Carbon removal

Fixing the messy voluntary carbon market

On this episode of Catalyst: The market for higher-quality credits is growing, but Lowercarbon’s Ryan Orbuch says the market still needs major reform.

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The voluntary carbon market is a mess. Oil majors, big tech, and many other industries purchase voluntary credits hoping to offset their carbon emissions. But years of reporting have revealed major problems in the industry, from worthless credits to outright fraud. Amid allegations that many of its credits might actually worsen global warming, the CEO of the largest issuer of credits, Verra, resigned last year.

And so perhaps it’s no surprise that the market for traditional offsets like renewable energy credits and avoidance credits shrank in recent years. Yet the market for a newer type of credit, carbon removal, is actually growing.

So what’s behind this bifurcation in the market? And are the voluntary carbon markets fixable?

In this episode, Shayle talks to Ryan Orbuch, partner at Lowercarbon Capital. He leads the firm’s carbon removal work. Ryan argues the market is fixable with major reforms, like overhauling incentives and ditching the idea that the voluntary carbon market can offset buyers’ emissions with as many cheap credits as needed.

Shayle and Ryan cover topics like:

  • The bad incentives underlying the problems with the current market.
  • The role of credit-rating agencies in the market.
  • Ryan’s ideas for designing a better market from scratch, including ex-post payments, modular protocols, and a feedback loop for improving supplier methods.
  • The potential challenges with these approaches, like financing prior to payment and uncertainty in credit delivery as protocols change.
  • Companies that are pioneering some of these approaches, like Isometric’s new protocol for the bio-oil geological storage technique used by Charm Industrial.

Recommended Resources

Listen to the episode on:

Sign up for Latitude Media’s Frontier Forum on January 31, featuring Crux CEO Alfred Johnson, who will break down the budding market for clean energy tax credits. We’ll dissect current transactions and pricing, compare buyer and seller expectations, and look at where the market is headed in 2024.

Catalyst is supported by Antenna Group. For 25 years, Antenna has partnered with leading clean-economy innovators to build their brands and accelerate business growth. If you’re a startup, investor, enterprise or innovation ecosystem that’s creating positive change, Antenna is ready to power your impact. Visit antennagroup.com to learn more.

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Shayle Kann: I'm Shayle Kann, and this is Catalyst.

Ryan Orbuch: One of the things the old market did very effectively, until people realized that they weren't getting what they were paying for, was gave people the impression that you could have real avoidance or carbon removal benefit outside of your supply chain, some random other place on Earth, for like $10 a ton.

Shayle Kann: Carbon markets are dead. Long live carbon markets?

I am Shayle Kann. I invest in revolutionary climate technologies at Energy Impact Partners. Welcome. So if you've listened for a long enough time to this podcast, you may have picked up that I'm sort of wary of the voluntary carbon market, at least in its current form. I've just seen too many examples over too long a period of time where a buyer, with generally the right intentions, discovered that they purchased something different than they thought they had purchased or maybe they purchased nothing at all. It's a mess and it's affecting financing and growth of technologies that actually really matter for the future of climate. On the other hand, I have seen the climate math and I recognize there's basically no way we hit our climate goals without building a kind of mind-boggling amount of specifically carbon removal in the next few decades. And given that we don't have government mandates generally, or a compliance market for carbon removal, that leaves voluntary procurement as the only current path to kickstart this industry.

So we're sort of between a rock and a hard place. It's like a broken market, but with a bunch of technologies that actually do need to scale. So what's the solution? Step one, I think, is diagnosing the problem. Yes, there has been an enormous amount of vaporware and even some fraud in the historical voluntary carbon market, so why? And why haven't the organizations who are ostensibly built to avoid this done so? And then once we answer that question, step two is, how do we do it right? Well, Ryan Orbuch, who you've heard before on this pod, thinks about this a lot. He leads the Carbon Removal Fund at Lowercarbon and has, as you will hear, a lot of thoughts on how the next generation of voluntary carbon market, in this case focused on removals, should be constructed. Here's Ryan.

Ryan, welcome.

Ryan Orbuch: Thank you. It's great to be here.

Shayle Kann: So you and I have had a couple of, I would say, very good, very frank discussions over adult beverages about the problems with the voluntary carbon markets as they exist today, and what's going to have to change for them to retain any real value and to scale, particularly for carbon removal, over the next couple of decades. So I think our point here is to replicate some of those conversations, albeit in front of a mic instead of a drink. Let's start with the state of the market today. Give me your sense of where we're at today in the state of the voluntary carbon markets.

Ryan Orbuch: The market for low quality, non-trust worthy things is shrinking at the same time as the market for trustworthy things is growing pretty dramatically, and everyone's trying to figure out where they fit in that kind of shuffle.

