Carbon credits and the fight for transparency with Tommy Rickets (BeZero Carbon)

Hello, everybody. Welcome back to Transmission. Today, I'm talking to Tommy Ricketts, CEO and founder at b zero carbon. So if you've ever looked at the carbon market or carbon credits and wondered, how does this even exist and is it just greenwashing?

B zero is building the infrastructure to answer that question. So just like S and P and Moody's are credit ratings companies, b zero is a carbon ratings company. So they assess whether a reforestation project in Colombia or a plant in Iceland or a mangrove restoration in Kenya is actually removing the carbon it promises.

So we talk about how the carbon market works, why price and quality don't necessarily correlate, and what it's like to build a business that shines a light on an industry with a lot of hype, but a lot of cynicism around it too.

So if you're curious about how the trillions needed for climate solutions are gonna flow and how we can make sure they land with real impact rather than false promises and slide decks.

This conversation is a must. Tommy is an excellent guest, really knows his stuff, and what I most enjoyed about the conversation was the fact he was upfront and honest. He does not dodge the tough questions. Alright. We might as well get stuck in. Here's Tommy Ricketts from b zero.

Alright. Tommy, welcome to the podcast.

Thanks for having me.

We are sort of cousins. Right? Because, Molten are investors in your business and are investors in Moto Energy.

Yeah. I mean, I, I had a LinkedIn message from my investor in Molton in September twenty one. And by December, I'm gonna make it up, but the fourteenth or somewhere around then, they'd given us a term sheet for our series a, and they've been part of my board ever since. So, yeah, couldn't couldn't ask for a better investor.

Yeah. Special shout out to to Molton. So if you could, can you tell our listeners about b zero? What is the problem that you solve in the world?

We are a carbon rating agency.

What that means is there are these things called carbon credits that's supposed to deliver a ton of, CO two, avoided or removed, and people wanna use them to essentially help offset or pay for the emissions that they're making. The challenge with these things is they are kind of like a a financial asset. You can kind of buy them and trade them, and they kinda work like a commodity, and people sort of wanna make a market of it, but you don't actually get delivered it. So it's just you're never really sure how much carbon is in this thing that you're supposed to be buying, and yet you're trying to make this action, which is a kind of definitive action that I have this negative emission. I'm trying to buy a positive outcome, and if I put them together, it's gonna create mathematical zero. And so the heart of the problem at the heart of the carbon market is how do I prove the impact that I'm having?

And a carbon rating is our way of trying to say, well, look. There are these quite strict methodologies that you have to follow. There's a lot of science and very heterogeneous project types that you have to try to evidence, but it's all a probability.

Right? It's all a confidence interval. And if you think about it in those terms, a carbon rating is the extent to which we believe that, you know, a ton is delivered, essentially, then it's a lot easier to understand the risks associated with these things without the risks of these things fully undermining their very existence.

So it's kinda like a third way. Like, either they're real or they're not real is a false binary. Right? They're kind of real in lots of different ways.

But then if you think about maybe, you know, if if I borrow money, I have a a mortgage, right, and that's the bank telling me what they think the probability of me be paying that debt is, it's the same. Right? You know? There's a chance I default.

There's a chance I don't. And and that and that kind of risk based approach, we think, is a way to square the circle of the integrity issue around are they real and everything that goes on with greenwashing and, at the same time, build a language of risk which allows people to understand and invest and actually operate in this market at scale.

And and b zero calls itself a carbon ratings agency. And ratings agency is a phrase that everybody knows a couple there's there's obviously some some bad press from the financial crisis and whatnot, but I think rating agency as a as a concept in the financial world is is quite a familiar one. But then in carbon, what what's the jump that you have to make between those two things?

You talked about us being cousin businesses. I think a carbon rating agency and a, a credit rating agency are probably cousins in in in that sense. They're not they're not, siblings directly.

So the familial nature, to to continue this metaphor, is that you're both trying to to treat this as a risk instrument, trying to identify the fundamental as in the the key properties that drive its performance over time. Even doing that in the carbon market is basically starting from scratch because just thinking about it in financial accounting terms, thinking about it in in in clean datasets, and, the way you would go and do benchmarking and referencing and statistical distributions, all this type of thinking, which is standard stuff that even really quite simple investors in financial markets is, like, you know, whole whole new level of Swahili when it came to the traditional sort of science and NGO paces that this this market came from.

So you're trying to financialize essentially the way the analysis is taking place. That's where it's very similar to a credit rating agency, But the content is completely different. You know? We're not looking at price deck to earnings ratios or, you know, e v EVEBITDA multiples or whatever it might be.

