Practical Sustainability: Impactful Carbon Trading

Jeff Kavanaugh: Welcome to the Knowledge Institute Podcast, where we talk with experts on business trends, deconstruct main ideas and share their insights. I'm Jeff Kavanaugh, chief learner and sharer with the Infosys Knowledge Institute. And today we're here with Dr. Barbara Haya, director of the Berkeley Carbon Trading Project and a research fellow at the California Institute for Energy and Environment. Dr. Haya, thank you for joining us.

Barbara Haya: Thank you so much.

Jeff Kavanaugh: You've been involved in admissions office at research for the last two decades, dating back to even your doctoral research. Of all the interesting insights innovations, what's perhaps been the most surprising insight you've discovered in this research journey?

Barbara Haya: So carbon offsets allow an emitter, whether it's a company or even an individual that wants to reduce their carbon footprint, the chance to pay someone else to reduce emissions, to cover their own emissions, or to help them meet their target for reducing emissions. Each offset credit should represent one metric ton of carbon dioxide equivalent reduced or removed from the atmosphere. And just to give a sense, so on today's carbon offset market close to half of all credits are from forestry, either forest preservation, tree planting, improve forest management, a bit over our quarters from renewable energy projects. And then there's a whole slew of different projects in all different areas of agriculture and transportation and industry that is allowed to generate offset credits.

Jeff Kavanaugh: And Global Interdependence is what we'll explore in today's conversation. Welcome to the Knowledge Institute Podcast, where we talk with experts on business and global trends, deconstruct main ideas and share their insights. I'm Jeff Kavanaugh, head of the Infosys Knowledge Institute. And today we're here with Jeff Kavanaugh founder and chair of OneShared.World. In a world of increasing complexity and specialization, Jamie is a variety of things, the true polymath, futurist, geopolitical expert, science fiction novelist, and media commentator. Jamie is a Senior Fellow at the Atlantic Council and has served in the White House, State Department and United Nations. He was also Deputy Staff Director of the Senate Foreign Relations Committee under Joe Biden.

Jeff Kavanaugh: Carbon offsets have taken off as a method for organizations to reduce their carbon footprint. However, companies need to ensure they're investing in offsets, then make a real difference. Where do organizations go wrong in their approach to adopt or implement these programs?

Barbara Haya: So first let me answer sort of what are the organizations involved in the offset market and in determining or ensuring offset quality? So basically the rule makers for the offset program are the major registries. So there are basically five different offset registries globally that create the large majority of the offset credits that are available to companies and others to purchase. And these registries define what project types are allowed to participate, as well as the rules for how to estimate the emissions reductions or removals from individual projects, process of third party verification that the reductions are real. So where things have gone wrong, I strongly believe are at the registry level where they aren't ensuring that the projects that participate are projects that really were enabled by the offset program and the offset incentives. And they also, aren't making sure that the methods for estimating project impact are based on the best science and are not over credited. So what that means is that the buyers really need to do due diligence on the quality of the credits that they procure.

Jeff Kavanaugh:Sounds like organizations could actually do harm if they don't approach carbon offsets properly. What are some of the negative environmental and societal consequences of a poorly run offset program?

Barbara Haya: One thing that's important to remember with offsets, they're often presented as tons of emissions reductions, but offsets are inherently a trade. So any credit that's purchased is often used by the buyer to justify continued emissions or to take the place of other actions that they can use to meet an emissions' reduction target. So when offset credits represent less than one ton of CO2 reduced or removed, it takes the place of direct emissions, reductions, or other climate action that's more effective. And another real risk is that it makes us believe that we're reducing more emissions than we are. If you have method for companies to inexpensively procure credits that reduce emissions mostly on paper and not in practice, that allows us to pat ourselves on the back saying that we're doing a lot when we really are doing much less than that. And that's very dangerous in a world where we have such a limited carbon budget and we need to be reducing our emissions as quickly as we possibly can.

Jeff Kavanaugh: So between a false sense of security and virtue signaling, I guess it's somewhere in the middle there, but in all seriousness, is that a real risk that deviates from the hard work of real reduction, and it's more that these appearance of this coverage or purchasing your way through them?

