COP26 Carbon Markets Debrief Fireside Panel

On 30 November 2021, we held a COP26 Carbon Markets Debrief virtual fireside panel. The panel included Stephanie Zhu, General Manager - Sustainability at Delta, Rene Velasquez, Head of Carbon Markets at CBL, Nathalie Flores, Director for Climate Change Adaptation and Mitigation and Samuel Gill, COO and Co-founder of Sylvera. It was chaired by our Head of Policy, Ben Rattenbury.

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[The below transcript has been lightly edited for brevity, clarity and readability. For exact quotes, please refer to the video.]

Panel discussion Transcript

Ben Rattenbury

What was COP26 like for you?

Sam Gill

COP was a bit of a blur for me. It was an exceptionally busy time, but it was really nice to meet, in the flesh, people that I've been working with now for 18 months, almost two years, virtually. COVID's meant that we actually haven't been able to meet in person. One of the really nice aspects of COP was meeting all of these fantastic passionate people who work in this space, in the flesh, and being able to collaborate and discuss in person. One of the things that also stood out to me was how well-represented the private sector was at this COP, and for many people, that was presented by the press, as a negative, but actually, in reality, what that means is the private sector, that markets, are starting to galvanise. They're starting to take action, and they're taking this seriously as an issue. That's a really exciting thing. When I take a stand back, many people say, 'Look, this COP didn't deliver what it needed to.' In reality, in public sector terms, it actually made quite a lot of progress, and moved quickly, but, we're all aware we need to move a lot faster, and markets have the capability to do that. So, for me, it was great to meet people in real life, to collaborate, to share ideas, and exchange, but it was also really exciting to see the private sector out in force and try to really drive the agenda.

Stephanie Zhu

Yeah, I will agree with everything that Sam said, especially having met three of the people on this panel at COP for the very first time. For us, for Delta and myself, it was my first time at COP, and it was a lot to take in. It was very overwhelming, but it was interesting to see that it was almost like two different events, so to speak. So one being the actual negotiations around Article 6 and the classical agreement, and then also what Sam said, just the private sector really having these separate events, talking amongst each other on how we can really scale, and do things quicker, and align with what's happening in more of the traditional COP negotiations. So it was very interesting. It was a lot to take in and to keep up with what was going on with Article 6 every day, and also to keep up with everybody that was there [and have] meetings. To Sam's point, we hadn't seen a lot of people within the carbon markets, within the aviation sector, for almost two years, just to talk about everything that has happened, how we in the sector, we in carbon markets, and we working with governments, we're trying to push things forward. So, I feel like a lot was able to happen, and I think it was a great experience.

Nathalie Flores

Well, for me, it was a little bit different, because I've been a negotiator for about 10 years now. [...] Before, I was very very technical at some level. Now I hold the title of Climate Change Director. For me, what’s challenging [is...] this is my convention. At the Ministry of Environment, we have about 30 COPs about different topics, from whales to sustainability in general, like Rio plus 20. We have to also work on the certification convention, and other UN conventions that I could spend the whole day mentioning. [...] I was in charge of this one. I first have to coordinate our entire internal delegation for the Ministry of Environment. Our President apparently couldn't come to the World Leaders Summit. So the Minister of Environment has to take over. So I have to support him, as well, and then we have to sit at the table of the negotiations under his leadership, putting into perspective, of course, their priorities of the Dominican Republic. Why was it different this time? Because this is a new government. It's a new administration. We've been in office for one year. So it was the first time that this new administration was going to COP. So it was challenging, at the same time, to go through the whole process with the Ministry of Foreign Affairs, other ministries of our country, that have to do with development, energy, other sectors, and, of course, the interest of the private sector. Due to COVID, we were asked by the President of the COP to have a small delegation, which we tried to stick to due to [the need for a] COVID bubble, [when going] into the negotiations rooms. I think, as the Dominican Republic, overall, we delivered. Our main goal was to position our country as an emerging climate leader, because we are geographically very well connected, and, at the same time, we are challenging our private sector to go further. You have to change from social corporate responsibility, and you need to start investing. So that was our main goal. And, of course, financing for our small developing states. We try to speak up, and raise our voice in the different negotiations groups that we are part of, as the Dominican Republic, so that we can position the country to go further. That’s the first impression of the COP, as overall for our country.

