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How carbon markets can move beyond offsets to achieve net zero
In this episode of the Sustainability Matters podcast, the speakers look at carbon as a commodity and examine how Microsoft is pioneering a new strategy focused on carbon removal.
As more businesses focus on net-zero targets, voluntary carbon markets (VCMs) need to play an increasingly crucial role. The VCMs are a necessary and important tool for offsetting hard-to-decarbonize emissions, and there is a vital need to scale them; however, there are many challenges in their current state. In this episode of the Sustainability Matters podcast, host Bruno Sarda and EY Sustainability Global Account Lead for Microsoft, Alissa Byersdorfer, join Brian Marrs, Senior Director for Energy and Carbon Removal at Microsoft, to examine the growth of VCMs and how they need to evolve.
Bruno sets the scene with a brief history of the VCMs and carbon as a commodity. He shares that VCMs are growing and are now a key component of many businesses’ decarbonization strategies but there are some significant challenges around credibility and quality. Alissa explains how the alliance between Microsoft and the global EY organization helps other businesses achieve their own decarbonization goals through sustainable strategies and data management solutions.
With a commitment to becoming carbon negative by 2030, Microsoft is a pioneer in this space. Brian discusses the challenges Microsoft has faced and how the VCMs need to evolve to focus more on quality carbon removal products. Brian covers why Microsoft’s strategy is solely focused on investing in carbon removal programs and how they have approached the challenges of the carbon market with their four north starson quality.
Lastly, Brian shares some first-hand advice for companies exploring VCMs to achieve their net-zero goals.
Key takeaways:
The VCMs are a powerful and necessary tool to help businesses decarbonize but business currently have challenges around buying quality and credible credits.
Most Fortune 500 companies have net-zero targets that are predicated on using the VCMs.
Currently, most credits traded are avoidance, programs that reduce emissions, rather than remove them, but these increasingly face issues around quality.
The fast-growing sector of the VCMs is carbon removal, capturing and removing carbon from the atmosphere, but these make up only 3% of all VCMs credits issued.
A rigorous due diligence process is key when buying carbon credits through the VCMs.
You can also listen to this podcast on Apple, Spotify
For your convenience, full text transcript of this podcast is also available.
Brian Marrs
Quality must come over quantity. It’s better to ensure that every dollar you spend results in climate action than just trying to cover the emissions math on a sheet of paper and moving on.
Bruno Sarda
Hello and welcome to the EY Sustainability Matters Podcast, our regular look at ESG [environmental, social and governance] and sustainability topics, and how they impact businesses around the globe. I'm Bruno Sarda, Climate Change and Sustainability Partner at Ernst and Young LLP and your host for this series. The scientific consensus is that in order to avoid the worst effects of climate change by the end of the century, the world needs to reach net-zero greenhouse gas emissions by the year 2050. The “net” in net zero means not all of that can be achieved by reducing or eliminating greenhouse gas emissions and that we will need to remove the rest from the air.
So, today we will explore the topic of the voluntary carbon market or commonly referred to as VCM. The VCM is one way an organization can balance its environmental impact by buying voluntary carbon credits and companies can purchase credits that represent the removal or avoidance of carbon dioxide emissions. And these credits result from projects like renewable energy or energy efficiency, reforestation, and all kinds of other activities that either avoid or remove greenhouse gas emissions.
And that's an important point to distinguish between the different types of credits: avoidance and removal. Avoidance credits are from activities that reduce emissions by preventing their release into the atmosphere. Think avoiding deforestation or producing emissions-free energy; whereas carbon removals are from activities that remove or capture carbon from the atmosphere and store it. Think things like reforestation or direct air carbon capture and storage, for example. And the VCM has evolved over time.
The Kyoto Protocol back in 1997 really marked kind of a major milestone for enabling international participation and carbon markets becoming more common place, so the Kyoto Protocol enabled countries to sell excess emission units to other countries, making carbon a commodity that can be tracked and traded like any other commodity. It also established something called the Clean Development Mechanism or CDM which allowed countries to implement emission reduction projects to earn certified emission reduction credits or CERs, thus forming the foundation for today's VCM.
