What to Expect out of COP26: Interview with IETA CEO

Dirk Forrister:

Working together, you can tap the lowest cost opportunities in any given place. And as you're pursuing net zero, you can tap into the opportunities for carbon capture and storage or nature based removals. You can get to the goal faster and cheaper than if each country acts in isolation.

Michael Torrance:

Welcome to Sustainability Leaders. I'm Michael Torrance, Chief Sustainability Officer with BMO Financial Group. On the show, we will talk with leading sustainability practitioners from the corporate, investor, academic and NGO communities to explore how this rapidly evolving field of sustainability is impacting global investment business practices and our world.

Speaker 3:

The views expressed here are those of the participants and not those of Bank of Montreal, it's affiliates or subsidiaries.

Susan McGeachie:

Hi, I'm Susan McGeachie, head of the BMO Climate Institute. The BMO Climate Institute's vision is to convene a strategically planned system of technical expertise, enabling policies, incentives and investment to advanced decarbonization. Our role is to be our client's lead partner in the transition by helping to accelerate innovation, convene partnerships and finance the technologies and other solutions we need to enable the transition to a low carbon economy. The International Emissions Trading Association, or as we'll call it for the remainder of this discussion, IETA is a key enabler of this system. I'm excited to be here today with Dirk Forrister, CEO of IETA. Welcome, Dirk.

Dirk Forrister:

Thank you, Susan. So glad to be with you. Thanks for inviting me.

Susan McGeachie:

So Dirk, before we get into your latest work and priorities for COP26, perhaps you can share a bit on IETA's history, the global role you've been playing as the business voice on market solutions for climate change.

Dirk Forrister:

Sure. IETA began in the aftermath of the Kyoto Protocol. It was actually established over 20 years ago, 1999. And it was set up by a group of companies that thought that the market components of the Kyoto Protocol were going to be important for enabling their businesses to make the changes they needed to make, to address climate change. So it's always been about market cooperation and from those humble days, I think there were around 20 people at the original IETA meeting. We've grown to be about 180 companies that operate globally. Many of them only in single markets, obviously like the European carbon market or the Chinese carbon market or California.

Dirk Forrister:

But they all have common interests on what they would like from the international negotiations, because they kind of understand where climate policy is headed, what net zero means for them. And the ability to cooperate through markets is going to be super important to achieving their goals. So we're accredited observers the Glasgow summit will go there with a delegation and we'll try to be available to answer any questions about how markets will react to policy decisions. And we do the same thing with national governments around the world, including there in Canada, both at the federal and provincial level. So that's a little bit about IETA.

Susan McGeachie:

That's great, Dirk. I mean it certainly a rapidly evolving space and it just want to go back for a moment, I suppose, in your long history, back in 2019, IETA a released a research paper that demonstrated how international cooperation in the carbon trading market could save as much as $250 million per year by 2030, 345 billion per year by 2050 and 988 billion by 2100 by reinvesting the savings and JC reduction solutions. I understand from the research, the modeling estimated a global reduction of 5 billion tons a year in 2030. So couldn't you give us an example of how international trading arrangements can achieve these types of carbon and financial savings?

Dirk Forrister:

First of all, I should acknowledge the modelers that did this are housed at the university of Maryland. They're professionally employed by the Pacific Northwest national laboratory. So one of the US national labs and they run a model called GCAM and GCAM has been used on every IPCC report since the first one. So it's been there for a long time. I used to work at the US energy department and used to rely on these models and others for helping us understand what the implications of policy decisions were. So the modelers, as they looked at this, found that because everybody has a different starting point on climate change, their mitigation opportunities and costs vary widely. And that's part of the reason that many of the targets they've taken very widely. And if you plot those out and take them forward to say, if they continue on that trajectory out till the end of the century, what would they accomplish?

Dirk Forrister:

You get a kind of a spaghetti diagram, because they all have different cost curves. So it doesn't take a genius. Although these guys might be geniuses, but to figure out that if you allow them to cooperate and instead of a spaghetti chart, you have a single line, a market converging price that it's going to be cheaper for some of them and others of them are going to make money. So that analysis you pointed to, and they've done quite a number of runs and they've actually inspired a lot of other economic modelers to tune up, to do this as well. And they all kind of find similar results and it actually kind of confirms what I think we would think in terms of just normal human nature, that working together, you can tap the lowest cost opportunities in any given place. And as you're pursuing net zero, you can tap into the opportunities for carbon capture and storage or nature-based removals.

