Carbon offsets: do they work? w/ David Oliver

Tim Coldwell:

If you’ve taken a plane anywhere in the last 10 years, you might have been given the option to offset your carbon emissions at checkout. Over the last decade, carbon offsets, or carbon credits, have exploded across all industries. And today, massive companies like Microsoft are buying up carbon credits to help them meet their Net Zero pledges.

David Oliver [preview]:

Offsets are a financial instrument that comes from protecting the environment—reducing emissions or removing emissions from the atmosphere.

Tim Coldwell:

To be honest, sometimes carbon offsetting could feel like getting fooled by a magician at a kids’ birthday party. We all know the bunny didn’t actually disappear; it was just cleverly tucked away when you weren’t looking. It can all feel a little too easy, like it’s just there to make us feel better. So we’ll sit down and enjoy the show.

David Oliver:

Most people think that offsets are like some esoterical something that doesn’t exist anywhere. The idea of carbon markets is to trigger good behaviour. Right? So if you can generate half-a-million dollars worth of offsets by taking some action, a lot of people will take that action.

Tim Coldwell:

That’s David Oliver, CEO and co-founder at Greenlines Technology. His view is that not only are carbon offsets a tangible and very real thing, he says there are ways that you could actually make money from them. That’s money that can fund new sustainable infrastructure. Money you can use to hire green building consultants. Money you can use to retrofit buildings and processes to create more carbon credits and make even more money. It’s a whole new way of looking at what a Net Zero building sector could look like. Because, in reality, today’s building sector is an ecosystem filled to the brim with incentives to build good.

But creating a buying carbon credits has a lot of nuance. It’s still a highly unregulated space, mostly fueled with voluntary action and good intentions. So is it all too good to be true? Or can we actually make some serious coin while building towards a sustainable future?

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David Oliver:

Ah, I think the first thing we need to recognize is that we live in a carbon economy. Whether we like it or not, these days everything is priced or structured around the carbon impact that things have. Right? So once you realize that you live in a carbon economy, the question is whether the carbon is an asset or a liability for you.

But I think that what—everybody seems to be coming to an agreement now that the carbon markets are a key tool for fighting climate change. Now the question is: how we use them? Do we use them? Where do we use them? That’s—those are the questions that we need to ask.

Tim Coldwell:

So I think the mechanism for the carbon market actually working is what are called “carbon credits” or this concept of carbon offsetting. And when I refer to them here in the, you know, through the rest of the podcast, they’re kind of used interchangeably. But David, what’s the simplest way to think about a carbon credit?

David Oliver:

A carbon credit is something that we do something. Think about you—you bike in the morning, or you buy something sustainable, or you plant a tree. You have a carbon impact. So if you are able to reduce, or remove, one tonne, one metric ton of carbon from the atmosphere, that’s quantified as one carbon offset, or sometimes called “carbon credit.” 

Tim Coldwell:

Cool. And you know, as we talk about this, I can’t help but feel like sustainability has gone crypto. And for that reason, many people may have a lot of skepticism about carbon credits. So why do you think some people are challenging it, David?

David Oliver:

Oh, I—I couldn’t agree more. Actually in fact, I was one of the most critical persons that you could find a few years ago. If you think about it, the first offsets produced in the world were like 25 to 30 years ago.

Offsets are a financial instrument that comes from protecting the environment—reducing emissions or removing emissions from the atmosphere. So the accounting for those things have evolved over time. So the accounting in the early days was not fully developed. It—it’s as—as any new market things change over time, and improve over time. In the carbon markets it’s no different.

So there has been a lot of people that taken—has taken advantage of that lack of accounting rules, or lack of, for example, the double counting, which is a very common term in the carbon offset markets. People that sell the same offset—offset twice.

Those are things that are natural and normal in most new markets. But I think the important piece to—to take out of this is that over time things have improved a lot. Now there’s international standards that are applicable. There are rules and regulations that set the bar on how things need to be measured and—and reported. And (inaudible) there are like a whole range of, now, initiatives today that are trying to even be more strict and apply the financial accounting rules into the environmental world. Which is very, very important.

Now we have a two-tier system in the carbon offset world—if you want to call it that way. One is the—what’s called, ah, high-quality offsets, which are those that meet those high-quality standards and regulations and—and accounting rules. And the—they don’t call it but—it’s basically the low-carbon or low-quality offsets, which are those that are maybe more questionable. And those are priced lower in the marketplace because people might not trust the—those environmental claims as much as the high-quality offsets.

