Ep 12 Voluntary carbon markets with Jay Mariyappan

Intro: Hi, everyone. Welcome to sustainable. Energy Aisha Paul cust I'm yoke. Then Ben today where receiving J Mary Appin partner at evolution environment, asset management, or E a M and asset developer focused on carbon market. We are going to talk about the carbon market, especially about the voluntary carbon markets.

We've covered subjects, such as the drivers of the carbon credit demand and the central issue of the quality of Kevin. Credits. As always, we would appreciate. If you could take the time to rate and comment on the show, it helps listeners to find us. Thanks. And on with. The show. Hi, Jay. Welcome on the show.

Yiou: You work in an environment and energy for your entire career. What brought you to Asia and, what have you learned working at Cindy Khanum and pets as well?

Jay: Well, firstly, thanks very much for having me on the podcast. Coming to your question, I started working in Asia in about. 2002. I worked for a UK based, renewables company that had an office in India. And I also attended the deli conference of parties, so I think that was COP eight. And we've just recently had Copper 27 in Sharma l Sheik. So that shows my age Subsequently, I started working on financing some early wind projects in India, and then on carbon financing, including some of the first clean development mechanism projects to be registered in China, which were again, wind energy projects. As the work I undertook spread to other countries in south and Southeast Asia, I decided to move properly to Asia in 2008 with Cnda. Carum I worked on the project pipeline, which included. Projects which captured and utilized methane, such as from coal mines, particularly focused on China, landfill gas to energy and wastewater, as well as more conventional renewables after a decade at, Cindy Carum in Asia, I joined Patronus based in Malaysia, back in 2018 to start their new energy business.

In terms of learnings, you know, I came to Asia when markets were relatively early.

So firstly I learned a lot around, policy measures and their effectiveness. Implementing projects with high standards, in terms of what I think people call E s G today, but what we thought of as good practice, so as high technical standards, health and safety, environmental standards buy-in from local stakeholders and, benefits flowing to local partners and stakeholders.

 Secondly, I learned a lot in taking early development risk. And carbon finance was used in some of those projects by adding a secondary revenue stream that could potentially be monetized in say, US dollars or Euros. And this helped alleviate some of either credit offtake issues that we saw or currency risk.

Thirdly, I'm probably the most important one actually. I learned some of the cultural differences and characteristics of different markets across the region. It's not uniform. And this, including the development of teams that can implement, market entry, which would be different in those countries and growth.

 And then finally, as renewable markets became more mature in the region, their scaleup attracted a myriad of players, including all local, but also foreign utilities, private equity and infrastructure funds, equipment suppliers, pure play developers, corporate energy buyers, and of course oil and gas companies. And this is where the sort of lower capital cost players really provided an attractive exit route for those taking early risk. So with patrons, I learned a lot about really how transition looks like in an oil and gas company. The challenges of building a new business within a large corporate, as well as the opportunities it can present through its adjacent businesses, which may be very different from a pure play renewables developer.

Yiou: You just mentioned you were head of renewable energy and patron. And also the chairman of Ampu. Before joining the current as a manager at E eam, could you explain what was the appeal to join e EAM and, what investments philosophy you have?

Jay: What the appeal was for me to join AM after having that experience was. at a time Carbon markets was really a way of helping finance renewables when they were more expensive, than alternatives. And during this kind of first stage of the carbon markets, until it's. Relative demise in about 2011 onwards. During that time, renewables became much more mature and I started then focusing on conventional financing of renewables, which became increasingly abundant, but around I'd say 20 19, 20 20, we started to see an increase in interest in carbon markets as more companies set net zero targets and aspirations. Including the company I was working for at the time, and the demand started to increase due to the Paris Agreement coming into force. Companies aligning with the Paris Agreement targets, it was, a tool for companies to meet carbon neutrality, and also product offsetting. Such as carbon neutral l n g, cargos and flights. So the appeal to me to join EAM was really to want to work with some really great people, both within eam, bits, advisory board, but also partners.

