Episode 200: The Role of Carbon Offsets with Verra's CEO, David Antonioli
Today's guest is David Antonioli, CEO of Verra. Verra is a global leader helping to tackle the world's most intractable environmental and social challenges by developing and managing standards that help the private sector, countries, and civil society achieve ambitious sustainable development and climate action goals.
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What is Verra? Talk a bit about the organization and the work that you do.
So we're a standard-setting body. We're a nonprofit organization based in Washington D.C. and our job is to essentially certify good stuff and we're mostly looking at projects. So projects that are trying to create value by investing in good solutions to a variety of problems. Obviously, the problem at hand and our flagship program is the Verified Carbon Standard Program, the V6 program.
That program certifies carbon credits or carbon offsets. As you can imagine, we get a number of projects wanting to get the certification because, at the end of the day, if they are successful at getting the certification, they'll have a credit that has value in the market that a buyer can then buy. So in many ways, we’re the glue that holds the market together. We sit in between the supply side, which is the project developers, and the investors investing in projects.
They need to have trust that the rules that they're following actually are going to generate something of value. And then, on the other side, buyers, the demand side of the equation, want to buy something that's of value. So looking for again rules and procedures that have integrity and have credibility, and give credibility to the underlying things they're buying. In this particular case, it's carbon credits. In addition to the VCS program, which is again our flagship program, we run a number of other standards-based programs.
Two of them help certify or help projects report their sustainable development benefits. One is the Climate, Community & Biodiversity Standards and that's exclusively for land-based projects, and the other one is the Sustainable Development Verified Impact Standard. Both of these allow projects to be able to report sustainable development outcomes, specifically in audited, certified outcomes. So we also run the Plastic Waste Reduction Standard, which is a similar take on the carbon credit concept but in the plastic space.
So essentially, it allows people to go out there and pick up waste plastic that would've otherwise ended up in the environment or was already in the environment, collect it, and either recycle it or make sure it gets deposited in a proper landfill. Then you can get credit for that as a way to finance the underlying activity of going out there and picking up plastic waste, so that's the organization as a whole. We're built on rules and procedures.
We're sort of a quasi-regulatory body because most all of our procedures have a regulatory taste to them. So we update our rules on a consistent basis because we have to follow best practices and new scientific evidence. We also do public consultations on all major rule changes. So it's a very heavy process, but at the end of the day, it's what you need to have a system that's trusted by both buyers and sellers of the credits.
The concept of an offset is essentially you're doing things that are generating emissions that you can offset. And yes, ultimately, you need to stop doing those things or doing them in cleaner ways, but in the meantime, you can offset the difference to get to zero. Where did that concept come from?
I think there's been a lot of environmental economics that have been studying this concept. This is my telling of it. Other folks might have a slightly different version of history, but there were the early years of the Acid Rain Program in the United States where companies were told, "You have to reduce your emissions of sulfur emissions in your power plants, but you can trade amongst yourselves those permits."
So that was the idea of basically providing an overall limit for an entire industrial sector, in this case, power plants burning coal. And then, if you meet that target and you go below, you can actually sell your surplus to someone else, so that was called emissions trading. When the Kyoto Protocol got passed, there was this idea embedded into it that companies could trade their emissions, but they could also bring in emission reductions from outside of the boundary if you will, of the bubble.
So they were allowed to bring in reductions from the developing countries, under the Clean Development Mechanism of the Kyoto Protocol. It was a way to recognize that companies could invest in projects elsewhere to reduce their footprint to the level that they needed to based on the regulation, but also it allowed them to reduce their costs. So there was a cost-saving element, and the idea and the philosophy is that if you reduce the cost, companies are more willing to actually take on the action.
If you make it really difficult for them, they're going to fight it tooth and nail. So if you actually provide some flexibility to them, they will be more willing to play ball, reduce the emissions, and not fight the regulation so much. So that was really the genesis of emissions trading and carbon offsetting, and it really happened in a regulated context, those tended to be the large-point sources, right? Obviously the power plants, certainly in Europe where the Kyoto Protocol was implemented, the cement plants, the refineries, the steel plants. but what started happening in the early 2000s is that companies started to say, "Well, you know what? If the regulated entities..." (the ecosystem that supported them and that saw these regulations being put in place), said, "Well, actually, we could do this ourselves. We could reduce our emissions," or, "We could try to invest in projects elsewhere." So it started to become a thing where companies wanted to invest in projects.
