Podcast – Voluntary Carbon Markets: The Road Ahead

Andy Kriha: Hello and welcome to our fourth and final episode in our series on the year ahead in carbon markets. Our previous episodes covered the Renewable Fuels Standard, state and regional cap-and-trade programs and state low carbon fuel standards, and today we're going to be finishing up by talking about new voluntary carbon markets. This is going to be a slightly more educational podcast than our past ones, largely because of a lack of regulation in this market, so we're going to be talking more about what are the building blocks of a market and what are the issues that are challenging the scaling up of markets right now. We're going to also talk about what regulations are on the table and what can be done by government bodies now, and then we're going to finish off by predicting the future of avoidance-based and removal-based offsets. Before we really dive in deep though, Alex, can you kind of set us up on why this is such an important topic?

The Voluntary Carbon Markets Ecosystem and Why It Matters

Alex Holtan: Sure, and thanks, Andy. I think one of the primary benefits to this market, or potential benefits to the market, is that it's international in scope and it's potentially the first way that we're going to get a standardized global trading market around greenhouse gas emissions. But it is a voluntary market, in that there is no direct regulatory oversight over voluntary carbon markets here in the U.S., or globally. So there are a number of challenges to the market, and I think we're going to get into this a bit later, but the primary challenge that I see right now is the absence of standardization as to what it means to be an acceptable voluntary carbon offset. And that has a number of implications to both kind of the market itself, the validity of the instruments themselves and overall how effective it can be as an emissions mitigation tool.

I think one of the primary benefits to this market, or potential benefits to the market, is that it's international in scope and it's potentially the first way that we're going to get a standardized global trading market around greenhouse gas emissions.

Andy Kriha: Right. So before we go further into the building blocks of the carbon market, I do just want to discuss where we are right now, what sort of regulations or standardization efforts are underway at this time. You know, there are, like you said, there really is no direct regulation yet, but there are a couple of regulatory bodies that are involved and we'll discuss these more later. But here in the U.S., they're the Federal Trade Commission, or FTC, which can prosecute false environmental marketing claims, and the Commodities and Futures Trading Commission, which oversees commodity markets. But neither of these can really make the nuanced policy choices that will ultimately lead to the success or failure of this market. There are currently a handful of voluntary independent verification bodies. These include VIRA, the Gold Standard, the American Carbon Registry, among others, and what they do is perform third party verification services that purportedly certify that an offset project represents real emissions reductions. And these bodies' business model is tied to the number of projects that they approve, and so there really have been some questions about their underlying methodologies and whether or not they are sufficient to actually achieve the emissions reductions that the underlying projects are claiming to achieve. Offsets that are verified by these bodies are generally traded bilaterally through negotiation. There are some exchanges that exist, but really it's a lot more difficult to verify the legitimacy of offsets that are purchased on exchanges because the parties can't negotiate for the rights to audit or otherwise oversee the projects that they're purchasing the emissions reductions from. One body, ICE, recently announced that it will be launching its own exchange, which may bring some credibility to the exchange market, but that remains to be seen.

Alex Holtan: Andy, really quickly on the, you know, the trading market aspect, there are a couple of different levels to it. You know, both CME and ICE have listed voluntary carbon offset features contracts where through the settlement process, market participants can actually take delivery of the offsets themselves. You know, as you mentioned, there's challenges around verifying or validating the quality of the offset that you would get through that process, though both exchanges have basic qualification requirements around the type of offsets that can be delivered through their process. The ICE platform that you mentioned addresses that problem to some extent. It allows market participants to essentially bid on or purchase offsets from specific projects. So you know exactly what are the type of attributes that you are going to receive, whether it's kind of a, you know, avoidance offset, for example, or what type of project it might be coming from, whether it's nature-based or something else.