Dirk Forrister:

You can get to the goal faster and cheaper than if each country acts in isolation. So that's kind of what the model show and probably the most dramatic type of change in my mind is not everybody has tropical forests that have the capability of both saving emissions from stopping deforestation, but also sequestering huge amounts of carbon and not everybody has great underground reservoirs. So what the modeling shows is that cooperation through a channel is offered in article six of the Paris agreement. In other words, linked carbon markets can drive investment to the places where they can do the most good at any given point in time. So you get a much more rational economic outcome.

Susan McGeachie:

So you've just published phase two of this modeling work, which now looks at global and regional trading dynamics and an investment flows in a net zero world. What are the biggest takeaways from this analysis?

Dirk Forrister:

Well, this time we tried to put a net zero frame on it and tried to squeeze the models to produce an outcome that could give us a as close to one and a half degrees as possible. And what we learned is say three big lessons, at least for me. One is again, maybe a no brainer to some of your listeners. And that is the longer you wait, the harder it is because the model uses a global atmospheric budget, just like it has an ability to simulate that global carbon budget that is thought to be equivalent to either two degrees or one and a half degrees. And if you use up too much of it at the front end, you get really squeezed at the back end. So the sooner you start the better, the second thing that I think it taught us was, again, a timing lesson.

Dirk Forrister:

We have some big emitters out there, some big countries that haven't actually announced what year they would hope to get to net zero. But if big countries like India and China and Russia take longer than 2050 to get to net zero and I think China's pledged to get there by 2060, Russia's recently announced that they'll do the same as China. And if India takes that or something later, it basically means you can't get to a one and a half degree level of protection, unless some other countries go a lot faster. So United States, Canada, much of the OECD is focused on trying to get to net zero by 2050. If China, Russia, India take longer like 2060, then somebody's got to make that up and do it faster. So that's an important lesson just about the phasing and the timing, but the other lessons are really about trading.

Dirk Forrister:

You know, when you hear the term net zero, many environmentalist, friends of mine only hear the zero. They want to gloss past the net. And the net is hugely important because most countries don't have the capacity to get the zero on their own. They either don't have the money or they don't have the storage potential. So what it tells you is that you need, I think, three things to make it work. You need rational timing and sped up timing. The second thing you need is the ability to cooperate across borders, through trading. And the third thing is that you need removals in a big way. And eventually the model sort of shows that all of the trading at the end of the day, like 20, 30 years from now is going to be in removals. And some of those will be from nature.

Dirk Forrister:

So this is good news for forest owners and farmers, because there are improved techniques that farmers can undertake that would help to sequester carbon and soils. There's great potential in soils and the same in forest. It means great things for reforestation and it maidens great things for opportunities and wetlands and algae growing and things like that. It also means that we have to get serious about carbon capture storage and utilization. I know in Canada, there's some great examples of this in Alberta and Saskatchewan, we have to have many more of those. So we have to prove out and build public confidence in the ability to store carbon, either underground or to take it to physical forms so that it's sequestered in building materials and the like. So I think the removal side comes out as hugely important in this. So it's back to the timing and getting sped up timing, having the ability to trade. And then third, a lot of it's about removals.

Susan McGeachie:

I mean, everything you're saying, it highlights the critical importance of establishing a rule book for the transfer and trade and GHG reductions among nations. We know that's through article six of the Paris agreement. What happens if we don't see progress on the article six rule book coming out of Glasgow?

Dirk Forrister:

Well, so the authors of the Paris agreement were really clever in how they drafted it in that there's a part of article six that does not require rules. It's good if you have rules, but you can cooperate with, or without the rules. And that's the second piece of the article 6.2. What it says is that if you are cooperating, if you are teaming up through market mechanisms, that you have to act in conformity with the rules that are there, essentially the language is such that you've got to conform to the rules, but if there aren't rules, you're free to do it on your own terms. So I do think that there will be a lot of market activity that will happen under 6.2 with or without agreement in Glasgow. It's better if they get more clarity around how you account for transactions in article 6.2, but governments can also pioneer new approaches and do that with integrity.

Dirk Forrister:

And the UN can catch up later. Now my hope is, and we're pushing really hard on this is that we want clarity now. We've had an extra year to think about this and work on solutions. And by the way, Susan, this was a topic that was supposed to be solved COP23, COP24, COP25. And the negotiators keep turning in an incomplete paper. This time they really are under pressure. And I think that the area that, you know, if they don't get agreement, the part that suffers is another part of article 6, which is about creating a mechanism at the UN that any country can use to produce credits and have them internationally recognized. So this would be Kyoto Protocol had the clean development mechanism. This is a new and improved version of that that would be run by the UN framework convention on climate change.