Barbara Haya: Absolutely. So companies, universities, cities, others take on climate targets take on carbon neutrality goals. The presence of the offset market means that there's a really easy way for them to meet their target by just buying these credits off of the market. If those credits are less expensive than they currently are, then reducing their own emissions or doing actions that's more effective, those purchases take the place of real emissions reductions. So yeah, I've seen this happen where it's really hard for a company or university to justify making the difficult decision to electrify their vehicle fleet and electrify their buildings and get off of natural gas when they could equally make the decision to just buy these credits, which is less expensive and much easier. And I worry that carbon offsets demotivates action in this way, by offering this cheap, easy option for meeting a target.

Jeff Kavanaugh: Well, we haven't talked about the magic number. What does a credit cost?

Barbara Haya: So on today's market, offset credits as I understand, can be anywhere from like $3 a ton to $25 a ton for sort of the bulk of the credits out there, and then really the highest quality carbon removals go for a lot more than that into the hundreds of US dollars.

Jeff Kavanaugh: Do you see carbon taxes emerging as an alternative to the trading scheme?

Barbara Haya: We have seen carbon taxes being implemented in different jurisdictions globally. I think it's always been in some areas really a challenge to implement a tax because of political resistance to taxes of any sort. I mean, I think generally carbon pricing is an important policy where carbon pricing can happen because of a tax, it can happen because of a cap like under a cap and trade program, either way it effectively puts a price on carbon. And I think that's always a good thing and something that we do need to see more of. I mean, I think that there always will be a place for companies to take additional voluntary action to reduce or cover their own emissions. Like so many companies that have taken carbon neutrality commitments around the world and I think that will always be there in addition to direct regulation.

Jeff Kavanaugh: For these carbon trading programs or schemes, it's hard enough for large companies with lots of resources to do it. Do you have any guidance from your research about medium and small companies and how they can take steps as well?

Barbara Haya: The most important thing is for companies to reduce their own emissions directly. And if companies want to do something in addition to that and invest in climate mitigation outside of their own supply chains, it is a lot easier for major companies to do the due diligence and the research and build connections with organizations doing work on the ground that they can support. For medium and smaller size companies, I would say where possible, if you want to support climate mitigation beyond reducing your own emissions, do your due diligence on a company or an organization or a project that you want to support that does climate mitigation, they might or might not create offsets or otherwise just choose the project carefully. And I think it's really for the small and the medium size companies where, one thing that the Berkeley Carbon Trading Project is really trying to do is to push the whole offset market, to tighten up its standards so that anyone can really trust the credits.

Jeff Kavanaugh: Can you walk us through what a really good carbon offset or trading program looks like?

Barbara Haya: I want to tell you about what the university of California, the system of 10 campuses is doing. And we recognized the quality challenge with procuring offsets off of the market and that really for any company or university or institution, the best way to ensure that your offset investments are really making a difference is to build your own projects or get new activity off the ground, because then you know that you're really having a difference and you can know that you can estimate the emissions reductions effectively. And we put out a call for university initiated offset projects, sort of broadly to university faculty, staff, students, and researchers so not knowing what we would get back. It was a big experiment and we ended up getting back an amazing set of project proposals or offset project proposals and we supported 12 of those as pilot projects.

Barbara Haya: Some of those are in the global south like cook stoves and solar lantern projects in countries in Africa. Some of them are here in California, really focused on innovative ways of reducing emissions, such as from or including from concrete production, as well as livestock emissions and rice cultivation here in California.

Jeff Kavanaugh: A few years ago, you had written a paper on managing uncertainty in carbon offsets. You made some insights from the standardized approach taken to California. What are the main points or the insights that you found from this report?