Right? You're looking at biomass in a dry forest ecosystem and whether or not you think the ten year forecast of this, which is quite experimental science, is realistic and whether it actually achieves that over time. So the cousin element is the translation of science into a system of financial analysis that can then be essentially treated like any type of risk taking, and therefore allows people to have confidence or at least understand how to price what they're actually being exposed to, which is the financial language way of saying, I want there to be lots of people investing in the global south and in nature and all kinds of new technologies.

These things have experimental and quite, heterogeneous types of of behaviors and risks, but it's a good thing, we believe, to invest in nature and climate a positive climate action. And, you know, this is just the boring architectural side that you need to build in order to make that vision a reality and get hundreds of billions to invest in this.

So if I may, I'm gonna come at this a bit like I'm a kind of a a ten year old, and you can tell me whether I'm I've been too simplistic, and then we can go down the rabbit hole. But let's say big corporate, you know, big data center owner operator or a big polluter in the world says, right, I wanna I wanna, offset some of my carbon, and I'm gonna go and invest in a, a forestry investment or a buy you know, some sort of, carbon offsetting scheme. And then they go, well, how do I know whether is this legit or not? You know, I can spend millions, tens, hundreds of millions on on this thing, and I can you know, it's it's great for my investors and my publicity, but is this thing actually moving the needle in carbon?

And then they come to you, b zero, and say, alright. Tell me how legit this is. You know? Is there is there default risk? Is there you know, are they actually removing this carbon? Is that how this works?

Kind of. I mean, let's just start maybe just start by saying sort of the the the basic building blocks. You need to understand a project life cycle to understand how we we, you know, contribute to it. So a developer will be an organization that sees you know, wants to have a physical, intervention in in nature or build something from a technology perspective, which they think can have a climatic impact.

And by monetizing that climate impact Just to ask you there.

So what what what would be an example of these kind of projects?

Yeah. So it could be, regrowing a forest. It could be, what's called improved forest management. So you, you know, you you slow down the pace of logging, and you actually have more, growth in the trees over a longer period.

It could be, more sustainable harvesting. You could have just deforestation avoidance. Could be mangrove restoration. Could be soil restoration.

Could be huge amounts of agricultural, practices, through to quite kind of innovative technologies like direct direct air capture, biochar, which is like a hybrid. It's kind of sort of basically putting, organic matter, burned organic matter onto the to the ground and locking the carbon. In that way, it can be, you know, all kinds of quite exotic ocean activities.

And then, you know, older times, it was things like cookstoves where you replace basically charcoal with types of cooking fuel stoves, or even renewable energy. And, basically, the whole idea is by having this additional revenue associated with this activity, yeah, the intervention can take place. Right? And so additionality, which is the extent to which you need the money to, to actually do the activity, is a big part of the carbon market lingo bingo, which is it's sometimes a bit too oppressive, the lingo bingo in this market. But that is really that's the essence of a carbon credit from another type of of of green finance.

And all of those activities in you'd hope, by monetizing the climate impact, have a high likelihood or have any likelihood of actually taking place. Now that's the first thing. Right? Is there an intervention from which setting the the the climate benefit would, you know, therefore finance it?

And then you've got investors who will say, okay. Well, I'll give you the capital to do it, and they might want a financial return or credits in return. Then you have intermediaries, which can be transaction venues, like exchanges and marketplaces, or it can be brokers, like dealer brokers. And then you have the buyers.

And the buyers, you know, as you said, they said the buyers who want to kind of offset some of their emissions. The thing to to that gets a bit tricky is the bigger players wear many hats.

So, you know, biggest clients will buy them for their own corporate footprint, will maybe invest in them for their own speculative or potentially future, you know, return basis, and potentially trade them. Some of them even develop them themselves. So I think with that regard, as they start to deploy more money in this space, so that, in other words, financial terms, they have more risk exposure, they care more and more about stuff like, how do I actually understand these assets? How do I understand these instruments? How do I understand the impact these things are having? So the first thing that a rating does is just try to explain it, all of these different types of of activities, in one coherent sort of system of analysis, language of risk, whatever you wanna call it, which is, you know, three main risk drivers. Do you need the money to do that activity, additionality?

Is it actually having the impact? It's saying it is carbon accounting, and it will be there. Will it be there at the time it's promised, which is permanent?

Some people call that durability.

And then, like, we're going, okay. Well, all of these characteristics are common. Doesn't matter if you're a forest in Zimbabwe or you're a duck plant in Iceland, and they should therefore be comparable.

Like, that's the first thing you're doing. And then you're saying, well, a rating is essentially our our overarching view on, you know, all of those components coming together and saying to what extent will they actually deliver against this claim. And what you're trying to say is really the evidence submitted by the project should fully evidence its impact.

