116 industry experts to help ground their analysis in the practical experience of those who were developing and implementing sustainability strategies for business every day, today. This led to two reports, the first of which, titled An Outlook on the Voluntary Carbon Market, is an examination of the market and the way in which different scenarios for its futures could develop. The second is A Strategic Approach to Using Carbon Credits, which sets out a framework for businesses as they consider how to engage with this market.

We also put together a third report, which is Ensuring High-Quality Nature-Based Carbon Credits. This captures the lessons we, Shell, have learned over the past half decade in interacting with the market both as supplier and consumer, and the steps we take to secure a high-quality supply.

It won't have passed you by that in addition to the publication of these reports, the past few weeks have been significant for climate discussions. With COP26 concluded, this seemed like an opportune moment to look at what has been achieved in Glasgow, what it means for some of the scenarios we put forward in the outlook report, and the implications for businesses as they develop their carbon neutral pathways and result in offsetting strategies.

I'm delighted that such a variety of businesses have joined this webinar. Please do get involved and ask questions, and get in touch with us after the session. We want to continue the conversation and we hope, help scale up a transformant, verifiable and effective voluntary carbon market, and through that process, support our customers in their decarbonization journeys.

With that, Katie, I'm going to hand back to you to set up Jesper.

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Katie Sullivan

Excellent. Thanks very much, Bill, I think it's a perfect way to start us off. And it is, it's great to see a broad range of organizations join us today from across sectors and borders. We really are at a pivotal point for carbon market growth and activity, but it's absolutely critical that as the voluntary market scales and interacts with compliance markets, we work together to enhance its transparency while also ensuring integrity.

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Katie Sullivan

Now I'm going to hand it over to Jesper from BCG, who only a few weeks ago, although it seems like a few months ago now, was actually on the ground with me and the team at COP26 in Glasgow. Jesper will share his main takeaways from the UN talks, including the long-awaited, hard fought outcome decision on Article 6 of the Paris agreement, a framework that should have tremendous impact on carbon markets, and an article that IETA's community certainly holds near and dear to our hearts. Jesper, over to you to tell us what happened at COP26.

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Jesper Nielsen, Managing Director and Senior Partner, BCG.

Jesper Nielsen

Thanks, Katie. I think David, if we can put up the slides.

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Jesper Nielsen

I very often get asked was COP26 a success or was it a failure? My short answer is that it was a success in the political context. I think it exceeded reasonable expectations. But it's obviously not enough, it's not enough to really hit 1.5 degrees, and I think coming out of the conference, I think we all know that it is barely alive.

I do think that one big positive was that I think all major governments and a lot of the big businesses, the whole financial communities are now aligned around the shared goal of net zero. I think that, combined with the urgency that we have in terms of climate, I think that means that we will see an acceleration of the climate transition. I think we will see exponential growth in the energy transition, and we will see exponential growth in carbon markets as well, including the voluntary side.

One thing that I also discussed with many people at the COP was the need for a demand-side claim for the journey to net zero. Just before COP, SBTI came out with their net zero standard. However, it doesn’t talk about the journey of actually getting there besides a science-based abatement pathway in value chain.

I think that we will see over the next 12 months a claim coming out that is deemed as credible, that will address also the compensation side of the journey. I think that will be another major demand signal to corporates and help fuel the market.

Lastly and most importantly, we obviously had, finally, an agreement on Article 6. I think that is a demand signal both for the compliance market, obviously, but it will also have spill over effects for the voluntary side, and I think likely to lead to a convergence over time. If we go to the next page, I'll talk a bit more about that.

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Jesper Nielsen

First of all, I think that we will see a lot more demand on the compliance side. Clearly, we'll see Article 6.2 transactions, Switzerland is starting to pioneer that. I think that we'll see some regional ETS schemes incorporating the ITMOs into their schemes. On the voluntary side, I think we'll actually see some corporates starting to use the compliance products, the ITMOs, for voluntary purposes. I think we will especially see this in the tech sector and the consumer sector, where they will try to strive for the highest possible quality of credits.

This will be including corresponding adjustments, which is obviously one of the big questions for voluntary markets now. I think questions around that will continue, at least for a while, and will create some uncertainty. We have Gold Standard going one way as we know, and Verra is now debating what way that they will go.

We think that the most likely scenario is a tiered marketplace, where at the top, we have the ITMOs, and then we'll probably have different types of voluntary products priced off that benchmark liquid ITMO. That could very well include products that essentially are built on the same methodologies as the compliance market, just without the corresponding adjustment.

This is what point five here is all about. I think that we see over the next three years, we would see a convergence of methodologies used in the new CDM 2.0 mechanism, and over time, that the voluntary market will mirror those same methodologies. I think it would be difficult for any corporate to have difference of quality between the two types of offsets that they will be using.

I think that will link to, that will mean that we will transition to what we call the linked market scenario on the next page.  

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Jesper Nielsen

This we think is the most likely scenario. It will mean that we will have at least one gigaton per year of demand by the end of the decade, but honestly, it could be a lot more than that. I think every time I look at this, my demand forecasts go up, and obviously, if we get that claim standard I mentioned, if we get these links to the ETSs, I think we will easily see two plus gigatons per year, and that will obviously make a real difference for our fight against climate change.