Fast-forward to today, we've come to a point where companies, especially the consumer-facing ones, have essentially a new liability on their books. They have to report their greenhouse gas footprint. Once they report that, they have to do something about it and hopefully that means they reduce their internal emissions to the level that they can, but they also can invest in projects beyond and that gets to the net-zero commitments.
If you think about offsetting, if it's used properly, we encourage companies to set a target, a net-zero target, meet that target and go beyond that to reduce the residual emissions. And that's the sweet spot is for carbon offsetting, but there's some work that we, in the sector and the industry if you will still have to do to clarify what the claims are that companies need to make.
So just a good example, I was listening to NPR the other day and there was a credit card that got announced. They said, "Oh, we'll plant a tree and yield zero footprints, and you're good to go," but they didn't really define what zero footprint is. They didn't use the term carbon-neutral, but it's not clear what I get by using this credit card and how many trees they're going plant and whether it's really going to offset my footprint, so there's a lot of doubt and concern about what the claims are that companies are making when they buy an offset and whether they're meeting a target.
If we can clarify that, that will provide a lot more clarity for people wanting to enter the market and you'll be able to know, "Well, if I'm going to say I'm carbon-neutral, it's going to mean that I'm doing X, Y and Z." And ideally, we're pushing companies to set a target, a net-zero target, meet that target and offset the residual emissions beyond their net-zero target, so they're on a pathway to reach the net-zero target by 2050.
So when I think about the clean energy transition with the caveat, I've been thinking about it a lot, less than you have, but I think about essentially there's a lot of good that came from the Industrial Revolution but that the externalities of pollution that got created as part of this hyper-growth gets pumped up into the atmosphere and there's really no cost to that.
So you can just dump it unlimited and not really think about it, and it's made kind of a mess and caused us to live not in harmony with the planet that we rely on to support humans and other life forms, and to some degree with each other due to things like inequality, and essentially we need to re-architect the global economy to factor in the externalities and be more in harmony with the planet and with each other. So I'm going to stop there just to check. How does that align with your understanding of what needs to happen?
I totally agree. It's the typical tragedy of the commons situation where we pump emissions into the atmosphere. We don't see the immediate effects and, therefore, we don't assume that there are any costs, but, in fact, we're now learning, certainly the IPCC report yesterday made it very clear, that there are some serious consequences, but our economy has been built around these systems that don't incorporate the costs of the greenhouse gas emissions.
And yet, it's had tremendous impacts and consequences for people who are now suffering the consequences of climate change. We need to figure out how we actually put in an economic signal so that we stop generating that many greenhouse gas emissions and we can correct the course of our economy, but I would agree that you're absolutely right, that it's all about how we've basically developed as a society without taking into account the consequences of greenhouse gas emissions, which are now coming home to roost.
You hear about the 12 years or 10 years or catastrophic consequences, point of no return, and then there are others that say, "Look, it's more of a slider where the longer we take, the worse things are going to get," but worst just means a higher probability of extreme events or some more suffering or things like that, but it's a slider. It's not like there's truly going to be an extinction event, and those are the stakes. And maybe this is more of a personal question than a Verra view, but where do you fall as you think about the stakes here and the magnitude of the problem?
The stakes are pretty big. I worry constantly about threshold points. The weather today here in Washington D.C., it's what it should be roughly. It's pretty cold, it's around 32 degrees. That's what you would expect. But boy, you know, five weeks ago, it was 60 degrees. That felt very uncomfortable. And then, you start to think, "Well, what does that mean for everything in our ecosystem? Are the trees going to go through their natural cycle? What about the birds and everything else that supports that?"
I do worry that there are some significant threshold point-of-no-return kind of moments that we would reach. I'm not a scientist, but that's just my personal view. We need to do everything we possibly can to get off this track where we're pumping out so many emissions into the atmosphere. We have to do it. Again, I'm not a scientist. A scientist would be able to provide a bit more clarity, but I think the scientists are saying that.
They're saying, "Look, we are in a situation today where we need to significantly drawdown, not only stop putting all of those emissions into the atmosphere, but we need to start to drawdown atmospheric carbon and we're in a pretty dire situation." So, I stand with what those folks are saying, “that it's a pretty dire situation. We need to do it”. It may very well be that it is a bit of a slider, but I do think there are these things called tipping points, at which point there is a point of no return and things can get pretty bad. I don't think we want to test that. We've got the technology. We've got the ability to do it. We should just put it into action.
I'm sticking with these big philosophical questions upfront for some reason, but when you look at our existing system, the one that was responsible for the Industrial Revolution, the system of capitalism and market forces, has that run its course? What role do you think that system should play in the next chapter for the world?