Dirk Forrister:

The good part about that is that there are countries in far away places that may have difficulty accessing the market and finding cooperation partners if the UN isn't there providing some of the glue and some of the credibility and has credibility, both at home and convincing their own ministers, that this is a reliable approach, but it's also giving credibility to the buy-side that this is a trustworthy system that they can rely on it. So that's the part that I think will suffer the most. If they don't get an agreement, 6.4 will get too far behind. Now, the good news is that there are independent standards that we're using in the aviation markets, under the IKO program for international aviation. And those private standards are quite robust. They're recognized also in California and in Columbia and in South Africa. So people are already using them.

Dirk Forrister:

So this time around, I think the UN has a run for the money in terms of the standard setting and that there are independent standards that can carry out some of those functions. Again, it's just better if it's got agreement and everybody's bought into it, but I don't think you can hold these markets back because investors like your institution are pressuring clients to get on a net zero pathway and they need to chart their way forward. They need these mechanisms to work. So I don't think there's any holding it back. I just think it's better if the UN gets its act together and Glasgow's the perfect time and opportunity to do it.

Susan McGeachie:

That's well said, Dirk. I actually want to stay on the issue of credibility for a second. You know, the Carbon Pricing Leadership Coalition appears to be leaning toward a hierarchy of carbon credits that prioritize some credits, such as carbon removals over others, such as reductions and avoidance. And then of course, we also have the science-based targets initiative, which doesn't recognize the use of offsets and science-based reduction targets. Can you speak to the growing credibility concerns from that perspective in these markets and how you believe these concerns will affect the structuring of a global trading system?

Dirk Forrister:

So there are parts of that that I think the IETA view would be that they're parts that we would agree with that eventually, just like that modeling showed, if you go out to the 2050 timeframe, maybe even in the 2040s removal credits are going to start to dominate, they're going to be hugely important unless we figure something else out. I'm hoping there's a lot of bright engineers out and in garages in Silicon valley, figuring things out. We need innovation here, but based on what we know right now, there is going to be a need for removals to play a greater role. And I see the difference in this as, I mean, science-based targets we think they try to cut it to finally, they try to be too specific about what they think is right for a company to do when and where and we think the whole spirit of the Paris agreement, it's about flexibility for countries and companies or companies to figure out what works for them.

Dirk Forrister:

But that notion of beginning to think about using credits for compensating, for whatever your emissions are, that are beyond regulation, that is going to start to get tighter and tighter. The amounts regulations going to tighten down. That's going to mean that in some of these asset class care categories, like a reduction in methane or a reduction associated with adopting energy efficiency measures, or renewable energy, gradually those are going to be things that are required by law. So they might not be eligible to be a carbon credit anymore, if it's required by the law. And it might be under a cap and trade system. So it's a different kind of a credit that's trading, but in the traditional offset programs, they would award credits for renewables. I'm going to pick renewables as an example. CDM produced a lot of credits for renewable projects. These days, not so much because things are changing. Renewables are now in the money in many places it's cheaper to do renewables than fossil fuels.

Dirk Forrister:

So it wouldn't pass what, you know, one of the proofs of getting a carbon credit is you show that it's additional to what would happen anyway. And so I think that's an asset class that's kind of under pressure. It's not that it doesn't have great growth prospects. It does. It's just that it may have different drivers other than a carbon offset credit. So I think because we're transitioning into the Paris timeframe, we're now in the Paris agreement periods. And in that period countries have to elaborate what exactly they're doing at home. What's going to be covered by their national program. And then it's the leftovers that could be available for carbon crediting in a way. So I think it's partly that transition, that it's drawn a lot of attention to voluntary markets in particular and what companies should be doing in voluntary markets.

Dirk Forrister:

What kind of credits have veracity, but I think it's more countries elaborate their plans, those discussions will get easier and it'll get clearer, but I'm really kind of encouraged about the amount of activity happening to bolster voluntary markets and provide pathways so that companies can invest more at scale. I'm happy to see that, but I think we're going through some growing pains there on sorting through. At what point do you wean yourself off of reductions and avoidances, which are generally more cost-effective than removals, at least the removal type that are associated with technology. Those are generally higher costs.

Susan McGeachie:

I actually have two questions out of that. So you've talked about the removals and you've talked about nature-based solutions, and I just want to keep on that for a second. Nature based solutions are so important to us at BMO, not only for the carbon reduction potential, but the co-benefits such as the positive impact they have on biodiversity protection and restoration as well as job creation. So can you speak a little bit more about the role in everything you've just set up for natural climate solutions and perhaps touching again on credibility concerns, although I think you addressed that well and after that, we'll move quickly into your view for the voluntary carbon markets.