So I’ll give you an example. Think about this. If you plant the tree but in two years the tree burns down, that is not helping the environment much. Right? So there are certain activities that last longer, certain activities that last less, ah, than others, ah. So those high-quality offsets are those that last a long time, that are real, that can be verified by a third party, and so forth.

So those are the ones that the, ah, leaders in the market are buying. They’re the ones that the leaders in the market are producing and selling. And obviously, that’s what, I think, every government in the world is aiming for.

Tim Coldwell:

Can you give us maybe a little bit of colour on the kinds of organizations that actually watch the market to avoid double-dipping and to—and to enforce the accounting standards for the high-quality credits. Like who is actually doing that?

David Oliver:

Well, there’s two markets in—in reality. When we talk about carbon markets there is the compliance markets, which are they’re regulated by governments. Those are, let’s call them, “compliance regulated markets.” The rules are very set in stone. They—those are like very transparent. And they—the governments set the rules. The ones we’re talking about are the voluntary markets, which are basically companies or entities taking voluntary action to reduce envir—the carbon impact on the environment.

And who sets the rules? Well, there’s a whole range of organizations, international organizations, typically non-profits that sets those—those rules. And that’s where the questions come in. Right?

If you are an international non-profit organization, who regulates you? Right?

Tim Coldwell:

Hmm.

David Oliver:

So there has been a lot of questions about those organizations. And there’s about 15 organizations like that in the world. But there’s three or four that are the—the leading entitites. They call them “fully fledged standards.” Which are the Verra, for example is one that is very predominant in North America. Gold Standard in Europe, it’s very, very strong there.

So the question is: who sets those rules? Well, they follow the accounting rules of the financial sectors, usually. And they—they aim to be more and more strict, by themselves, because the market demands that.

And now, obviously, with the Paris Agreement, some of those offsets to be able to be quantified against the national goals of every country.

Tim Coldwell:

So let’s just imagine. I’m a building owner and I want to build a 30,000 square foot office building. And I would typically build a building that has, over the 30-year life expectancy of the building, emits 15,000 tons of carbon. And instead of doing that, I’m thinking about building a Net Zero office building that, you know, emits zero tons of carbon over the base—life of the building. How would I think about monetizing that? Can you actually monetize that decision that I’m making as an owner?

David Oliver:

Yeah, absolutely. I think one of the interesting pieces here is that most owners, building owners, are completely unaware that that’s even possible in the first place.

Tim Coldwell:

Yeah.

David Oliver:

Which is the most frustrating thing. Ah. Carbon markets are an excellent tool to finance the CapEx and OpEx expenses, and even turn a profit on decisions that you make that are sustainable. In this case, for example, if you go from a 15,000-ton to zero by doing a like mass timber for example, by doing high-efficiency lighting, all those great things in a—a state-of-the-art building. Those things can be quantified.

So those can be turned into offsets that can be placed in the market and sold as offsets. And there’s standards and regulations to quantify those reductions.

And most people think that offsets are like some like esoterical something that doesn’t exist anywhere. Every offset is a serial number that sits on a public registry. So you can go, and find, and look, and scan every project that is available worldwide. They’re public.

So I think what is important is that the building owner understands that (a) there’s a lot of things that can be done that can be quantified to reduce the emissions, and (b) that those quantified reductions can be turned into offsets that can be, ah, sold in the marketplace. The question is: who buys those?

Tim Coldwell:

Yeah. So let’s just get our heads around like the value of this. So this scenario where we’ve got 15,000 tons that are avoided because we’re building a Net Zero building, what do you think the value of that is? Like what’s the price per ton today? And where do you think it might go in the future?

David Oliver:

Ah, carbon markets, ah, voluntary markets. So (inaudible) let’s separate the compliance versus the voluntary. Voluntary offsets are priced in Canada, the high-quality ones—meaning things like buildings producing offsets—would be priced between $20 and $30 Canadian today.

But the one thing that’s happening in the market is right now it’s—it’s growing exponentially, both in volume and price. So five years ago we were talking about $5 a ton; today we’re talking 20 to 30. I think in five years we’re going to be talking about $100. There’s estimates that by 2030 the voluntary offsets should be priced about—about 20, ah, $200 a ton.

