Do short-term carbon offsets have value? How should their value be calculated for buyers?
Last month, the research non-profit CarbonPlan released an analysis of tonne-year accounting of carbon offsets. The report examined how tonne year accounting works, its limitations, and how it might be improved.
The CarbonPlan authors also released a critique of the method used by NCX, an offset seller. NCX issued a response post, and the back-and-forth was a visible surfacing of some of the main issues within offset markets.
On March 2nd, NCX announced a $50 million fundraising round from investors including JP Morgan and Marc Benioff, indicating that the uncertainty about offset calculations isn’t dampening the enthusiastic corporate interest in voluntary markets.
As net-zero plans have proliferated in the last year, the demand for voluntary offsets has grown, as has predicted future demand. However, while corporations and governments pledge to remove CO2 to fulfill their climate commitments, climate economists continue to debate some of the most fundamental elements of measuring offset emissions.
Earlier this week, Bodie Cabiyo joined his Carbon Direct colleague Alex Dolginow in penning a thorough blog post titled “Accounting for Short-Term Durability in Carbon Offsetting”.
In this episode Bodie and his Carbon Direct colleague John Dees joined host Radhika Moolgavkar to discuss tonne-year accounting, the challenges of measuring short-term durability in offsets, and the current research into alternatives.
Full Transcript
Announcer: You’re listening to Carbon Removal Newsroom, a weekly show about current events in the world of carbon removal, from technology and innovation to policymaking and job growth. Brought to you by Nori, the carbon removal marketplace.
Radhika Moolgavkar: Hello, everybody, and welcome to the March 3rd science episode of Carbon Removal Newsroom. This week, Jane is not joining us. She’ll be on hiatus for a few months with a personal family stuff. So I am joined today by John Dees, a PhD candidate at UC Berkeley’s Energy and Resources Group and also a senior science analyst at Carbon Direct Incorporated. John, thank you for coming today.
John Dees: Thank you for inviting me. This is a great opportunity. I’m glad to be here.
Radhika Moolgavkar: And Bodhi Cabiyo, did I say that right? I forgot to ask before we started recording.
Bodie Cabiyo: Close. It’s Cabiyo.
Radhika Moolgavkar: Cabiyo. Thank you. Bodhi Cabiyo, PhD candidate also at UC Berkeley’s Energy and Resources Group and also a science advisor at Carbon Direct Incorporated. And he’s joining us from Italy. So Bodhi, thanks so much for being here today.
Bodie Cabiyo: Of course, really happy to be here. I’m going to be playing John’s sidekick today because it’s late and John is much more experienced at this stuff, but I’m looking forward to the conversation.
Radhika Moolgavkar: Yeah, I’m looking forward to hearing both of your perspectives. And as always, I’m Radhika Moolgavkar, Head of Supply and Methodology here at NORI. So earlier this week, Bodhi, you and your Carbon Direct colleague, Alex, oh my gosh, another hard name, Dalganow, Dalganow? I mean, I’m probably what you’re- Complain about hard names. I have one too. I should know better is, you know, penned a really interesting blog post titled accounting for short-term durability in carbon offsetting. And so I was hoping that maybe you could give our listeners a bit of an overview of what your blog post said and your recommendation in that post.
Bodie Cabiyo: For sure. Yeah. Well, yeah, it’s fortuitous timing that we’re having this podcast interview today because we just published it on Monday. And for the record, John Dees was also very involved in the writing of that or in the thought process of that. Alex and I were the writers though. So the kind of core question that we were looking at in this blog post is a lot of carbon removal solutions are They have short-term carbon storage. So if you think about planting trees or storing carbon in soils, that doesn’t last forever.
Unlike say, something like direct air capture with CCS, where you’re putting it underground and functionally storing it for thousands of years or mineralization. And when we’re talking about carbon offsets, carbon offsets to be effective basically have to be forever. You can think about like, If I buy a 30 year carbon credit today in 30 years, when that carbon credits up, I’ve basically, I’m re-emitting carbon emissions in 30 years. So I’m delaying my emissions for 30 years, but I’m not actually completely offsetting my carbon emissions. So this is, this is kind of a, it’s, it’s kind of a complexity and carbon offsetting.