Rene Velasquez

Thanks Ben, so I'm the odd man out here. I didn't actually attend the COP because I had the flu, and I didn't want to be a super spreader at the event. So I stayed home. So my COP was relatively quiet compared to the other panelists, but I have, I guess, a different perspective, because effectively I wasn't there, and I saw the hive of activity going on just through social media channels, and through the dialogue and conversations of many folks that were there, my peers, who I saw just incredibly motivated by what both Sam and Steph and Natalie just mentioned, this kind of wave of activity that was evidenced not only in the policy realm, but also in the private sector. Effectively, to me, [...] the outcome was not perfect, [but it] was very very good. It was a lot more than many people had expected going into the COP, in terms of the Article 6 rule book being finalised, and now an understanding around the Paris mechanism, and things, like corresponding adjustments, the ITMOs, etc. [have been reached]. We were all really hoping for that policy signal. To me, it really brought home that traditional economics 101 [principle], where good policies, and having the policy tailwind, allows the markets to really harness competitive advantages and innovation, and really just helps to spur greater activity, and to ultimately meet the the ambitions that are being set by corporate leaders like Delta Airlines, on this panel. Essentially, it's being able to harness the power of markets, and I think that one of the things that I saw going into COP was really this positive notion and feeling in the marketplace, as evidenced by the price and the volume action on the voluntary platforms like CBL. Two to three weeks prior to COP, we just saw this very bullish sentiment going into COP, and then, ultimately, [it was] vindicated as a result of those policy outcomes. It's really interesting to see that now all of the mechanics are really working well together: policy makers, financial markets, investment, corporates making commitments. It just felt like everything was falling into place, whereas, in previous COPs, like I remember the Copenhagen COP, maybe Paris was different because there was a lot of optimism as well, but, it certainly, this time around, just felt like the optimism was just overwhelming, which was fantastic, and I'm really sad I missed it.

Ben Rattenbury

I'd like to spend a few minutes now for us each to think about what the COP means in our specific areas. Rene, it'd be great if you could maybe go into a bit more depth on what you think the Article 6 outcome will mean for the markets.

Rene Velasquez

Yeah, it's a great question. I think to be very upfront, I think the market is still trying to digest the kind of policy impacts for voluntary carbon, in particular issues around corresponding adjustments. There seems to be, effectively, still some discussions around what are the meanings of certain language [terms used] within the actual, published texts at the COP. We were advised by the chief negotiator at the UNFCCC on a recent IETA call, the lady's name is Amy Steen, not to dig too deep into the underlying meaning of every single word, because effectively, [because] of the nature of the negotiations, some of those were replaced multiple times and, ultimately, finalised. [...] Many many actors are still trying to digest what are the impacts for voluntary carbon offsets as it relates to things like corresponding adjustments. What seems to be the conclusion, and the understanding of most, is that corresponding adjustments, so the accounting nomenclature around moving and allocating the emission reductions and the benefits to to a country's ledger, certainly apply in the case of the article 6.2 and 6.4 for the ITMOs, and then the Paris mechanism instruments, essentially, like, the next generation of CDM, and for compliance systems like CORSIA. But the question mark is the question around 'other' in that definition, in the Article 6 language. And many proponents in the voluntary market, see that there really is no need for that corresponding adjustment for substantiating purely voluntary claims, because essentially you're not moving the units from one country to another country where the corporate is domiciled. So I think that there'll be some time to digest this. I think that the standards certainly [...], in the private context, like the VCS and Gold Standard, will continue to put out guidance around how they interpret it. But essentially, you'll have two tracks: one for voluntary offsets with corresponding adjustments, and those without them, and we'll see where the market really tends to go. What does the adoption look like from a corporate making commitments? I suspect some corporates will want and need corresponding adjustments for a certain subset of offsets. So, for example, and I'd love to get Stephanie's view on this, is, obviously, it seems that for CORSIA-eligible offsets, there will be a requirement for those corresponding adjustments. So that will create, essentially, a smaller pool of liquidity that, I think, will have an effect on pricing, but that's certainly known. 'Will voluntary buyers be looking for corresponding adjustments for purely voluntary offsets?' If the answer is, 'yes', then I think that will gravitate and take the market down that direction. I suspect that it's, 'no', and I suspect that voluntary buyers will essentially look to finance projects through the process of acquiring those offsets in areas where they can make significant impacts. I think it'll be the countries that choose not to require corresponding adjustments for those volunteer activities in their countries that will be really successful in attracting that private financing to come in and spur those emission reductions at scale, whereas, maybe some others don't. So, you'll see this divergence, and that will be really interesting to see. But the overall thematic trend, that we see in the market is that the demand is not going away, that the demand is consistent, and it's effectively buoyed by the tailwinds of policy direction, increasing investor and shareholder pressures, societal pressures and that decarbonisation is a long-term megatrend, and it's now going to be the biggest transformation in terms of, geopolitics and economics ever, it's greater than the industrial revolution. So that horse has bolted, and I think that is the key direction to drive now. The question is: 'Can supply keep up with the demand?' And will yet to be seen. Ultimately, I see, in summary, Article 6[‘s] corresponding adjustments, maybe being bottlenecks in some [or...] certain parts, in terms of the supply constraints, and that may have disproportionate effects in terms of pricing. That will be an interesting thing to watch.