Demand is likely to exceed supply, leading to a shortage. I think to fill that shortage, we will need quite large-scale REDD plus projects. I think that's one of the only real levers to get to these levels of supply that are necessary. Even so, we will see price increases, both because of the shortage, but also because these higher prices are necessary to really unlock that supply.

For the compliance part of this, I think actually, we'll see even higher prices, because the corresponding adjustments will mean that supply will be even more limited. I think we will see governments retain some of the lower-cost projects for themselves or locally, and therefore, we'll see that international projects will have to go up the cost curve in terms of abatement, and therefore drive prices up.

That does create some risk, I think, to the demand. I think we are very confident in demand at the up to $20 a ton, but if we're talking $30 or $40 a ton, or even $50 a ton, I think we need to see what happens on the demand side for the voluntary purposes, obviously not for the compliance purposes.  

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Jesper Nielsen

In summary, we think that COP26 is a significant demand signal for carbon markets. We think that the voluntary carbon markets will grow exponentially, and we see convergence with the compliance markets, with the voluntary markets increasingly mirroring what happens in the compliance markets. Thank you. Back over to you, Katie.

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Katie Sullivan

Thanks so much, Jesper. Great insights, crisp overview from Glasgow and leaning into markets and Article 6 and what the future could have in store. I think you've set the stage perfectly for our panel discussion, where we're going to dig deeper into the COP potential impacts on the VCM and outlooks for what's ahead. Thanks for joining us, and hope to see you again, hopefully before Sharm El-Sheik in Egypt next November at COP27. Thanks again, Jesper.

Jesper Nielsen

Sounds good, thank you.

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Katie Sullivan

I'll ask the rest of the panellists, Bill, and we have Anders and Chris join me on video. Excellent.

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Katie Sullivan, Managing Director, IETA. Bill McGrath, GM Global Environmental Products, Shell. Anders Porsborg-Smith, Managing Director and Partner, BCG. Chris Webb, Global Carbon Markets Director, The Nature Conservancy.

Katie Sullivan

Some great scene-setter presentations from Bill and now Jesper. Let's start with just a segment on COP26, recognizing, many people are still digesting what's coming out, and we're seeing these reflections and briefs on what seems to be on a daily basis now, since Glasgow, including from some of these key standards out there, like Gold Standard and Verra and I know ACR is coming out, and IETA's voluntary hub, ICROA will also be publishing reflections on Article 6 decisions and VCM potential impacts sometime this week.

With that, I'd actually like to first tee up Chris. Chris, with TNC, fellow traveller across all these markets, and certainly, UNFCCC circles, how are you and TNC interpreting what's come out on Article 6 from Glasgow, and what it means really, for the VCM going forward?

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Chris Webb

Great, thanks, Katie, thanks everyone.  Great to be here with you today. I'll say a few things, partly to emphasize some points that I think have already been made that are worth emphasizing, and also bring in some things that I've heard both inside the negotiations and things that were going on outside in the broader conference.

Having said that, one of things that myself and my colleagues have been doing, and some of you may have already seen this on Linked In, but if not, if you find me, then you'll find it. It's a plain English interpretation of what we think was in Article 6, and we've put it up on Linked In because we'd really like to try and crowd source others' ideas, because I think one of the things to take away, is we've got a great signal on that demand side, at that macro level. But the implementation still seems a little uncertain. Do take a look at that. Hopefully, it tries to turn all of that Article 6 language into something we can all digest.

Some things that I heard. I think the first point to make is this point about growth. We really expect COP26 to really have given that boost to continue growth in the voluntary carbon market. Not just the net zero commitments that you heard, but actually, the fact that governments have got Article 6 over the line, I think is a real indication at a political level that governments are supportive of markets. It's no longer if they will support them, it's these detailed rules of how. I think that political support will be very helpful for businesses in the voluntary carbon market as it looks to further scale.

Two things I saw as I was walking around the conference centre rather than inside the negotiations, one, I really saw a huge amount of new technology being brought to the voluntary carbon market, whether that's in satellite data for monitoring and reporting, or some really interesting uses of data to help buyers understand risks in underlying projects and credits. So, one of the things that I think we could see is some potential disruption in the market about how it operates and how we implement it. I think that disruption will deliver two things. It will deliver efficiencies, and it will increase quality. So, watch out for technology disruption.

The third and one very dear to my heart and The Nature Conservancy's heart is nature. There was a nature pavilion right at the heart of the conference zone. We had billions of dollars pledged to stopping deforestation, and so really it felt, for the first time I can remember, since I've been following the COPs for 15 years or so, was that nature has played a really central role. The voluntary carbon market data really supports that as well now. Nature was about 5% of the market ten years ago. It's now over 50% of the market.

Another thing that I think I was picking up outside the conference was, a really interesting continual wave of market consolidation. There have been a lot of organizations that have been active in this space for a number of years now that are seeing an opportunity for growth, but are looking at M&A opportunities for how they can bring in the resources and scale to capture this opportunity. I think that's an interesting trend to watch for. I think in turn, that's also creating space for new organizations to come in.