Like, you know, like, the the same as, evaluation of a stock should fully value the company, you know, appropriately. And if you think the price of the the company is is too high, sell it. If you think it's too low, buy it. You know, in a bond, if you think that the price of, your credit exposure is, you know, you're you're riskier, then I'm gonna offer you a higher rate of you know, higher lending rate to actually book to lend to you. In carbon credits, it's the problem that we're originally solving, which is interesting, is that when that buyer, as you said, is coming in to go, how do I know if this thing is actually having an impact?

The main transmission vehicle in all forms of of capitalism, something that I'm it's taking me many my whole career to appreciate fully, but is the price mechanism. And when you're in there, you go and buy this thing, you know, your, as you say, data company x, you'd expect that if you paid ten dollars, fifty dollars, or five hundred dollars, the five hundred dollar one would be a hell of a lot better than the ten dollar one. The problem that we encountered when we started and, you know, that's an area where we see the most impact of our rating is there was no correlation between price and quality.

And so the you know, before you could even start going, how do I understand the impact? Shouldn't the impact already be basically in the price? Because price is distribution of risk, and that's the information point that everyone uses. And so, actually, the whole system, the fabric of the way the market was exchanging and communicating and and transmissioning, information hadn't been built yet.

Right? So a rating is it's a psychology of analysis. It's it's a way of, like, creating a language of of of analysis. It's also about trying to re revive the price mechanism as the main information transmitter in the carbon market.

And, actually, the weird thing about the carbon market, to finish this point, is the marginal cost of delivering the activity, so keeping a forest standing through to building some sort of futuristic energy, is wildly different.

And in most markets, like an energy market, like, obviously, you know, like, you work in, kilowatt hours, a kilowatt hour, cheapest to cheapest to deliver, you know, is cheapest to deliver wherever the market clears. If you can you know, whatever your price is below the the market clearing price is your profit.

Like, doesn't really work like this here. You know, if I buy something for twenty dollars, maybe that's only cost fifty cents to create. Right? And that's a you know, it's a steal for the people that have actually have sold it to you or they're making off, like, a band there.

But or I've put my marginal cost of production is five hundred dollars, and, actually, I've sold it to you for two hundred, and I'm making you know, it's still ten times what the other the other credit is, but I'm I'm losing money. But even weirder, the twenty dollar one produced at fifty cents could be twice as good a quality. And then, like, so it's just, like, the whole thing wasn't really making sense, and that's what you're trying to kind of reestablish this traditional ways of understanding and interpreting this space. So to go back to your question, the buyer, they'd come to us and say, well, first of all, have you rated this project?

Okay. And you can get our ratings. They've been on you know, we've we've made them public since we launched. And they can, like, you know, get a freemium account and go, okay.

Have you rated, you know, project a? Yeah. Oh, yeah. Good. It's a it's interesting. It's a it's a it's a double b.

Right? So we think it's like a moderately moderate risk. You know? Like, it's okay. It's not great.

Maybe it's got some good sides, some bad sides. Maybe it's just mediocre all around.

And then they're gonna go, okay. Well, why do you think this? Oh, well, obviously, that's where you subscribe. You know?

You you can see all of the analysis that sits underneath that. Oh, okay. How does that compare to the other five projects that are similar in this region? You know, Northern Columbia or whatever.

Oh, it's the best. That's really interesting because it's not that higher rating, but it's the best of these types in that way. What what are they doing differently, and how does that you know, and why? Oh, but I've actually just been offered a similar project in Peru, and you've given it an a rating, but it's selling at eight dollars.

Well, obviously, buy the a one at eight eight dollars. Right? Because that's much cheaper. All this type of thinking, basically, believe it or not, wasn't really taking place.

Each individual corporate was going to an intermediary. They would have in house research teams who would say, you know, this is the good stuff. Right? But the old adage is Henry Ford, you know, you can buy any any model as long as it's black.

You just sell your own book. Right? That's the challenge that with obviously intermediaries.

Not to say they don't do great work. It's just to say that, obviously, if I'm selling you from a list of ten, how what's to say that I'm not gonna say the list of ten is the best? That's obviously the point of independent research. And then they go, okay.

That's good enough. And when we first started, you know, we we found that some credits were you could buy from some of these organizations were trading on the exchanges for less than a dollar and were available for purchase for corporates at fifteen dollars. You know, that that's quite outlandish spreads, right, to use a financial that's pretty outrageous. Right?

And, again, you know, they should know through the rating, one, why and to what extent is this having an impact, and two, how the hell do I decipher the price action in the market with a quality reference point or a quality benchmark?