And we don’t really have good agreed upon frameworks for how to How to account for that variability in how long carbon is stored. And it’s important because in an ideal world, every carbon offset is one tonne of carbon permanently stored. And so you have no re-emission event. But in reality, we have a lot of really good solutions, especially nature-based solutions that don’t have that quality of storing carbon forever. And so we have to figure out ways that we can Uh, ways that we can effectively integrate those short-term storage solutions like nature-based solutions into carbon offsetting frameworks.
So that’s kind of, that’s kind of the high level of the, the, the goal where we’re trying to, to, to achieve. Let’s see. So, um, the, the kind of the core question is, I think everyone, we can all agree that short-term carbon storage has value. Nature-based solutions have value. For starters, you know, there, there have been tonnes of papers that have shown that, you know, that We can get gigatonnes of carbon removal through things like forestation, um, or things like improved forest management or storing more carbon in soils. And so how do we, how can we actually unlock that, um, in, in a carbon offsetting framework?
So, sorry, it’s, it’s a, it’s a long blog post. So I’m trying to, trying to hit the important points and set up the scaffolding for it. So, so fundamentally though, we have to answer the question of how much do we actually value that time? What is the time value of storing the carbon? And the answer to that question depends on, it depends on two things, really. It depends on, most importantly, how you use that short-term storage. And we developed a framework that encompasses what we’re going to be talking about today and encompasses 10-year accounting, which we call, basically, there’s two approaches using the short-term credits.
There’s vertical stacking and horizontal stacking. So if you imagine kind of, um, if you imagine like a block of your, your one tonne of carbon emission laid on a timeline and that carbon emission lasts forever, essentially. Um, one way to, to offset that carbon emission forever is to buy a 20 year credit today. And then in 20 years, when that carbon credit is up, you buy another carbon credit. And then when that kind of credit is up, you buy another one. Um, alternatively in 20 years, you could buy a permanent Carbon credit say maybe director capture has scaled up effectively.
Um, and so it’s, it’s cheaper or it’s, it’s more, more widely available. Um, the other approach, which is a little bit less straightforward and which is I think going to be the meat of what we talked about today is a vertical stacking, which is basically, um, instead of stacking, stacking up those 20 year credits over time, instead you buy a bunch of 20 year credits today and you count up all of the All of the carbon benefits, all of the climate benefits of that carbon removal. So maybe say you could run some models and you could decide that if I buy five 20 year credits today, that sort of more or less counterbalances the long term impacts of my one tonne of carbon emissions.
So these are both potentially valid approaches and they’re both ways of integrating these short term credits. And I think that We’re in an exciting time because we’re just at the beginning of a rich conversation of, well, not the beginning, it’s been around for quite some time actually, but I think we’re at the, we’re restarting a rich conversation on how to talk about the time value of carbon storage, especially in the context of carbon offsetting. So that was kind of a high level.
Radhika Moolgavkar: Thank you, Bodie. I appreciate that. I was going to ask John because as Bodie mentioned earlier, he’s been involved in this area for a long time or relatively. I don’t think anyone’s been in carbon removal for too long, really. But why now? Why were you guys thinking that this is the time to start talking about short term versus long term durability? I actually like the term durability better than permanence. So I’m going to try to adopt that in my own language. But what drove you guys to post this and think about this?
John Dees: Sure. So as we pointed out, this conversation is at least 20 years old. And as we’re starting to see some of the conversation pop up around this, folks that were involved in this 20 years ago, I’ve started to see, you know, pop up on LinkedIn and other places get really excited that this conversation that was pretty active at one time and sort of went to sleep has made its way back. And I think the reason is, is that, I mean, we’re seeing carbon markets are scaling like exponentially and we see Tonnes of firms out here that have made net zero pledges, nations have made net zero pledges, and everybody’s scrambling around trying to figure out where these, if they can’t directly mitigate their emissions right away, how they might purchase offsets, whether in a voluntary or regulated market to deal with their emissions until they can.
But we’re sort of at this point now where It’s growing so fast that the rules are being made now. There’s a lot of, you know, with the most recent work on the Paris Accord that these rules are starting to be put in place. The voluntary markets have been around for a while, but there’s a lot of focus and attention on what the rules are going to be like going into the future. And so Now is sort of the time to figure out how this stuff is going to work because after this gains enough momentum and the markets reach a certain size, there’s a degree of lock-in that occurs.
