Welcome back to C&F Talks, where I get the opportunity to speak to one of the speakers at a forthcoming City & Financial Conference. Today, I have with me Simon Puleston Jones, he's the Founder and MD at Emral Carbon, and Simon's going to be speaking at the third International Carbon Markets Summit, which is being held in London on the 29th of May. Simon, welcome.

Thank you for having me.

Great to have you with us. Let's turn to our first question.

What are the most important tools or mechanisms we need to unlock a high-integrity global carbon market?

Thanks, Maurice. Well, the first observation is simply the word market. We need a market, and we have a lot of sellers, a lot of suppliers. We don't have a sufficient amount of buyers, and that's because in the voluntary carbon market, the requirement to buy is exactly that, it is voluntary. And so, we need actually more regulated mandate, more supportive policy that either incentivises more companies to set targets and to participate in carbon markets, or we need more companies to be more compelled to participate in those markets.

And from a market design perspective, we need less obligations on people to buy bits of paper, allowances, and more market design that encourages companies to acquire credits generated through projects that actually avoid, remove or reduce carbon emissions.

So, the first thing is about making sure there's enough demand in the market and compelling that demand from the heavy emitters where necessary. The second thing is really around MRV, so the measurement, the reporting, the verification that we can actually trust, and more consequences for getting that wrong.

We need to have confidence that a tonne is a tonne of emissions avoided, reduced or removed if we're going to have high-integrity markets. And the final thing I'll mention just by way of introduction is trusted market infrastructure that is truly institutional grade, it's resilient, and it is operated by brands, preferably from wholesale financial markets that have spent decades building trust and thereby facilitating the scaling of other markets and now moving that expertise into this market, the carbon market.

And given all of that, if those prerequisites were met, Simon, how long do you think it would take for the voluntary carbon market to become healthy again, for demand to increase?

So, I think that that could be accelerated in terms of the demand by compelling that demand and this further convergence between compliance markets and voluntary carbon markets, which we're starting to see around the world, including here in the UK, where the UK is looking at including direct air capture and BEX and possibly the Woodland Carbon Code within its compliance market.

There's opportunities to respond to the latest SBTI, the Science-Based Targets Initiative, consultation around corporates and how they go about achieving net zero, opportunities to include interim and long-term targets for purchasing carbon credits, whether they be carbon removals or otherwise. And it seems blindingly obvious to me that an obvious solution is to say that if a company is a publicly traded company and it has residual emissions that it has failed to abate, then it should be required to compensate for that and pay by purchasing eligible credits.

Yeah, and thereby stimulating a lot more demand.

How do we ensure that carbon credits really represent additional and permanent emission reductions or removals?

It's great, great questions. So, this really goes to the MRV, the measurement reporting and verification. The validation and verification bodies are supposed to check as an independent third party that the numbers that are being presented to the standard in terms of the quantum of carbon emissions that have been avoided, removed or reduced are actually accurate.

And what we found is because we don't trust that process, we now have carbon credit rating agencies who are, among other things, rating whether a ton really is a ton. And for me, that's not the answer. That's a symptom of the problem, the fact that we have rating agencies rather than fixing the problem, which is we don't trust the MRV.

So, I think we need to do more to look at the MRV process to make sure it is robust, that it can be trusted. And unfortunately, that also comes with accountability. And we need to hold the standards to account where there are proven wide gaps between the MRV that's been carried out and the ultimate amount of carbon that has been separately determined to be avoided, removed or reduced.

I think the other thing we can do is around more use of the Internet of Things, digital MRV, more real time digital assessment. And you talked about additionality and permanence. With additionality, actually, has the time come for the sacred cow of additionality to be slain?

We're trying to build a market, and yet we're designing a market where you can only issue and create credits if they are quote, unquote, additional. Normally, we mean financially additional. And by that, we mean that were it not for the ability to sell carbon credits in the market, the project would not be profitable.

Well, why should we only be developing unprofitable projects? Why should we not be permitting those who are profitably removing carbon from the atmosphere from generating additional revenue as a reward through carbon credits?

Yeah, I think that's a very good point.

In terms of ensuring that the whole thing has credibility, what about the scope for assurance services from auditors and so on? Other people who could sign it off rather than rating agencies providing sort of guidance about projects themselves. What about the auditors, the companies providing assurance services?

There will always be a desire not to rely on somebody else telling you that everything's fine, or at least just one person, whether that be the validation and verification body, the standard bodies like the ICVCM, rating agencies. So, there will always be a role for an EY or other assurance bodies to provide that third-party comfort. And certainly, in my experience, the market's largest buyers aren't willing just to rely on a credit rating or aren't willing to rely on the MRV. They want to do their own deep dive, deep diligence.

Yeah, yeah.