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Enjoy the conversation.

So before b zero came along then, was the obviously, your play is partially a transparency play. Right? You're you're shining a light on a market and what is turning into a commodity.

In fact, I was interested to know, do you is carbon a commodity? Yeah. How do you think about that? Shining a light on that, and that that must, expose all sorts of things, good and bad, in in the market. You've alluded to a few of those things. But can you just talk a little bit about when you first shine a light on this market, you know, what what's the what's the feeling you get?

Disclosure in the voluntary carbon market is actually not bad. I prefer the word disclosure often to transparency, but it's patchy. The quality of the data is quite poor, both language and numbers. It's very inconsistent.

But, actually, all of the criticisms and act and the foundation of of my entire business and the people that also deliver carbon ratings and associated diligence products, was based on the fact that a lot of that information was disclosed. So we had a starting point to go in. It's not quite the same as quarterly earnings, but we had a starting point to go in and read these very, very convoluted and and long winded reports that would be submitted to the creditors and try to figure out what this project was actually saying it was doing, turn it into a system and language of analysis, and then repackage it as a rating, you know, with our analysis overlaid it.

So, funnily enough, we would never have been able to get into this space if there wasn't actually half decent disclosure to begin with. And the irony with the compliance market, that's where governments are saying you have to buy them under our government backed schemes, is that they're actually very opaque. So one of the one of the findings, I think, is, like, the in the voluntary is about your compulsion to buy. So in the voluntary carbon market, you're not compelled to buy.

People buy them voluntarily, but disclosure is mandatory at an accredited level. In the compliance credit market, purchasing is compulsory, but disclosure isn't. So you have this weird way around where, actually, you'd think of of government markets to be better, but they're actually much more opaque and not necessarily better. So the first thing was just to say is that it wasn't actually that bad, the disclosure.

It just was very, let's just say, like, herding cats to begin with. The second thing to say is, well, if you start to try to figure out how to assess these things and apply traditional rigor like benchmarks, distributional analysis, you know, you you remodel them and you do back you know, bottom up analysis of the same assumptions and you find that they're wildly different or they're very similar, confidence interval analysis, stuff like that, you actually realize that they're just a very large distribution. You know? There's good there's good.

There's alright. There's less good. There's highly speculative. But the language that we prefer to use is that that is a risk spectrum as opposed to the more language of morality, which is, like, good and bad, which I think is a pervasive and often corrosive tendency amongst the environmental movement, which is to say that they use moral language when what you're trying to redo is get people to pay for their impact and use much less dispatch much more dispassionate and less a moral language of just like, well, you know, would you pay top dollar for something that's having very low impact?

No. Right? You know, you wouldn't pay top dollar for a really low quality super processed piece of food, so why would you expect to do that here? You know, you're not calling that person that created the processed food immoral.

You're just saying that that's obviously you know, that's rubbish in, rubbish out. Right? So I think anyway. So I I that was another thing that we were trying to do was, like I'll give you a case I'll give you an example.

In the early days, people would project the the impact of deforestation for up to ten years before reassessing whether actually that projection was accurate.

Could you imagine putting a couple of million or even more behind that thing going, oh, look. I'm really, really confident that this forest, you know, was was definitely under a threat and was gonna be just, you know, deforested, and these guys are doing a fantastic job to to protect it.

And the forecasting error could possibly be infinity.

Right? You know, obviously, that's like and then you don't check for ten years.

And this is this is, like, deep, super complicated ecological, assessments using blends of, like, ground truthing, remote sensing, experimental, like, forestry analysis, and you don't reassess it for ten years, you imagine the forecasting error. So, like, irrespective of using the words of morality, you're like you could say, yeah. You were fully greenwashing. Or you could just go, you know what?

This is a frontier asset with a very small amount of money that's gone into it. Experimental buyers, the best thing you could say about them is that they're at least putting a price in their emissions and trying. And the project developers, well, they're at least trying to figure out how to build this thing and use some methodologies to do it. Like, for me, that's kinda cool.

That's the way things get built. Or you could turn around to go, you know, you were lying. You were just so you know, embellishing.

You know, you you would you never knew. Yeah. Sure. But I reckon none of them knew.

Right? And if you hand on heart in the dark pantheon of their, like, of their souls, they could not have for a second thought that they're gonna be a hundred percent accurate ten years from now on a bunch of experimental data, nor should they held be held to that standard. Right? That that's just, for me, that's, like, nonsense.

But, again, back to the sort of corrosive activity of the green movement, they're very, and I'm part of it, but, you know, we can be very, self flagellating.

And and and making objective things subjective for for the the short term gain of getting an emotive response. For the long term is, as you say, it can it can erode it can just make people think, none of it's none of it's real. None of it's true.