We've got growth, technology, nature, and market consolidation. But lastly, perhaps just pivoting back into the negotiations, you heard from Jesper there, how the connections between compliance and voluntary are getting closer, that they're getting pretty blurry in places. For example, companies using ITMOs, these Article 6 credits, for voluntary purposes.

There's a couple of things that I'd add there. One, the details for the Paris agreement mechanisms are yet to be determined, but they could set the tone and direction for the voluntary carbon market. The voluntary carbon market isn't going to have to follow these, but it's very often that organisations involved in the voluntary carbon market will take some of their cues from how compliance markets are operating.

If we think about what type of projects are ultimately allowable under this new CDM mechanism, or what vintages of credits are deemed allowable or not, you could start to see how the voluntary carbon market might take some of those cues. I think that's something interesting to watch for in the coming months and years.

I'm getting really micro here, I started sort of macro. My last point is a very micro one. Some of the crediting periods are shortening. That's essentially the time around which you have, in an initial period, to sell carbon credits for your project. In fact, we've seen some of that in the voluntary carbon market in recent months as well. Really, what that means, is that you've got a shorter period of time within which to make a return.

I'm interested to see if that has an effect on skewing projects to certain types or countries where that risk/return suits and sits with that shorter crediting period better than others. Again, you can see the voluntary carbon market taking its cue from how that plays out a little bit.

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Chris Webb

Standing back, we think there's a whole world of opportunity here for businesses. That growth really looks like it's coming. The details still need to be worked out. I think the main implication for businesses there is stick close to host governments. That's going to be increasingly important.

But there's still a role for business to play to ensure the world gets these details right. Bring your voice and your opinions, we need to make sure these work as effective tools for corporates around the world. My plea is, please don't necessarily just stand on the side lines. We aren’t quite there yet; we get one last push.

Katie Sullivan

Excellent. Thank you so much, Chris. Extremely well said. Going from, definitely macro, but really important insights on expect the growth, right, there's going to be a wave, we've got to ride it. On the tech disruption, on broadly, nature, and on how the voluntary market will start to take its cues from compliance. And how now the real work, it's got to get done, on implementation.

Bill, we were having a little chat about this earlier, I guess last week now, but there's been a ton of briefings, and if you've been in the bowels of the UNFCCC process and Article 6 negotiations, it's been some tough sledding, and it is a great moment, and we are embracing the package that came out of Glasgow. But really, now it's time to implement, and where the work really happens. Do you want to share your brief thoughts on Glasgow, what it means, and the path forward?

Bill McGrath

I think Chris picked up on a number of things. Let me just, perhaps, add some flavour around them. It took us six years to get markets validated as a mechanism for dealing with climate change, if you will. That's what Article 6 in Glasgow actually established, and that essentially what Kyoto created, Paris evolves. I think for those of us who have been in the details of what Kyoto was, I think it's also solved some of the problems that Kyoto had.

I think if you're also a pragmatist, you recognize that this is version 1.0, and to torture the tech analogy, version 1.0, needless to say, is going to be a work in progress.  There's quite a significant amount of uncertainty about how the apparatus for Article 6 mechanisms, whether that's what's captured and what's referred to often as 6.2, or sorry, what is 6.2 and what is 6.4, the mechanics of that need to be worked through. That's really, hopefully, we see that initiated at COP26 and concluded in Sharm El-Sheik next year in COP27, to set some ambition. But validated markets, the first point.

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Bill McGrath

The second thing, the growth potential now gets interesting, because we're seeing, you heard Jesper talk to it. You're talking about a price point, today, let's call it ten, he was talking about 20. We're talking a market scale that has been in the hundreds of millions of tons moving to the billions of tons. What that's beginning to create is the prospect of demand that then stimulates supply reaction, and is then validated within a construct that's been effectively ratified within a COP. That provides greater confidence that invest can produce something that has a destination. That begins to spin the wheels, if you will, of industry in solving this problem.

That's my second point, we've got validated markets, we've got growth potential. I would also just like to point out that, the pragmatist in me has to highlight, that having been through the ups and downs of these markets for more than a few years, uncertainty is rife.

This is not a treaty that is cascaded down, that's often pointed out as being one of the Achilles of Kyoto, because it didn’t get ratified by a number of key players. It is an agreement that is built up, and is subject to interpretation locally in that process. In other words, it has to move form an agreement framework at, if you will, the United Nations level, into individual states ratifying it into legislation. There will be twists and turns in that process.

To summarize, markets are validated, we have growth potential, but boy, don't expect the ride to be a straightforward smooth one. There are going to be bumps. Back to you, Katie.

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Katie Sullivan

Thank you, Bill. Twists and turns along the way. It certainly never gets boring, but it's a really exciting time to be in this space. It's a really pivotal time.

Anders, thanks for joining us, and thanks for all the hard work that you, Jesper and the team at BCG did with these reports. Maybe looking back to just the high-level overview provided in the reports and the scenarios, and thinking back, because those were published, and certainly a lot of the heavy lifting was done before Glasgow, and what came out of Glasgow.