Dirk Forrister:

On a nature-based solutions, I think there's a lot more there than people give. It's easy to try to take pot shots at some of the programs that are in existence, but I actually think they're pretty robust and they're continually improving and they learn from each other. And this is the independent carbon crediting standards that typically review and scrutinize and award the credits. They set up rigorous standards. They have third-party audits of whether projects meet those standards. And I think they're an important part of the picture on getting to net zero. I would say that the future of these, again, ties back to ultimately where they get accepted for compliance. So a lot of your clients now might be doing this for voluntary purposes and they may have as much interest in the water quality benefits or the women's health benefits or the employment benefits as they do the carbon.

Dirk Forrister:

But I think one of the lessons that we've learned over the last might say three to five years, is that where a government recognizes those types of credits for compliance, you'll typically see a lot more investment around it. And I'll give as an example, California. California, even though it has in its ETS limits on how many offsets you can use from those types of solutions. It's seen a tremendous boom of crediting on degraded lands on native American reservations, where it's given those entities an ability to come forward with forest protection and forest management programs that could qualify. And it stimulated a lot of investment into those communities. I think it's been hugely important. Whereas if you look at the European ETS, which were also a fan of, it doesn't allow those. So there's been none of that kind of improvement in Europe, not associated with the carbon market.

Dirk Forrister:

So I think it's an area where I hope Europe learns a bit from, you know, they're now seeing prices up in the 60 Euro range. So I think they're getting serious about wanting to know what removals in Europe might mean, but also in other countries, what that might mean for them because they're hitting very painful price levels. But I do think that that aspect of getting it recognized in a compliance program also helps the voluntary side. So that then, you know if you're buying a unit in the voluntary market, that's approved by one of these programs, that you're buying something that's governmentally sanctioned, you know. It's governmentally recognized as a compliance unit. This is something we're working on with a set of jurisdictions in a special initiative where Colombia is an example where Columbia has a carbon tax.

Dirk Forrister:

We've been working on extending that tax or converting it into emissions trading program. But what they already allow is that in compliance with the tax, you're allowed to tender a certain number of credits, including forestry credits. And again, it's stimulated an enormous amount of economic activity in poor rural areas that otherwise wouldn't have been a part of the climate game necessarily. And they're really benefiting. What I'm getting at is this is important. It needs to expand in a voluntary markets, but one of the enablers of it will be if compliance markets start to increasingly recognize and I'd say the places to watch are South Africa and Chile and Singapore and very possibly Indonesia as places that may have compliance systems that recognize these types of forest offsets.

Susan McGeachie:

And so for the voluntary markets, what's your view there in terms of their growth? I know we are hearing a lot about the task force for scaling voluntary carbon markets. And I believe IETA is playing a role in that initiative. So what's the role of that initiative. What's the role of IETA there and where do you see the market going in the next five, 10 years?

Dirk Forrister:

Volunteering market, it's been growing the last couple of years substantially, but it's still tiny in the grand scheme of things because this year would be if the trends hold, they'll finally reach a billion dollars in value and so I remember working back in the Kyoto era on single CDM projects that were a billion in value, and of course these are lower price. The volumes are bigger than that, but it needs to scale and there's ample room for it to scale. And I think we're all indebted to Mark Carney for taking this on and being a champion of improving and scaling voluntary markets. Our role going forward, so they've had a task force underway for the past year to try to come up with a process, to look across all of the carbon crediting standards and to give them another assessment about whether they are actually producing the highest quality credits.

Dirk Forrister:

And that's being established now. We're involved in running the secretariat for it, but the British standards Institute is going to be developing the review process for scrutinizing the existing standards. And hopefully if there are soft spots in any of those programs, it's going to identify them and hopefully they'll all improve and we'll continue this effort and improvement. But I think Carney's hope is that instead of maybe growing by a double or triple, that it scales up 15 fold over the next very few years. So that will involve getting enough public confidence in it and getting the trading instruments improved so that large financial institutions can lean into it and provide investments at scale.

Dirk Forrister:

Now, I know a lot of financial institutions, they don't trade commodities like they used to let's put it that way. So the actual purchase of the offsets may be modest for them, but there's a lot of pressure that they can apply on their clients who do emit carbon that may be viable purchasers, but also I think a vital role for investing in the underlying projects, because once you have a forward curve and maybe it's exchange traded, that's a hope for these things that they get standardized enough to trade on exchange, that can build a lot of confidence in the financial sector that you can see a forward curve. I mean, you don't have to look at IETA as a modeling projections of what it might be. You can look at a real forward curve in a market and get a sense of that. And I think that's going to be ultimately where a lot of the importance of that new initiative is.