Ben Rattenbury

There's definitely been talk about a split in the market of the VCM: on the one hand, carbon credits with corresponding adjustments, and on the other, credits without, and you mentioned CORSIA requiring corresponding adjustments, even though no one quite knows how this will work in practice yet, because the accounting mechanisms haven't yet been created.  Stephanie, Rene referencing CORSIA and tailwinds, so along those lines, can you say a bit about what you think the Article 6 outcome means for you, and your role, and how this might impact your strategy going forward.

Stephanie Zhu

Yeah, definitely, so, I think I agree with everything that Rene talked about. For us [...] we have a goal that is carbon neutrality from March 2020 going forward. We have been purchasing offsets. We work through a lot of different partners [...]. Ultimately, investing in the carbon market and buying carbon offsets in the short term is because we need to make an impact on climate now. We're not, stopping all the other things, to your point on tailwinds or reducing fuel, that all needs to come to decarbonise aviation, but for right now, we need to look at things like how to end deforestation or stop deforestation by 2030, and the lever that we can use currently is carbon offsets. We buy a lot of this, and there is going to be a part of our portfolio that obviously [...] needs to be eligible in order to meet our CORSIA obligation over the next 15 years, and then, there's another part of it that, I guess, really falls under the voluntary portion, in order for us to meet carbon neutrality. I think where Article 6 comes in, we'll really be understanding, '[..] is there going to be a need for corresponding adjustments? And, do we, ultimately, [...] do corresponding adjustments for just CORSIA-eligible, and then not for the rest of the portfolio?' And, I think, this is really great, as we're thinking about what we're going to be doing for the next three to five years. Understanding what those impacts are, and then just thinking about how that's going to ultimately impact where we invest our money to really scale preventing deforestation [and] where these funds really need to go to make [the] ultimate impact in the short term. I think one other thing that I will touch on [...] We've been in this space a relatively long time, I think, purchasing much smaller scales before, but, I think, really, for corporate buyers, that are going to be coming into the space, to meet their net zero targets or carbon neutrality targets, or to be able to be on this journey along carbon, I think it's really important to have transparency, and for these people within companies, like myself, that may not be carbon traders day-to-day, to help understand all the nuances around Article 6, know what has to be done if you're going on one track, if you are doing CORSIA-eligible, and you're an airline, what has to happen. So, I think, we kind of talked about this a little bit at COP, also, we're not all carbon traders, and there's a lot of nuance of this, so, I think, just transparency builds visibility, and understanding, kind of, what has to happen in order for us to be able to finance these projects will be, I think, really critical in the next couple months and year.

Ben Rattenbury

Nathalie, obviously you were in the heart of the negotiations. Could you say a bit about how you think the COP26 outcome has landed in the policy community?

Nathalie Flores

Okay, so we have a lot of, let's say, counter views because all of our countries have different interests. We put so much effort in[to] bringing Article 6 [to COP], and out of this COP, this is what we wanted. Though, of course, and I don't wanna sound, not politically correct, but the usual players played their cards. We were fighting until the end, especially to avoid double accounting. I know the private sector and entities like those represented here like Xpansiv CBL, like Sylvera, Delta, which is also a company, right, have been putting so much effort together to actually make the balance needed to stick to 1.5 and, of course, make the balance we need to avoidable accounting, but we were very afraid that we were actually getting into, a road of a possible double accounting. Most of the negotiations group that the Dominican Republic is part of, and other negotiations groups that we are not even part of, were [as] worried as we were. Especially because forestry issues are a priority for us, we were having this conversation: ‘If you are allowing CDM credits into the Paris rule book, you should allow also, the work that small developing states have been doing in protecting their forest to try to make this balance, because forestry it's supposed to be, the 'cheapest way' to fight climate change, right?’ So, we were making this little fight, which was a priority for us, [it] was important, but it was not, [a] push back [on] the agreement itself. It was even more deep in the way [in] which [...] the agreement was put forward. So as I mentioned before, for us, I have to say this on behalf of my country, we were a bit disappointed because we have [spent] about, I don't know, 12, 13 years trying to put together readiness, preparation and [more] preparation to [gain] access to this benefit of [a] results payments, and then being able to do some program, like the program that perhaps Delta does, and we haven't been able to do that. You know what I mean? So right now, in our view, in that specific part, just to give you an example, how our conversations in the negotiations were, and, of course, this is diplomacy, this is very political. When leaders sit together, we, at technical level, we advise them. But at the end, if you want an agreement, if you want a result, and, at least, set a basis, we have to let go [of] some of our, not priorities, but fight our priorities later. In our case, also, finance was an important issue, finance, in general. That's why we were in the negotiations group we are part of because this is a consensus convention. So we had to try to make our voice [heard] through the negotiations group that we are part of. So we were very keen on finance for adaptation. So we were, like, ‘if you were going to finance through the Green Climate Fund, for example, mitigation actions, and you are going to fund electric vehicles, you are going to fund wind farms, and everything, what would we do with the investment that countries like mine need to do on adaptation?’ So we wanted to link, we wanted to make the link between Article 6 and funding for adaptation as well. And at some point we were very, positive on the outcome of that, but later we were a little let down, and, at the end, we […] accepted the text as as it was, in order, to reach consensus between countries. But we haven't give up on our priorities, and we are very looking forward to keep improving tax and these rules as part of the negotiations process. But I think it's very important, the role that players, like all of you here, do, in this, because having the interest of our private sector, though, Delta is not private sector of the Dominican Republic, but has more than nine flights a day between the Dominican Republic, between, for example, Santo Domingo and Europe. So I can say Delta has, sort of, [an] interest in our country, because [...] of the Dominicans flying Delta to New York, just to give an example. So having these players there, and telling us: 'Look this is priority for me. This is what your country needs to head because this is the way I can help you reach your 20% reduction that you want to do through your NDC and transportation, through aviation. Is one of your mitigation actions typified in your NDC? I'm here and this is my priority.' So, I think that this was an interesting COP, because [...the] private sector was really engaged. [The] private sector was really following up with their government, but it was smooth. It's like: 'This is my research. This is what I've done. This is what I can do. So take this as advice.' So [...] that's what we were trying to do, play, all the cards in our priorities, and the priorities for our country. So, in general, we were a bit disappointed because, of course, the real priorities of our country on losses [and] damages as a small island state and adaptation were not [as] rich as we expected. We got some stuff for adaptation, but not like the fights that we did until the end. Like we were there, negotiating on your Sunday until the last call. So yeah, I think we can keep improving, and we will keep doing it, and we will push you to have the Dominican Republic in this precise moment to take that leap, that next step, that we need to take now that the Paris rule book is advanced and finished. 