In your reflections on what actually came out of COP26 and Article 6 and your scenarios, do you have anything you'd like to elaborate on with respect to the reports?

Anders Porsborg-Smith

No, I think, there was a lot of anticipation, I think, throughout the year to what COP would bring, and if I take my client hat on, and you say, the multitude of clients that we have looking into this space, I think it was both, you could say, an order of anticipation, some people were anticipating something to happen that would signal more clarity, but there was also an element of uncertainty.

I think that was one of the catalysts that Bill and our team, we sat down, when we started writing this all the way back in January or February of this year, where we started to look at the different scenarios and say, how important is it, when we are looking across the board? I think what we found was, irrespective of scenarios, the market would grow, and it would grow significantly. But I think almost, it was very difficult for us to not get a market that would not be material in size. At least, we came out of that exercise with a strong confidence in, the market is here, and it will grow, irrespective of, you could say, governmental agreements and what have you. I think that has very much also been validated throughout the summer process.

But I think now that we have Article 6 sending a very strong signal, I can say, in the last two or three weeks, we've been absolutely flooded with requests and you could say, intents of moving stronger into the market. It goes across actors that are looking to buy, it goes across developers that are looking to scale. It goes across financial institutions that are looking to basically provide more efficient and better funding. It's market infrastructure that's trying to provide a more seamless link to markets.

Last, but definitely not least, it's regulators, that are trying to say, hey, how can we build on this? How can we build a market that first of all, is compliant with the rules and regulations, but also that can facilitate the needs for companies and our corporate actors to get to net zero?

I take it as a tremendous, you could say, vote of confidence, and also a mechanism that will help facilitate the next generation of growth on a scale to what we saw across the scenarios as getting to the first gigaton, and as Jesper mentioned in the intro, visioning how we are going to get to multi-gigaton, in terms of market scope. Very, very positive outcome.

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Anders Porsborg-Smith

I would also say that when we have looked at a lot of this, the devil is in the detail. I also have companies that are coming to me saying, well, now that we have a stronger linkage and a stronger direction towards ITMOs and towards, you could say, double counting at the governmental element, how does that leave corporate actors and some of the, I wouldn’t call it Wild West, but some of the fragmentation that we see in methodologies and standards out there?

I think that's going to be one of the challenges, is to translate all the mechanisms and everything that we've seen into a coherent and consistent set of detailed implementations of rules that make it easier and simpler for companies to with confidence, be part of the broader market.

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Katie Sullivan

Great comments, Anders. I think that actually sets the stage perfectly for our next section, to actually delve into what exactly this means for business and customers who are actually participating in the voluntary carbon market or who are giving some really serious consideration to offsetting and offsetting strategies and what to do. Especially for newcomers, it can be kind of overwhelming to navigate this space. I think that, I will say, to just put a fine point on the COP26 discussion now, watch this space, to echo Chris' comments.

I'm not going to say a call to arms, but now is the time to really become engaged at all levels, including across capitols, so state level, province, certainly national jurisdictions, when you look at those updated, nationally determined contributions that have been coming through, and we're well over 150 now, the majority of those have some kind of reference to an interest or desire, or frankly, a need to use international markets and cooperation to reach their goals or enhance ambition. Yes, busy, busy days.

Let's think about, again, business customer perspective. We have all this ambition, these corporate net zero targets. There's growing scrutiny, growing scrutiny about how companies are using voluntary markets and carbon credits as part of their decarbonization strategies.

How are you and your colleagues really responding to these concerns? I think there are some very valid concerns. How do you authentically communicate to a variety of stakeholders, be it media, or NGOs, or investors, or other companies, about the legitimacy of using these markets, the voluntary market and offsetting strategies. Chris, I'd love to hear from you first, you and TNC, and then we'll go to Bill after.

Chris Webb

Thanks Katie. A really important topic. Maybe I'll say a few things to set the scene of where we see the lay of the land and how we're thinking about it.

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Chris Webb

I think it's fair to say that the voluntary carbon market has probably spent most of its time to date, the last 15 or 20 years, really focused on supply side integrity. Are these projects delivering the climate benefit that they claim to be?  But this point that you flag here, Katie, is very much about demand-side integrity. When is it okay for a business to be using a carbon credit? When is offsetting okay, when is it not okay? I think that topic has gained rapidly huge prominence in the last 12 or 18 months or so. And as you flagged, rightly so. We just don't have any time left to tackle this climate crisis, so we have to be sure these credits are closing the emissions gap.

During the past 12 or 18 months or so, a number of high-profile global initiatives have aimed to provide some clarity here. Folks I'm sure have heard of initiatives such as the Task Force for Scaling the Voluntary Carbon Market or the Voluntary Carbon Market Integrity Initiative. We're not very good at setting up snappy titles in this market, but that's a side note.

But also, as you heard earlier from Jesper, organisations like the Science-based Targets Initiative have shared some initial guidance at a high level for how they see credits fitting into their framework. A number of you may have seen similar thoughts put out by organisations like the World Economic Forum, or the World Business Council for Sustainable Development.