But that that's easier. Yeah. Just to bank that point. There's the two wings of it, which is I shouldn't have to pay for environmental impact ever, and therefore, I won't, you know, make everything I wanna discredit everything.

Or there is, like, the over well, there was just, like, literally puritanical agenda of, you know, unless it's perfect, everything else is basically just rotten, which is also just nonsense. And so, you know, you're kinda stuck halfway in between. You can never be pure enough, and you can never be, or you're basically on the wrong side of it because you're trying to make me make me pay for something I shouldn't have to pay for. So, yeah, yeah, you're right.

It's it's it's a real pickle, but this is, like, you know, this is a markets based solution to try to actually get people to pay for emissions and create jobs and growth out of that activity, which really winds up a lot of people on both sides of that.

So so I wanna try and get my wording right here. But and so forgive any clumsy language, but how do you find the challenge of, a a lot of and you'll have the numbers better than me. But, I mean, you talk about East Africa, for example, being a carbon market powerhouse.

And a lot of the the the carbon removing or carbon market activity happens towards the fringes of the OECD and sometimes in in in in nations where the rule of law or the the the sophistication of the markets isn't isn't necessarily at the same standard as as what, we are privileged to grow up with. And so how do you how do you make those things all all work out operating in regions which much of the world you know, they don't have as developed capital markets, and therefore, they don't have as developed legal systems and and all those things. And if you're listening to this and and I've upset you in a way I've described that question, then, forgive me. But, hopefully, you know what I mean here, Tommy.

I'll give you an example of what you mean. There's only I but, well, the last time I looked, there's about forty companies with that actually issue bonds, and there's, you know, depending on how many you count, around two hundred countries in the world. So four fifths of the countries in the world are unable to issue debt as countries. So, you know, to just use a financial way of explaining it, no one in the world trusts four fifths of the companies to actually give them money to pay for their own sake.

Right? So that's another way of saying that. Yes. Very immature and, lower down or high in the corruption scales or low in the in institutional development scales, any of those sort of, like, you know, economist indices sort of things.

That's kind of the cool thing about working in an area which theoretically should lead to a massive wealth transfer from the global north to the global south because the global south is rich in carbon assets, if you wanna call it that way. And the Global North is short carbon, very short.

And, you know, that's one of the most exciting things particularly about the nature side of it, which is nature restoration and preservation should become an enormous multitrillion dollar industry, which should predominantly go from, you know, back from the channels of industrial production, which have been, you know, keeping the global north rich for the past three hundred years. So, like, that's really cool. But as you say, operating in countries that have bad rule of law, volatile policy environments, high corruption levels, well, what types of industries are expert at operating in those?

It's the miners, right, and the commodity trading houses and the companies that have and sell global commodities and ex from extractive industries. So it's little wonder that, you know, Vittols and Shells in this world are, you know, are predominant players in the carbon market, because they're the ones that have the biggest expertise in operating in those spaces. I think one thing that I would just mention is there was a the carbon market people listening for this will know what I mean, but there was a big scandal around selling misselling of a of a of a of a a scheme in in in a in a country in South Africa, not South Africa, but in Southern Africa.

And, it was the hundred and ninety five in the corruption list. And you're going like, why would the carbon market not have some aspects of fraud going on, but every other industry that operates in that country is totally riddled with issues to do with it. Like, why would it be different? Right?

And I'm not and I guess that's quite a cynical statement, but it's just to sort of say that's the reality sometimes. So back to this idea of such something slightly sanctimonious and puritanical, you know, that's kind of what it's like doing businesses in frontier countries. And, of course, you can export rules of engagement and export terms of engagement. But, also, that's the people that need the money the most, and I think that's just people need to be a bit more realistic about what it means to be doing business in some of these countries.

So, yeah, it's it's an interesting challenge. What I would say, though, is I don't think that there is a discernible difference between the project quality in the global south and global north. I think actually in many instances, in in certain types of projects, there's a higher quality in the global south. And the people that are working in those spaces from LatAm through to sort of Southeast Asia, scientists are very good all around the world.

Right? And there's loads of amazing institutions, amazing academic academics and and investors and developers everywhere. And, actually, showing the credibility of the impact, in some instances, is easier in those countries because they really were under threat. Right?

Whereas actually showing that in the Midwest and state of the US is harder. And so, actually, in some elements, it's the way in which you assess the carbon credit lends itself to having a positive spin towards many aspects of the global south. I think the the thing that's can be trickier is just, like, trying to get some of these countries sorry, some of these larger entities to want to buy in those countries. Like, there's a lot of buying behavior, which is the global north of the global north, and often people do wanna buy from the country that they operate in.