Ben Rattenbury

I should say, on behalf of all of us, thank you for your efforts in the negotiations, because it really was a tireless and a very grueling effort. I know there were a lot of extremely late nights during the period that you were in Glasgow, and it's wonderful news all around that there was a successful conclusion after so many years of trying on Article 6. So thank you for your efforts and, of course, nobody thinks it's a perfect deal. Everybody had to compromise, and, like you said, this is a big milestone that, hopefully, can improve year-on-year onwards to COP27 and beyond. Sam, could you say a few words about what you think the Article 6 conclusions means for project quality?

Sam Gill

Yeah, for sure, so, I think, when we think about project quality, obviously, that's our job. We systematically assess project quality, and what we see is that it's a general trend in the newer projects towards quality. So there's been a huge amount of innovation in the voluntary sector, in the voluntary carbon market, around these methodologies that are used to generate credits. And I see the Article 6 outcome as basically supporting that trend towards innovation and trend towards quality, I think, if you look [at] the backdrop to these discussions [...], if you look at the voluntary carbon markets, there's a trend towards more and more state involvement in the issuance of credits. You look at the jurisdictional nested REDD programs, for example, there's this trend to pushing the accounting up at the national level, and then nesting projects into it. So, I think, the signals we're seeing around corresponding adjustments is just going to be pushing that trend even further. I think that can only be a good thing to see more and more engagement from [...] the national level in the sector because you want governments to be really engaged in the possibilities that the market are able to open up in terms of financing. So I see it as a really positive outcome. [...] If you look at the Article 6.4 mechanism, I'm generally very positive that any methodologies that come out of that mechanism will be stronger than the CDM ones, and we'll build on the innovations that have been made in the voluntary sector between the CDM days and now. But, more generally, Glasgow sends a very strong signal around quality, that quality is only going to improve, that it's expected, that both nation states and the private sector deeply care about quality, and I think that that's something that's not going away, that that's definitely growing, and that, for me, that's a huge positive. 

Ben Rattenbury

I'd like to build a bit on the idea of quality, and particularly this idea of co-benefits, because we heard a lot in Glasgow about the rights of indigenous peoples and local communities, I think much more than many previous COPs. So I'd briefly like to ask Nathalie, and then Sam, so given this increased focus on indigenous peoples and local communities within the voluntary carbon markets, do you see this as having an impact in the coming months and years ahead?

Nathalie Flores

Well, the years to come, I'm gonna take an example again, my country, so you can put it in[to] perspective, because, of course, I'm a governmental representative and this is what we have to do. For us, I think, it's gonna be a lot of work, because we need to change, let's say, the mindset, we need to educate our private sector and our rules. In the rules that we have put into place, we have to go beyond the institutional arrangements that we have until now, and now we have [to] make these things match. I think there is a lot of opportunity [for] a country like mine that, basically, [is] going to jump into the possibilities of carbon markets. I think this is the very first step for us to start changing our mindset, and by changing our mindset, I mean our private sector. Our private sector has credits, of course, from previous UNFCCC mechanisms, and decisions from the past, but, right now, I think [...] we are in the best moment for our private sector to start a voluntary market and jump into the international carbon market itself. So [...] we were not, let's say, the happiest as a country, [or] a part of the group of countries, with the overall outcome, [...] overall I think this is the perfect moment. I mentioned before that we have a very ambitious NDC for a small country. Our emissions are 0.06% of the whole world emission, but we are still in development, and, I think, right now, it's the perfect moment to start this architecture of financial, of the financial structure for climate change in our country with the commitment that we did that 7% of the investment to reach our NDC needs to be national. So 5% is gonna be from the private sector and 2% is going to be from the government, and that's challenging. That's something that our President needs to lead and he's committed to do. He's been committed to push forward carbon neutrality for 2050, which is very ambitious as well, and I think the only way we can reach that is engaging our private sector with current markets, both [on a] voluntary basis, internally, and also internationally. 