But two things about that little list I've just sort of reeled off. Well, three things. One, it's incomplete. There are others putting in their views here. Secondly, none of them have really got to the point end of their process, of saying here's the framework, here's the rulebook. And so, thirdly, I reeled off five already, there are others. There's no single universally adopted best practice yet. We're sort of in this period where we know we need to tackle this issue, but there isn't a universal best practice guide that is there, ready, off the shelf, that everybody has signed up to around the world.

I think it's also fair to say that organisations such as ourselves are really leaning in hard, it's a big focus for me in my team in the next six months or so, is to really try and give this clarity to businesses. But on the face of it, I suppose, it might be sort of challenging to think, well, which way do I turn here? Where do I go? Some of the positions at a very detailed level, across those that I mentioned, they do differ. But I think at their core, they all seem to share some common criteria for businesses to adopt.

So, three things. One, set net zero by 2050 at latest as a long-term target, and then you need an interim target, perhaps the next five to ten years, that's aligned with that pathway. You need a meaningful plan for how you'll achieve this, particularly that interim target piece, and you need to align all of your business activities around this. That would include things like executive remuneration and how your lobbying and advocacy programs are showing up.

I think despite that uncertainty, I think there are some core things for all businesses to hold on to, to enable them to move forwards with confidence there.

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Chris Webb

The last thing I want to say is often, carbon credits change hands multiple times, before being used as an offset. Companies who both use and transact credits need to think not just of whether they meet these criteria, but whether the companies they're selling to do as well, and how they will monitor this. That's, I think, a relatively unsolved challenge in the market, and again, something that we're really working hard to provide solutions for businesses in the coming months. Back to you, Katie.

Katie Sullivan

Thanks Chris. Yes, your team is working really hard, including across, certainly, the TSVCM, the Taskforce for Scaling the Voluntary Carbon Market, now known as the Integrity Council for the Voluntary Carbon Market, ICVCM, but still, really nascent global mechanisms that are looking at driving and ensuring integrity for these markets, including the demand side of the equation, which is relatively new, right, compared to the supply-side integrity piece.

Bill, I'm really curious, and I'm sure the audience is, about Shell's journey in this. It's obvious that there is scrutiny for all major industries, certainly Shell and oil and gas peers. But how are you and the team, really, communicating about your use of the voluntary carbon market as it evolves over time, and just the use of carbon credits as just a part of your core decarbonization strategy?

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Bill McGrath

I think a lot of criticism about using offsetting certainly arises if that is all you are doing. If that is the sum collection of your activities, then it's unlikely that you're going to play well in the public square. At least here within Shell, one of the things that I think we endeavour to be very clear about, is that the focus should be first on avoiding. At the end of the day, there's a budget. Let's call it a trillion tons of greenhouse gasses, or specifically carbon dioxide in the atmosphere, we're limited to. So, if you can avoid adding to it, that's the first step.

The second step is if you are adding to it, how do you reduce it through actions within your value chain? As I noted in the intro, one of the challenges though, that you face is, are the solutions available today to do those? One of the choices you're then faced with, is are solutions feasible in a way that enables you to deliver a footprint that is in fact, zero, today? That's usually intractable, because you don't have the technology or you don't have the economics. What can you do today? That's, as I said earlier, where offsetting comes in.

The criticism often is, if you offset today, you basically don't have to do anything tomorrow. Let me just come back to something Chris said. Paris is very much about a pathway to carbon neutrality. If your actions basically say that today, tomorrow, all the way to 2050, you're going to have, you're going to emit and offset, that's not consistent with that trajectory, or with the philosophy of Paris, or indeed, as Shell has stated repeatedly, the need to avoid, reduce and compensate.

Through time, the need to compensate should be reducing. An effective decarbonization strategy will use high-quality credits and expect that through time, the need for those will reduce, as alternative sources of energy become available. The trajectory, the pathway, is just as important as the tools.

It's that combination which then gives legitimacy to the way in which you achieve carbon neutrality, or indeed, as some customers that we work with have begun to highlight, creating the potential to go beyond that. Indeed, getting to negative emissions, and the couple at the very forefront, not just carbon neutral in the year, but being carbon neutral across their lifetime. It's always good to have customers who are chasing the frontier. Hopefully, that sets in context the way in which we look at it.

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Split screen showing closeups of Katie Sullivan, Bill McGrath, Anders Porsborg-Smith, and Chris Webb.

Bill McGrath

To summarize, avoid, reduce, then compensate in the context of a clear trajectory to carbon neutrality. I hope that helps.

Katie Sullivan

I think that's really helpful and crystal clear, thank you, Bill. Chris, I'm going to be circling back to you in a moment to talk about mitigation hierarchy issues, and also, I'd love for you to highlight the brand-new report, actually, that TNC worked together with the CI and others.

But before I do, on the procurement strategy, the carbon credit procurement strategy, Anders, you worked with a bunch of different clients out there and helped them navigate this space. What's your main advice and guidance on companies, probably many on the phone, or on the webinar today, in the audience, some guidance for them on the carbon credit procurement strategies that they want to develop.