So it was sort of the moment to figure this out. And we finally reached a critical mass, I think, of people participating in these markets that we have to figure it out.
Radhika Moolgavkar: Not to get too sideline down the policy track, but I’m curious, John, how... Who you think will be the people that finally make these rules? I mean, you have voluntary markets, you have regulatory markets, you have multiple countries, you have different scientific panels. How do you imagine all of these groups coming together and agreeing on these rules?
John Dees: So this would purely be my own speculation. So this is a little bit outside my wheelhouse. But the way I hear these conversations being had and my intuition Is it’s probably going to be a convergence, right? There are existing regulatory markets. The folks participating in the voluntary markets are trying to get smart on this really quick. There are obvious incentive reasons to do that. I’m not sure where we end up at the end of the day, but at some point, the criteria in the regulated markets and the criteria in the voluntary markets There’s going to have to be some convergence at some point because I imagine the regulatory markets aren’t going to get any smaller.
The voluntary markets are not going to get any smaller. And I think if there comes a point where the voluntary market is subsumed by regulatory markets, people participating in that voluntary market want to know that they bought credits that are valid and hold up no matter what happens down the line. And so I think there’s a lot of folks out there that are putting a lot of emphasis on making sure that they buy quality. And so there’s a lot of work to be done in that space to make sure that we can teach people about what it is they’re actually purchasing when they buy a credit.
Radhika Moolgavkar: Yeah, so not to be a spoiler, but Bodhi, can you maybe tell us what Carbon Direct, which is kind of the end of your blog post, how they solved for this problem, the vertical versus horizontal and What their philosophy or your company’s philosophy is around this.
Bodie Cabiyo: Yeah, for sure. When we think about vertical and horizontal stacking, I think vertical stacking, it’s very uncertain. It requires a lot of assumptions, a lot of modeling. And I think at Carbon Direct, our ethos and our philosophy about carbon removal is that it should be completely robust. The science comes first and climate comes first. And so for that reason, we, uh, what we did is we chose the horizontal stacking approach, but we took it a step further. And, um, what we did is we actually, we, we bought the credits for today.
Um, but then we also bought credits to replace those credits in the future. So, uh, we, we called it like a bridge approach. So we brought the, we bought credits that are going to last for a few years that are nature-based, uh, nature-based credits. And then we also bought what’s called X-ante. Carbon removal credits from a set of companies that are providing permanent engineered carbon removal services. So basically how that works out is for the next few years, our carbon emissions are covered by the short-term credits. And then when they expire, those ex-ante permanent credits will have come online.
So from today until forever, basically, we have offset Offset our emissions. And the beauty of that is that we are simultaneously supporting, we’re supporting a great forestry project, and we’re also helping to scale these really absolutely critical engineered carbon removal solutions.
Radhika Moolgavkar: Yeah, that actually was what I was going to say. My favorite part of this is you’re The biggest argument in favor of nature-based solutions, in my opinion, is the additional ecosystem benefits that these bring, right? So you’re not, and we’re all familiar with that. So I love that you’ve sort of bridged, as you said, the gap, and you’ll be providing all these ecosystem benefits in addition to the carbon removal while then getting the durability that you need in 20 years. One quick follow-up question on the companies that you chose for the 20 year, at the 20 year mark.
How did you guys analyze the likelihood of their success? And how are you thinking about if they don’t succeed, because these are all early stage startups, what your pivot would be and what your approach would be in that situation?
Bodie Cabiyo: So the question is about basically the risk of delivery failure.
Radhika Moolgavkar: Yeah, exactly.
Bodie Cabiyo: Yeah, it’s a great question for all X&T credits, whether they be forestry credits or DAC credits. I actually don’t have, I don’t have the answer to that question offhand. It’s a really important question. The companies that we worked with, we have a lot of trust in them and we, yeah, we know them well. So we’re not too worried about those credits getting delivered. But I think that, you know, if this kind of solution were to scale up, that would be a really important problem to solve for. John, do you have any thoughts on that?