Shayle Kann: Is the data bearing that out? Let's talk about the low quality stuff, and we're going to talk more about what constitutes low quality, and why it's low quality, and so on, but to a first order, people probably appreciate what that means. Is it actually shrinking? Can we see that market shrinking in volume or in dollars?

Ryan Orbuch: Yes, after massive spikes in 2021, especially, we've seen traditional offset market, especially avoidance credits, actually down year over year on volume in 2023 for the first time in a while.

Shayle Kann: And do you think we have any ability to ascribe a reason behind that? Because you can imagine it is because, and we're going to talk about this, there have been a bunch of... We're back in the world of exposes about how a bunch of these projects are nonsense and the whole system is kind of messed up. So you could imagine that it's that and that purchasers are getting spooked, which is basically, in my opinion, what happened 10 years ago when the market tanked for the first time. Or you could imagine it's the economy. Like you said, the market spiked in 2021, 2022, and so this is just sort of like a resumption of normalcy.

Ryan Orbuch: I think it's primarily due to the fact that the problems with a lot of the traditional system have been made so evident and so loud that buyers can't look the other way anymore. And I think the reason it's more confidently that, obviously, macro conditions have some effect, but I think it's primarily driven by that. Because as I'd mentioned, the market for high quality, much more expensive tons, has gone up dramatically this year. So I think it's more of a reshuffling than a total contraction.

Shayle Kann: Yeah, though it's also true, correct me if I'm wrong, that you're sort of comparing apples to oranges in the sense that "low quality" existing voluntary avoided deforestation type credit market, that's a couple billion dollars a year market. Whereas the current market for, I think what you mean when you say the sort of high quality next generation stuff, is an order of magnitude smaller than that currently. So it's growing a lot faster off of a small base.

Ryan Orbuch: I don't know if I'd say it's an order of magnitude smaller than that. If you do it by run rate maybe, but in practice most of the dollars that have gone into the market for higher quality removals are forward offtakes, right?

Shayle Kann: Right. I guess that's true.

Ryan Orbuch: So the cash is spent when the removal's delivered. And if you add up all those contracts, it's on par or getting close to the size of the voluntary market last year. So I think it'll be eclipsed pretty soon.

Shayle Kann: Yeah, that's interesting. That's actually particularly interesting in light of the fact that there is so much attention being paid right now to the broken nature of the legacy market. If it is true that the new market, and we should probably explain a little bit more how we're distinguishing these two categories, but if it's true that the new market is about to be as big if not bigger and is higher quality, that certainly isn't getting reported in the same context as everybody talking about the old market falling apart.

Ryan Orbuch: So to your point on apples to oranges, I think a thing that is really important to understand here is that one of the things the old market did very effectively, until people realized that they weren't getting what they were paying for, was gave people the impression that you could have real avoidance or carbon removal benefit outside of your supply chain, some random other place on Earth, for like $10 a ton. And a lot of the money in that $2 billion market is money that wants to spend $10 billion a ton. It turns out you can't spend $10 a ton and do anything real.

And there has been a lot of concerted work and paperwork to make you think they're doing it right dynamics to try to justify those very low prices. And one of the things that buyers have reassessed is if the very low prices don't give us the credibility that we need and don't get us the value that we expect to get, then maybe we just do have to pay higher. And I think that reassessment is where some of the new demand is going to be coming from over the next few years, enabled by better dynamics and a better registry.

Shayle Kann: Yeah, I would add to that too that I think what has started to enable buyers to be willing to pay higher prices for higher quality is that I think there's less of a focus on the concept of offsetting the entirety of your emissions or offsetting the entirety of a product's emissions so that you can claim it to be net-zero, which was a thing that I think dominated for a while. And so why would you care whether you're paying 10 bucks for 100 tons, or 100 bucks for 10 tons. The only reason you care about that is what you are crediting that against, basically, if you are indeed doing that.

And I think because people evoke it up to the fact that actually the things we really need to invest in are inherently more expensive, or at least currently more expensive. You should get the credit, the branding and marketing credit equally, if not more, for fewer tons at higher prices than more tons at lower prices, if those more tons at lower prices are lower quality. And I think it's taking a while for the world to adjust to that dynamic, because otherwise, realistically, nobody is offsetting 100% of their emissions or even a products emissions via direct air capture credits. That's a ludicrously expensive value proposition today.

Ryan Orbuch: Absolutely. I'm glad you're bringing this up, because frankly, I am blown away by the fact that that concept has propagated as slowly through the system as it has. We did this at Stripe in 2019. It was literally just, don't worry about exactly how many tons you're buying, spend however much money you can spend to buy the best tons that are available. The whole premise is catalyzing new supply for a new market, so of course don't expect it to be available at the same price, but just buy however much of it you can. And that works actually.

