Hi everybody, and welcome to another edition of C&F Talks, where I have the opportunity to interview one of the speakers at one of our forthcoming events. Today, it's my great pleasure to be speaking to Mark Kenber, who's the Executive Director of the VCMI. For those of you who don't know, the Voluntary Carbon Markets Integrity Initiative, and Mark's going to be speaking at our International Carbon Markets Conference on the 29th of May in London. Mark, welcome.

Thanks very much, Maurice, great to be here.

Very good to have you with us.

So, this is a timely interview, isn't it, in that the government's put out its recent consultation on high integrity principles for the carbon markets. What sort of impact do you think they're going to have? And a second link question, what has been the involvement of the VCMI in that?

Well, I think the government's recent consultation document is a very significant moment. We've had in the past both the UK and the US issue principles for high integrity carbon, and in the UK's case, voluntary nature markets, but principles don't move markets. What the UK has issued its consultation on is how to translate those principles into policies, incentives, regulations that will actually drive demand.

And this is why I think this is important is three or four years ago, companies were making voluntarily investments in carbon credit markets, because there was reputational brand value associated with it. They felt that at some point in the near or medium term, they would be able to use carbon credits to fulfil some of their corporate climate transition obligations. And that particularly the reputation and brand value element has disappeared.

Companies want to be able to use carbon credits. We have, we're just finishing off three or four months of market research across 20 countries. And companies have said, almost across the board and across sectors, that they see a value in carbon credits, they want to decarbonise, it's not a question of using carbon credits as a substitute or as a way out of their decarbonisation.

But decarbonisation is difficult, and it's expensive, and they want to be able to take responsibility when they cannot meet their targets or cannot be on track to fill the gap. And the UK consultation opens the door to that. The second thing that companies have been saying to us is without that brand value, without that reputational benefit, they need something to drive them, something that creates a value proposition or a business case for them.

And that comes from government, whether it's a direct incentive, the ability to use carbon credits, as part of meeting an obligation. For example, the Singapore government has a carbon tax, and companies can use carbon credits to offset some of that liability. So, this government piece is the UK government consultation is very important, and not alone.

The French government last week issued some guidance on using carbon credits, and again, referred to voluntary carbon market integrity initiatives, VCMI's guidance, we're expecting that Singapore will do the same and other countries will follow suit. And that will begin to raise the level of regulator and policy support for carbon credit market investments.

But isn't it the case, I mean, trying to improve the sort of reputational aspects of it, but what's that thing of it can take a lifetime to gain a reputation and a few seconds to lose it? I mean, how easy is it to restore that? Does this consultation go a long way towards restoring that so companies will be happy to use carbon credits?

Well, I think I've got two ways of answering that question. One is, over the last three, four years, we have seen incredible investments in building infrastructure and building the integrity infrastructure around the carbon credit market. So, you have our partner organisation, the Integrity Council for the Voluntary Carbon Market, which has created a threshold standard, both for the programs that issue credits, and for methodologies for projects themselves.

And that has already raised the bar. And we can see that there's a price premium for what I call their core carbon principle labelled credits. And there is a shift towards quality in the market and a desire for integrity.

And so that's a very important part of that. The second answer is, you know, trust and reputation are important. But if a government says to you, you must buy these carbon credits, or you have an obligation, and you can use these carbon credits that meet these specifications to meet part of your obligation, then reputation is important, but it's not as important as the business case, which is reducing costs or taking advantage of incentive. And that's why government intervention is so important.

Yeah, yeah. And the second part of my earlier question that the role of the VCMI in this because, is it the case the government have taken essentially your standards and that they're pushing those?

Well, in the consultation, they clearly say that they recommend that or suggest that recommending the company should follow our claims code of practice. And then yesterday, two days ago, we announced our scope three action code of practice, which would allow companies to use carbon or require and allow companies to use carbon credits to make up the difference when they're not on track to meeting their targets. And that too, is included in the government's consultation.

I mean, I think there are two reasons for that one is we are and have been established as an organisation that creates guidance and rules on the demand side of the carbon credit market, how companies should engage. And so, it's fairly straightforward that they should look to us. But also, we've been working, we have a country contact group of nearly 80 countries.

And we worked very closely with companies all around the world over the three or four years we've been around. And therefore, we have obviously been working with them to put policy and regulation in place that supports the market.

Maurice

And when you're talking to corporates, what are the most common misconceptions that you encounter about, corporates or others, that you encounter about corporate use of carbon credits? And how does your claims code help dispel these?

Well, I mean, there's the single biggest misconception is that companies that are using carbon credits are doing so to evade or avoid some responsibility to decarbonise internally. But the evidence over the last two or three years suggests that that is far from being the case. So, for example, an ecosystem marketplace report two years ago, showed that companies that are voluntarily buying carbon credits are investing three times as much on average than those that aren't in their own internal decarbonisation.

Companies are engaging with voluntary carbon markets one point nearly twice as likely to be reducing their emissions year on year, and twice as likely to have internal carbon pricing mechanisms. So that suggestion that companies use carbon credits to escape the responsibilities and loophole to greenwash is just not true across the board. And that's one big misconception.

The other is that as a result of much of the criticism of carbon credits in 2022, 23, particularly, that all carbon credits are worthless. Well, if you look at the work of the emerging ratings agencies, BeZero, Calix, Carbon Direct, and Silvera and others, there are clearly some projects, as there are in the bond market that are perhaps junk status. But there are a lot of credits that are double A, triple A.

And there, as I said before, a push towards quality. So, there's a misconception that if a carbon credit is not fit for purpose, then that means the whole market is not fit for purpose. A, we know that's not the case, there is a variety within the market.