Andy Kriha: Right. And the last thing I want to mention here, the current state of play is that there are also some voluntary bodies that have been formed with the goal of bringing standardization to the market. These include most notably the task force on scaling voluntary carbon markets. That is a body that includes representation from large banks, energy companies, verification services, including VIRA, as well as a host of other private businesses, and they released a draft report about two years ago that serves as sort of a roadmap to how they see scaling voluntary carbon markets. There's also the Voluntary Carbon Markets Integrity Initiative that has stakeholders from not only private industry, but also government and nonprofits. They fairly recently released a provisional claims code of practice, which is set to be finalized this year, as well as other reports on the issues involved in voluntary carbon markets. So there are certainly efforts underway, but, you know, it's still a long way from standardization here. Moving on, I think it's important to kind of scope the discussion and say, you know, what are we talking about when we say a carbon offset and, you know, what kind of falls within the scope of what we're discussing? So what we're really talking about are greenhouse gas offsets. We use the term "carbon offset" because, in the vast majority of instances, any other greenhouse gas such as methane is measured and treated on a carbon equivalent basis, but that doesn't mean that they all are. In some instances, methane reductions or reductions in other greenhouse gasses can generate. There aren't offsets that are measured by the direct reduction of those gases. There's very good technical reasons to go that route. Most notably, methane, when converted to a carbon dioxide equivalent basis, is normally determined on a 100-year time scale, which from a technical perspective isn't that accurate. They should really be pegged to whatever the underlying net zero goal is. So if it's, you know, if the net zero goal is by 2050, then the timescale that methane reductions are converted into carbon equivalent reductions should be pegged to that time frame instead of to 100 years. But because of all of this, it's easier to just say carbon offsets. Just know that we really mean greenhouse gas offsets when we talk about that. These offsets can be avoidance-based or removal-based. We'll talk about that in a second and what that means. But regardless of which type they are, they represent one metric ton of reductions in greenhouse gas emissions versus a baseline business as usual condition. And offsets are generated by a party that creates the reduction, and it is sold to another party that actually has its own emissions, and then the purchaser of the credit gets to claim that they do not have emissions while the emissions of the purchaser transfer to the books of the seller. So what do we mean by avoidance-based offsets versus removal-based offsets? Well, an avoidance-based offset represents an emission that is legally allowable but did not occur. So an avoidance-based offset is generated on things like building a renewable energy facility that displaces fossil generation, installing carbon capture and sequestration equipment on an industrial facility or substituting a low or no carbon input in a supply chain for a higher carbon input. Removal-based offsets, on the other hand, are generated from activities that physically remove carbon from the atmosphere. So that's mostly at this stage going to be direct air capture. As many of you may know from news reports, nature-based offsets are a very hot topic. Nature-based activities occupy a sort of hybrid position between avoidance-based and removal-based offsets. The physical mechanism at play with nature based offsets is carbon removal in that plants are taking carbon that was in the air and removing it from the air. But at least at this point, the majority of nature-based offsets are generated on projects that protect existing forests and other ecosystems as opposed to planting new ones. And so those activities share a lot of the same characteristics and a lot of the same concerns that come with avoidance-based offsets. So for this purpose, we group the protection of existing ecosystems and with avoidance-based offsets and the creation of new ecosystems or restoration of previously destroyed ecosystems as removal-based. There's a few interrelated, tradeable attributes that we're not talking about today. We're not talking about renewable energy certificates, or RECs. We're not talking about responsibly sourced gas, or RSG. And we're not talking about other tradeable environmental attributes such as water reductions or plastic recycling credits. These are all very important and to a large extent are intertwined with carbon offsets to varying degrees, and many of them face the same issues, but for the purposes of limiting the discussion today, we're really just focused on emissions-based offsets. So with that, we can dig into the big issues that are really challenging regulators and challenging all of these voluntary parties that are trying to establish some sort of system of standardization. Yeah, Alex, did you have something?