And despite some issues that the CDM showed, it was possible to fund projects to reduce emissions. And since then, the market has grown with a lot more private sector engagement, new project types and innovations, and a greater market growth. And like anything that grows, there have been growing pains as well. The VCM has faced challenges of quality and creditability in some projects and claims, eroding the trust needed for it to scale and be an important tool to reach the goals of the Paris Climate Agreement. And that credibility issue can make it harder and more expensive for companies because of things like due diligence requirements needed in order to have confidence that they are sourcing from quality projects.
We've seen and heard these challenges from many of EY clients who have made public net-zero commitments and, you know, we offer them support from how to source their renewable energy to how to navigate the entire carbon offset and removal process from, you know, how to develop proposals to how to actually do due diligence or how to structure project transaction themselves. So, despite these challenges, the voluntary carbon market or VCM is a powerful and necessary tool to help address climate change especially as more and more companies are beginning to enter it. And a pioneer in this space is Microsoft. So back, you know, beginning in 2012, with the launch of their carbon fee program and now with their CDR or carbon dioxide removal portfolio. And I'm lucky to have with me today, Brian Marrs, Senior Director of Energy and Carbon Removal at Microsoft, to discuss the inspiring work they are doing in the carbon-removal market. Also joining me is Alissa Byersdorfer, a partner in Ernst and Young LLP Financial Accounting Advisory Services practice in the US who spearheads our sustainability relationship with Microsoft globally. And I'm looking forward to hearing more about Microsoft’s journey in the VCM, specifically carbon removals. And with that, I'll hand it over to you, Alissa.
Alissa Byersdorfer
Thank you, Bruno. As we build this path to a more sustainable future, we're increasingly seeing strategic relationships and alliances playing a really pivotal role to fuel innovation. And, of course, both EY teams and Microsoft, we each have our own sustainability goals that we're working toward, but the shared purpose, underlying it as a foundation, has really been the long history of collaboration between the companies and the reason that this foundation works. EY teams have been serving Microsoft for more than 20 years in more than 125 countries around the world.
We at EY were honoured to be named Microsoft's Global Sustainability Changemaker Partner of the Year for 2023. And this collaboration has also developed into a robust alliance to help other businesses achieve their own decarbonization goals through sustainability strategies and data management solutions. And, Bruno, as you mentioned, Microsoft has been a pioneer in the voluntary carbon markets and this stems from the aggressive and ambitious decarbonization goals that they’ve set. And Brian, of course, you're quite familiar with these goals, but for our listeners, Microsoft has committed to being carbon negative by 2030 and removing all historical emissions by 2050. So, that would mean that Microsoft would need about 30 million tons of carbon removals in order to achieve these targets. So, ambitious is an understatement and understanding these targets, the voluntary carbon market, it must play a huge role in your team's strategy. So, Brian, can you discuss the current state of the voluntary carbon market and how your team is navigating it and some of the challenges that you and your team are facing?
Marrs
Certainly, and before I kick that off, I just want to say it's great to be here with you and Bruno, and just appreciate the continued spotlight that EY teams puts on the nexus of business sustainability. So, thank you all for having me on. And maybe, I'll start this discussion with a dose of humility. I am hardly a global carbon markets wonk who's spent the last 20 or 30 years building today's voluntary carbon market; and I have tremendous respect and admiration for the professionals who have dedicated their careers to making carbon markets work since the Kyoto Protocol, essentially. And the job is never done and remains punctuated with massive triumphs and disappointments. And that said, you know, my background’s in building and operating energy infrastructure, and most of my career has been in the energy industry, specifically power grid planning and operations and energy economics and clean energy developments.
So this is the background through which I see today's VCM from my seat at Microsoft and I'll discuss here in a second. We're borrowing from the success in clean energy procurement to inform our strategy and execution in carbon removal. So, that's sort of the preface here but maybe to backtrack to your question more succinctly, the VCM has never been more vital for climate action. It can be a scary place for corporates right now, and to Bruno's point, you know, with growth can come growing pains. The VCM really sits on a spectrum somewhere between an economic miracle and an economic paradox. So what do I mean by that? We can think about this as a “glass half full” and then I can talk about maybe the “glass half empty” perspective on the VCM. On the economic miracle side of the spectrum, this voluntary program remains one of the main vehicles, if not often the only vehicle for the private sector and increasingly the public sector, to take climate action. And depending on what study you read, there are thousands of corporations across the globe, including now the majority of the Fortune 500 companies with net-zero targets, and we should celebrate that. And many, if not most of these targets, are predicated on access to carbon markets in the VCM itself.