So the people who we would partner with on investment, and help scale environmental markets. Through the raising of funds from institutional and other investors that target environmental commodities. And these are ones that could provide long-term and multiple benefits. So not just emission reductions or removals, carbon credits, but also looking at wider, Types of environmental commodities which are coming up.

For example, we heard, there was a biodiversity cop, recently, and we see the proliferation of things like biodiversity credits, plastic credits, and others, coming up in the near future . So I really wanted to kind of be on that vanguard of linking institutional investments to these environmental commodity markets, which we see, being very scalable in this future.

Ben: It was a definitely, interesting move to focus on that. And the subject of today as you said, is, the carbon markets. We'll talk first. About compliance markets, but then we move into voluntary markets and I think we'll really focus on voluntary markets cuz that's really, your specialty here.

But I think it helps just to give, a sense of what is compliance markets. Could you explain what are the two main compliance pricing mechanisms? So I'm thinking about carbon tax and ETS and what are the percentage of green gas houses emission, they are covering right now and, in which jurisdictions they apply, if you can give some examples.

Jay: Sure. Yeah. I think, Ben as you mentioned, there are kind of two direct carbon pricing instruments that we have. Carbon tax, which is essentially where a government levies a fee on greenhouse gas emissions. By doing that, it provides an incentive to lower emissions. So the government, determines the price and the sectors or companies that are liable for the tax. And the market then determines the level of emission reductions that are incentivized. Carbon taxes have being implemented, of course in Singapore as we all know, but also in countries as diverse as South Africa, Canada. She. Island and Sweden, and prices have ranged from $1, per going up to $137 perton, which was, in ua. The second one is an emissions trading scheme. And this is really essentially where there's a limit or a cap is put on the total volume of greenhouse gas emissions in specific sectors of the economy. Particularly these are the most carbon intensive. Sectors such as power, iron and steel production, refineries, et cetera.

A government then issues or auctions, tradable emission allowances to the entities covered by, the cap. And each allowance gives them the right to emit a certain volume of emission. And then the entities will need to surrender their allowances for their emissions during the compliance period. So companies then have a choice. They can meet their cap through keeping emissions in check, or reduction measures, or by purchasing additional allowances. And of course they can choose to sell surplus allowances. And essentially this type of scheme is called cap and. There's a slightly different type of emissions training scheme, which is baseline and credit system.

This is where covered entities can earn emission credits by producing lower emissions than the actual baseline. And these can be traded around and these systems include intensity standards and tradable performance standard. again. With emissions trading schemes, there's a very diverse set of countries and regions that have implemented, etss, including eu, China, certain states of the US such as California, and then South Korea. But more as we see going forward, there's quite a number of countries, that are announcing that they want to do emissions trading scheme, including in this.

In terms of, schemes, they're around 37 carbon tax, schemes across the world and 34 emissions trading schemes. And coverage is around 23% of total global

Ben: Right. That is really good overview of, the compliance markets. So now if we move to voluntary markets, could you just define what are voluntary carbon markets in comparison of compliance markets?

Jay: Sure, one of the main differences we spoke about compliance markets, which are regulated by government. Voluntary markets are really where individuals, all entities, choose to purchase credits. So it's a choice. It's not an obligation, to support their climate commitments.

We always say it's choice and it is voluntary, but, that's becoming less of a choice because once you announce these things, you are watched, you have stakeholders who are looking for action. So what was really voluntary? Maybe actually becoming kind of semi compliant in a way. That essentially each credit, which corresponds to one metric, ton of reduced, avoided, or removed CO2 or equivalent. Greenhouse gas can be used by the company or the in individual to compensate, for emissions of one ton of co2. And when a credit is used like this in the voluntary market, it's moved to a, a registry for retired credits, and it's no longer tra. So it's essentially going out of the system. It's being retired, and it's used to compensate for emissions elsewhere by that individual or company. That's something else about voluntary markets and compliances. They're not mutually exclusive, so there is some overlap between them and project based credits from the voluntary market can be used within some of the compliance markets or emissions trading schemes or tax schemes. For example, in Singapore, companies can meet up to 5% of their obligation through buying credits from, certain standards, including Vera Gold Standard or, gcc, for example. South Korea. You can also use some project based or convert some project based credits, into that system.