Alex Holtan: I was going to say, Andy, I think you did a really good job of setting the table here and giving a high-level overview of the ecosystem that is the larger global voluntary carbon offset market. And, you know, in thinking about the particular challenges facing regulators, and even market participants themselves when evaluating the extent to which they want to participate in these markets, issue number one has to be additionality, right? Where additionality is the idea that you have to demonstrate that your carbon reduction is additional, or real. So comparing it to a base case, did the project that generated your offset create a situation where there's less carbon in the world than if that project hadn't existed? So why don't you take additionality here as issue number one?

I think it's important to kind of scope the discussion and say, you know, what are we talking about when we say a carbon offset and, you know, what kind of falls within the scope of what we're discussing? So what we're really talking about are greenhouse gas offsets. We use the term "carbon offset" because, in the vast majority of instances, any other greenhouse gas such as methane is measured and treated on a carbon equivalent basis, but that doesn't mean that they all are. In some instances, methane reductions or reductions in other greenhouse gasses can generate. 

Potential Issues and Challenges

Andy Kriha: I think you're absolutely right, that is kind of by far, the biggest issue, or at least the one that has been most talked about. So the biggest challenge, I think, in proving additionality isn't really demonstrating the actual emissions or the lack thereof of the low or no carbon projects that is underlying the offset. That said, there are some thorny issues around defining the scope of emissions throughout a project supply chain, and what should and should not be attributed to the project. So there are definitely some issues with that. But I think really the biggest issue and the biggest challenge is defining what the business as usual case looks like. And this is a bigger problem for avoidance-based credits than it is for removal-based credits. And so I think one good, illustrative example — and I don't want to pick on, you know, nature-based offsets too much, they definitely play a very vital role, but they are also the one that has been in the news a lot recently as we're going to talk about in a second. So a less perfect example of this is protecting the forest that otherwise could have been logs. To the heart of additionality, it's not good enough to just say the forest legally could have been logged, thus not logging it means you can generate carbon offsets. You need to determine whether the forest actually would have been logged. That means taking into account is the terrain suitable to accomplish logging? Is the price of lumber, does that outweigh the costs of logging such that it would have made logging economical? Getting this exactly right can be incredibly difficult and really kind of begs for policymakers to step in and to make some of these policy choices about what is good enough. There have been some high-profile cases of fraud, nature-based offsets. This predominantly comes from projects in developing countries where offsets were generated and sold to protect forests that were never really at risk of logging. But because of where they were located, it was very hard to verify this. Recently, The Guardian published a very high-profile report that claimed that 95 percent of all nature-based offsets don't represent actual carbon reductions. And Alex, I think you have some thoughts about what went into that report.

But I think really the biggest issue and the biggest challenge is defining what the business as usual case looks like. And this is a bigger problem for avoidance-based credits than it is for removal-based credits. 

Alex Holtan: I do, Andy. I think the, perhaps the more important question is what are the consequences of The Guardian publishing that report? Not necessarily whether people agree with or disagree with its conclusions. You know, I have a number of questions as to the methodology, in particular how they defined the base case scenario that allowed them to come up with this 95 percent number. But for clients and for participants in the market, I think the bigger question is, you know, do studies like this Guardian article increase the risk of being challenged on your use of offsets to accomplish, whether it's a net zero or some sort of emission reduction, commitment or goal, and we've seen that risk cause a number of high-profile market participants to come out and say that we are not going to use nature-based, you know, avoidance offsets as part of our emission reduction plan or program because it's very difficult to prove additionality and it leaves them open to challenge. So I think this is going to be at this point in time of the larger voluntary carbon market infrastructure, addressing this issue is going to be the key to whether we see some real growth, especially in prices, as people either become very comfortable with the validity of the instruments if the problem is able to be solved or, you know, continue to see some very low and depressed prices if there's not a satisfactory solution to this issue.