I would say that this is an indictment of the capitalist system. Again, if we build into the system we have the right measures to internalize the externality, in this case, greenhouse gas emissions, I think we can use the system to get out of it and I think that's really what markets are all about. If we can make sure that the markets recognize the value of greenhouse gas emissions or the cost of a greenhouse gas emission into the atmosphere and we price that in, then the system will turn around and start to price and benefit those activities that are not pumping greenhouse gases into the atmosphere.
That is really key. The magnitude of the problem is so big. We need markets and we need the capitalist system to get us out, but we need to have it be bounded and directed in a way that actually helps us solve the problem and helps us develop the new technologies we still need to develop to be able to rescale, to scale the solutions that we need going forward.
When you look at these net-zero commitments that these big companies are making, and they say 2030 targets or 2050 targets, and although it's getting better and there's more accountability, a lot of them don’t have staging or concrete plans or accountability in between. If I were just trying to look at these companies objectively and figure out how serious they are, should I care about the ratio of reduction and offset when I'm assessing the caliber of their net-zero commitment and progress?
I don't think you want to look at the ratio. What you want to look at is what the target is. Let's take the example I had before, right, where you're emitting 100 tons today. By 2050, you want to be emitting five. So today, maybe it's hard to get to 90, but you have to get there. But maybe if you have to get to 80 in let's say 10 years' time you want to be measuring that company against their target as long as they have a trajectory to get there.
I think that's what we can hold them accountable to, but they have to have that target and they have to be meeting it over time. I think what's going to be really interesting over the coming years is that we're starting to see the need for proper accounting of how companies are actually developing, implementing, and reporting on their targets, and I think that's very exciting.
I'm actually very, very hopeful because I think you've got initiatives out there like the Voluntary Carbon Markets Integrity Initiative and science-based targets, that are basically trying to say, "Okay, here is the process for setting a target." The VCMI, the Voluntary Carbon Markets Integrity Initiative, is going to be looking at what claims companies can make on the back of the credits that they but ideally, they're going to say, "Well, actually you can only make a claim if you have a target and you're meeting your target, or you're close to meeting your target”. So that you can't just be saying, "Oh, I'm carbon-neutral," without having demonstrated that you have a target and that you're on a trajectory to meeting it.
To me, again that's the key. If we can pair these two, internal reductions by companies, to their footprint, additional action to compensate for the residual emissions, that's the sweet spot. That's where we want to push companies to get to because that is where we can have a significant impact on climate change. We can get on that curve. We can stop the problem from getting worse in the long run.
And historically, what are the key buckets in terms of types of offsets, and then what trends are you seeing in terms of the types of potential offsets? And, and what I mean there is; could be avoidance, could be removal. What types of projects are out there, and then are the certification bodies like Verra? Is it one size fits all in that you can certify any kind of project or is it that certain kinds of certification bodies are better for certain kinds of projects?
To the first part of the question, there are a variety of different credits out there. If you think about the trajectory of markets, what we've seen in our system is that in the early days of the VCS program, the majority of the credits and the projects in the system were renewable energy projects and that's because, at the time, renewables weren't common. And so, we credited a lot of them, but in 2019, we said, "Actually, we don't believe that grid-connected, larger-scale renewable energy projects are additional." And I'll try not to add lingo to the podcast here, but that is one if you bear with me, I will introduce that concept because it's really key to carbon markets. And essentially, a project being additional means that it wouldn't have happened without carbon finance. And because you're going to use that outcome of that project to offset another emission, you really have to demonstrate that carbon was a key driver in making that project happen.
So in 2019, we decided that grid-connected renewables were no longer additional because they can stand on their own. Now, we still allow them in least-developed countries because the conditions there are particularly challenging, but all other countries we don't allow them anymore. So we no longer credit renewable energy projects in most countries and that means that that project type has now started to be a lot less important, certainly in what we certify.
Now, back in 2010, one of the big innovations that we did was to support and bring into the carbon markets natural climate solutions, so forest conservation, forest restoration. Now, we're starting to see a lot of work in the agricultural sector. So we really thought that these systems could leverage carbon finance to actually achieve some important goals. We address some of the key challenges that people have in respect of these credits, and so I'll mention two of them.
One of them is permanence, so the idea of, if you plant a tree or you conserve a tree, that tree can catch fire. It can be cut down and the carbon stored in that tree can end up in the atmosphere. So that's a risk that all of those projects face. What we did is set up a system to create a rule that would require projects to set aside a certain percentage of the reductions they achieve.