But we also know B, that, you know, some of the accusations about robust quantification and measurement, I wouldn't deny those, but they are equally true of national carbon accounting and corporate carbon accounting. And so, if we let the perfect, if we only allow for perfection, no one will ever do anything.

Absolutely. And of course, you know, carbon credits fund projects around the world.

What sorts of projects or interventions are most urgently in need of investment? And how can the voluntary carbon markets help raise finance in these areas, perhaps especially around nature and biodiversity?

Okay, so what kind of projects are needed? Well, there's a timing question is one issue. So whatever kind of project we're looking at, the reason that they are carbon creditable projects is because they would not happen otherwise.

So, a key element of the carbon market is this additionality would the activity of the project happened otherwise, if it would have happened anyway, there's no reason to be given a carbon credit. So, we're talking about a whole bunch of projects that are either not the least cost option or don't have an IRR without carbon finance, that would make them bankable. And those are everything from, you know, a community that has no electricity supply making a choice between a diesel generator and an off grid solar system, both which would provide the same reliable energy.

If the diesel gen set is cheaper, then you need the carbon credit to put the solar instead. But the timing issue is you need to do it now, not wait, you can't ask a community without electricity to wait for four or five years till the public sector funding is available or some other fundings. So, there's a timing question, because those opportunities to reduce and remove emissions will be stranded. So that's one point.

Across the board, our belief is that is an all above all the above approach, we need both emissions reductions and removals, and we need both nature and technology. So, you know, there are everything from low carbon irrigation in the agricultural sector, better techniques for and for restore maintaining soil carbon, there are protecting of standing forest was called reducing emissions from default, red plus reducing emissions from degradation and deforestation, restoring and maintaining mangroves and other blue carbon sites, then restoring and reforested degraded lands, increasing woodlands, using clean cookstoves, where you have millions of people who use dirty wood burning or charcoal burning stoves, clean cookstoves, switching from, you know, early phase out of coal fired power stations and replacing them with renewables. There's a myriad of things that need to be done that can be done but require finance.

So why carbon finance? Well, as I said, at the beginning of the answer, these are projects that would not happen anyway, if they had a high and bankable return, then you would assume they would happen anyway, but they don't happen because for financial reasons for political barriers, whatever they may be. And so therefore, you need the carbon finance to bridge the gap between the not acceptable IRR and IRR that works the bank.

And the carbon finance can go beyond that, in that it is, as a result, leverages other sources of capital, because most carbon credit projects don't rely on carbon finance alone, they need other debt and equity finance and that carbon finance can leverage those other sources of investment, but can also lay the groundwork or the foundations for countries then to be able to expand in that area.

And so, one good example of that is a number of solar carbon crediting projects in India, between in the first decade of this century, made a difference on their own, but created the conditions, skills, capacity, knowledge, understanding, manufacturing, and so on and so forth, for India then to have an extremely ambitious solar mission.

So just to continue on that theme for a moment, if we can, what do the multinational or multilateral rather, banks and development institutions do in terms of carbon credits? Do they factor them into the potential financing of some of these sorts of projects?

Certainly, in some cases, they do. The World Bank, in particular, has been a pioneer with some of its carbon funds over the years. Now, I think through MIGA is looking at insurance to underwrite some of the risks associated with carbon projects, and has, you know, its client countries which want to need to use carbon finance to meet their nationally determined contributions, their own climate targets.

So all the multilateral development banks are involved in this in one way or other, they play different roles, some of its capacity building it, some of its providing anchor finance, some of its insurance, but they all see carbon credit markets and carbon finance as being essential, because at the moment, there is no other mechanism to channel private sector finance into projects that would otherwise not be bankable.

Yeah, it's so important, isn't it?

There are some estimates that the VCM could reach $35 billion by 2030, obviously, from a pretty low figure currently. What needs to happen to you now then to make that a reality?

Well, I think one is the governments need to introduce clear and consistent frameworks and incentives for corporate engagement. It goes back to what we were saying earlier, companies need to know that A. they're allowed to do this, and even better required to invest in carbon credit markets. And that at the moment is going to come from government frameworks, where we hope that SPTI, ISO and others that are setting standards or frameworks for corporate net zero will also enable that and then you've got both the voluntary and regulatory side pushing in the same direction, saying to companies, not only can you use carbon credits, but when you are off track, you must use carbon credits, you've got to, you can't just shrug your shoulders. And we've been working with companies, governments all around the world to drive that consistency and clarity and what companies can and should do.

But also, to ensure there's harmonised as much harmonisation as an interoperability as possible across countries, because many companies, as you know, operate in multiple regions, and want to be able to have consolidated carbon credit investments. And so, you know, one piece of work from the We Mean Business Coalition said that a regulatory claims code would suddenly would immediately increase corporate spend on carbon credits by 8% straight away. So that's not going to get us to 35 billion, but it shows that there would be a response to a regulatory framework.

So, I think the regulatory side and the independent voluntary standard setters for corporate climate action, they both come together around use of carbon credits as a complement to corporate decarbonisation, something you do above and beyond, either to go beyond your targets, or when you really cannot meet your targets or be on track to meet your targets, you take responsibility for those excess emissions by investing in carbon credits, that will get us a long way towards whether it's 35 billion or not, but certainly scaling it up far beyond where it is at the moment.

Yeah, very good. Well, let's hope that all that progress is made. But for our viewers, if you'd like to hear more about this and related issues, please do come along to the conference. Once again, the International Carbon Markets Summit on 29th of May, which is being held in London. Further information is available on our website www.cityandfinancial.com.

Mark, I look forward to seeing you at the conference. Thank you for joining us.

Thanks very much, me too.