So there is quite a large prejudice often towards local supply, which tells you understandable, but slightly begets the idea that a dollar invested in East Africa is worth a hell of a lot more to to that economy than a a dollar invested in in in in eastern United States, for example. So it's so it's a complex issue. Right? But just because doing business in some of the world's poorest countries isn't always the most elegant process doesn't mean that, therefore, it's fundamentally an obstacle to delivering good projects, which I think is also quite interesting reference point in the market.

So just to go back on something you touched on earlier, I think it'd be really useful for our listeners if you're right you're right in the middle of this market. And, for many of us, myself included, it's not completely clear to me how a voluntary market works and a involuntary or compulsory or or whatever. Could you just give us the one zero one on those two things?

So let's maybe start at the very top, which is, paying for your emissions through, instruments. There's three ways you can do it. A tax, like, you have to pay this tax based on what you pollute, which would be the simplest way to get everyone to pay for their emissions. Two, a cap and trade, which is basically you draw a big circle around a bunch of industries. You calculate how many emissions that they generate. You then say that's you're gonna reduce it by x percent every year, and you're allowed to buy and sell those permits based on whether you've beat or you've missed that target.

The third way is you try to create physical instruments, like carbon credits, from an actual intervention, and then the voluntary and compliance pertains to the reason as to why you're buying it. They're the same instrument. They're just a carbon credit. But in a voluntary sense, it's basically traditionally corporates or other organizations, could be individuals, who want to voluntarily buy this instrument to put a price in their emissions and try to address their impact.

On a compliance scheme, a bit like in cap and trade scheme, they're mandated to do that from the government, and they have to buy specific instruments which qualify for that regime. Now they could be the same project. It's just that they, you know, think about two different shops. One, you have to walk into and you have to buy what's on the shelf, and one, you don't have to walk into, but it's the same thing on the shelf. Right? So it could be that that's the case, or it could be that there's slightly different things on the shelves. But this idea of voluntary is quite a weird and quite a a hot potato for some people in the space because buying equities is voluntary.

Buying debt is voluntary. Like, you know, you're not not compelled to buy anything in a financial market. I do it because I think there's a potential return or whatever else may be. The carbon credit is the really thing that's important. And I think over time, it's most people think that they the two are gonna converge. And back to my shop analogy, there'll be one shop, and there may be differences about what you're allowed to do depending on which region you come from or, you know, which industry you work in. But, basically, they'll all be the same thing, and you have to just go in that, and you'll be told to by different government institutions.

The other way of saying that, by the way, is actually compliance comes from the government mandate. Voluntary technically comes from a consumer mandate. So the traditional reason why people bought those is because they wanted to say that by doing better, they would, be able to sell more, generally speaking. And, actually, the reason why you had the big scandal in two thousand and thirteen around carbon neutral was that people were saying, buy me because I'm doing good.

And then if you said, well, show me the things that you're saying are evidencing that you're doing good, but those are bad. So you've just said to me you're doing good, and I've just bought you because I thought you were doing good, and, actually, you're doing not anything or just actually bad. Shame on you. And so you also have this weird thing whereby the buyer in this market can be stung by all of the risk associated with the credit, which is also quite a weird way around.

Anyway, so the voluntary is and and compliance is about the mandate to buy. The carbon markets means that they're a carbon credit as opposed to an emissions allowance, And the distinction there is emissions allowance is a piece of paper, and a carbon credit is supposed to be backed by a physical intervention.

So then I've got it feels like I've got to ask this question, which is a bit of a trap. So is the voluntary carbon market, the assets in the voluntary carbon market, surely they're lower quality. Right?

No. That's not what we find. You've got to think about it like this, but there there are there are a bunch of organizations. I think thirty or the the main ones are Veera and Gold Standard. Then you got some new ones coming up that are isometric, which are called standard bodies, and their job is to write methodologies and basically check that you're doing what you say you do. And then you have government organizations that are doing it. But they're all just organizations writing rules and, you know, requirements for you to basically evidence what you're saying.

There's quite a big distribution amongst them all, you know, from the UN through to the private sector through to the NGO players. And I think we don't find that there is a inherent quality bias towards schemes or credits that comply with government schemes. I originally said to you that they are also the most opaque, so it's also not that easy to to assess some of these things, but we're not seeing that that is definitely a thing. The thing that is true is that it's a risk transfer.

So the risk is on you if you're buying it in the carbon market. The risk is on the government if you're buying it in the government market.

And, you know, the government told me to buy them. So what? The people can't see what I'm doing, but I'm shrugging my shoulders. But, like, like, it's not, you know, it's not my it's not my problem.