You referred earlier to the need for having a sort of credible market infrastructure such as is common in wholesale financial markets. So, what's missing? What are the bits and pieces that are missing for the market infrastructure currently and what needs to be sorted out in order to achieve full potential for this market?

What's missing is a CSD that is operated by a trusted financial markets participant. If you like a DTCC or Euroclear or Clearstream for carbon markets. What we have today is a fragmented market infrastructure, 65 registries.

If you want to trade the entire market, you need an account at all 65 of those registries. It is surprising to me that more people do not look at wholesale financial markets, whether it be bond markets or equity markets or others and say, well, what lessons can we learn from financial market infrastructure that works there, that solves the problem we have today? And it's really simple.

The goal is surely to be able to open one account at one institution and then to be able to buy and sell, transfer and receive carbon credits in and out of that one single account rather than every standard having its own registry.

So, what is holding the established CSDs back from this market? Is it because it's simply too small for the present time?

It may be considered to be too small and there are other solutions that are out there in the market. So, some believe the answer is not to have a CSD, but to have an independent registry that is independent of the standard whose methodology has been followed to generate the credits. Others believe that the answer is a meta registry that sits on top of all these registries and provides you with a single screen.

But ultimately, you want a single account. You're quite right that one of the things that's holding the market back is a lack of volume, a lack of market maturity. And therefore, I can't speak for DTCC or Euroclear or Clearstream, but they may consider the market is currently too small.

There's also reputational risk has put off many institutions, including corporates, from participating in the market, largely due to historic challenges with the market rather than those that are present today, but we need more people who truly understand markets and who come from financial markets, wholesale financial markets, to be participating if we're going to scale the voluntary carbon market successfully.

Maurice

Final question, Simon. Turning to the other side of this, trying to attract institutional investors into the market, do you think carbon's ready to be a mainstream asset class and if not, I mean, some of these other points we just discussed are probably key to this as well. What needs to be done to make sure that it is?

Well, the first question is really which investors, which institutional investors and why, and then what type of investment opportunities are they looking for? So, the market's been ready for institutional investors and has them for some time. But one has to bear in mind that the voluntary carbon market is largely about emerging markets.

It's about the global south. And in any other asset class in financial markets, emerging markets is a subset niche that is typically associated with high risk. And so that's one of the challenges. That's why we're not seeing an avalanche of pension funds, for example, deploying their pension capital into the market. The projects themselves are often developed by startups. They're often developing first of a kind technology and deploying that.

The market is predominantly still a primary market with very limited secondary market liquidity, whereas what institutional investors really crave in a word, is boring. Boring is beautiful. What I mean by boring, I mean de-risked businesses that are well into growth stage, using proven technology, and they've been around for several years.

They've proven they can develop projects and secure the best offtakes, the highest ratings. Those businesses just don't exist in vast numbers in the market as it is today. So actually, the real job is to make this market as boring as possible in the sense of making it as investable as possible.

But we're on a journey and I think we'll be there by 2030. But we need the next five years really to build that trust, that experience and develop the technology readiness levels to make it more investable. But for institutional investors, particularly VCs and private equity, there's an opportunity to participate in those innovators now to get the rewards down the line.

But you really need to have the risk appetite to do that. And at the moment, we're finding the banks don't have that market, that risk appetite in many cases, often because of market risk. And they are, their market risk teams are concerned that if they're financing projects and they have to enforce security and they get carbon credits as a result, are they going to find a market for those carbon credits to offset the financing?

Yeah. So, I mean, really, it's a market in the making still, despite all the work that's going on in terms of adding credibility and integrity. But by 2030, you think we'll get there, it will be a proper functioning market, hopefully?

I think it's a proper functioning market today, with thousands of people working week in, week out to the best of their ability to address the biggest challenge of our time. What's missing is a sufficient number of participants on the buy side, to actually purchase the end product, a carbon credit. What's missing is sufficient policy drivers to compel or at least encourage more participants to do that.

And we are missing more participants from wholesale financial markets with a sufficient risk appetite to actually finance these projects at scale. It's coming, it's coming, it's coming. The market is working through how best to make the market boring by having a good track record of delivering high-integrity projects.

And although we can't afford to be patient, we do need a degree of patience to have a critical mass of businesses that are truly investable in accordance with wholesale financial market expectations.

But the opportunities are there, as you say, for people who want to get involved now, which is, I think, a very, very positive note on which to end this particular discussion.

So, for our viewers, if you'd like to hear more about these emerging opportunities, in what is set to be a very exciting market, then please do book a place at the third International Carbon Markets Summit in London on the 29th of May. Further information available on our website, www.cityandfinancial.com.

Simon, I very much look forward to seeing you then, and thank you so much for joining us today.

Thank you. See you next month.