John Dees: I can speak sort of generally. I wasn’t involved in this particular process at Carbon Direct, but in general, we’ve assembled a pretty deep bench of experts across the board. And I know that in our work generally, we spend a lot of time looking at the projects that come our way and try to both through empirical data and expert opinion. Try to assess for ourselves and review the quality of projects, the likelihood of success and the risk of reversal. Because I wasn’t directly involved, it’d be hard for me to directly speak to how these particular projects were analyzed, but they definitely get a certain amount of scrutiny.
Radhika Moolgavkar: I mean, and I think it’s completely fair in this current age to say, we don’t know, like we’re taking a risk. We are putting forward a philosophy that we believe in. And if it doesn’t work, we pivot, right? I don’t, I wasn’t like trying to put you in the spot in any way, but I am curious how people start thinking about these ex ante and future technologies and how you mitigate risk. We talked a lot about misretigation and natural solutions, not as much in, I think, DAC in some ways because it’s further out and people aren’t like thinking that mind frame.
So anyway, let’s kind of pivot to what Bodhi was talking about was going to be the meat of the conversation though. I think your blog post is pretty meaty and discuss what last month was released by a research nonprofit called Carbon Plan. I’m sure most people who listen to this podcast know who they are. They released an analysis of 10-year accounting of carbon offsets, and it first examined how 10-year accounting works, the limitations, and how it might be improved. Additionally, the carbon plan authors released a critique of the 10-year accounting method used by NCX, which is an offset seller.
NCX also issued a response, and there’s been a little bit of back and forth, which has shown sort of the Tension maybe that’s being developed around 10 year accounting and some of the big questions that still need to be answered in this space. However, NCX has not been slowed down because This week, I guess Tuesday, the day after your blog post dropped, NCX announced a $50 million fundraising round from investors as diverse as JP Morgan and Mark Beninoff. And so obviously there is a lot of interest and money being directed at this type of solution, carbon offset solution.
NCX does forestry, if you aren’t familiar. This is also balanced with all the net zero plans that have proliferated and the need for durability, because to get to net zero, you have to reduce your emissions forever. So let’s just take a step back, because that’s a lot of information. And maybe, John, you can explain to our listeners how Tony and your accounting works and what its goal is.
John Dees: Sure. So yes, this carbon plan critique for me in particular was really exciting, because this is something I’ve spent a lot of time And I thought they did a really, really good job of laying out the issues. Again, this is a 20 year old conversation. You go back even 10, 15 years, people were even discussing, you know, does temporary storage have value at all? And I think this back and forth between Carbon Plan and NCX is actually quite productive because this is a complicated topic. Tonne-year accounting in the simplest terms is a family of methods That is attempting to draw some sort of physical equivalency between carbon stored for some period of time and a permanent emission to the atmosphere.
I think the carbon plan has a sort of simple initial way of explaining it, which is you can think of a tonne year as you can take a tonne of carbon stored, multiply that times the number of years that you’ve stored it, and that gives you tonne years. But I think conceptually a more useful way to think about it is really a tonne year is a measure of impact. So if you think about the radiative forcing, which is essentially the change in the amount of outgoing infrared thermal energy in the atmosphere that is caused by CO2 being put into the atmosphere, which is what causes the warming, that is caused by a tonne of CO2 released into the atmosphere in the first year that it’s in the atmosphere.
That is what we would call a tonne year. So initially in that first year, you put a tonne into the atmosphere, you’ve trapped some additional energy in the atmosphere. Now in each subsequent year, that tonne is in, in each subsequent year after the first year, CO2 is taken up by natural processes, you know, land sinks, the ocean sink. So in each subsequent year, its quote impact or radiative forcing effect is going to be less than it was in the first year that it was released. So you can choose an arbitrary time horizon, say 100 years.
You release a tonne of CO2 into the atmosphere. In year one, it produces a tonne year of impact. In each subsequent year, it produces less than a tonne year of impact. Till you get out to your 100 year mark, it’s going to be roughly half the impact in that year. But you can sum all of those impacts and get to a total number that tells you something about the About the radiative forcing impact of the tonne without using the term radiative forcing and really small numbers. So if you use carbon plants calculator on their website, a one tonne emission, if you arbitrarily stop counting at 100 years, produces about 50 tonne years worth of climate impacts, physical impacts.