So, the demand side of the equation for carbon products is there even if it can often be a lagging indicator; in some respects, a red herring. So, if you believe the consulting reports, built largely on, you know, forecasts about net zero into the future, today's VCM would need to grow from about US$4 to US$5 billion a year to a US$100 billion a year in the 2030s. And like all forecasts, all are wrong, but some are insightful. And I think that helps, you know, ground the widespread corporate commitments that are yet to be realized. So, this amazing voluntary program, built largely on international goodwill and entrepreneurial sweat and tears, is really seeking to create credible climate solutions ahead of regulations because the math behind 1.5°C, you know, the UNFCCC targets, needs to move faster than current policy frameworks would provide. So, that's the “glass half full” perspective and I'll pause here. I'm happy to jump into the “glass half empty” or the economic paradox side of the spectrum.
Byersdorfer
Brian, you really painted a great picture on why the VCM played such a key role in decarbonizing. Have you seen it growing in importance over the last couple of years?
Marrs
Absolutely, and I think it's grown in importance maybe despite some headwinds, you know, I mentioned the volume and the size of the market that needs to grow. I think that when we look at the data, particularly between 2015 to 2022, the VCM has almost tripled or quadrupled in size, so we're seeing more carbon credit issuances in retirements, even if that has decreased in recent years by several tens of millions of tons, but the rate of change is up and to the right.
I think where we have some of the main concerns about the VCM today is about quality. And so, you know, there are many reports that have come out saying that up to 10% to 20% of avoidance credits hold up under increased scrutiny. So I think Microsoft's approach has really been to think about the VCM as a vehicle for carbon removal where we feel more comfortable in the quality of what we're buying, and really thinking about how to incorporate removal products as a larger and larger portion of the VCM. Today, carbon removal's only 3% of all VCM credits issued and most of those are on the spot market from existing inventory. So, we're looking to sort of re-pivot that market along some key pillars and I can talk about those in a second in our commercial approach.
Byersdorfer
That's really interesting, Brian, and you're echoing the concern that we hear from a lot of clients around the quality and the credibility of the projects that come through to VCM. It's interesting to think about how Microsoft is navigating that scrutiny. Are you finding that as you scale your own efforts to remove emissions that the carbon market is still a really important component of Microsoft being able to achieve those goals?
Marrs
Absolutely, I think one of our key learnings is that buying carbon in today's market is too hard, so we need to work across a host of other companies and brilliant collaborators ranging from NGOs to the public sector to change that. And so, I think that, you know, really the way we've approached the carbon market is with four north stars on quality. And we've really put quality as the heart of our program. We want to make sure that every carbon removal credit we buy results in the climate impact advertised.
So, in terms of those four north stars, the first one, and probably the most important one in many ways, is additionality. We want new projects built the same way, you know, learning from our experience in renewable energy in terms of PPA [Power Purchase Agreements] versus unbundled RECs [Renewable Energy Credits]. We absolutely want new projects built on behalf, which means, you know, we're not buying all our credits on the “spot” markets from existing inventory. We're signing contracts, with long-term price signals into the market, with contract, plus four or five delivery cycles.
So, that helps guarantee additionality. The next is permanence. We want to make sure that the carbon removed from the atmosphere, from the soils of the water is stored over the lifetime, certainly of our goals and really at least a 100 years. I can talk a little bit more about our commercial approach in a second because we do purchase across all carbon-removal durabilities, but permanence is key. The next is measurability, the MRV [measurement, reporting and verification] plans behind these projects.
We need to make sure that we have a way of monitoring what we've bought from and that we can, on an ongoing basis, certify the additionality and the permanence. And then the next step is environmental justice, which I think is increasingly a critical factor in the VCM and certainly carbon removal. And at the least, we want to make sure that our projects do no harm, and at best, you know, we want to enrich biodiversity and community benefits where we place our projects that we buy from. And so, to guarantee these four north stars, we have a rigorous due diligence process, with a team of third-party vendors that look at every single process and third-party vendor, in some cases for months, and that's a sacrosanct piece of our contracting process.
Byersdorfer
That's definitely a robust process, Brian. Do you want to talk a little bit more about the commercial aspects of how you got through this analysis?