Shayle Kann: Yeah, but it actually gets to a very fundamental thing about this market, embedded in a term that is used in the market, which is offset. The term offset implies that you are crediting your purchase of a ton of avoidance or removal against something. You are offsetting something else. And if indeed you are offsetting something else, then your goal as the purchaser is inherently going to be, spend the fewest dollars possible to offset the most that I possibly can within the bounds of, obviously, you need to buy things that are real. But that's your intent. Whereas I think the model that Stripe introduced and a bunch of others have pursued is actually, no, that is not the goal. The goal is not offsetting whatsoever. It is to leverage the dollars that you have to spend to have maximum impact on early scaling or proving of a suite of new technologies that are going to be necessary in the long-term. And that's a very different thing, I think.

Ryan Orbuch: You really hit the nail on the head with that, Shayle, that subject to certain constraints you could try to buy as many tons as the thing that you're emitting and at a reasonable price. And the thing that the entire old market essentially sort of conspired to do was convince you, the buyer, that that was possible. That there were enough tons at a low enough price with their stamp that you could do that. And there aren't and there never have been. And the original sin with carbon markets was this bad incentive structure encouraged by registries that weren't aligned around the problem, to protect the interest of the sellers and brokers of the credits to make them look like there are enough credits at low enough prices. That this idea that you can buy your whole footprint with $10 ton offsets is a thing you can do.

And that creates a really strong incentive for them to not acknowledge, or not recognize, or not update their systems to the fact that if many of those tons turn out to not be real, whether through sophisticated economic exposes or literally just walking up to a guy at the forest project and asking what he's doing and hearing he's obviously not doing the thing he's supposed to be doing. Whatever the level of sophistication in the analysis of what went wrong, the system was premised on an incentive structure to make you think that there's enough supply, for cheaply enough, that you can do this. And that's why the quality bar has fallen out because it was never meant to have a quality bar, it was meant to convince you there was supply.

Shayle Kann: Well, in theory it was... I don't know what was meant by whom, but in theory, so let's dive into the old market, as we're calling it right now, and a little bit more exactly what's broken in the mechanics there and the value chain. And then we could talk about what the new market needs to look like. So first of all, define the old market, as we've been talking about it, briefly, and then give me your brief synthesis of why all the incentives are misaligned.

Ryan Orbuch: Yeah. So for these purposes, the old market we can sort of think of everything after Kyoto clean development mechanism onto recently when carbon removal has started to grow. So that's primarily by volume avoidance credits. I think by volume, purely the most wrecks, but then what people discuss more is the avoided deforestation, REDD+, other sorts of avoidance credits. There's some avoidance credits that are probably reasonably good, but the vast majority of the volume is particularly low quality avoidance. There's also some reforestation. Some of that reforestation is likely good, but again, you have this weird pricing pressure where good reforestation costs north of $50 a ton. And if your system is set up to tell people that $12 a ton is good, then no one's going to buy that if you make the $12 a ton thing look the same.

Shayle Kann: Yeah, I think that ship has sailed on renewable energy credits as carbon credits, or at least it should have sailed at this point. I think the thing we want to talk probably more about is the avoided deforestation stuff, which as you said, is where a lot of the volume has been and where there have also been a bunch of those exposes recently and over the years indeed as well. Let's just talk through how that market is structured because I think it speaks to your point about the incentives for everybody being aligned on a bad incentive, basically. So just walk me through an avoided deforestation project in the old market, and who are the players in the value chain and what are their incentives along the way?

Ryan Orbuch: Definitely. So there's a handful of different players, and we could talk about who they are and then how they're going to move positions and move roles in a better design market. So in the old market you have project proponents, project developers, suppliers. At the end of the day, the people doing the thing to nominally generate the carbon credit. And then you have-

Shayle Kann: And just to be clear, sorry, just to be clear on that, the thing that they are supposed to be doing is taking a plot of land that otherwise would've been a forest, that otherwise would've been cut down, and not cutting it down.

Ryan Orbuch: Correct. In the avoided deforestation case specifically. There is some land that currently has a lot of carbon on it, and they are saying, "We will maintain that forest, maintain that soil carbon stock. Whatever is there is going to stay there." Different than, "We're going to remove this much."

Shayle Kann: Right. Okay. So that's the project developer, projects owner, whoever it is. That's the player that at the end of the day should be getting paid the majority of the dollars that are spent because they're the ones who is not generating economic value otherwise, which would've been the purpose of cutting down the trees in the first place. Presumably, they would've made money on that. So you're saying, "We'll pay you not to make that money." So they should be getting the money?

Ryan Orbuch: Correct.

Shayle Kann: Okay.