Barbara Haya: That report is a roadmap for how regulators offset program developers can design their offset programs in a way that does not over credit. And we highlight the importance of making sure that you're targeting a set of projects that most likely would not have gone ahead anyway. And the types of issues that have led to over crediting from methods of setting of estimating emissions reductions. And then I think one of the interesting things that came out of that paper is a focus on the types of perverse incentives that can be caused by carbon offset programs. Let me explain it in examples. So the California government has an offset protocol that credits methane emissions reductions from coal mines, where it pays coal mine owners to destroy methane that would've otherwise been released to the atmosphere in the process of coal mining or from abandoned coal mines in the US.

Barbara Haya: And one of the way that offsets work is they work by creating a profit motive where they make it financially beneficial to implement a climate mitigation project. And in this case we're creating or California has created a profit incentive for the world's most greenhouse gas intensive of industries, coal mining. And what we found is that the profits that could be made from capturing methane and selling the offsets for the gassiest mines in the United States was enough to keep a struggling coal mine open longer and make it significantly or meaningfully improve the profits from coal mining. So this is an example of the type of ways that the incentive created by offset programs really needs to be carefully analyzed in designing offset programs that contribute to climate mitigation.

Jeff Kavanaugh: Who are the highest quality offerers out there. So as listeners are thinking about it, who do you recommend as is the highest quality?

Barbara Haya: I think if you're a company looking to procure high quality offsets, the best thing that you could do is to do due diligence on specific providers and specific organizations, and really build a relationship with a specific project developer that you trust. Other than that, I think the highest quality credits on the market are there're two different types of them. One is so these high sustainability projects that are working in the global south in rural areas, such as clean cook stoves, solar lighting, some reforestation projects, projects where you're putting funds into helping improve people's lives in ways that also reduces greenhouse gas emissions.

Barbara Haya: And I think a second sort of category of the higher quality credits are those that are more the high potency, greenhouse gases from industrial processes and chemical processes, where for example, a company might be able to use a different type of industrial process to reduce their greenhouse gas emissions, where the main reason why they're doing it is because of the greenhouse gas emissions. So we can be confident of the additionality because there isn't another competing or another reason why they would implement the technology. And there are a set of sort of these high potency industrial gas projects that are also among the higher quality out there.

Jeff Kavanaugh: Which protocol or small number protocols do you recommend as some of the ones sort of doing the least amount of over crediting, or maybe to reduce the double negative, they're doing the best job of crediting and more accurate?

Barbara Haya: It's really the two categories from what I've seen so far, and this is ongoing work, but it's the two categories that I said that there's some set of projects that provide cook stoves and solar lanterns, clean water to some of the poorest areas in the world where a lot of those projects, at least they're having an impact, even though many of these protocols are over crediting, you know that you're still having an impact on the ground that both in greenhouse gases and on people's lives. And subset of that category is, and this is where sort of hard off the press work that I'm doing with a PhD student here at UC Berkeley, is looking very carefully at the cook stoves projects. Many of those projects are over credited because of methods used by the rules to estimate emissions reductions, where they're choosing emissions factors that lead to over crediting.

Barbara Haya: But there's a subset of projects there that are more likely to under credit than to over credit and wonderfully, those are also the subset of cook stoves projects that have the most health impacts and the most health benefits. So when you switch from burning wood and charcoal over an open fire or in a traditional cook stove, and you switch that to liquid fuels, which can include LPG, it includes biogas and wood pellets also has this benefit, one thing that you're doing is substantially reducing the amount of smoke that's released into the home, where women and often children surrounding them breathe in smoke in the process of cooking. And it dramatically reduces the smoke coming out of the stove, which also dramatically improves the health impacts from that respiratory burden of them breathing in that smoke.

Barbara Haya: Those projects also are the most likely to under credit just because of specific choices made for what the rules are for how to estimate the emissions reductions. I think this really points just how important it is for us to tighten up the offset market so that we can trust those credits because there's this potential for so much money to be going to projects like this and so many others that have real meaningful benefit to people and to the climate. And I'm worried that we're just wasting a lot of money today because we're not accurately counting the true benefit of the projects.

Jeff Kavanaugh: What do you think is the most important thing to get this message from the lab out to the market? What is needed so that the broader market and society hears it and acts on it?