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Anders Porsborg-Smith

Yes, to start it off, I very much agree with what Bill said about the hierarchy. We are also crystal clear that you can say compensation is a residual measure and should be treated so in a net zero decarbonization pathway. I think that's incredibly important also, for the recognition and for the integrity of your decarbonization pathway, so that should be the starting point of any, you could say, compensation action.

I think the second question that companies come with, is what, everybody understood, we need high-quality carbon credits. That's been a mantra I think everybody agrees on that. But what constitutes a high-quality credit, and how do we evaluate different credit types and different credit choices in that context, I think is the second question that they ask. Because they are often told that we need to basically come up with a high-quality credit, we want to make sure that we can, our entire scheme can withstand, of course, public scrutiny, as it should. In that sense, that's typically the second point they come across.

When we face that, we are very clear on this, that in today's market, there are many manuals out there. We've been working also, myself, of course, with WWF and others in laying out our interpretation also, and I understood that Chris did the same.

But when we're looking at the hierarchy of removal versus avoidance, we're looking at the hierarchy of nature-based versus engineered, which is typically our matrix, we have a tendency to say that what is basically removal and engineered are typically the high-quality and you could say the platinum-grade credits. Because everybody can agree that they have very little conflict when it comes to both leakage and additionality. There are most certainly not any conflicts also, when it comes to permanence.

But as we move into that hierarchy, and we move downwards towards the avoidance side and on the nature side, that's typically what has, and least in history, been criticized as credits that have not withstood the test, when it comes to scrutiny of NGOs and other important stakeholders. So, we typically advise clients to be on the safer side of that spectrum, and what that typically constitutes is that the lower grade of credits should be credits that, to some extent, respect both those constraints and are effective credits for the offsetting as a whole.

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Split screen showing closeups of Katie Sullivan, Bill McGrath, Anders Porsborg-Smith, and Chris Webb.

Anders Porsborg-Smith

Then the last question of course, and I realize, we are not going to have time to dive into a lot of detail, but what is the approach? Are you going to buy directly from projects? Are you going to buy through intermediaries, are you going to structure your own portfolio or are you going to have a more concentrated portfolio?

Without going into too much detail, I would say that there are choices to be made, but a big part of what determines your choices is the scale of your portfolio. The bigger your offsetting need, of course, the bigger legitimacy there is to go alone, or go with a partner to build a broader portfolio. The smaller you are, the more likely it is that you are going to choose a strategy where you're going to have more intermediary support in terms of structuring your portfolio and help to build both resilience and also build, you could say, leverage the capabilities that exist out there.

Luckily, there are a lot of companies that do that in a very credible and transparent way, as well. There are a lot of discussions we at least are having with clients in that regards.

Katie Sullivan

Great, I wish we had more time. This is going by fast. You touched on the mitigation of hierarchy piece, so I mentioned this brand-new paper that came out, that Chris and his colleagues, WWF actually was involved as well, so TNC, CI. I'd like Chris to highlight some of those issues.

It focused on natural climate solutions, and I also, Chris, want you to touch on some of the concerns, some legitimate concerns, and some uncertainties related to natural climate solutions broadly. Then some specific considerations related to REDD plus, reduced emissions from deforestation and degradation, with the context of, how do companies make sure they're picking the right projects, or at least can probably navigate the options with confidence, and the risks, with confidence. Chris, over to you.

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Chris Webb

Thanks, Katie. I don't think I'm going to cover all of that in, we could do much more than 13 minutes just on that, so I'll be brief, and then we can dive in.

Maybe I'll start with that paper. Thanks for mentioning it, Katie. It was a paper published in a journal that's called Nature Climate Change, and it was actually published just a couple of weeks ago. It tried to lay out, in the context of natural climate solutions, so using nature as a tool to help with the climate crisis. The exam question we were thinking about was is there a hierarchy in the way that we've been thinking about the mitigation hierarchy here. Is there a natural climate solutions hierarchy?

The paper really thought about three things when it thinks about a potential hierarchy. The first is thinking about the timeframe. It really focuses in on the need to think about this next critical decade to tackle the climate crisis. So, where are we going to get the biggest abatement in that sort of a timeframe?

Secondly, given that magnitude of opportunity, what portion of that do we think is cost effective relative to other solutions we've got to tackle the climate crisis? Then third, what are the broader co-benefits that these different natural climate solutions can offer, thinking about the broader opportunity for them to help support a number of SDGs?

The way we think about natural climate solutions then, fell out into three categories with a hierarchy across those three. At the top is protect. The thing that came out as the biggest cost-effective opportunity with the most co-benefits globally is protecting critical ecosystems that we have, still have left around the world.

Secondly, then comes manage. How do we better manage working lands today, be that forests or agricultural lands? Then last, but by no means least, and I'll say a little bit on that, is restoration, how do we restore degraded and destroyed natural lands? The removals really mostly reside in that last piece, the restoration piece, with interestingly is the element that this paper is suggesting the world might think about coming to last. Protect first, better management second, then restoration.

I'm going to pivot a little bit to some of your questions there, Katie. These natural climate solutions and REDD plus. Yes, you know, I think along with the broader voluntary carbon market, there have been bumps in the road to coin a phrase we've heard already on this call. I think, I am however, increasingly optimistic.