Andy Kriha: Yeah, I think that's exactly right. And, you know, I wanted to provide one example of the type of methodological policy choice that really should be left up to policymakers in order to help set a baseline of standardization. And that's, you know, with these forest projects, you know, we know some verification programs allow forests to generate offsets, even if that same forest is subject to a conservation easement, and they usually put some time limits on it. The conservation easement has to come into effect simultaneous with or after offset generation. I think a couple of verification bodies even allow the conservation easement to come into effect shortly before it starts generating offsets. From a purely technical standpoint, this could be called double dipping because conservation easements are generally put in place in exchange for compensation. So you're protecting the same forest and getting compensation for it from two different sources. If you have a conservation easement and you're generating offsets and it arguably destroys additionality because a legally binding conservation easement means there is no longer a business as usual case in which the forest possibly could have been logged. That said, at least at this early stage in the markets, it wouldn't be completely unreasonable for policy makers to step in and say we're OK with this kind of double dipping because we think we need that level of incentive in order to get this level of protection, that we're not going to protect enough forests if they can only access one of these funding sources. And so that's just, I think, a very good, clear example of the type of choices that need to be made in order to grow these markets. So moving on to some other policy considerations. Another big one is whether offsets should be required to be geographically and or temporally matched with the emissions that they're being used to offset. You know, climate change is a global issue. GHG emissions become mixed and dispersed throughout the global atmosphere, and that means that avoided or removed emissions have the same global impact regardless of where they occur. At the same time, offset projects frequently have co-benefits that are more localized. That could be reduced water use, it could be the preservation or creation of public green space, it could be reductions in emissions of particles other than GHG is particles that might affect things like asthma or other health conditions. And the emissions sources that are purchasing the offsets frequently have localized harms. And so, you know, there's an argument there that the localized benefits of offsets should be passed on to those experiencing the localized harms of emissions. And so we need to match in geography the offset project with the source of emissions.

Alex Holtan: And this is actually one of the main objections from the environmental justice community, not only with respect to the voluntary markets, but mandatory emissions trading markets as well, in that the, you know, the impact of the emissions is felt more acutely in black and brown communities. And, you know, but they don't necessarily see the benefits of the emission reduction that ends up related to the emissions occurring in their community. So we'll talk a little bit about the politics of voluntary markets close to the end of the podcast, but you'll see, you know, objections from both the right and the left. And one of the main objections from the left is really, you know, EJ issues like this, you know, location issue Andy just highlighted.

Andy Kriha: Exactly. And that's not just with respect to environmental justice communities here domestically, but also globally with developing nations. There is a balancing that has to occur where on the one hand, offset projects can result in much-needed investment in developing countries, but on the other hand, we have seen firsthand that these projects can sometimes exploit vulnerable populations in those nations and can be much more difficult to validate for domestic-based regulators or other validation bodies. And so, yet another example of the choices that have to be made. From a timing perspective, you know, can we say that a company claimed that it used zero carbon electricity to create a product when its facility, for example, runs at peak load times by purchasing offsets that were generated by a facility off peak? You know, there's an argument there that this is a false claim because by the strictest definition it might not be additional. And from a policy standpoint, it doesn't incentivize the construction of enough net zero carbon electricity to meet peak demand. Alex, do you have thoughts on kind of, the practical challenges with hourly power matching or high matching in general?

Alex Holtan: Sure, I think there are challenges at two levels. One, at least here in the United States, there is a challenge with respect to the generation stack during peak load hours and during off peak hours. I think it's a very likely situation where you're running your facility during peak load hours. Some of the energy or a good portion of the electricity generated and used by the facility may be fossil fuel-based, while, you know, the electricity generated in off peak hours, say, overnight with maybe renewable, like wind. So being able to actually match your consumption to exact time and generation of renewable energy may not be that practical here in the U.S. given the current state of the generation stack in a number of different parts of the country. In addition, there's the technical challenge associated with really being able to match the emissions profile of the electricity that you're using with your plants functioning. And that is a challenge really driven by data. And one right now, just based on anecdotal client feedback, it would be quite expensive to undertake that type of technical exercise. So it may be worth it in the circumstance of the hydrogen production tax credit. But if we're applying this type of rule to voluntary carbon markets where, you know, prices are extremely depressed right now, you know, the end result might be the cost benefit analysis doesn't work, that the obligations you need to incur in order to generate the offset cost too much based on what you're able to sell it for.