California is a big scheme, which also has an Um, scheme we often talk about things that they're very separate. But I think over time we will see a lot more, overlap between the two markets.

Ben: That's interesting. And you've explained quite well at the beginning that There is compliance market basically imposed by the regulation government, whereas voluntary is driven more by corporates. So was wondering if you could, talk about the development of corporates, climate commitment and how this has translated into the development of the voluntary carbon markets.

Jay: Sure. So I think putting compliance markets aside and the project-based, what roots into those think in the early days, Companies utilize voluntary carbon markets to really help them with carbon neutrality. So each year they would calculate their emissions, usually scope one and scope two emissions.

Scope one emissions are those direct greenhouse gas emissions from sources controlled or owned by a company scope two are indirect and associated with the purchase of electricity, steam, heat and cooling

so they would either reduce those through internal measures and then offset the remaining emissions through the purchase of credits or even renewable energy certificates, for example. So that's really what most companies did in the early days. Then they took this further by setting actual target for emission reductions and applying a strategy to meet those, reductions through internal measures and offsets. Companies then began aligning with, Paris Agreement, including setting science based targets, in line with efforts to keep within one and a half degrees. And then there's really the proliferation of net zero carbon targets, which really meant that companies who set those targets had to look through everything that they did.

But The cost of meeting that target became a big issue. So they could cost out all the reductions that they could do internally. Over time, there's only so many things that you can do within a budget and also within time constraints. And so the use of voluntary markets then became a main tool, that could help meet those targets and then we see people going further than this. So, scope three emissions start to be looked at as well. These are indirect emissions associated with, transport and distribution of products, processing of sold products and use,

Companies can participate in voluntary carbon markets, either individually or even as part of industry-wide schemes. And one example of this is the carbon offsetting and reduction scheme for international aviation. Coria. So this was set up by the aviation sector to offset its greenhouse gas emissions and all international operators taking part in coria have all pledged to offset all the CO2 emissions they produce above a 2019 level. And they can use a certain, category of carbon offsets from the voluntary. The way that corporates engage with volunteer markets is it's still changing. So there's a lot of different approaches some actually say we don't want to use offsets. Some say, we want to use offsets for scope one, scope two, and then we want to encourage investments that reduce scope three.

Ben:

That's interesting. So when some corporate says they don't want to use a set, does that mean that they just want to implement strategies to reduce it? Scope 1, 2, 3 and not using any affair. To achieve the goal.

Jay: Yeah I say this is still, the minority, because it's easier said than done to go fully net zero without doing, anything in the voluntary market. And it also depends on what kind of timeframe, what technologies are available and what industry that you are in.

But yes, essentially some are saying we want to do all in-house. Some are taking the approach where they'll do all the in-house reductions that they can and then they will use, carbon credits such as removals whatever remains. But they kind of do it at the end. Others will say, we'll do, all the reductions we can, internally and any that we can't do, or any that we haven't done on an ongoing basis will offset. So still, still, quite a range.

Ben: So you. You explained it quite well. Where the demand of carbon credit arise is really driven by corporate commitments. To achieve the NetSuite. Targets and this can be in the energy or in. The ordering gas or transport sector where it is very hard for companies to decarbonize. And if we look at the supply of carbon credits, there's a mute YouTube approaches that we can use to remove carbon from Thomas here. And so i'm a bit curious about who you would categorize

Um,

Ben: and what offer used the main tab of carbon credit in the markets

Jay: yeah. There's more than 170 different types, and that's increasing. But they cover a number of different sectors. So let's take, forestry and land use, renewable energy, household and community, chemical and industry, energy efficiency, waste disposal, agriculture, transport.

They're the main ones, but they're obviously some others as well. And then these sort of different types can be categorized into two, main types, which is emission reductions, include capturing and destroying carbon or avoided emissions i e that is preventing carbon that would've been released to the atmosphere.

And then secondly removals where greenhouse gases are sequested and stored either naturally, for example, through trees or by technology, such as director carbon capture technology and storage, underground. It's definitely a complex range of activities that can be done.