Barbara Haya: I've done a lot of thinking about sort of why after 20 years of learning by doing, we're still seeing such poor quality. I think it's because the offset market is sort of in its fundamental structures, a perfect storm for poor quality and here's why. So with five reasons working together, so one is uncertainty. So offsets are inherently uncertain because we know how to measure emissions. It's much harder to measure emissions reductions because you have to measure them against a counterfactual scenario that never happened and therefore is unmeasurable. It's really hard to know what's additional, what's not, and what would've happened, were it not for the offset program. That substantial uncertainty is being deliberated by the second point and that is that everyone who's making decisions has a conflict of interest that everyone has an interest in a larger and therefore poor quality market.

Barbara Haya: You know, buyers of credits want cheap credits, sellers of credits want to sell more credits and make more money, the third party verifiers want to be hired again and the registries that are writing the rules also benefit from more market share. And so this whole system is also buffered by complexity and lack of transparency, which sort of buffers the whole system from scrutiny and researchers like myself, where it's just really hard and involved to understand the quality of these credits. Two other reasons are I think we're in a low quality loop, and what I mean by that is there's currently over crediting going on, which keeps prices low. And once prices are kept low, they aren't high enough to drive real mitigation. And so for example, if a registry were to create a cook stove's methodology that accurately and conservatively estimates the impact of these projects and doesn't over credit, any project developer that chooses to use that protocol will generate what one third, one fourth, one fifth of the number of credits, everyone's going to choose the existing protocol and be able to generate more credits.

Barbara Haya: And then the last point is simply I think another challenge is that there's a trade off between creating an effective financial incentive for climate mitigation and ensuring that the credits are real and not over credited. What I mean by that is so many people who are involved in and running the offset market, come at it from the perspective of, we need to see more funds going into climate mitigation. They see it as a funding source for these underfunded activities like forest preservation, like landfill gas capture systems, where we're seeing all this methane going into the atmosphere, that shouldn't happen. We need funds to prevent that from happening.

Barbara Haya: And I think the design of a program that creates lots of funds going into climate mitigation, given the low prices today is really different from what you need to do, like the much smaller, more carefully designed program that you need to ensure that the credits are not over credited. And I think those who are writing the protocols are writing it to generate funds for worthwhile projects and prioritizing that rather than prioritizing, not over crediting and generating credits that can be trusted.

Jeff Kavanaugh:What is the one thing or the main thing that a corporate leader can do to improve the quality of these carbon offsets and carbon credits?

Barbara Haya: Most important thing to do is to prioritize direct emissions reductions before buying offsets so these aren't truly tradable. And the second thing I would say is do your due diligence before buying offset credits. Look carefully at the project documents do research on the developer of the projects, treat offsets like you would treat any supply into your business where you would do research on the different materials on your suppliers, see offset similarly as a supplier into your business and do that careful due diligence.

Jeff Kavanaugh: Great. What are some good carbon trading and offset resources that you recommend for people to follow?

Barbara Haya: One is SBTI, science based targets initiative, which is a way of sort of a system of publicizing and making claims on your emissions impact and emissions reductions impact. Some organizations that are doing wonderful work include Carbon Direct, which is a company that does consulting that helps companies procure offsets. CarbonPlan does wonderful work, doing research on the quality of specifically removals, offsets and removals projects out there. Calyx Global is another consulting company that I think is doing really good work, looking at the quality of many different project types on the market. The Berkeley Carbon Trading Project provides resources. We have a repository of literature on offset quality. We have a database of all the offset credits that have been generated so far on the voluntary offset market. So do a search for the Berkeley Carbon Trading Project at the university of California, Berkeley.

Jeff Kavanaugh: And everyone you can find details on our show notes and transcripts at infosys.com/iki in our podcast section. Dr. Haya, thank you so much for your time and sharing your passionate points of view on carbon trading and offsets. Perspective like yours are needed if we're going to move closer to a carbon neutral future. Thanks for our producers, Catherine Burdette, Yulia De Bari, Christine Calhoun and Dylan Cosper, and also our engineer, Dode Bigley. Until next time, keep learning and keep sharing.