So being able to actually match your consumption to exact time and generation of renewable energy may not be that practical here in the U.S. given the current state of the generation stack in a number of different parts of the country.

Avoidance-Based Emissions

Andy Kriha: So I think there's just one last issue that we want to cover here before we finally get into what regulatory bodies are actually looking to do here in the U.S. as of right now. And that issue is the issue of if and when to phase out the use of avoidance-based offsets. Avoided emissions, I think, certainly have a clear role in the short term to incentivize immediate emissions reductions where those reductions are relatively easy to achieve, and thus kind of buying us time to figure out how to reduce emissions in more difficult to decarbonize sectors and to scale up removal solutions such as direct or capture. That said, the use of avoided emissions based offsets doesn't necessarily have as clear of a role in the long term. It will be particularly challenging to utilize these types of offsets and jurisdictions that adopt net zero goals or really net zero mandates in particular, because when all of the companies within a certain jurisdiction adopt their own net zero targets and then we assume that there's some sort of regulation placed on top of that designed to prevent leakage outside of that jurisdiction, there is not going to be a clear supply source of avoided emissions because those companies will need to claim their own reductions in order to meet the mandate of the state rather than be able to sell the rights of their productions to others to use. So definitely something to watch. It's something we discussed in episode three. California has already proposed phasing out avoided methane crediting in its LCFS at beginning in 2030, to be completely removed from the system by 2040. And I think we think that timeframe is a little bit early for a sector-wide, but not that early. I think if jurisdictions adopt 2050 goals, we could see a lot of phasing out of avoided emissions based offsets throughout the 2040s, and potentially a complete phaseout by about 2050. So anything to add there, Alex?

Alex Holtan: No, I mean, it's going to be interesting to see how this plays out. I think there are a number of factors that play into kind of, the speed of the transition, if it does take place, from allowing avoidance-based offsets to eventually moving away from their use altogether. One factor is going to be the efficacy of removal technology and how practical that ends up being. The other is going to be the will of the regulator and how strict of a stance are various different jurisdictions across the globe going to take on the some of the issues that you just raised. Will there end up being different rules in Europe versus the United States? And how is that going to all play out globally? So there's a number of different questions that need to be answered over the coming years, and I think that's a good transition to a discussion on what the U.S. is doing right now in terms of regulating these voluntary markets.