I think the first thing to say is, we've come a long way in the past 20 years. I think some of what is left is actually more of a perception gap, rather than there being these huge risks, necessarily, across the board, with nature-based projects anymore. In fact, that's been a lot of work that our colleagues have been contributing to over the recent years, is enhancing the scientific underpinnings for such projects. I think we've got better data, better tools.

We also need these natural climate solutions. We need REDD plus. REDD plus sits at the top of that mitigation hierarchy I just talked about of nature as a climate solution. The IPCC validates that. We can't get to 1.5 degrees without nature. I think a lot of the risks lie in inconsistencies, therefore in implementation, rather than some broader underlying inherent risks. That does apply to all, whether nature-based or others.

But there are some things to bear in mind with nature-based projects, most notably, permanence. If I plant a forest over here, how do I really know it's going to be here in 20 years? Leakage is another one. If I stop people chopping trees down in one area, are they just going to move down the road and chop them down in another?

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Split screen showing closeups of Katie Sullivan, Bill McGrath, Anders Porsborg-Smith, and Chris Webb.

Chris Webb

Then with these avoidance, these protect projects that are at the top of that hierarchy, setting these baselines remains something that the market continues to enhance and evolve how we approach that to ensure that we're really taking in the best, latest science to ensure that's done with integrity. But that risk of setting those baselines is one that's popped up a number of times over the years.

The other reason I'm really hopeful, is not just that I think that a lot of the risks are more perception than real, but actually, those that remain, I see a market that is extremely alive to all of that. We're talking about it here, there was lots of conversation at the COP about this, and I think the market is working really hard to deal with those risks, whether it's the standard setters, project developers, buyers, there's always more to do, but I really see a market committed to this continuous improvement.

I think for businesses how to engage, I think a lot of the things that you just heard there apply here, about thinking about your capabilities, thinking about your risk appetite, and thinking about specifically what you want from carbon credits. How are you diligencing suppliers, how are you ensuring you've got strong relationships with your suppliers? There are some specific things to think about, but I think the principles you heard previously from Anders all apply here as ways to manage those.

Katie Sullivan

Great points, Chris, thank you. I am looking at the clock, so we have less than ten minutes. Questions are coming through; we have some really great ones.

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Q&A

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Katie Sullivan

It's not over yet. If you still want to add some into the Q&A. The first one, and I'm going to read this all. There seems to be a huge disconnect between the financial community and those in the carbon generation market. The financial community is talking huge volumes and dollar values, and yet to get protocols, contracts, consultants' verification takes significant time, work, documentation, verification is very slow. How can all this be sped up, volumes increased with credibility, contracts and consistency?

There's a lot to unpack there. We don't have time to go through all the different layers, but I do think that the disconnect between financial community and the carbon market space is quite valid. Anders, I see you shaking your head. Do you want to take the first bite at that one, maybe Bill after?

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Anders Porsborg-Smith

Yes. It's funny, we just published two weeks ago a joint report with GFMA, which is the Global Financial Markets Association, and exactly this in their stance, and of course, having worked with a lot of these companies, I know that the process is slow. But they are increasingly embracing this space, both as an area where they need to grow, they need to provide more simple documentation and more simple requirements to make projects bankable, and to get adequate financing.

Although I think there is a disconnect, I do feel that that disconnect is narrowing quite rapidly, and I do think as we get more infrastructure, as we get more clarity on future guiding rules, I think you're going to see the financing not becoming as big a constraint as it probably has been in the last two or three years.

Similarly, so as buyers are opening up, and yes, we can testify to this as well, that we are getting asks for pretty significant purchases. Bigger scale, they want bigger projects, bigger impact. I think the combination of access to finance, more smooth documentation, and the bigger projects will make it a lot easier to scale in the size. Although it feels maybe at the onset that there is a disconnect, I do feel like there is a momentum that will narrow that in the near future.

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Split screen showing closeups of Katie Sullivan, Bill McGrath, Anders Porsborg-Smith, and Chris Webb.

Katie Sullivan

Then what if, for follow up, then what if they say, and we want only removals. Yes.

Anders Porsborg-Smith

Yes, exactly. A big part of that will be the case. We see that of course, the DACs are getting a huge amount of financing and funding and appetite from buyers, if you look across climate networks and then carbon engineering. But that's not the case.

I think we are also seeing advances in REDD plus, and you could say, blue carbon, we see agri, regenerative agricultural practices, whether or not we are talking Indigo type or we are talking Agoro Alliance or whoever is cultivating this space. The nature-based solutions I think, is a space that everybody recognises will need to grow rapidly and at scale.

For me, at least, I feel, I see the momentum across the board, not only on the very end of the quality spectrum, but also on the broader range.

Katie Sullivan

Perfect. Bill, anything to add to that, and also just the new wave of considerations really that co-benefits, right? Not just mitigation or low-cost, the co-benefits piece that has to be baked in to some of these considerations.