And tonne year accounting, there’s two main, it’s a family of methods, but there are two general methods that most calculations fall under. Attempt to figure out how much carbon and for how long do you need to store it to prevent an equivalent amount of impact to the amount of impact of one tonne over that time horizon. The most straightforward method is known as the more cost of method, which is, it’s enticing because it’s very simple. If I store a tonne of carbon and I store it for 50 years, I multiply 50 times one tonne And I’ve achieved 50 tonne years of carbon storage.
There’s already a problem there, and I’ll loop back to that, which CarbonPlan points out. The other method that I think CarbonPlan made the point, which I think was spot on, that is more physically correct is the Leshoff method, which essentially treats, if I store a tonne of carbon for 50 years, it treats it as a delayed emission. So what happens in that case is that rather than taking tonnes and multiplying it times years stored, you remove a tonne of carbon from the atmosphere, store it for 50 years, and in year 51, it becomes a new emission.
And the impacts now happen in year 51. You sum the impacts from year 51 to 100, and that is the harm that was caused, but the actual tonne year benefit is the impact For the remaining 50 years that got pushed out past the time horizon, if I’m trying to hopefully do this in a way that people can kind of visualize, what you’ve essentially done is you’ve taken the, you’re only, you could choose 100 years as your arbitrary time horizon, you could choose 20, you could choose 50, but essentially you’ve taken that impact curve from the one tonne emission and you’ve slid it forward in time and some portion of those impacts are now beyond the time horizon and they’re ignored.
And that is what you would count as your tonne year benefit. For storage, which in terms of the way we think about things in the climate modeling space is more physically appropriate in terms of the benefits that actually accrue from temporary storage.
Radhika Moolgavkar: You were going to loop back to one thing from the first description. So do you want to touch on that really quickly before we move on?
John Dees: Sure, so one of the things that Carbon Plan points out, which I thought was really helpful, and I very much encourage people to go over there and play around with their calculator, is that, so I stated that if under the Moore-Costa method, if you store a tonne for 50 years, you would have 50 tonne years of credit, right? We also stated that one tonne year of emissions add out to 100 years is about 50 tonne years of harm. So what you’re implicitly saying is if you stored one tonne for more than 50 years, that would actually be more beneficial than not emitting the CO2 in the first place, which we know just on its face, you know, physically is not the case.
So the more cost of method what Carbon Plan was getting at, actually, although on the surface, claims drawing a physical equivalency between emissions and storage, It actually breaks some rules that it’s clear that it does not actually physically represent what’s happening in the atmosphere. And the reason for that is that CO2 in the atmosphere is decaying and CO2 in storage is not. And so that’s where this disjunction occurs.
Radhika Moolgavkar: Thank you. That was very helpful. And this is a very complex thought process to get your brain sometimes wrapped around. So like John said, definitely Check out the carbon plan website and play around with their calculators to visualize it a little bit better, potentially. So, Bodhi, just generically, how prevalent are these types of 10-year accounting methods within the global markets for offsets, for carbon removal offsets?
Bodie Cabiyo: Yeah, it’s really interesting to me, actually, because, like John said, we’ve been talking about 10-year accounting for, like, 20 years. But there’s actually very... There are scant examples in the carbon market of projects that are actually applying this. You mentioned natural capital exchange, NCX. And to my knowledge, that’s actually the only example that I can think of off the top of my head that’s trying to apply 10-year accounting. It’s entirely possible that some projects have tried in the past. But I think in a way, it’s a product of necessity. Innovating really they’re they’re pushing improve forest management in really innovative ways which I admire one of those is that they are decreasing the amount of time that landowners have to sign up so Leonard sign up for a year.
They have to defer harvest for you, which is essentially it unlocks a lot of participants that were excluded by improve forest management projects in the past that required either. Typically, either 40 years of commitment or 100 years of commitment. So by doing this, they’re creating these one-year credits. And as a carbon offsets community, we’ve said that 30 years is OK and 100 years is OK. But one year is kind of radical. So they’ve really been pushing this 10-year accounting approach and I think have been a major driver in opening the conversation back up.