U.S. Regulations for Voluntary Markets

Andy Kriha: Yeah. So I think the big regulatory action that's making a lot of headlines right now is from the Federal Trade Commission, or FTC, that is currently undergoing a public comment period for its interpretive guidance, which it calls the Green Guides. These are non-binding provisions that are located in the Code of Federal Regulations, and they're meant to guide the FTC is use of its authority to prosecute unfair and deceptive marketing claims under the FTC Act. It first issued these guides in 1992, it's updated them several times since, most recently in 2012. These are really just meant to convey the FTC's interpretation of how it believes its broad authority applies to environmental claims and to aid businesses in avoiding the use of misleading claims. False environmental claims like this are often referred to colloquially as greenwashing. The FTC's authority here would not be to directly regulate carbon offset markets, but rather to punish users of carbon offsets that claim to be carbon neutral, net zero carbon negative, or make other such claims based on the use of offsets when those offsets can't be verified as representing real additional emissions reductions. The FTC's authority here is extremely broad and requires claims to be true for any reasonable interpretation by consumers. The guidance contained specific provisions governing claims based on carbon offsets, as well as contain other sections for wrecks, recycling, organic goods, etc. Enforcement historically has been focused on consumer products, making claims such as organic, sustainable or all natural. They have not, up until now, been used to enforce claims based on the use of carbon offsets. The current administration, however, has been pretty aggressive in its enforcement of the FTC's broad authority in multiple areas and is currently undergoing a public comment period on the Green Guides, as I mentioned above, which potentially signals that it intends to increase Green Guide's enforcement. In December of last year, the FTC opened this public comment period seeking input on changes that should be made to the guides with respect to offsets, as well as a couple of other categories. They're looking for data and potentially false or deceptive claims that are already being made in the market. And I think it's important to note that as of now, there have been no notable comments posted for us to evaluate. But we do think that by the April 24 deadline, there will be probably hundreds of comments about the use of offsets. We strongly encourage parties with a vested interest in the creation or use of offsets to make their voices heard by submitting a comment by that April 24 deadline. At this stage, this is just a request for information, not a proposed rule, because this is interpretive guidance and not a substantive rule. The FTC is not required by law to issue a separate proposed rule before finalizing any changes to the guides. That said, courts at certain times in the past have viewed interpretive rules as having a sort of substantive rules waiver when regulated parties claim that the rule deviates from a longstanding practice of the agency. So we do anticipate that in order to minimize the chances of a long, drawn out legal battle, the FTC will probably submit proposed Green Guide language for an additional round of public comment before any of those changes are actually finalized. The question becomes then, what can the FTC actually do here, and how will it impact markets for voluntary offsets taking signals from the current Supreme Court? Courts at all levels have recently been skeptical of not only uses of agency authority under broad or vague statutory language, and as I mentioned above, the FTC Act is extraordinarily broad. So even though the Green Guides have been on the books for 30 years, they've not been used to prosecute generators or users of offsets. And because they're non-binding interpretations, there's an argument to be made that they could not have legally been challenged before they were actually applied against an individual party. So this use of agency authority may still be viewed by courts as a novel use and thus subject to challenge. In order to avoid legal pitfalls and frankly, in order to avoid overburdening its own staff, the FTC is probably not going to get into the weeds on some of these niche technical issues that we've talked about today. So, for example, where Alex talked about the Guardian report on nature-based offsets, we think it's highly improbable that the FTC would prosecute generators and users of offsets discussed in these reports or small methodological issues that are subject to debate. Doing that would require the FTC to make determinations about the validity of emissions baseline and methodologies, including making policy choices about what assumptions are acceptable and what imperfections we should accept in the process. This would draw it outside of its technical wheelhouse and as just discussed, arguably it outside of its statutory mandate as well. Courts looking to last year's landmark decision of West Virginia v. EPA will likely say that the FTC was tasked with prosecuting claims that are provable is false and not tasked with making nuanced policy determinations that could have major impacts on the operation of carbon offset markets and, by extension, national climate policy. That doesn't mean the FTC can't take any actions that would still have enormous policy implications. The FTC, going back to an earlier example, could lightly outlaw the generation of carbon offsets on forests that are subject to conservation easements. It could also probably say that claims that a product is carbon negative cannot be made on the basis of avoided emissions and instead must rely on removal-based emissions. Both of these would be relatively simple, straightforward examples that apply only to whether a claim is true or false and don't require the FTC to get into overly technical analyses that would be well outside its wheelhouse. Yet, despite that, both of those drastically restricted the ways in which offsets are currently used. Worth noting here that most states have equivalent unfair and deceptive practices laws, and the state laws tend to allow for private citizens to enforce the laws in the courts through lawsuits. Environmental groups have increasingly been using these laws to challenge alleged greenwashing across sectors. We're currently aware of and following two pending cases against a natural gas utility in Maryland and Washington, D.C. These are the first that we know of where the claims being challenged were made, in part, based on the use of offsets. So we'll continue to monitor these, but it's very unclear at this point how those cases are going to turn out. Moving on from the FTC, last year, the CFTC requested comment on its role in voluntary offset markets. And Alex, I think you have some opinions on how the CFTC could play a role in these markets under its existing authority.

 The question becomes then, what can the FTC actually do here, and how will it impact markets for voluntary offsets taking signals from the current Supreme Court?