Ryan Orbuch: Really, the people whose land it is who would otherwise benefit from cutting the trees should be getting the money, there's usually some extra steps in between, but conceptually, yes.

Shayle Kann: Yeah, that's a good point. Right, right, right. It should be the landowner or whoever resides on the land or whatever. Right. And then there might be a project developer who sits on top of that, but okay.

Ryan Orbuch: But so they're like, "Okay, I'm going to do a project. It's going to be an avoided deforestation project on a square of land in Argentina, Brazil." Wherever you want to pick. "And I got to figure out how many carbon credits can I expect to sell from this project so that I can go get it financed. And then how do I sell those credits? How do I turn them into real credits?" And then what you do is you go to a registry, the traditional registries, the project developer goes to the registry. Traditional registries, Verra, Gold Standard, ACR. Verra's generally the most popular. And what happens there is what's called a methodology. So maybe folks have heard of methodologies, or a REDD+ methodology, or anything like that. But in general it's like, "Okay, guy with square of land, what are we measuring? What are we counting? What are the numbers that exist here in terms of how much you should be able to issue? And then how do we check later, if we check later?"

Shayle Kann: Right. So the methodology is a combination of the calculation of how many credits you should be able to generate by doing the thing that you're saying you're going to do, and the mechanism to verify once you have done that thing.

Ryan Orbuch: At a level that could apply to a whole range of projects doing that thing. There is a more detailed thing called a project design document that's more specific to your project, but maybe less conceptually relevant here. But these methodologies are broad in scope for the most part. It is a avoided deforestation methodology. And the idea is many project developers would then implement projects according to this methodology. The methodology creation itself is often conflicted, where the supplier is paying the registry to create a methodology for them, which has some obvious issues. Or they're using some other one that some other supplier created.

Shayle Kann: Right. So now we're getting into the thing that's, I think, a little bit less obvious, but sort of insidious, right? Because in theory you think, okay, the point of these registries, they are generally third-party nonprofit organizations, and you think they're basically... To the extent that they're supposed to be an arbiter of quality here, it's basically them. They've presumably put all of the work and diligence into making sure that the methodologies are robust and the project design documents are robust and such, that at the end of the day if somebody qualifies, according to their nominally stringent criteria, you should be able to have faith that the thing is real. You could invent a third-party on top of that who then, and this exists too, who goes through all the projects and says, "Okay, these are higher quality and these are lower quality." But as a first pass, the registry, I would think, should be the one that you think says this is at least real or not real, if not high quality, low quality, right?

Ryan Orbuch: They absolutely should, and this is the role that buyers believed they were actually playing because it's the obvious role you need them to play. And buyers were misled that they could effectively play that role in this old system because their incentives were optimized for the supplier's financial interests and the supplier's ability to produce predictable volume, not to actually understand the actual carbon cycle. Which is nominally the whole premise of paying anyone to do an offset or removal, is you're paying them to do something to the carbon cycle. That is the thing you were transacting them money for. And the traditional registry system abstracted so far from this, to become mostly a paperwork shop with occasional ground contractor visits. And it's just not the case. And then there were a lot of very well-meaning and genuine academic and policy efforts to try to fix the methodologies.

Be like, okay, so the amount of baseline deforestation that would've happened in this region was actually much higher. So you can't credit the stuff that you didn't have any effect over. Or you drew your project boundary right on the edge of someone's land, and instead of deforesting in that area, they just deforested the area next to the box that you're calling your project. And sure, no trees were deleted in that square, but the net impact on the carbon cycle was nothing. And a lot of people have genuinely spent decades, and they truly have believed that this might work. And I can understand that sort of belief from the academic perspective of what I would characterize as, if we can find the correct string of magic sentences to put in the methodology, it will correctly represent the world and it will work. It's not that dissimilar for fighting about social cost, or carbon numbers, or whatever. And that's just not going to because the incentive structures in the system are wrong and you need to change the role of the registries to fix the market.

Shayle Kann: So let's talk about that incentive structure a bit. You mentioned one component of a problematic incentive structure, which is that, let's just say I am doing a new kind of project and I want to get my project qualified for credits. What I do is I go to a registry and I say, "I want to create new methodology for my kind of thing." And I pay the registry to do that. And so the registry is getting paid to create the methodology, which creates a misalignment of incentives where they're incentivized to create the methodology on my behalf, and probably because I am the customer, somewhat incentivized to make that methodology what I want it to be. What are the other ways in which you think there's a broken incentive structure in the registry world?

Ryan Orbuch: Yeah. So sometimes you'll have them create a methodology, sometimes you'll get them to approve yours, sometimes you'll use an existing one. But yes, basically, the registries historically have the incentive to issue as many credits as possible because they get paid per project and per issuance, and even sometimes a fee when those credits are traded. So at the end of the day, they want to make every credit look as identical as possible to every other credit, and issue as many credits as possible.