Uh, another example, which I think is partial was partially born out of, out of what NCX is trying to do is, um, the offset registry Vera is now developing a 10 year accounting protocol. Um, and they have, they, they’ve, they’ve released a public draft that’s open for comments. Now, um, they have a fairly simple and conservative approach, which is basically they are just using a one to 100 equivalency factor. So One tonne year or one tonne of carbon storage is equal, sorry, 100 tonnes of carbon storage is equal to one year of carbon stored forever or for a hundred years reality.
Um, and so, uh, those are the two main examples, um, with the Vera protocol, it’s, I’m not sure who’s actually going to use that because the economics actually work out. Um, I think in, in most cases, the economics work out pretty poorly. Uh, you know, you could imagine. You can imagine a 30-year project, if you do the math, it’s going to be a lot more beneficial to just sell that as a permanent credit rather than 30 tonne years of credit. I think the dirty secret of offsets markets today, though, is that we really don’t have any explicit accounting for the time value of carbon storage.
So, um, nobody’s using 10 year accounting and, you know, like, I think, uh, NCX is getting a lot of heat for pushing this conversation, but the reality is like, you can go on the carbon market today and you can put a 10 year soils project and a thousand year mineralization projects in the same basket. And they’re both just labeled a tonne of CO2E. And, um, in a lot of guesses, the buyer doesn’t even know the difference between the two, unless they do some digging. So I think that, yeah, I’m glad that the conversation is happening now because it feels like it’s kind of been ignored.
Radhika Moolgavkar: Yeah, I mean, I kind of smirked when you talked about that because sometimes I wonder if this is just a simple, I mean, I know it’s not a simple answer, but like there’s just a huge transparency question that’s also being not acknowledged in the conversation as much like, Maybe this is just that people don’t, it shouldn’t get so complicated, but it should be that we won years worth this much and 100 years is worth this much. And if buyers understood that they could properly value the carbon removal credit. And maybe that’s what we should be also talking about more broadly.
And I’m happy that NCX is kind of pushing the conversation, like you said, because I think it’s important. Moving on, though, because we have a lot more to talk about, and I want to make sure we kind of capture some other thoughts that came out of that carbon plan analysis. So the carbon plan analysis was applying to two different 10-year accounting methods that John just described. And one of the interesting things was that some projects could produce significantly different offset quantities for the same project. And this is where I think transparency only has its limitations because this is where the science and the accounting really do meet the road.
So when extrapolated to the size of the world’s voluntary carbon markets, this discrepancy could be huge. And so does it make it impossible to compare to corporate climate plans if each of the companies is purchasing offsets that are derived with totally different calculations. And so is the answer here to force people to give us their calculations? It may be back to transparency. I don’t know. What do you guys think?
Bodie Cabiyo: I think you’re absolutely right that transparency is key here and transparency is Exactly what we don’t have in the current market. Like we just said, like, you know, you can put a 10-year project and a thousand-year project in the same basket without really even knowing the difference in terms of the climate impact. This was kind of the challenge that we were trying to get at in our blog post is working towards a transparent framework for accounting for, you know, these different methods. And we talked about horizontal stacking, which is just basically renting credits over time.
Um, it’s very transparent. It’s very straightforward. Um, with all of these tenure methods, uh, there’s always going to be assumptions embedded, um, no matter, you know, even if we, even if we create the perfect tenure accounting method, there’s inevitably there’s going to be climate modeling assumptions. There’s going to be discounting assumptions potentially. Um, and so, I think that transparency is going to be absolutely key if we decide to adopt those methods as a carbon offset community, because you’re absolutely right that we could end up with one measure of 10 years that is half or even a tenth of another measure of 10 years, and nobody would be the wiser.
And it would be even harder to find out for the average offset buyer. John, anything you want to add to that?
John Dees: Yeah, I would just say, you know, so transparency, I think is the key, the key word here. I think there is, you know, Bodie understands probably the markets themselves far, far better than I do, but just thinking in generalizations and what I do know, we’re sort of talking about three things here. We’re talking about, A, we have, we have credits out there that have no sort of fundamental logic underlying the, you know, their, their value, you know, we’re not really paying attention to how long they last at all. And then we have the two methods that we’ve discussed, we have two tonne year methods that we’ve discussed that where even tonne year doesn’t mean the same thing, depending on what you, depending on which method that you choose.