Alex Holtan: As Andy mentioned, there was a request for comment issued by the CFTC last year with respect to its role in voluntary carbon markets, but that was part of a larger initiative from the Commission, which also involved a daylong conference on the questions raised in that request for comment, among others. This issue has been one of focus for current Chairman Benham at the CFTC since he was a commissioner. So it is something the CFTC has invested a lot of time and energy into thinking about the various ways that they might or whether they should be involved in the voluntary carbon markets. I would think if you look at the request itself as well as kind of the variety of different comments that came in, you saw a number of different themes. But the big one to understand is that as it currently stands, the CFTC's role in being able to kind of regulate voluntary carbon markets is somewhat limited by its statutory authority. Specifically, the CFTC only has anti-fraud, anti-manipulation authority over and a voluntary carbon market as well. You know, analyzing or looking at or perhaps characterizing voluntary carbon offsets as a commodity, which the commission has done in the past. So, you know, they have the ability to go after people who are issuing fraudulent instruments, for example, or, you know, manipulating futures or primary markets around voluntary offsets and, you know, potentially could pick up some of the cases that the FTC might look to bring as well, where people are making kind of fraudulent marketing claims around the, you know, the sale of voluntary offsets here in the United States. So, you know, the CFTC, I think that is clearly within their jurisdiction to take that type of action. However, in terms of kind of policing the market on a more proactive basis, requiring reporting, overseeing the verification agencies, requiring registration of brokers, they don't have the statutory authority to do that. They can send signals to the market — for example, you know, they could make perhaps recommendations to the verification agencies on what they would expect to see around verification standards in order to avoid issues of fraud or manipulation — but, you know, they can't impose actual compliance obligations on market participants at this point. I know there have been informal conversations on the Hill in terms of, you know, the proper role that the CFTC might play in these markets, similar to the discussion of, you know, the role the CFTC might play in crypto markets at this point. But we haven't seen any real legislative progress on that front. So right now, you know, the CFTC ability to really shape voluntary markets is quite limited to their anti-fraud, anti-manipulation authority. We've seen a number of other efforts by, you know, financial regulators to regulate this market around the edges. We saw the SEC propose a rule that would put in place a number of disclosure obligations as standards with respect to publicly traded companies. And that rulemaking has been a long time coming and has been, you know, a long process for the SEC. There was a significant amount of pushback from industry on some of the more onerous obligations for larger companies around level three emissions, for example. But, you know, the chairman, Gensler, at the commission has been committed from day one to getting that rule done. So, you know, I think we will see something out of the agency perhaps by the end of the year, but it very likely that it would be subject to litigation if they do issue something. I think one jurisdiction where you have seen more regulatory activity and progress than here in the U.S. is Europe, for a number of reasons. But two things to watch for carbon market participants on a more global scale coming out of Europe. The first is the CBAM, or the carbon border adjustment mechanism, which is essentially a tax or tariff on imported goods into the E.U. That seeks to approximate the difference between what it would cost to comply with the regulatory requirements around emissions in the E.U. as compared to that regulatory cost in other jurisdictions. So, you know, trying to level the playing field for European industry when it comes to the costs associated with trying to achieve their climate goals across the European Union. There's also the green taxonomy, which goes into a fair amount of detail on the type of claims that can be made with respect to a variety of products around environmental attributes, emission reduction and other kind of ESG-associated claims that can be made similar, perhaps to what the FTC is looking to do with the Green Guides, but more advanced, I think, in its process and thinking and perhaps a lot more specific given the way that the, you know, the Europeans have structured their green taxonomy. Lastly, we've seen a number of proposals here in the U.S. to allow regulators other than, say, the CFTC or the FTC, to play an active role in policing voluntary carbon markets. The USDA has been suggested by certain members of Congress as a potential regulator, at least with respect to nature-based offsets. And while there have been some legislative, bipartisan legislative successes on the role of the USDA in promoting the ag industry's participation in these markets, bills that have advanced somewhat through Congress that would have made the USDA and have an active regulator in this place have not become law for a number of reasons, one of which the, you know, there's a general opposition in parts of the Republican Party to ESG and emission reduction programs generally. And then again, as we highlighted earlier, there is some distrust in pockets of the left, especially with respect to environmental justice issues, on the efficacy of voluntary carbon offsets in kind of achieving climate goals. So we didn't see the USDA being made kind of the regulator of choice on nature-based offsets. So I would expect to see that the CFTC and the EPA as the likely candidates to regulate this market to the extent that legislation is proposed and advanced. Given my background, I think the CFTC would be, you know, if you had to pick a regulator well suited given they understand trading and markets. But we've seen other areas, in particular the RIN markets, where the EPA and the CFTC have cooperated to oversee those markets to make sure, you know, at the very least, that fraud and manipulation is identified and prevented. So anything to add on the federal front?