And because if they can't issue enough credits, then their whole reason for existing in the minds of the voluntary buyers who think they can buy a million credits at $10 a ton, and in the minds of suppliers who are the people who actually pay them to issue the credits, it all falls apart. And once you've issued some credits against a methodology that aren't very good, then you still have the incentive to not change it because then it makes you look bad for issuing those credits historically. And you're more incented to dig in on, "No, our methodology is fine actually, look at all these good credits we've been issuing against it."

Shayle Kann: Let's talk about how that's actually manifested, which is, just to give a specific example, Verra has been under fire. In fact, the Verra CEO stepped down earlier this year and it's been sort of tied up with, there's a bunch of avoided deforestation projects, largely in Africa, that have had credits issued from some of the largest project developers in this space and certified through Verra on those registries, which have turned out to largely be bunk. So what's your sense of what actually happened there? What was the chain of events that led to this situation?

Ryan Orbuch: I would split it into two categories. There is the projects that generally did comply with the rules of the methodology, and the rules of the methodology just don't represent what's happened in the carbon cycle very well, and people are now figuring that out. And then there's the projects that just did outright fraud, literally wiring money to not the people on the land and instead to their executives or any other sort of just kind of general fraud that happens to be happening in this place, which also wasn't policed very well. But between those two things, there are well-meaning project developers that got caught up in this because this was the only set of rules they had to issue credits.

They don't know. They're told the rules are good. In many cases they may have been doing a good thing actually, but because the registries and the feedback loop with the registries is to just keep issuing credits and make each credit look the same as every other credit, everyone's incentivized the other way because the buyers don't want to go back and say, "Wow, all this money we've been spending over the last 10 years was a waste." So the registries want to save face and be like, "No, no, no, we're improving our methodologies. We're updating it. That thing is still real." And it just becomes this house of cards where every actor benefits from the thing looking fine, including the project developers when they're still getting paid.

But it just pulls us further and further from doing anything to the carbon cycle or having a feedback loop for doing anything to the carbon cycle. And the other thing I would say on this is that there's very little to no... There are occasional audits by verification bodies who will show up and measure a couple trees or something against the methodology, and sometimes that results in changes, but rarely does. There's very little feedback loop for suppliers in how to do their carbon thing better. They are interacting with this registry, basically filing paperwork back and forth. It's not a dynamic loop of, here's how to do your thing better. And that's really critical, especially for new solutions, for the registries to provide that feedback loop for suppliers.

Shayle Kann: Okay, so in terms of how to fix it, I think the thing... I mentioned this before, but we should talk about it for one second. One thing that has emerged that you could imagine would be a reasonable solution here is that, okay, so the methodologies that... The registries exist, the methodologies are the methodologies, but all they're doing is minting credits and they're not telling you what's a good credit, what's a bad credit, et cetera. And so there have been a bunch of new players who've emerged to sit on top of that and say, "We're going to do a deeper level of diligence. We're going to do more verification. And we're going to grade these things. We're going to be the Moody's or S&P for carbon credits. And so that way we'll help you distinguish."

And at least you'll understand that if you buy that $10 credit, you're buying a degrade credit or whatever it is, but if you buy the really valuable thing that's actually doing the thing it says it's doing, then maybe you're buying an A grade credit. And if those take hold, then it should bifurcate the market by pricing. And so you should have a market for higher quality stuff and a market for lower quality stuff, and you let the buyers decide, and that sort of answers your question. To what extent do you think that is a solution? Or do you think of it more as just like a bandaid on a gaping wound?

Ryan Orbuch: I'm not sure exactly what role ratings are going to play long-term, but your articulation that that will cause a bifurcation, yeah, that's literally what happened this year, right? This is the first time we've seen the market for the lower quality cheaper credits contract at the same time as the market for newer, more quality, more durable removals has grown. And the exact attribution of that from investigative journalism piece, to market liquidity issues, to whatever it may be, it's hard to say for sure, but I think the fact that the scrutiny has arrived matters. And it means that people are looking not just to, okay, let's fix the methodology slightly, but huh, maybe the system was designed wrong. How would you want to design it correctly?

Shayle Kann: Well, I guess I'm drawing a distinction between one world in which you could say, the system is designed fine, we just needed better visibility into how to distinguish quality amongst credits that otherwise are measured equally. Every credit that is classified on Verra is a ton, and so there's no real distinguishing features amongst them until somebody else steps in, does the hard work, and tells you on the quality of that ton. So that you could say, that's not a fundamental market... It's maybe a gap in the market structure that's getting filled, but it's not a fundamental problem. Whereas my sense is that in your ideal world, actually, we kind of reinvent the system entirely.