Marrs
Yeah, I'd love to. So, in terms of operationalizing those quality north stars, we're really taking a three-pronged approach. The first, and I sort of mentioned this before, is the portfolio approach. We're not only buying engineered CDR or only buying nature-based CDR, we're looking for a blend of projects and not assuming the right answer across any given land management practice or technology pathway. We're taking a number of small- to medium-sized bets and spreading them out in a portfolio.
So, diversification is the only free lunch when it comes to risk. Diversification and carbon removal is a very nascent field, so we're not assuming winners, and we're trying to look across a range of entrepreneurs and established companies and finding those solutions. And that helps us manage our CDR on a global basis. Second piece is, we want to send a long-term signal to the market, you know, and this very much resembles renewable energy where we saw developers needing 10-, 15-year, 20-year PPA contracts to stabilize those investments and bring in institutional capital into the renewable energy space.
When we approach our deals, we are looking for longer terms in offtake tenders to help provide that offtake security, such that we can see lower and lower cost capital rather than risk capital enter the CDR space and really get that entrepreneurial engine going. And then the third piece is, we really look to build the markets we buy from and that, you know, what does that actually mean? Well, it means we might look at CDR approaches that are less proven today, but have gigaton potential in the future that might be overlooked by buyers in the market, but might help prove a critical point in VCM market construction in the long term. So, I look at open system solutions, like ERW or enhanced rock weathering as a key factor here, soil carbon and then novel approaches to reforestation or afforestation in that bucket. So, those are our three commercial approaches and like I said, we use that to operationalize our quality north stars on a consistent basis across our global portfolio.
Byersdorfer
Thank you, that's really interesting, I'd like to pivot, if we may, I'm curious around your perspective on COP28. There was a consensus coming out of COP28 on Article 6, of the Paris Agreement. There was hope for a consensus, but unfortunately that didn't happen. Can you explain for the listeners Article 6 and how this lack of consensus from a COP28 impacts the VCM and how Microsoft participates in it?
Marrs
Yeah, so this is a big topic and we could probably have an entire podcast just about Article 6. So, I'll try to be a bit brief here and actually think about this more from a commercial perspective. Carbon markets will work best when they can cross borders. And so, Article 6 is sort of the enabling piece for a consistent, corporate and national or sovereign accounting translation system that would house that. And so, if you think about the successful carbon-removal system in the global markets, you want countries that can be net outflows, meaning we have more removal in one country that can flow to another, the same way we have emissions accounting, right; there are some countries that emit more than others and that's how the global emission system works. I think that we need a complement there to help organize private sector solutions within those accounting frameworks, so we can deploy capital confidently that carbon can cross markets and borders, and we can pursue the best projects at the best time.
Byersdorfer
It's really clear that this is going to be a challenging road for most companies that are trying to achieve decarbonization. Brian, can you speak to the importance of partnerships in this space and how they impact the Microsoft strategy.
Marrs
Yeah, that's such a great question. Partnerships are key to everything we do. And when I look at the carbon-removal market now, it reminds me of when Microsoft signed its first PPA for renewable energy in 2014, you know, small project in Illinois, where we had to work hand in hand with partners to figure out the financing and the structuring of that deal, and then how to get executive buy-off inside the company. The removal space is even much broader than renewable energy. It's crossing at least 10 to 15 different technology platforms, land management, so everything from project origination to due diligence, to thinking about the financing of these projects and then how we work on, the bankability and then contractibility, all of that involves creativity from partners. There's really no right answer at this point, so we sort of have to discover that and back to building the markets we buy from. You know, sort of this program is an exercise in that and it's showing what's possible. We described our carbon negative by 2030 goals as moonshot. You don't get to the moon without partners, right. And so, I think that, for us, that's always our first foot forward when we're thinking about how do we get to a solution, who do we need to work with and what expertise do we need. And I am constantly amazed by the companies and entrepreneurs we work with. It is so impressive, the ambition that they put into crafting new carbon-removal products and bringing them to the market. So, I'm just, like I said, constantly impressed and amazed.
Byersdorfer
So, taking that comment around, there's no right answer. And the creativity that it takes for companies to put these moonshot goals forward, how do you see the VCM evolving as more companies are getting closer to their carbon-negative and net-zero goal dates?