Andy Kriha: No, I think you covered it quite well.

Predictions for the Future of Carbon Markets

Alex Holtan: OK, well, we're coming to the close of our time here, and I think we've painted a very mixed picture on the voluntary carbon markets as they stand. You know, there's definitely a lot of opportunity here still, but the markets face a number of challenges, which we've highlighted throughout this presentation. But any long-term predictions on where voluntary markets may end up?

Andy Kriha: Yeah, I mean, I think there's going to be huge corporate demand for this. I think it's not super likely, but possible, that there will be a federal net zero mandate at some point in the future. But more likely, a combination of state mandates and corporate goals that end up resulting in most of the economy pursuing some sort of net zero goal by 2050 or thereabouts. And that is really going to drive the demand for offsets, all sorts of offsets in the short term, and then certainly at least removal-based offsets in the long term. But I think what we've shown here today is there is a long way to go, right? There's these greenwashing suits that could be potentially successful, especially in blue states. There could be increased enforcement of greenwashing by the FTC. There's just a complete imbalance of information between generators and purchasers of offsets at this point. And so I think that demand and the need for standardization will likely drive the passage of some sort of legislation at the federal level for oversight of carbon markets, and just pulling a number out of the air, I'm going to say, by the end of the decade. But what are your thoughts, Alex?

Alex Holtan: Yeah, I think mine are largely consistent with yours. That we're still, you know, in relative terms at that nascent stage of this market, at least here in the United States. And that's going to take a number of factors to, I think, push this market into a regulated market. But ultimately, I think there does need to be some degree of government oversight to do two things. One, to give kind of credibility and validity to the instruments themselves and two, you know, to set standards that allow fungibility across borders. I think the genesis or motivation for that regulation is likely to come from a number of different directions. First, you mentioned the greenwashing lawsuits. I think corporate players in this market are going to look for safety and clarity as to the claims that they can and can't make, and one would greatly appreciate standardization. I think we may also see in the short term a number of potential, at least very critical, studies on avoidance-based, particularly, you know, nature-based avoidance offsets that will cause questions to arise from a number of different market participants and perhaps, like we saw in the early days of the RIN markets, some fraud cases brought as well. And you know, those three factors could create a triangulation that would allow a number of different stakeholders in this process to come together and reach some basic agreement on a framework for oversight and regulation. It's going to take a lot of effort. And I think the maybe I'm a bit more optimistic than you. Hopefully before the end of the decade, maybe 2027 and 2028. But ultimately, in order for these markets, I think to achieve their goal, you're going to need to see some form of regulation.

 I think corporate players in this market are going to look for safety and clarity as to the claims that they can and can't make, and one would greatly appreciate standardization. I think we may also see in the short term a number of potential, at least very critical, studies on avoidance-based, particularly, you know, nature-based avoidance offsets that will cause questions to arise from a number of different market participants and perhaps, like we saw in the early days of the RIN markets, some fraud cases brought as well. 

Andy Kriha: Great. Well, with that, thank you for listening to our podcast. And if you've listened to all four especially, thank you. And please do not hesitate to reach out to us with any questions.

Alex Holtan: Thank you.