Sam Gill

Yeah, I think, from our perspective, when you look at the market, and you take a step back, a huge majority of these projects without indigenous communities, and without the involvement of indigenous communities, there is no project. There is no carbon offset. There are no positive climate impacts. So it is a complete misnomer to ever really discuss this market without discussing the role of indigenous communities. So when we look at the quality of projects, we're always looking at how the project's interacting with, and integrating with, the local communities. How are they supported by the local communities? How are they supporting the local communities? All these sorts of questions are completely vital to understanding whether the project has been designed well, whether it has any chance of success, and whether it is a just and good project to be supporting. So, when you're looking at the quality of the offset, or the project that you're looking to support, the role of the indigenous communities in that project is always a key consideration to be looking at, if not the key consideration. But quite apart from the climate impacts, and the kind of climate integrity of those projects, and those projects' chance of success, it's really important to many of our clients to be looking at the co-benefits that the projects offer and a lot of our, in fact almost all, and actually, I'd go so far as to say all of our clients are incredibly motivated by the positive impacts of the projects, and they pay a very  keen eye to looking at how those projects are supporting the roles of communities and the development of communities' welfare. So, yeah, I think COP did a great job of highlighting the importance of that. That could always be improved on, but I do think the role of indigenous communities was put forward at COP and I think that's again a great outcome for the process.

Ben Rattenbury

Okay, I'd like to turn a bit more now to the markets themselves, and Rene you said a little bit earlier on about the fact that you see supply falling a bit short of rising demand, at least in the short term, but can you say a bit more about how you expect the market to respond to this, and how you expect the supply-demand dynamics to play out in the coming months.