Ryan Orbuch: You need someone whose job it is, is to figure out the effect of a given thing on the carbon cycle. And we have said that the old registries played this role, and people believed they played that role, and that's what it meant for them to issue a ton. And that's just not what it meant. Those tons only vaguely corresponded to the carbon cycle. They didn't totally not correspond, there is some overlap, but it was very vague and very indirect. And when you have someone whose role it is to figure out what a intervention actually does to the cycle, and work with suppliers to make their intervention do the thing that the buyer wants it to do for the cycle, to give them that feedback loop operationally, logistically, from an accounting perspective, so they can actually optimize their business to do actual removal.

You know something's wrong in the old system because very rarely did suppliers change their behavior. It's actually just as simple as that. We're learning new stuff about carbon removal and even just forest science all the time. Some rule set that's made some year will change over time because the science changes. And in a science first approach versus an accounting first approach, where everything has to be exactly the same, that's fine and that's good. And what the suppliers do over time should change as the science advances.

And you should have a dynamic feedback loop there, where what we all recognize we're trying to do is get people to remove carbon from the cycle and to interact with the actual carbon cycle directly. And that's what you're being paid for. So if the crediting system gets too indirect from that, it's like, sure, there's fake credits or buyers are buying bad stuff, but that's almost less the part that I care about because I'm interested in actually getting carbon removal to actually happen. And to do that, you need a feedback loop with suppliers of, what things could they be doing differently? What things did they need to be measuring? How can they do something different next year to deliver more tons? And if they're not getting that, then you know something's wrong in the system.

Shayle Kann: All right, so how do you do that? So in your designed from scratch market structure for carbon removal credits, who are the actors and what are their incentives?

Ryan Orbuch: Yes. So you have suppliers, project proponents, people trying to do the carbon removal. You have buyers. And then you have a registry that works for the buyers, not the suppliers.

Shayle Kann: Right. So that's a fundamental distinction, it's the opposite, right? Old model... Yeah.

Ryan Orbuch: Fundamental distinction because of course they work for the buyers. The buyers are the ones who want to make sure that the tons they're buying are legit, and good, and trustworthy, and usable. And even in the old world, it's weird because they worked for the suppliers, the suppliers paid them, but paid them with money from the buyers. And it was this weird path through thing that screwed up the incentives. It's not like suppliers just have magic money separate from people buying from them. It's always been the buyers paying conceptually. But we did this weird path through to break the value of buyers paying. So we have a registry with a direct relationship with the buyer, whose job is to evaluate deliveries of tons.

Shayle Kann: Yeah, let's talk about how that'd actually work in practice, because I think one of the reasons that the market has been structured as it has historically is, the way that it works is you're the project developer, project proponent, you want to get credits minted. Once you get the credits minted, you could sell them. And so the first step is to get them minted, which means you need to go to the verification body, the registry. And so of course, you're going to pay the registry to do that because there's no buyer yet, and so there's no buyer to pay at that point. So that has to change, I guess, in the universe that you're describing. Is the buyer saying, "Hey, registry, I want to buy 10,000 tons. I'll pay you a fee to make sure that they are high quality." Or how does it actually work?

Ryan Orbuch: So there's two things that change. One is that the buyer pays the registry to evaluate deliveries. And two, the credits are issued after they've been delivered, not preemptively before. At the end of the day, the buyer should send money to the supplier after they have done the thing, not preemptively based on a guess in the methodology about how much of the thing they might do, which then undermines any feedback loop or incentive. And then in that world, when the buyer is sending the money to the supplier after they have performed the thing, is the case in all of these new carbon removal offtakes because of course it is, you're buying something that doesn't exist yet, you obviously would only pay them after they've demonstrated they can do the thing. When you have a ex-post paid on delivery credit, then you have a registry who the buyer pays to make sure that delivery is legit.

Shayle Kann: So the registry acts as the verification body after the fact as well, and that is also paid by the buyer?

Ryan Orbuch: Conceptually, yes. The registry may contract versions of this out. There's different ways you can design the model that I think this part is a little less important. But conceptually, yes. The registry and the verifier are the same body that serve the same function because being a registry is just posting a log of verifications. Of course they'd be the same. How else can you know which tons have been delivered? Well, the ones you've verified you know have been delivered, so your registry of delivered tons is a registry of delivered tons. It's not projected tons, it's not conceptual tons. It's tons that have actually delivered, a log of things that have happened to the carbon cycle.

Shayle Kann: But you still need a methodology, right? I agree that you're going to get paid ex-posts when the things are delivered, but the front end of it, if I'm a project developer who's going to do something to remove carbon, I need to contract with a buyer and we need to have an estimate at a minimum of how many tons I'm going to deliver and a price for that, because otherwise, how am I going to finance the thing that I'm building? So somebody has to create the methodology to do that. So in this world, who's creating that methodology and who's paying for it?