So back to your question about 15,000 tons at what price per ton? Well, today it would be probably 20 to 30. In five years probably you’re looking at 50 to 100. And so forth. So I think we’re talking about a lot—a lot of—a large amount of money.

Tim Coldwell:

The simple math there: 15,000 tons times 20 bucks is 300,000; 15,000 tons times 100 bucks is 1.5 million. That’s a lot of money that can be used to offset the premium cost of doing some of these greening strategies. And I think that’s part of the point of carbon credits, is it not?

David Oliver:

Absolutely. It’s the idea of carbon markets is to trigger good behaviour. Right? So if you can generate half-a-million dollars worth of offsets by taking some action, a lot of people will take that action. And that’s the end—the end-game of this—this—this sector. Right?

So that’s why the federal government now is launching the federal GHG offset system. Which is a voluntary program for people to produce offsets, sell the offsets in the marketplace. It’s a voluntary run by a government—which is unique in the world, by the way. Or the B.C. government is doing—has its B.C. offset program, where they can actually buy offsets from developers here in B.C. from a multiple range of industries.

By the way, there is no building owners producing offsets in B.C. here yet—at least selling to the B.C. government. But that will change soon.

Tim Coldwell:

So can you just paint a little bit of a picture, David, about who is buying carbon credits right now?

David Oliver:

Well, there’s three groups of people that they buy offsets. One is the private companies with Net Zero pledges, for example. You know, “By 2030 we want to be Net Zero, so we need to buy offsets to offset the remaining emissions that we can’t reduce by ourselves.”

Ah, the second is the governments. Governments today are large buyers of offsets. And the reason for that is because the Paris Agreement at COP, ah, Article Six, allows them to purchase offsets from the market to meet their Net Zero, ah, pledges or their reduction targets. Like I think it was Japan announced that 100 per cent of their commitment would be based on purchasing offsets. Which is shocking, if you think about it.

So voluntary markets last year. And voluntary, as the word says, is voluntary, so nobody has an obligation to disclose the numbers. But those that—that disclose, disclose that the last year the market was worth about a billion dollars. Which is not big. But the expectation for 2022 is that number is going to grow to $1.7 billion worth of offsets. Which is not much again.

Now, last year the ratio of demand versus supply was 2-to-1. So for every offset produced in the world, there were two offsets being acquired. So if you think about how is it that math works? Like who—how—how can you buy twice the amount of offsets produced? Well, people go back in time and buy previous years’ worth of offsets, low—lower quality. But the—the interesting piece here is that—that the demand is outpacing supply by far.

Tim Coldwell:

Yeah. And one would also think that the purchase of offsets is a way to attract investment into different parts of the world. And so there’s a certain aspect of helping to build infrastructure in developing nations as part of this whole offsetting program. Is that something that one should really thing about?

David Oliver:

Yes. But it has not been realized yet. Actually, B.C. is one of the, I would say, the leader right now in the world. Because we’re now in discussions with the B.C. government to actually do just that—to use carbon markets to finance the development of infrastructure projects. Think about bridges, roads, you name it. Right? If you can use carbon markets to finance the—partially those projects, the amount of taxpayers’ dollars required for to fund those projects are lower, is lower. As simple as that, right? You’re using market-based mechanism to finance those—those projects.

Tim Coldwell:

Okay. So we’ve talked about selling carbon credits on one project to generate revenue. But I expect that the administration costs are prohibitive on a one-off project basis. Umm, is there a way to address that?

David Oliver:

That’s what has been stopping most, ah, building offset projects in the past. Until about five years ago, there was no mechanism for people to bundle different buildings into one project—offset project. And after the administration costs are high, so it was not worth it.

But five years ago, the—the standards that run this—this sector allowed the bundling of activities. They call it “program of activities.” So you are allowed now to include multiple buildings into one project. So what it means is that the fixed costs are pretty much the same, and so obviously the revenue it’s much higher, so it becomes financially sustainable.

Tim Coldwell:

Of course I’m interested in this because we’ve got 130 active job sites across the country, and we could bundle the things that we do with those clients that are good for the environment into a program that allows us to monetize this. So that’s a really interesting idea.

Can you give the listener a sense of scale required to make kind of the aggregation of this stuff work?