Rene Velasquez

Yes, certainly, and maybe even picking up from the thread just previously around quality. I think that they're interlinked. So when we look at the ultimate end buyers, let's say, the net zero corporates, to echo Sam's comments, I think it's absolutely imperative, and many of them are already doing this through their public commitments, for them to support high quality projects, because, ultimately, this is a voluntary action, and they're looking to engage with their key stakeholders, whether those be internal or external stakeholders. So, a key determining factor in them selecting the underlying units, the underlying offsets, from specific projects is very much linked to these additional, what traditionally references co-benefits, so the climate, the biodiversity and, importantly, the community benefits, that Sam just touched on, and so did Nat. In terms of the holistic picture at the NDC level, when we look at the project levels, these are really important determining factors, and the way that they are represented are really best reflected by pricing. So what we've seen is a couple of things that have really helped to shape the narrative. (And this will, kind of, lead into the supply piece, to answer your question.) [...] The first thing was [that] the market really [needed] to establish benchmarks, and we, as an exchange, have helped to facilitate that [by] working, obviously, with partners like S&P Platts, and other price reporting agencies, to help to address one of the key issues that Stephanie highlighted, the transparency issue around pricing, but also with regards to the supply component and the transactional volumes. Once the benchmarks, like, for example, the nature-based global emissions offset, or N-GEO, were established, one of the core tenants of those, of that contract, I should say, is to have an insistence on having those co-benefits certified, so via the CCB label, that then created the price signal, essentially, for those units. Everything that lacked that CCB, essentially, now [somebody] had an incentive to go ahead and get it, or sell at [it] a discount. And then what's happened since then is through the work of a Sylvera, and I really commend your team, is the dissemination of even further qualitative differentiation around those projects. And so now there are projects that have really strong ratings at the Sylvera level that actually now attract a premium above the market. So what that sets is an ambition for other project developers to really pursue that price premium. So one is just the fundamental mechanics, right? And then the other piece is that the floor in the market, the kind of the boogeyman in the industry that a lot of dissidents around the carbon markets have been harping on about for years. It is just no longer there. There's this, pervasive notion that there's always been, and will continue to be, this oversupply of super cheap credits. That's just not factually correct. There's been so much activity in the market, that all of that overhang has essentially been exhausted in the market, and the last wave essentially of that, and it's helped to, sort of, bring up the floor price, is the action of many crypto coins, and other kind of, crypto space, DeFi in particular, Klima Dao, Toucan Earth, etc., that have effectively acted as a black hole, or a sink, for all of these really, maybe not highest quality offsets, and effectively taking them off the board. So now what that creates is, and to answer your question around supply, an incentive for the financial markets, and the private sector actors to go ahead and implement new activities that reduce emissions at scale and can actually get the highest price premium. So there's this kind of lag that's occurring right now in terms of the investment, huge sums of money being raised and now deployed in the upstream side of things of project development. It'll take some time for those to actually be realised, and that will then spur further supply in the long run, right? We're talking like a 10-year, 30-year kind of horizon. In the short term, the supply right now is constrained, and it's just a factor of essentially a number of financial asset managers all rushing in at once and effectively taking positions. If you do a deeper dive, and you look at the analysis by Sylvera, which is fantastic, on the project issuance versus retirement of units, also I recommend looking at the Troves Research on this, there's a clear indication that there is sufficient supply out there. It's just sitting on the books of many of these, kind of, asset managers. I think that now that they've started to take positions, they'll now want to start rotating that portfolio, and be able to provide off-tank agreements to those corporates to be the natural, kind of, attrition of those offsets, and so there'll be this natural, kind of, pendulum swing back. I think that what we'll see, and this is a bit of a hypothesis, is that as we reach, sort of, December a lot of the traders that have been long will start taking some profit, and putting, and providing liquidity into the market, so we'll see that kind of supply squeeze be alleviated a little bit, and in the new year, we'll start seeing more and more supply hitting the market. I think [...] what we've seen now is this perfect, kind of, storm of increase in demand that, kind of, caught a lot of people off guard and then the supply constraints that are just a phenomenon of the pandemic, like getting a VVB verifier and validator to a project site to actually do the monitoring on the ground has been problematic in a pandemic. So what that's also created is a need for, essentially, MRV 2.0 tools that can be leveraged by satellite and LiDAR and other drone, satellite and imagery technologies to help to achieve a better and much more scaled picture of emission reductions. So there's this kind of lag, but markets kind of go in those phases, and we'll start seeing that supply constraint be alleviated. So again, hopefully, that makes sense. So, a lot, and to Stephanie's point, there's a lot of corporates that are essentially coming into this essentially, green, let's say, and there's a lot of sophisticated traders that were caught off guard by the actions of a lot of these crypto, kind of, outfits. I think that they that were very stealthy in terms of how they approached it, and then they all came in really really quickly and they ate up the supply, and I think that that's a positive for the market, because now that downside risk for the asset managers is effectively gone, for the project developers it means that there's an incentive to go ahead and implement further higher quality, and for corporates there's even a lesser risk that they're going to be challenged by NGOs and others around sourcing offsets that are dubious in nature, and essentially what's available is high quality, and there'll be more and more of it. So I think it's a really good service that they've done is [to] effectively be the bottom feeders in the market and take out a lot of that older supply.

Ben Rattenbury

Okay, I'd like to quickly move on to a brief conversation about demand. So I'd like to ask Stephanie and then Sam, given that there is ever more and more capital and investment being allocated to the market, what risks and opportunities do you think this creates? 

Stephanie Zhu

It's a great question, and I think Rene has honestly touched on a lot of this, so I'll just pull out, at least, from our perspective what we probably see as the biggest risk and opportunity. I think the opportunity with a lot of this money being funnelled in is there's great opportunity that the projects and the locations that really need the carbon financing to protect areas or invest in low-carbon recarbonisation is getting it. I think that's very different from what we have seen in the past, definitely, ten years, but even in the past two years ago from now. So I think that's a huge opportunity, and I think the risk, which multiple people have, kind of, touched on, at least, from the end user perspective, is, the more visibility, and the more focus there is on this, the more focus there is [on achieving] one and a half degrees, [on] what we need to do, the more pressure I think there is to make sure we are doing everything right from a brand perspective, [such as] investing in the right projects [and asking question such as] ‘Does it have the right social benefits, [...] biodiversity [benefits], and all of those [other benefits]?’ So I think that is a potential risk just for the end user. With things just moving so quickly, what might be good one day, is not. You can be, kind of, ripped apart for it the next day. So ultimately, I think, for end users the risk there is being able to utilise the data that's out there, for example, from Sylvera, from others, to say, when I make, when we're making decisions to push towards net zero, push towards decarbonisation, we are doing it with the best information possible to make sure we're actually doing good across the board.

Ben Rattenbury

Sam, just building on that, if you can maybe say a bit more on the point of quality and, specifically, with the increase in demand and supplied timing, how do buyers pick the best projects that will ensure a return on their investments?