Now, imagine you plant 100 trees. You have to set a certain percentage of that carbon you've stored into what we call a buffer account. And so, that buffer account, we can call on it whenever a project that does suffer a reversal, meaning that the trees get cut down, we can back it up and make sure that the credits that are in the market are legitimate. So it essentially works as an insurance pool. And as a project developer, you have to pay into that pool a percentage of reductions that you achieve.
That was a way to address the permanence issue and it's worked really well. We've seen quite a number of projects that are conserving forests. Now, with the drive towards more removals, we're starting to get a lot of interest in removals projects. The other challenge we addressed was the issue of leakage and this plays out, particularly in respect of forest conservation. The fear was, "Oh, if you protect a patch of forest here, well, the drivers of deforestation are just going to go next door."
So there's actually a set of rules that requires projects to measure leakage in the leakage belt around their project and to discount it from the emissions reductions that they achieved. So we were able to put in place systems and rules to address these concerns. We were able to bring these credits into the market and make them fungible with everything else in the system. And that is a real value, that basically, at the end of the day, when you have a VCU, which is what we issue, a verified carbon unit, it counts for a ton of greenhouse gas emission, whether it's the reduction or removal.
So there are a number of different project types. Those are very popular now, the nature-based solutions. We're starting to see a lot more in what's called the blue carbon space. So areas budding sea and land, mangrove restoration, mangrove conservation. That's a couple of very interesting project types being developed there. We're starting to see some more work in tidal wetlands, so the wetlands ocean blue carbon is a very exciting space.
And there's now an increasing interest in removals, as I mentioned before, because I think, in 2050, we will have to have a huge store of removals projects happening. So we're starting to see some interesting moves, movements, in terms of direct air capture some technological removals. And so, to answer the last part of your question, I think one of the things that ICVCM is going to do, again that's the Integrity Council for Volunteer Carbon Markets, is to set up a system where you can label or identify what kind of credits you're getting.
So is it removal or is it a reduction? Is it a nature-based solution or is it a technological solution? Do you have sustainable development reporting as part of that? So you'll be able to identify what kind of projects they are so that you can best identify and meet your needs as a buyer, so a lot of companies prefer projects that are protecting forests or a lot of companies may prefer more technological solutions. You'll be able to identify what those are and be able to choose the ones that you want.
When it comes to purchasing, if I'm a big company and I've got a net-zero commitment, I just want to be able to say that I'm making as much progress as I can towards that commitment. So if quality, for example, isn't factored in to how I'm doing against that commitment, I'm just going to go for the lowest cost, because then my dollars or whatever unit of currency I use stretches the furthest, and I can show the most progress and look like a hero, and my stock price gets reflected and I get my bonus. And the cycle continues. What incentive do these big companies have to care about quality? And if they don't, how do we get them to care more?
That's really again part of why the ICVCM is going to be so important because it's going to make sure that the credits that it blesses meet a certain threshold of quality. You might just end up buying credits that meet that criteria and that's down to the company and what kind of claims they want to make. Now, the threshold, my guess, is going to be pretty high and pretty rigorous.
So I think people should feel comfortable that once they're buying those credits, they should feel very happy with that. And in the end, you'll be able to make a claim that you're actually meeting your target and you're offsetting with these. But the key thing here is also that this has to be part of a package, right? If you are only offsetting, then people will wonder, "Well, why didn't you do any internal reductions?"
I think we need to hold companies to account for those internal reductions that they've set a path for. First of all, obviously, they need to set a pathway for achieving that net-zero target and they need to be demonstrating again that they're actually meeting that target. And beyond that, then they're offsetting. Once you've met that and you have a target, you're meeting it and you buy credits, I think the concern about price won't be so much because you'll have this system under the ICVCM that'll bless the credits that are legitimate, but companies will always have an incentive to align their interests along with the project types, right?
So for example, again I mentioned it before. Companies want to have project types that resonate with either their staff, their clients, or their consumers. There are a number of different ways that you can slice that but what we've seen in the volunteer market, which is interesting, is that we've seen companies be very concerned about the quality because it is their reputation on the line. So they will have a strong interest in making sure that the actual credits they're running are legitimate, but again once you have the system set up by the ICVCM, it'll be clear.
Now, there's a balance there. The ICVCM is trying to create a market that's more scalable and that's bigger to drive more finance to it, but that does come with a little bit more of knowing that this is the list of credits I can buy and I'm good to go. So there's a balance between volume and scale and the detailed due diligence that companies have been doing, which quite frankly is pretty difficult. Not all companies are going to go to that level of due diligence, because it's very costly. It's very time-consuming. And if you know that someone's already done that and there's a list of credits you can buy, then I think that'll be good for the market because it will allow it to scale and it will allow companies to enter the market with a lot more confidence.