Susan McGeachie:

I agree as a significant opportunity for financial institutions and maybe Dirk I'll leave you with the last question that is a big issue for BMO and very much related, but more focused on those internationally transferred mitigation outcomes that we were talking about in article six, can these atmo agreements benefit corporations in addition to state players? And if so, how would multinational companies operating in GHD intensive industries participate in that system?

Dirk Forrister:

Well, I mean, that's certainly our vision is that, I mean, countries can use article six and participate in these trades of Atmos that's an internationally transferred mitigation outcome, which is what's referenced as maybe it's kind of the accounting term that they're going to use in the Paris agreement. It can be done at a sovereign level, but I think in many market economies, that responsibility is going to be devolved to entities that are emitting carbon. And so a lot of your clients that emit carbon are going to need these credits and you may emerge as a supplier of those and you will be able to... I mean, article six is like one part of the Paris agreement where the private sector role is expressly noted. There's a recognition that the private sector is going to be deeply engaged in it.

Dirk Forrister:

So I think there is value in what governments do in terms of framework agreements with each other. We've seen some pilots of this. Switzerland has been leading the charge on this, where they've entered a couple of bilateral agreements with Peru and with Ghana on how they would cooperate under article six, how they would share benefits, how they would account for things. And I see those as kind of umbrellas under which companies in both jurisdictions could come in and collaborate under a government framework. Japan is also working on that. And I know a lot of our Canadian members have been quite interested in this because Japan has entered, I think, 17 bilateral agreements with trading partners that they would like to have future discussions about article six trading. These are a little bit more generally, haven't necessarily said it's exclusively article six. It could be other types of aid or that kind of program for Japan.

Dirk Forrister:

But I think what's the twinkle in their eye is that they want to have supply lines. And theirs is not necessarily a trading club because I think for example, I think Chile is one of the members and Indonesia, both of them have MOUs with Japan, but it doesn't mean that they have an MOU with each other. So I think it's kind of more of a hub and spoke model if you will, with Japan at the center and these supply lines with others. But I think after Glasgow, you'll start to see more of these governmental frameworks emerge. One of the things that we're interested in is if you look at what it would take for everybody to follow the Japanese path and have bilateral agreements with everybody they want to trade with, it can get really complex and a country like Brazil or Indonesia, or the Congo that are rich in forestry assets.

Dirk Forrister:

They might end up having to service 50 agreements and be a lot cleaner and simpler if there was a club they could join. And then this goes back to the famous economic research that professor Nordhaus did at Yale about the importance of having clubs that maybe it's not necessarily the whole Paris agreement as a club, it's subsets. And inside those subsets, you can have carrots and sticks that create strong trade relationships and reinforced climate goals. So I think that may be a model that people find attractive. I look at it and say, well, the EU ETS is a club. That's 27 countries that are collaborating in a single carbon market and they have the same price. So the competitiveness effects are blunted because a cement industry and Germany faces the same price as their neighbors and France or their neighbors in Spain.

Dirk Forrister:

And I think North America is going to need that, ultimately, if we're really going to take this problem on and deal with it seriously. So North America, we're lucky that Quebec and California have an operating model that we can all learn from where their markets are tied together and works really well. And again, the industries in those jurisdictions are exposed to the same price, but I think that's where the future is. And seeing more of these collaborative arrangements that involve kind of a cluster of countries that are bound together and achieving their Paris goals jointly. So we'll see, but I think that's where the future is. And once those frameworks are there, it's a lot more straightforward for the companies, but involuntary markets, we'll see companies, I think pioneering ahead of the governments on those things and building a lot of the commercial instruments that are going to be needed so that they'll become allies and getting the governments to complete the framework.

Susan McGeachie:

That's a great summary and wrap-up of the whole discussion, Dirk, thank you so much. Thank you for joining me to share your expertise on the environmental drivers and social and economic opportunities associated with environmental markets. And importantly, the practical actions that can be taken to increase liquidity and thank you to our listeners. Stay tuned to learn more about how climate change intersects our social and financial systems as we continue to share perspectives from climate action leaders before, during and after COP26.

Michael Torrance:

Thanks for listening to sustainability leaders. This podcast is presented by BMO Financial Group. To access all the resources we discussed in today's episode, and to see our other podcasts, visit us at bmo.com/sustainability leaders. You can listen and subscribe free to our show on apple podcasts or your favorite podcast provider. And we'll greatly appreciate a rating and review and any feedback that you might have. Our show and resources are produced with support from BMO's marketing team and Puddle Creative. Until next time, I'm Michael Torrance. Have a great week.

Speaker 3:

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