Sam Gill 

Yeah, that's a great question. I think, as we've already touched on, buyers are incredibly motivated by that piece on quality, and I think the really exciting thing about the market growing in this way, and the prices rising in this way, means that I speak with developers very regularly, and their eyes light up when they talk about the price. It's not out of greed, but out of the potential impact they can have, because, with a carbon price reaching 10 dollars, the types of projects that are now viable are incredible. [...] It's very exciting what this opens up in terms of the realms of possibility, but there still is a very heterogeneous market out there. Quality is on a spectrum and, as we've touched on, in this panel, it is an incredibly complex area to try and navigate, and many of the corporates that are making these net zero and carbon neutral commitments, many of these corporates aren't natives in this market. They don't have the necessary specialism and expertise in-house to execute well in a confusing and complex market, albeit one that has an incredible potential for great impact both on the communities and climate. So I think the really exciting thing about what we're doing at Sylvera is essentially we're able to provide data showing exactly which are the best offsets, helping corporate purchasers understand where they should be directing their investments to have the most impact, but also to minimise the potential for reputational risk that can arise if that corporate investment is potentially a poor quality offset, and so we're very passionate about the work that we're doing, and we believe that we can really support corporates in making efficient and impactful decisions minimising reputational risk.

Ben Rattenbury

Clearly not the final word on carbon markets and Article 6. These are still live issues that are being debated and they will play out over the months, and potentially the years ahead.

Questions and answers

Sam Gill 

Just while we're waiting for Ben to join, I might just kick off by answering Vitaly's question on the new coming satellite solutions that are coming into the space. Yeah, [I] completely agree that they present a cost-effective solution when compared to just traditional MRV. But I think one of the challenges that's, kind of, emerging in this space is there's now a proliferation of entities that are claiming to be able to produce these MRV solutions. But the actual quality of the MRV that they're producing really really varies, and, I think, particularly, also there are questions around how the models that they're building are calibrated. So it's really important when you're building a machine learning model that the data is properly calibrated and the model is properly calibrated. So, at the moment, the challenge is that the whole market, including the traditional MRV solutions, are using what we'd call allometry. So that's basically where you take fixed sample plots, sometimes they vary, but usually it's fixed sample plots, and they measure the circumference of the trees with a tape measure, and there'll be basic geometric models which look at the relationship between the size of a tree's trunk, essentially, and the amount of biomass that's stored in that tree. And then they'll use that data basically to estimate how much carbon is stored in that tree. And they'll take a number of samples per plot, and they'll use that. They'll extrapolate that, to basically work [out] how much carbon is stored in each hectare of that forest type. And that data collection is very very varied in terms of its quality. It has systematic biases. So it actually tends to underestimate the amount of carbon stored in the forest, and so when you're looking at these, like, remote sensing MRV solutions, the question is: 'How are those models calibrated? Are they using basic allometry, or are they using more advanced calibration data sets? How often do those models need to be calibrated?' And then, 'What is the quality and the performance of those models?' So I think, remote sensing first MRV is often presented as a bit of a, kind of, magic solution to the market, but actually there is a real variance in quality in those solutions, and so I think it's right that we look carefully at the standards that we adopt before we implement these models, but, in general, they have a huge part to play in the market, and, I think, a really exciting thing that they open up is also a more quantitative way of testing the additionality and baselines of projects, and so, in the Sylvera methodologies, we use a huge amount of the geospatial data that we drive with our with our tech stack to actually test the quality of the baselines of projects, and so, there's, like, a number of wins to be gained by using these more advanced technologies, because they can help give us assurance on the additionality and the baselines of the projects as well as giving a view on the performance of the projects and the design of the projects. I can see a second question off the back of that too: 'To bounce off Vitaly's question, do you see new actors coming into the MRV space to compete with Verra and Gold standard?' [...]  So essentially, what Gold Standard and Verra are doing are they set methodologies. So they're setting, like, frameworks, that then project developers and VVBs, which are verification bodies, then execute against. So I don't see that MRV, or new MRV players, will be competing with Verra or Gold Standard. It's more about whether Verra and Gold Standard [will] adopt these technologies into their standards. So, yeah, it's not really a question of competition. It's around, basically, evolution of these standards, and then also looking at the Article 6.4 mechanism, whether these new technologies will actually be adopted into these new methodologies, which will need to be spun up under that mechanism. So it's more about adopting those technologies into the current structures. I think a really interesting thing, and something that we're starting to work on, is also about using these data sets and the technologies we're building in, and implementing them in national level monitoring, so, looking at national-level inventories for carbon stocks in terrestrial sinks. But Ben, Domenic's question, that might be one for you. [It’s] just talking about the different bodies that are trying to help set and give some clarity around quality. So you've got the VCMI, you've got the governing body that was set up off the back of the TSVCM recommendations, you've got the SBTI as well. If you've got any thoughts around, those different bodies, and I've also got some thoughts around, project level quality, but, do you want to talk to that?