David Oliver:

When you think about developing (inaudible, 15:25) a project, ah, at scale—one of these multi, ah, building program—you’re looking at, ah, roughly between $50,000 and $100,000 worth of costs on—in the first six months or so. So to set up the program, less than 100,000, that would be, I would say that’s a safe bet. But still like that’s a lot of money.

You have to think about the scale of this, basically the ROI justifies that development cost. Right? So if you have a very large one building, maybe it’s worth it. But, ah, most buildings would require at least two or three buildings that are aggregated with multiple activities, more than one activity. So meaning either high-efficiency HVAC systems, or a building envelope that is more efficient, or, you know, you name it. Right?

So those two or three things that can be implemented to do one building, and then two or three buildings. That would be roughly the—the scale that you need to justify that investment.

Tim Coldwell:

Yeah. You’d have to kind of calculate the total tons that you might be able to monetize in the year, and then scrub off the administration costs, and figure out if there’s enough, you know, juice left afterwards to justify the squeeze—so to speak.

Could you provide some examples of aggregation and how that’s working right now?

David Oliver:

Yeah. There’s other sectors that, ah, have done this before. And actually the company—my company, Greenlines, we were the leaders on the transportation sector on that, doing that aggregation.

So we launched in 2017 and app called “Cowlines,” which is a trip-planning app. And it serves to help people move around the city with public transport, with bikes, and so forth. So you download it. You use it like GoogleMaps. And it starts calculating your emissions when you move around. But it will calculate your baseline as well. And it calculates, obviously this—the difference between the two, so the emission reductions. 

So the Greenlines’ Cowlines app has basically been doing the aggregation for millions of users for the last few years, on an ongoing basis. Which is very unique in the world. Nobody has been done—done that before. But that’s just on the transportation with people.

Now the question is: how about other types of activities? Well, there’s a whole range of, now, aggregation and bundling of activities that are happening. Infrastructure in B.C., growth building infrastructure. We are looking at aggregating multiple activities from, ah, multiple players for all B.C. roads. That’s a pretty ground-breaking project, which, you know, hopefully is going to come soon.

Another one is a company called CarbonSense is starting the development of basically aggregating household reductions. So when you switch to heat pumps, for example. One house is not worth it, of course. But when you aggregate a thousand houses, then it makes financial sense. So obviously that’s an incentive for people to switch to heat pumps.

And there’s a whole range of examples in every—pretty much every sector of the economy. But the most people is focused on the forestry and agriculture these days.

Tim Coldwell:

So let’s just wind it out a little bit. So it’s 10, 20, maybe even 30 years down the road. And the carbon economy is well known by most. And we’ve hit our goal to be Net Zero by 2050. What role do you think carbon credits will play in the future?

David Oliver:

I always say that this sector is—is—its success is its death. It means the day we get—we hit zero, the sector will disappear. And that’s a good—good thing. We all hope that—that that’s going to come soon. Because the carbon markets are mechanisms to reward those that are ahead of the curve. If you’re a company, if you’re an institution that are—is ahead of the curve on what do you—whatever you do, that’s great, but at some point you’re going to hit zero. Right? So that’s when the reward stops, because you—you dragged the industry down all the way to zero. So that’s—that’s a reward for you as the leader. And obviously, the taxation and the carbon tax that we all hear is the—the penalty for the laggards.

In 20—10 or 20 years, probably less than 10, every company in Canada will be actually quantifying and monetizing carbon reductions. At least the—obviously the—the ones that are ahead of the curve.

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Tim Coldwell:

That was David Oliver, CEO and co-founder of Greenlines Technologies.

That’s a wrap on “Zero by Fifty.” I’m so glad that you joined Jen and I this season. I truly hope you feel as inspired and motivated from this series as we are. It’s an exciting time for the construction sector. And we play a huge role on the frontlines of climate change.

As always, if you enjoyed this season of Building Good, don’t forget to hit the “Follow” button, and tell a friend about the podcast, because there is plenty more to come. And if you’re feeling extra-generous, you can leave us a five-star review.

Building Good is a Vocal Fry Studios production, supported by Chandos Construction and Bird Construction. The executive producer is Jay Cockburn. Our associate producer is Kattie Laur, with production assistance from Jessica Loughlin. I’m Tim Coldwell, thanks for listening.