Right? Like, you know, Treasury told me to buy them, so I'm buying them. Whereas if you're like, well, no one told you to buy these credits. You did it because you wanted to show that you're doing good, you know, and you're not doing good.

So, you know, you you bear all the risks. So I think that the risk transfer element of it is really, really critical as a big positive to the compliance space. But the kind of Seritus paribus quality aspect is definitely, if anything, probably slightly the reverse. We find that the highest quality credits are generally ones that'd be coming from what you'd call compliance based, voluntary based schemes.

Because you got you got you sort of got more skin in the game if it's on you rather than being held to the fire to go and buy these these instruments. Yeah.

You've also got twenty years of methodology development in some of these organizations.

Yeah. And and and ahead of a lot of, let's say, constructive and destructive feedback on those methodologies.

We had one government. I won't mention who they are, but, like, you know, they kind of say, well, like, oh, we wanna rate some of your domestic compliance credits, and they were like, well, no. Oh, okay. Well, you know, normally, we just get around you by saying we'll go to the developers, and we'll get some of their their disclosure.

Like, no. We we refuse to let them disclose to you. Okay. What if we, under NDA and confidentiality, privately agree assess some of these things and come back to you and tell you what we found?

Cool. Well, we found that they're not very good. Yeah. Yeah. We're not gonna let you in.

So, also, like, from our perspective, like, why what's the incentive to some governments letting us come in as a unregulated hopefully, we get regulated, but an unregulated private sector actor actor taking their projects apart, comparing them to these more transparent publicly available reference points, identifying that these government institutions have actually baked these things at a lower quality than the NGOs who have derided, in some instances, by the press, which self, you know, respecting civil servant's gonna let me in. Right? It's like letting the fox in the in the chicken coop.

But that's also we're just trying to explain that's not what we're trying to do, by the way. We're not trying to be the fox in chicken coop. We're merely saying that these things should all be compared and contrasted and assessed in the same way. And if your rules are are are more lenient, then it's fine if no one cares because it's a risk transfer, but don't don't pretend for a second that they're they're they're the best thing since sliced bread because they're not.

So one of the things that strikes me from watching you over the years and looking on your website is that you spend a lot of time thinking about governance and frameworks, which I guess makes sense. Right? If you're gonna come in and and assess these assets, then you you gotta really think about how you do it in a, this is an emotive word, a fair way, or you're trying to you're essentially trying to make subjective things objective and comparable. Right? So how how do you how do you go about that? How do you think about that as a business?

Yeah. And one of our DDs for, I think, one of our investment rounds was like well, so often a question we get asked actually is like, who's, like, auditing you? You know, who who's telling us that you are, like, you're kosher?

So there's that aspect of it. And then on the other side of it, a business model which you're kinda touching on is a rating agency business model is a very, very specific business model.

And there is a, you know, multi well, hundreds of billion dollar industry for regulated industry in the bond and credit rating space where the do's and don'ts are unbelievably strict. Right? And if you I used to be a regulator and ecotenalist, but, you know, if you break those rules, you go to jail. Right?

There's no, like, no, oh, you know, slap on the wrist stuff. Right? This is really serious serious, you know, regulated practice stuff. And the key thing that you have is that you're independent and that, actually, you don't have anything that can, potentially cause you to have a, you know, a a conflicted view or, you know, potentially create create an outcome for a rating, which can, you know, lead to a prejudicial view for one stakeholder group or whatever.

And then what we use is, you know, which is, I think, pretty reasonable, is that we use basically all of the building blocks of financial ratings, system. So no buying and selling, no post developing, no specific design advisory, no products like, obviously, buy a set of matching and these sort of, like, investment support sort of products. You've seen no commission structures, payments. There's no results based payments.

You know, you you don't you don't just get to pay me when you got the result you wanted. You have to pay me upfront and you find out afterwards. And then, obviously, disclosing all the ratings once they're once they're public to everyone. Right?

And, like, that that's the building blocks. There's a quite an age old debate in in rating agencies, which is like buyer pay versus developer pay. Should the buyer be paying and that's a less conflicted model, or should you allow issuers to pay? If you look at the regulations and the history of the regulations, and, sadly, for me, I've read a lot of that, It's about managing the conflicts.

There's always potential perceptions of conflicts. You know? Oh, well, if the developer pays you, then surely you're just pump priming the outcome to give them what they want. Well, I can tell you that my legal fee is just that they don't always get what they want, and they get very, judicial sorry.

They get very litigious when they don't get what they want. So that's certainly an evidence point that we are pretty independent. On the other side, if you're already long these things and you just wanna be told to buy good things, there's just as much evidence showing buyer pay models are just as conflicted as issuer pay models. Because if you're just subscribing to something that tells you what you wanna hear, isn't that driving subscription?