Ben Rattenbury

Yeah Domenic, it's a great question, and, I mean, the short answer is that the clue is in the name. It is voluntary. So it's always, I think, by definition, going to be a bit of a Wild West. As the governments take more of an interest, as the VCMs start to resemble more and more the compliance market, I think we're going to see government starting to place some rules around this, and then it becomes a little bit less voluntary, and a little bit more compliance. So, ultimately, the one decision maker will probably be the UNFCCC, and prior to that, individual governments setting their own, kind of, specific constraints, as they do currently, in the jurisdictions where VCMs are part of the compliance markets. I think another one to watch out for is the IFRS Foundation's ISSB. So this is the International Financial Reporting Standards body's International Sustainability Standards Board, and this is the body that sets the rules for global accounting that almost every country follows, and they are looking to set up similar rules for sustainability reporting for corporates. They may end up deciding what type of claims can be made off the back of a particular use of carbon credits, and that can then filter into the TSVCM and SBTI and VCMI and others, but I'm afraid there's no quick fix here. There's not going to be one body to rule them all, because each body thinks that they should be the one to do that. But I think we are starting to see some some coalescence, particularly around the TSVCM or the ICVCM, as it's now been renamed, and the VCMI, which are, kind of, two sides of the same coin, if you think about the distinction that they've made between ICVCM focusing on credit supply and VCMI focusing on credit demand, we could see a merger between those two, and, I suppose, that would be quite interesting, but, ultimately, it'll be for governments to decide, I think. 

Sam Gill 

Yeah, and, I think, from our perspective, we're seeing particularly on the supply side, and the high-level principles around what quality looks like in terms of project quality, and also, at a jurisdictional level, there seems to be increasing harmony around, at a principles level, what makes a good offset. So it needs to be additional, you need to have a sufficient assurance on the quality of the MRV, in terms of, like, the monitoring of the performance of that offset. But, I think, from our perspective, those principles will only get you so far, and you actually need a view on the performance and the quality of any project at the project level. So it's not enough to kind of agree at a principal's level, you need to then actually have data on a project, by project level, to actually look at whether any, whether each project, is actually conforming to the principles that have been set and agreed at that level, and so that's why we're so passionate about the work that we're doing, because we believe that talking about principles will only get you so far, and you actually need data at the project level to actually decide whether any particular offset conforms to the principles that have been that have been set. So it's really really important that you look at a project level so that you can pick the best offset, so [that] you can actually pick the offsets that conform to the principles that are being aligned on in these, kind of, high-level working groups.

Ben Rattenbury

Sam, there's an interesting question here from Joe, asking, 'Do you see corporate buyers voluntarily adopting the 5% adaptation, 2% cancellation levies from Article 6 when buying off the VCM?' 

Sam Gill 

I mean, I haven't seen any. I haven't seen any discussions to this effect yet, but I guess Article 6 is still pretty hot off the presses. I mean, in principle, I could very much see that happening. [...] It's very much within the spirit of what a lot of the buyers that are engaged in the market are trying to achieve, and so, I wouldn't be surprised if something like that emerged. I haven't seen any initiatives to that effect, but, it probably wouldn't be too difficult to affect. You just need a kind of agreement, or some coalescing of minds between the different exchanges that are emerging as the venues for these types of transactions, and, that would be something really exciting, if it did occur, because I think that would be very much within the spirit of what the voluntary carbon market is trying to achieve, and I think Article 6 sets a really great precedent there. So I guess, watch that space. What do you think, Ben? 

Ben Rattenbury

Yeah, I agree, I mean, it's definitely too early to tell, but, I think, that just as we have started to see a race to the top on credit quality in the last couple of years, and to the point where some companies are willing to spend over three hundred dollars a tonne to invest in very novel technologies, I think we will also start to see a race to the top on discounts, and so, for the moment, 7% is, kind of, the benchmark that was agreed in Glasgow, 5% for adaptation, 2% for overall mitigation. I think we will start to see some of the top end of the market trying to outbid each other on what type of discount they're applying, and that's a really interesting development, and it kind of ties in, I suppose, with some of the ratings that you're seeing, where some projects are massively overachieving on their carbon impact, sometimes a very significant multiple, and that's also something that you'll start to see priced into the market more and more. So another question here, Sam, from Camilla, which is about how you see the incorporation of removals technologies, particularly on the standard and the accounting rules?

Sam Gill 

Yeah, so I, already seeing removals methodologies being spun up by the voluntary carbon market bodies. So I've seen a number of drafts being spun up. In honesty, it's actually, from an accounting perspective, it's fairly simple to incorporate these types of technologies into the, kind of, like, government-level accounting, and the methodologies, in theory, are fairly simple to spin up, although you need to be careful when you look at the life cycle analysis, particularly of these sort of MVP plants, but, I see these types of technologies being incorporated into the voluntary carbon market ecosystems quite simply, and I think the corresponding adjustments, again, once there are national-level mechanisms in place, I think they'll slot fairly easily in just by nature of the type of technologies you're speaking about there. So I don't see these as particularly complex. [...] When you're looking at removals technologies [..] the onus is much more on getting them to scale and getting them to the point where they're efficient and deployable at scale which is, obviously, a huge challenge.

This was the end of the questions and answers session. If you have any questions please send them along to sales@sylvera.io.