So I think for me, you know, what it’s really about is being very explicit about where you derive your valuation for your credit from. And, you know, when we, as we develop better methods for accounting for durability, It’s probably not going to be the case that we, I don’t see anyways anytime soon that we’ve all adopted the same standard, but at least if you are clear about the assumptions that you’re making and the valuation system that you’re using to account for the durability of your offsets, as well as other characteristics of offsets, there is at least opens the door for someone to go into the market, understand how you got there and harmonize, you know, across, you know, well, we do our accounting this way.
But at least we know what the characteristics are of the offset that we’re buying, and we can decide to calculate that however we want to value it.
Radhika Moolgavkar: And then Bodhi, I think, just briefly mentioned this, but discount rates. So maybe, Bodhi, you might want to explain what they are and then how they factored. Maybe, John, you can explain how they factored into the NCX which has taken 10-year accounting and added another layer to it in their analysis. So Bodhi, if you want to start us off.
Bodie Cabiyo: Sure, I can start us off, but I’ll pass it quickly to John Dees. So he thinks about discount rates more than I do. So discount rates aren’t anything fancy or special. We use discount rates all the time in business decisions, in climate impact modeling use discount rates. Discount rates are A very, very active topic of discussion in the climate modeling community. I think people dedicate their whole careers to figuring out what the right discount rate is to apply in an integrated assessment model. So it’s a very lively space. And fundamentally, it comes down to a question of how much do we value the future?
And I think that in a business context, Companies can make that decision for themselves and they can decide internally, you know, what kind of valuation they put on the future to make the right business decision. I think when we’re talking about society writ large and the economy writ large, then you have to, you know, with discounting, you’re suddenly thinking about our grandkids and you’re thinking about, you know, the future of the earth. And I think Not to dig words out of your mouth, John, but you said occasionally that certain discount rates can make catastrophic events in the future look like nothing.
So we have to be really careful about them. But I’ll pass it off to you to give a more technical and thoughtful response.
John Dees: Oh, sure. Thanks, Bodhi. Yeah, I echo the final sentence there from Bodhi. I do say that a lot. It worries me about discount rates. But that’s not to say that we shouldn’t use them. There is a logic. I guess a good place to start is that, you know, one of the things that makes NCX’s 10-year accounting method different, maybe not entirely unique. I think we’ve seen other approaches that use discount rates. But Carbon Plan’s primary issue with the way that NCX is using discount rates Is that 10 years claim to be, and NCX, I think the way they’ve sort of marketed their solution is that they’re drawing some sort of physical equivalence between the carbon removal and the physical effects of climate impacts.
But then they’re taking a discount rate, which is actually an economic tool, and they’re discounting, or at least appear to be discounting physical impacts. And I think Carbon Plan pointed out that maybe That, you know, degrades the claim of physical equivalence somewhat when you do that. And I think, you know, for myself, I would agree that discount rates can be appropriate. But I think when you use discount rates, you want to be in an economic framework, which is where those, and there are alternatives Two-tonne year accounting that do situate themselves inside of an economic framework where discounting seems more appropriate.
But at a fundamental level, a discount rate says, I think some things that are intuitively true. We have what economists call a pure rate of time preference. If I could eat ice cream today, I could eat ice cream a month from now, we tend to have a human desire. We value the thing now more than we value the thing in the future. It’s probably different for everyone, but collectively, there’s probably some rate as a society. And then there’s a financial component to discount rates, which is the economy is, at least in good times, assumed to be growing.
We improve technology. It’s a general assumption, and I’m not saying it’s right or wrong, but a general assumption in most economic models that the future is wealthier than the past. And so there is some sort of opportunity cost To anything you might invest today, whether it’s climate change mitigation or anything else. And alternative ways that money could have been used, that investment could have been used that would generate a return. And so in an economic framework, your discount rate is really about trading off current benefits for future benefits or harms.
And in that context, they can be appropriate, but obviously they’re highly controversial as to what those discount rates should be.