Ben: Yeah, and do you feel that corporate for purchasing those credit have a good understanding of all the different type and the characteristic of these carbon credits.

Jay: No, I mean, generally I don't. But some have been doing this for quite a long period now. So they may start with using outside advice. Or partner with people who have that capability.

And then some of these large purchasers actually look to build internal capability as well. So over time they do get to know, but a lot of those that are starting off today or, more recently. I really don't think that they would have that ability to understand the difference. It's reasonably complex.

Ben: Yeah. It's a developing market and there's a lot of things happening in this markets. And, I guess. Big issue with carbon credits, is they are very heterogeneous, as you say they're like 100 100 plus type center, and they have very, different characteristics.

A few, common, qualities for, carbon credits that needs to be established for me, are Measurement verification, durability, or, permanence and additionality. So I'll just, define them and then we can, discuss about them. So, measurement verification basically are, whether we can verify that the credits is doing what is claim it is doing.

And that is removing or reducing the carbon atmosphere. On measurement verification, what are the meta general we use to measure, the project's carbon impact.

Jay: To start with every voluntary emission reduction program, you must, firstly determine a baseline, or the reference level on which you would calculate, any emission reductions or removals. These are the assumptions upon which these baselines are established and the accounting methodologies used to calculate emission reductions or removals. These vary bisector and program and scale. You, in the design of your project, you need to, set up a, an M R V plan, it's a monitoring reporting and verification.

And so that once your project activity is underway. Data is collected and processed to calculate emission reductions achieved against the baseline and during the monitoring period. And the monitoring period is just the amount of time that you set before you would then, report and verify, emission reductions.

So depending on the program, data collection could be just tracking the operation of a device. Let's say this is for clean cook stoves, for example. In power generation or renewables, for example. This could be just, meter readings or nature based of forest projects. It could be changes in tree cover over time. These are the types of mvs that could be done. Other impacts as well. So not just the emission reductions themselves, but other impacts would be also included in this MRV program. These could be the impacts on sustainable development goals, for example. But essentially this is an area, which EAM really focuses on when we look at investments, and work with our partners. So then finally emission reduction are then compiled into a report. These are subject to a third party verification. This is an entity that's accredited per the requirements of the standard to be used.

And these verifiers need to see through large volumes of data, well documented results, and ascertain really whether they are accurate, transparent and compliant with the standard itself.

Once those, have been verified, The standard setter then certifies them and then they can be issued to a registry, and from then on they're tradable. ,

Ben: And the second characteristic, that we are going to talk about is durability and permanence. They mean how long the CO2 reduction lasts. As for some natural base solutions such as tree planting might not be very durable. I was in france during the summer and France had a lot of fire.

And it was said at the time this summer they were like maybe 10 or 20 years of, tree planting carbon credit that was burn. So there are for sure some question about the durability of these type of assets. So on the durability what is the current state of the protocol to ensure durability?

Are there any God standard in this matter? And why is durability important?

Jay: I think as you probably know, carbon dioxide can stay in the atmosphere for a very long time. Eventually it will, most of it will dissipate, but at least a quarter of it will hang around for hundreds of maybe even thousands of years. So, what most high quality standards will look at is trying to define permanence at least 400 years.

So that's how it would define it. Some may say that's not long enough . But it's at least a period where, you can be sure that, at least the majority it, is permanently removed. Still there may be a quarter that's kind of left. But then once you've defined that as a hundred years practically, how do you actually achieve?

Given that, you know, projects are shorter in timeframe, are not really around , for that long. So it has to go on for generations. So. Different standards have taken different approaches to that. And some are more controversial, and as you mentioned, some have more goal standard, towards the way they approach it.

So maybe I talk about a couple of different approaches. So this Climate Action Reserve it's a US-based voluntary program, so they're taking two different accounting methods to deal with this. The first is, a ton ton accounting approach to permanence requirements.