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Bill McGrath

Let me just unpack two parts of that. The first one is, signals that stimulate supply. I think one of the ones that's really crystalized in the last six months has been the advent of forward price. Admittedly, it's a short-term forward price for voluntary contracts, but it exists; 12 months ago, it didn't. The drumbeat of activity around that forward price and its floatation with forward years has gone from being zero, to starting to give it some degree of credibility.

When you talk about financing, bankers like clarity on price formation, and they're starting to get that, admittedly, 12 months out isn't a lot, but as that grows and the credibility emerges, then that will also address one of the things that creates the connect back to the original question between financing and scale up. That will be an aspect that comes in.

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Katie Sullivan

I have a couple more questions before we wrap here. I think, actually, a really important one is, maybe Anders, just around the price discrepancy, really quickly, but around the price discrepancy that we're seeing, because it really, certainly for the, they don't, one dollar, two dollars here, and then up to $100.

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Katie Sullivan

Very quickly Anders, then Bill, we'll go back to you, okay, and then we'll wrap the session. Anders?

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Closeup of Anders Porsborg-Smith.

Anders Porsborg-Smith

Yes, absolutely. I feel like, at least within the comparable bands of quality, we have comparability of prices, and we are seeing convergence again, where I think everybody who is in the market right now understands that we cannot get adequate compensation for one-dollar projects. It doesn’t even begin to cover co-benefits that will be required to create a credible credit.

We start to see convergence around some base qualities, whether we are talking about Verra's credits, or we're talking about the comparable with Gold Standard, we start to get reference prices, and we see, of course, that the band for different credit segments starts to converge. I think on that, we then have light houses that provides at least indications of where a fair value would be for buyers and sellers.

Then of course, we have credits where there's a complete disconnect. If we talk again about either bioenergy or direct air capture, where we are talking anywhere north of $200, $400 per credit, has nothing to do with compensation per se, but it's funding a learning curve and driving down prices for future, a future market that will exist in ten to 15 years' time. Of course, we see companies doing that, but we're talking niche grades and niche qualities.

I think generally, we start to see that in the space, that there is convergence, and adequate transparency that makes it easier for buyers to understand, are we paying fair value, are we underpaying, are we overpaying, and get some credibility into that decision-making.

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Katie Sullivan

Thank you. Yes, and Bill, maybe actually, that complements what you were going to say, before you left us. Did you want to wrap up your comments?

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Bill McGrath

I'm not sure where you lost me, so apologies. To me, we are seeing, sorry, confidence start to emerge in terms of where pricing tiers are for quality. Not just in the present, but into the future, and that bolsters confidence for developers to move into a place where they're prepared to put capital to advance projects. To me, that becomes one of the key things that lands credibility of the ability of supply to meet demand.

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Katie Sullivan

All right. We have one last, I have to do one last question for all of you. I think it's fair to wrap this up. You have to make it crisp, though, and really resonate with the audience. The question that comes up, including today, is this all just a distraction? Voluntary markets and credits, all a distraction from the real job of decarbonizing? Is it all just greenwashing? From each of you, just very brief, one or two liners, and then I'll say some final parting words, then we'll wrap. Chris, you go first.

Chris Webb

Thanks. Not if it's and. This has to be about and, this is about companies decarbonizing, and additionally, financing and supporting low-carbon projects and programs around the world. If we get that right, this is about doing more, not doing less.

Katie Sullivan

Anders?

Anders Porsborg-Smith

Fully agree. I think the proof is in the last two- or three-years' empirical evidence, we've had more capital flow into areas where we absolutely need more capital to go into tackling difficult, you could say challenging abatement in areas that would either not have the regulation to support, or would not qualify for support under normal circumstances.

For me, absolutely, it adds value and as Chris was saying, absolutely, it's an and, it's an and question. I think most corporates actually take it as an and question. I have had very, very few conversations where people had put it up as an or.

Katie Sullivan

Right on. Bill, final word.

Bill McGrath

Definitely, an and question. To me, offsetting, I go back to my opening remarks, is an immediate way to address emissions while technologies to avoid and reduce develop at scale across value chains. It's that combination of activities that is the crux of how you actually get a credible pathway to delivering Paris. Let me just call it there.

Katie Sullivan

That's a great way to end. I want to thank all of you so much. We have to draw this to a close, we're going over. But special thanks to our speakers, to Bill, Chris, Anders and Jesper.

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Katie Sullivan

Thank you all, for those in the audience who joined us today. Wherever you are in your organisation's path to net zero, including if you're developing your own decarbonization strategy, we hope you found today's discussion very informative, and there's lots of discussion and working together ahead.

If you want to learn more, there will be a follow up email to all registrants in the follow up from Shell that will be circulated to all participants. This will include links to the Shell/BCG reports, and also some contact information if you want to have any direct follow up.

Finally, we'd love to hear your feedback from today's webinar, so there will be a survey link that pops up on your screen, and we'd be grateful, if you have a chance to respond to that. With that, thanks again for joining us. Stay safe, be well, from wherever you are in the world. Take care and thanks again. Bye-bye.

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Birdsong.

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Arial view of a forest and a lake. The covers of two reports are shown, one is titled A Strategic Approach to Using Carbon Credits. The second is An Outlook on the Voluntary Carbon Market.

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Thank you.