Radhika Moolgavkar: Yeah, so I’m going to wrap up with this final question for you both. And this is, I feel like we’ve only scratched the surface and there’s so much more to talk about and so much more for at least me and my brain to absorb and understand. But I was wondering if you found the NCX response, and I’ll ask both of you, Liz, like I said, to be compelling that this is an economic, I mean, I think it boiled down to like this is an economic issue, not just a physical issue.
And so we have to be able to translate this to an economic credit, if you will, or economic problem. And so, John, did you find that compelling? And Bodhi, I’ll end with you and ask you the same question.
John Dees: Yes, yes and no. So I think I personally agree with, I think it’s about framing, right? So as long as we, I think if you use economic tools like discount rates, then you most likely should be employing an entire economic framework, which is sort of the world that we end up in when we calculate things like the social cost of carbon. We use integrated assessment models that couple climate impacts, Economic damages, which arguably we care about temperature rise, but ultimately the way that translates to humans is in terms of impacts and in economics, we translate those into dollars.
And in that space, when you’re explicitly using an economic framework, discount rates make a lot more sense. I think that Carbon Plan maybe has a point that using this Without explicitly going into the economic realm, it’s sort of like we’re shoehorning a physical equivalence together with an economic tool. And inherent, you know, I think a carbon plan was pretty clear about this and probably fits well with my thinking on it as well. It’s not really an issue with the discount rate per se, so much as how we’re framing it, especially when we’re using the terminology of physical equivalence, because really discount rates are...
You can’t really discount a physical process. You can discount impacts from physical processes. And I think NCX, at least from what I can tell in their response, is really open to these types of critiques and is really thinking their way through it. But yeah, that was sort of my main takeaway. They’ve nudged in the past and moved to different assumptions based on feedback, critique, and conversation. So I really estimate that this is all in goodwill. It’s complicated.
Bodie Cabiyo: Yeah, couldn’t have said it better myself, John. And I think I would come back to the issue of transparency. Fundamentally, short-term storage has value. That is certainly true. Even if it’s for one year, there’s some value in that. But the fundamental challenge is we have to figure out and we have to agree as, as a community, what that value is and how we can transparently articulate that value in the context of carbon offsetting. And I think that’s, I don’t think it’s, it’s not easy. That’s why we haven’t figured it out to date.
And we’re just starting to talk about it now after, you know, 20 years, 20 years, people have been publishing papers on this stuff. We’re starting to talk about it again. But personally, I think I’m excited that this conversation is going forward because, frankly, we need all the carbon removal, we can get right if we’re going to. Like the IPCC working group to paper just report just came out and like we’re in climate change we don’t have a lot of time to you know to just sit around waiting for for solutions to develop.
And so I think it’s to me it kind of feels like all hands on deck, so we need the short term solutions, as well as the long term solutions, but. That’s not going to work unless we have clear frameworks to articulate the value of those short-term solutions. So I’m looking forward to see what comes out of this conversation in the coming months and years, hopefully months.
Radhika Moolgavkar: Yeah, I couldn’t agree with you more, Bodhi, that it’s all hands on deck. Let’s throw what we can at the wall, see what sticks, see what works. And all of these solutions have value inherently in them. So you two might not know, but I always end the segment with a good news, like something that makes me happy in the world of sustainability usually. Last week I deviated a little bit and got into female soccer, professional soccer, but generally it’s around sustainability. And so I will end the session today just talking about the fact that Guinness has launched a huge initiative with Irish Brewers of Barley to try to reduce the volume of CO2 generated by the production of the crop.
Of course, it’s near and dear to my heart because Nori is launched in soil ag. So seeing other companies and other places in the world adopt regenerative agriculture practices is fantastic. Really excited to see the amount of support that both the government of Ireland and a big major brand within Ireland is putting forward to Produce a nature-based solution. And so just want to give a shout out to Guinness and the rest of Ireland for some pretty creative and innovative work. With that, John, Bodhi, thank you both for being with us, Bodhi particularly, since it’s kind of late in Italy right now.
I really appreciate it. And hopefully you guys can join us again in the future.
John Dees: We’d love that. Thank you so much. Thanks so much.
Bodie Cabiyo: It’s been a pleasure.
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