So this is where a credit is issued for every additional ton that is sequestered permanently. And here the developer needs to demonstrate that this is all technically correct and feasible over the time period, and that they can ensure that this is going to be done 100 years. So contractually, that they have the means on the ground to be able to do this. That's a tough requirement, but that's what they would've to do.

The second approach is a ton year accounting, and this is where basically a pro ratta share carbon credits for each, successive year that the carbon is sequestered. So essentially this ton year would see, say credits awarded only for, small proportion, of each ton per. And then you take sort of a different approach, which is maybe the goal standard. Where they. Eliminate red projects. So these are the projects that reduce emissions from deforestation and forest degradation.

So they basically go, look, there's too much uncertainty around baseline setting and leakage, so we don't do those at all. And instead they allow projects that don't cut down trees to make room for new plantations. And so for permanence, what they do is they fix a 20% contribution to a buffer pool.

And essentially 20% of those credits need to be built. In the buffet buffer pool, over time and at the end of the crediting period, you don't get those credits back. They remain in the pool. So that, let's say a forestry project, which may go for 40 years, for the remaining 60 years, the buffer pool will remain in place.

And if there's a fire, example, it can be used against those, sinks or sequestered carbon, that would actually have gone back into the atmosphere.

Ben: I guess you still need people also to ensure that it is actually implemented. Over a hundred years, for example. Right. That's quite challenging as well. the, the last quality quality, we're going to talk about is additionality. So addition, it basically is that the sale of the credit is allowing, carbon reduction and does not finance something that would have happened any way. An example of it might be some of the projects in India have been, selling carbon credit, whereas they have already been in operation for five years. And essentially, Project are not additional because, the amount of money that's been, receiving from the carbon credit is not really allowing any reduction. And on this additionality aspects, how it is possible to ensure the additionality of a project and how can, additionally be established for most carbon credits available on the markets.

Jay: Yeah, when you look at additionality, you are talking about at the project planning stage, as you go towards, financial plots. So it's a snapshot in time that, you need to prove additionality. So some of the projects that you're talking about now, renewable energy projects, grid connected, when I started out 20 years ago, were additional from a financial additionality perspective.

Because they were, maybe five or nine times more expensive than they are, today. And now they're coming down at very, very cost competitive and sometimes, they're policy incentives still for them as well, they wouldn't normally meet that criteria.

But additionality is by definition difficult to prove because you are essentially trying to prove something that may happen in the future or may not. So there's a few different ways of doing this. Financial additionality as I mentioned. And that's basically trying to show that a project without carbon revenues is not meeting an industry acknowledged hurdle rate. and that carbon finance or carbon revenue is helping them get over that hurdle rate. I think that's always a difficult one to prove unless carbon is your only revenue, then it's very clear.

 Then you have ones like barrier analysis, that's used, positive lists where you essentially say Look for simplification purposes. Any project in this area and this sector, is additional because it's not business as usual today, or we've assessed it in the country and we know that it needs carbon finance to happen. So, that's sort positive lists. And then you have things like technology penetration thresholds. So they could say, for example, renewable energy projects that are being developed in some of the less developing countries where it's not so prevalent. Maybe there's a threshold for the first five percent of projects that are deemed additional. So they have very different approaches. There's still a controversial area. It still requires refinement. but it does need practical solutions because I think from a, project developer perspective and an investor, perspective, you want to have certainty that the assessment that's done, holds for at least the period of time that a project would run for at least the crediting period.

Ben: I might said Trek a little bit, but I was just wondering. Wondering, what is your take on the application of blockchain technology to And markets. Because there are a couple. Of companies working on blockchain and carbon markets. but I personally feel that the issue. With coven markets. And as we discuss is really, an issue of the.

The quality of the carbon credits. And it seems to me that blockchain isn't really solving. Solving that issue. So I was just wondering, what is your take on that matter?

Jay: Sure. You hit the nail on the head. There's a lot of companies that have set up. Or new companies that have been set up with, a remit to apply blockchain to carbon in some way or another. Sometimes it's trying to, make a solution or something that's not necessarily needed.