On the one hand, you're getting pushed by me and by the marketplace for better quality, better quality, better quality. And on the other, you're being pushed by the marketplace to not be a bottleneck and to scale. So how do you scale without compromising quality? Can you scale without compromising quality? Does the pie need to look more evenly distributed than 70% of all offsets getting approved by Verra in order to support what's needed in the marketplace?
You kind of pinpointed one of my pain points right now, which is like, "Oh my God, we've got loads and loads of projects coming through the door." And we are doing a number of things. The first thing is we're just hiring like crazy. We've grown from a 20-to-25-person operation to more than 80 or 90 today, and we're going to continue that growth pattern for the next year.
So we're looking at having easily more than 100 by the middle of this year and moving up the volume in terms of folks looking at projects, so one is hiring. Obviously, it's training, making sure that the project documentation that we get in the door is of high quality, which means working more closely with the auditors. A lot of times, we end up catching stuff that the auditors miss. If we can improve what the auditors are doing, we can start to create that system that enables us to do the final check and only catch final things.
We need to work on that, but the other thing we're doing is building out our IT systems, both to track projects but also to digitalize the entire project development process and the MRV in the long run. So if you can imagine what happens today, you prepare documents, PDF. You submit it. Someone has to go through it, check all the different sections. And then, at some point, it gets approved by the auditor. It comes to us. We check again.
And then it gets uploaded, but that's a fairly inefficient and somewhat antiquated process. So what we're trying to do, and we actually have a working group on this, is trying to get the methodologies automated or digitalized. So you will then, instead of submitting a PDF document, you will submit all your information through an electronic platform. That means putting those methodologies on an electronic platform. You'll submit the information. It'll be much more readily available. It'll be much more immediate and we'll be able to search for things better.
So it will make the data availability much stronger on a registry and that will then play its way through the assessment and the approval process. And then, at some point, we'll also have the MRV being supported by digital technology. So if you think about a meter on a land-flow gas project, you can imagine how you could actually have a meter sending a message through a system that says, "I've captured so much gas. It's been measured. We have such concentrations of greenhouse gases. We've applied this instruction of technology. We've distributed 99% of the methane and, therefore, we can turn it into a credit."
And then, that would simplify the whole process and you'd be able to get the issuance much more quickly. That's the kind of thing we're trying to include in our registry and the whole functionality. That, I think, is going to allow us to move a lot more projects through the system. Once we add the staff, make sure the auditors are doing their job, and we make sure that we have the IT systems to support that, that’s how, high level, we're trying to make sure that we handle all of the volume that's coming through.
Looking forward, what are the key priorities internally for Verra over the next 8, 12, or 24 months?
For us, it's to be able to manage the huge influx of project requests that are coming in the door and queries and account openings. You can imagine, we are in the process of upgrading all of our internal technology tracking systems so that we can actually manage the workload and there's the digitalizing of the whole project cycle. I'd like to see that start to have an impact and start to have some examples of how this could work.
That to me is really important because it's going to help with the workload. There's also an element of making sure that we're as transparent as possible with the stakeholders because we get stakeholders. They call up and say, "Hey, where's my project? How come I haven't heard back from you?" I'd like to have some system that provides some clarity and transparency to that process, and that we train all of our existing and growing staff. In fact, at least we can provide the support to the market, but to me, it's really about that.
There are a few other internal changes we're making to the design of the organization. So we're looking to hire a managing director and that job is posted publicly and we need to have someone. We're looking for someone who can help us integrate the different parts of the organization and allow me to do some of the other work because I can't be external-facing doing this kind of stuff; working with a board and managing the details of the organization. We're looking for a chief communications officer, for example. So those are some changes we're doing because we're growing from a small organization where we all knew each other. We all could know what was going on. It was a pretty small group of people, to now where we're going to be more than 100 people. We need to have much clearer business processes to make sure that we're all in touch, that we're actually processing things properly but that we're all keeping up to date on what's happening.
And that required systems and kind of, you know, operational excellence that we need to build out. So I would say our priorities are, "Let's make sure that we actually build out the organization," that we build out the ability to kind of respond to all the projects, but we're also embracing all these new technologies, whether it's from the digitalizing the methodologies to automating the project flow through the project review and approval process but also the MRV, which you mentioned.
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