Ryan Orbuch: In this case, the registry is creating that methodology, sometimes in partnership with suppliers, but not with any funding from suppliers. So this is how it worked for Isometrics Charm protocol that was launched earlier this week. They created the protocol in partnership with suppliers, buyers, consultants, experts, and their science team. And that is a registry owned, registry maintained protocol that's modular. And the modular piece is really important because one thing that's interesting about the traditional registries on Verra or something, there's like 230 methodologies, or something in that range. And that's kind of weird because that's a lot of overlap actually between those different methodologies.

There's only so many parts of the carbon cycle you could plausibly try to perturb with an intervention that someone would pay you to do. A methodology should be a wrapper over the actual carbon cycle process on Earth. And in that case, a bunch of companies doing enhanced weathering, a bunch of companies doing biomass injection, there should be overlap in those protocols. Because at some point the piece of the protocol is just the dynamics of biomass in a well, or the characteristics of mineral feedstocks for enhanced weathering. And these are literal modules. And the more protocols you make, then you can assemble those modules for consistency. And then you just update the modules over time as the science changes.

So instead of a bunch of independent protocols, the protocol is like a wrapper over carbon fluxes, and you want to make it as modular as possible to basically just be a composition of carbon fluxes. If a supplier says, "I'm doing carbon removal." They're saying, "I'm going to change the carbon flux on the planet, and that means I'm going to change this flux, and this flux, and this flux, and this flux. Mining, grinding, spreading rock, the rock weathering, the weathering aqueous products making it into the watershed, making it into the ocean, the losses along the way." At the end of the day, it's a bunch of boxes of fluxes with arrows between them for losses, and that is the thing that they're claiming to do.

Shayle Kann: Yeah. And I think one of the things that that potentially enables, though I'll admit I still think there's a lot of complexity to this that I'm waiting to see if this actually works out. But one of the things it enables is, some of the more complicated measurement verification challenges in parts of the carbon removal world, which have to do with things in the oceans, or in the soils. Some of these more challenging areas where the trade-off, as it stands today, is they generally are cheaper than the engineered solutions, but M&V is trickier. So if you're starting from the perspective of, here's the carbon flux, here's the way to think about what happens when you do alkalinity enhancement in the ocean, or whatever it might be. At least you've kind of got that. And then there's going to be a bunch of different ways that, as we see right now, there's this Cambrian explosion of carbon removal companies where everybody's doing something unique.

And so you don't have to create a unique protocol for every single one of them, but what you could say is, "Okay, well, if you're touching alkalinity in the ocean, we've got a piece for you. We're going to take that piece and we're going to plug it into some other piece or design some other piece." So I get the logic of it. I still wonder in practice how interoperable all these different modules are going to be. So let's take an example. Say you're spreading basalt or olivine on Ag land, or something like that, and the idea is mineralization. So presumably, there's various modules that you're going to touch there. There's the minerals itself, there's what's going to happen in the soil, there's runoff of the soil into the water. You're basically stacking these modules on top of each other and the concept is that by stacking them together, if you account for all of them, then you have a complete and holistic picture of the carbon flux of the thing that you are doing. Am I understanding that right?

Ryan Orbuch: Yep. Pretty much. And you have various requirements for levels of measurement versus modeling along the way. You have uncertainty and error propagation up through the stack. You have ways to categorize reversals. Because it's not going to be perfect to start, but it's what you have to do if you're going to be serious about it. And it's also the only way to track the Earth science. Because the Earth science on some of those components is going to change, and then you can change the module, and then you'll have a feedback loop with the supplier.

Because here's the thing, the suppliers don't always know how much or what to measure. And that's not their fault, reasonable people can disagree about this. How much more should you spend taking deeper soil samples, or more soil samples, or what shape should you put your control plot in the field? These are not one answer is obviously doing fraud and the other answer is obviously correct. These are actual genuine design questions for the system, and what you need is a protocol that puts guardrails around it so the supplier can make the right decisions, and then gives a feedback loop with every delivery. Because again, the question the registry has to answer is, supplier thinks these tons were delivered, were they actually?

Shayle Kann: Right. One thing I think about this, I think both from a buyer's perspective and from the world's perspective, is good and right. But I also wonder whether it's going to be a challenge from a market perspective. It's exactly what you said about the Earth science. For some of these categories, things are moving fast. We're going to learn a lot more over the next few years because we are early on in the science of a lot of this stuff. And so there is a distinct possibility in this structure that I, a project developer, want to do a certain thing. I stack together the right modules, I work with the protocol.