But I think there's a few areas where it is useful. So we talked earlier about M R V. The application of technology for M R V is getting better and better. So for example, if you looked at, land use change over time. With forestry, for example, you can obviously do a lot with field surveys and they're pretty accurate. But once you start to put in, digital solutions for this, utilizing, satellite data and remote sensing, it becomes very good now applying blockchain. For time stamping and verification of the source of this data that kind of adds a little bit level of, security and maybe transparency to the MRV process.

If you look at areas where companies want to know the projects that they're buying offsets from. What is the history of it? Who has made retirements? What were all the documents kept all of that. I think there's sort of some areas around blockchain that are being applied., let's say transparency and trusted nature of documentation. But I think the bit that's been more controversial, is where they've tried to tokenize, carbon credits, which is supposed to have been, Users more transparency and trust, but I has led to less transparency and trust in many ways.

Ben: Yeah, exactly. And, I think with Carbon Cs, since the quality are quite different, the prices are really, really different and at the end of the day, it's really the quality of the project that is important

Jay: that's right. I mean in a sense we say one ton equals one ton. That is reduced or avoided and its impact on climate change that's true. But then, from the point of view of how that tongue was produced becomes very important. And, we even find today, and this is an area that EAM is going into a lot more, is that the ton may be a byproduct. Of what is essentially a more of an impact focus. So let's say the real aim here may be to provide energy services to poorer households in rural areas. And that's where the main impact lies and the core, that we focus on is that, , they do happen to reduce emissions, against other fuels, but that maybe secondary and that may be kind of how a corporate might focus on it as well. So, although, the use of blockchain, I think it has, uses in areas of trusted documentation data, transparency. Some of the other valuable parts of it, I think maybe are overplayed

Yiou: So, now let's talk more about eam. And we're actually quite interested in EAMS market position and strategy, especially as a asset manager. In pertaining to the value creation of Carbon market.

Jay: So I think, overall, investment philosophy, our main goal is to generate significant risk adjusted returns for our investors. That not only drive large scale decarbonization, but also maximize social and environmental impact. That's really our overall aim.

Within that, we have, three key areas in decarbonizing the world that we think has powerful benefits. So these are, nature-based solutions with high biodiversity. So if you think about all of the, biodiversity hotspots around the world that are under threat, there's a way here of, sequestering protecting carbon within the ecosystem, but also preserving biodiversity.

There's then community based projects with high social impact. And I mentioned here before, there's still significant parts of the world population, who still do not have, access to clean modern services. And their services cover a lot of things including health and utilities and other things. So that's the second third is eye climber impact. So if you think of particularly areas around, methane, for example, a high global warming potential. It gives a lot of bang for the buck in terms of it's climate change mitigation. And there are solutions that can reduce, avoid, or remove large amounts of greenhouse gases through that. So these are the three. Focuses of what we do. and this means partnering and aligning with developers who want to design and build projects and portfolios with high integrity, and quality, whilst delivering this impact over the long term. So essentially we see ourselves trying to catalyze, finance in helping scale up in some of these area.

Ben: And could you talk about the concrete project you're working on right now and and it expected in platform, the climate.

Jay: Sure. Obviously it's still quite early days, for am but I think one of the projects that we are doing already, it's a long-term investment, so we're looking at over, 10 years, we are working with a partner who has been really doing this for a decade or more, so delivering services to some of the 2 billion who do not have access to clean, modern and affordable energy services for cooking, for lighting, and for other energy uses so that the organization has already delivered impact to over 6 million households, in parts of, south Asia. And now is looking to scale. With use of different technologies. So they've done, for example, improved cook stoves, solar lights, gravity, water filters. but now they want to kind of extend, to look at other, technologies which households are really looking to use. So, for example, some of these areas have now become grid Connect. And instead of improved cook stoves, which might still use biomass, they want to use induction cook stoves, which use electricity. So there's as households go the energy ladder, let's say, to use more modern and efficient fuels. How we're working with them is really providing, long-term security of carbon revenues, as well as financing some of the new projects within the portfolio. They have impacted so far, 6 million households. We want to help them impact 6 million.

Yiou: Wow. That's very ambitious. Thank you, Jay.

Jay: Thank you.