Marrs
Yeah, we thought a lot about this. I think that the more the VCM can embrace carbon removal in terms of translating the four quality north stars that I described, probably the better. It's not to say avoidance isn't important. It's just that we see a more verifiable and additional path in the VCM via carbon removal. So, certainly, we welcome the growth of carbon removal; it is one of the fastest-growing segments within the VCM right now and I think that is going to be a key piece.
I think for a lot of companies we certainly need to recognize that quality is more important than quantity, and that sending long-term signals for the products that we want is really important. And so, I think if the VCM can increasingly structure itself around multiyear offtake deals, around deals that unlock institutional financing, accommodating that for large corporate customers is going to be increasingly important because it's the key to quality and then in the long-term, it's also the key to getting the quantities that we need.
Byersdorfer
Is it fair to say that you think it'll differentiate companies, how involved they are in the VCM market as they approach their goals?
Marrs
I think so. When we look at lot at the new transparency laws that are either in consideration or may actually be issued, there could be a lot more attention to the VCM, because it'll become even more important for companies to demonstrate action on climate, so that I think is positive. At the same time, we need to be a bit guarded that that doesn't create a rush for low-quality, seemingly low-cost projects. And so, really, I think companies, the more they put quality first as part of their strategy to utilizing the VCM toward climate action and demonstrating progress on sustainability targets, the better. So, I think, yes, there'll be more attention to the VCM and that on net can be a good thing, but we're going to need to return to first principles here, and really make sure that our quality north stars are sharp and out front, and that we're thinking about that first and back solving into the commercial approach.
Byersdorfer
So, Brian, then for companies that aren't on this journey yet, but they need offsets and removals to achieve their climate targets, what do they need to consider and what advice would you give them on how they navigate their future role in the carbon markets, given this background of the negative media attention around project credibility and impact?
Marrs
Yeah, it's a great question. Do your due diligence. You'll need to look at projects, ask the right questions in terms of cost, climate action, you know, seek third-party help wherever you can. So that's certainly been our approach — is to move carefully. Obviously, we need to move quickly because that's what the 1.5°C math would suggest all of us need to do. But we also need to move in an informed, educated and smart manner that will actually help transform the market. So again, I think quality must come over quantity. I think just, you know, buying an offset is not the same, going forward, when we have more tools like carbon removal that are increasingly affordable. So, I would say that it's better to ensure that every dollar you spend results in climate action than just trying to cover the emissions math on a sheet of paper and moving on.
Byersdorfer
Thank you, I think that's going to be really helpful for a lot of companies that are in the process of developing their journey.
Marrs
Thank you.
Byersdorfer
Thank you, Brian, we really appreciate your time today.
Sarda
Yeah, let me add my thanks. Brian, for sure, I think complicated topic, but I think you bring both clarity and excitement to it. So Brian, Alissa, you know, thank you both for joining us for this important and insightful conversation on both the voluntary carbon market, the role it needs to play in order to scale, which it needs to, to become a trusted lever for companies and other institutions to use to help achieve necessary climate goals. Brian, I think, some of the points you made around the importance of long-term price signals, ability to unlock institutional capital, you know, we work with so many organizations, that I think they now number globally over 12,000 that have made some of kind of net-zero commitment, most of whom need to understand what is that long-term price curb on those things, both on reducing the emissions part, but also knowing that not everything can be reduced at least with current knowledge. You know, what are those long-term price curbs for some of these carbon instruments? And that is in itself an unlocking mechanism for capital allocation, for shareholder or board support, and to frankly fuel R&D innovation and all kinds of other market entrants. Like you said, I think the entrepreneurs are in no shortage, but they need to know that there's a market for them to participate in.
So, thank you again, I think this could be a topic of many episodes, but I thought this was really a good one to help bring many people into a conversation that they're probably not usually a part of, but really understanding how you do this well and what does it need to look like to grow in all the right ways. So, as I said at the beginning of this episode, this is the Sustainability Matters Podcast. You can find all past episodes of the show on ey.com or wherever you get your podcasts. You can also now find our most recent episodes on YouTube, so thanks for listening. If you enjoyed this episode of Sustainability Matters, we'd love for you to subscribe. Ratings, reviews and comments are always very welcome. Please also visit ey.com where you'll find a wide range of related and interesting articles that will help put these bigger topics in the context of your business or sector priorities. I look forward to welcoming you on the next episode of Sustainability Matters. My name is Bruno Sarda, you can find me on LinkedIn and feel free to connect with me there. Thanks so much for listening.