I say, "Okay, here's what it's going to look like. Here's what we think it's going to look like for me to do this." I estimate a certain number of tons I can do. I find a buyer. We sort of handshake. We literally contract, but it's sort of a handshake agreement in a certain way that says, "Okay, you're going to pay me X dollars for every ton that I do deliver." And then I go off and spend a bunch of money that I finance, hopefully with third parties, to go do the thing. And then a few years later, as I'm delivering, or even before I'm delivering, the science grows, and adjusts, and we learn I'm delivering way fewer things than I thought I was going to deliver, and thus I'm going to get paid way less to do that.

It's not dissimilar from if I'm a renewable project developer signing a PPA with utility and I underperform, but the risk of that underperformance seems, at least in some of these categories, way higher because it's dependent on this evolving science. And so I wonder whether one of the side effects of this, right though it might be, is that in these emerging categories with more scientific uncertainty, you're just going to have a really hard time financing deployments because of the uncertainty around how much you're actually going to get paid when you do it.

Ryan Orbuch: I think the way to think about this is that the science will change going forward. I think it's unlikely that you would want a system that arbitrarily invalidated past credits. At the end of the day, the supplier needs the instruction set to deliver against, and the value for this needs to be in this range for that to count. And that can change over time, but when an offtake is signed, it should be against a protocol that enumerates the delivery expectations for the buyer. And then if going forward the science changes, okay, maybe future offtakes don't happen.

You need some project consistency. But on one hand, maybe that sounds scary, but the alternative is, literally no one knows what counts as a delivery. And you can't contract that. The buyers can change the bar arbitrarily, and they have, which is not their fault, but they read a new paper and now they don't know whether to believe the thing. That doesn't work. Loudest, most conservative scientists in the room based governance doesn't work for this. You actually do need to make something offtakeable and contractable. And the way you do that is, for these emerging more uncertain approaches or the approaches that have had less scaled deployment, is you have an actual protocol that maps the carbon cycles, so the supplier knows where the goal line is actually, and then they can build their operations around it.

Shayle Kann: Yeah. Maybe there's some additional measure for any given protocol of scientific uncertainty that you could try to impute, and then based on the level of scientific uncertainty, you add a bigger buffer, or you pay a different price, or whatever it might be. Especially because all of these are forward purchases for things that haven't been delivered yet, as you said, that's a relevant metric, I think. It's a tough metric to actually measure, but it's real.

Ryan Orbuch: Well, you can actually do it statistically and propagate measurement uncertainty, and then have a couple overall factors. And this is what you do. A supplier is delivering X tons. In practice that is with some uncertainty bar, and you credit conservatively a little bit below the mean of the uncertainty bar. Buyers have been implicitly comfortable with uncertainty for decades because we'd lied to them that the uncertainty didn't exist. For some of these things there is going to be uncertainty, that can be represented in very aggressively statistically bounded, so you can know quite confidently in upper and lower bound. Credit somewhere in the middle. And then those error bars will come in overtime.

And what you want is you want the supplier to be able to sell more tons and make more money for the same cogs, if they can bring in the error bars around the uncertainty, and innovate on measurement, innovate on modeling, innovate on how they deploy, innovate on their logistics. Because again, if the supplier's financial incentive is to reduce their uncertainty, that's against a feedback loop with the real carbon cycle. That's an actual system that will actually solve the actual problem.

Shayle Kann: All right, Ryan, this was exactly as fun a conversation as we've had over drinks, so thank you for that. I know you guys at Lowercarbon have backed a company called Isometric that I think is exactly the kind of next generation registry that you're describing. So the modular protocol stuff in particular, I think, is sort of hard to conceptualize in theory, so it's worth checking out how they've done it. It's all public if you go to Isometric. I think it's a really interesting idea. There are others out there also who are trying to reinvent how this market is structured, so I'm personally hopeful that we figure it out. I have a lot of skepticism about the voluntary carbon market born out of 15 years of experience of watching it crash and burn over and over again, so I'm definitely incentivized to make sure that we do it right as we start to scale new technologies that are going to be necessary, so appreciate you talking me through it.

Ryan Orbuch: Thanks so much, Shayle.

Shayle Kann:

Ryan Orbuch leads the Carbon Removal Fund at Lowercarbon Capital. This show is a production of Latitude Media. You can head over to latitudemedia.com for links to today's topics. Latitude is supported by Prelude Ventures. Prelude backs visionaries accelerating climate innovation that will reshape the global economy for the betterment of people and planet. Learn more about their portfolio and investment strategy at preludeventures.com. This episode was produced by Daniel Waldorf. Mixing by Roy Campanella and Sean Marquand. Theme song by Sean Marquand. I'm Shayle Kann, and this is Catalyst.

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