So, you know, both of them have potential issues. I think where the regulators in European, you know, FCA, US regulators have come down on is say, right, these are the do's and don'ts. And we apply those ones as they pertain to the financial markets. But, you know, it is different, and maybe they'll come down differently as they get regulated.

On the governance point, we're one of the biggest private sector science teams in the whole global carbon market. The team has published, you know, tens of thousands of academic papers across all different disciplines.

We've, at this point, spent, I don't know, King's ransom, a lot of Molten's money, seventy, eighty million on building analytical infrastructure to assess this very niche asset class.

That that, to be honest, you know, do I need to have a professor to like, we have an advisory panel, and they're really good, but, like, you know, that is evidence enough, right, that we have, you know, we have nearly two hundred clients paying us to do this work. You don't think you think Microsoft is gonna keep paying us? They think that we're not we're not good at what we do. You know, we are a company that lives and buys dies by our brand and our reputation.

So for me, the the whole, like, oh, you know, I've got this scientific advisory panel, and they basically rubberstand what I do, and therefore, what I do is credible.

I think that's, like, that's that's inferior to saying I live and die by the quality of the work that I do. I make that quality of work publicly available, and therefore, I treat others like I like like like I want to be treated myself, which is to say, if you think my view's rubbish and we definitely didn't nail every view at the beginning, then, you know, we'll be held accountable to that. And, you know, we better fix it up sharp and be humble and stay stay, you know, stay learning and stay engaged in the market because that's way more important way of building credibility than just basically going, I've got eight professors who are gonna basically tell you that this is good.

Because that's a markets based approach. Right? Like, you let you know, you expose your view. You let all the experts interrogate your view, and then people basically coalesce around whether they agree or not with you.

That's for me a way more intrusive and extensive way of having a conversation about the quality of your work than basically going, nothing to see here. Some really great people have done that. And my twist to that would say, but the very people that you might want to get on your advisory panels are the people that I have as staff. So, like, I'm actually already employing those people who would have just been out of universities anyway to do this, but they're just now getting better paid in the private sector by doing a, you know, better job than they would have been there.

So it's not even like we're going and having, like, bad you know? So I'm also squaring that circle by hiring very many of those people. But it's it's a fascinating question. I think our independence is everything, and the quality of our work is always improving because we expose it to so many people, and that allows us to get a lot of sometimes acerbic, sometimes very happy feedback, and, yeah, the analysts to live and learn.

And, Tommy, I wanna come on to my final question for you, which is my favorite, which is what is your contrarian view?

Man United will get Champions League qualifying. It's probably quite a good one. What is my contrarian view of the carbon market or of the environmental space? Like, what's the subject?

Everything's in scope. Whatever you want.

My contrarian view, fine. A bit more zeitgeisty.

AI will take much longer to be adopted in earnest than is current than the kind of urban hype cycle is really suggesting today. It's mispriced because the energy production, that goes into it is basically not paying for its true environmental impact, and it's all being subsidized by, you know, equity anyway at the moment. And as that gets repriced, that will slow down the adoption cycle.

So, yeah, I think the AI AI adoption bubble will be slower to to slower to be, take place than than than a lot of people think. The other contrarian view would be, I guess, I don't know if it's as contrarian, but the politics of the environmental movement is now is is returning.

Having hoped for many people, including me, like, that would be good for the twenty twenties, it's now emerging as being a very negative, headwind, if you will, for for for the environmental movement.

Actually, getting getting in the way.

Yeah. And, actually, you know, net zero as is being drawn as, like, a tax, basically, on consumption and and on businesses.

And I think the contrarian view would be things probably need you know, will probably get a bit worse in the short term. But, equally, I do think that we're gonna emerge from whatever the financial model is that emerges next few years with the green economy at its heart because I don't really see a way out, basically. The only way a way to make create new jobs and new growth is to revalue our environmental impact, and that is basically, will create and unlock trillions of dollars to to actually get people doing things. So that's not even that contrarian, but that will be my other one.

Excellent. Well, Tommy, I know you you're a very busy man, so thank you for taking the time to speak to us. And, if you'd like to learn more about what b zero and Tommy are up to, do go to their website. There's loads of incredible content on there, and you can you can click in and see all of these different assets and and what b zero are up to.

And, if you wanna learn more about carbon markets, we're gonna do a few more episodes on this in the next, ten or so episodes. So watch this space, and do not forget to like, subscribe and hit all the good buttons. They mean the world to us. So thank you, Tommy, for coming on and joining us.

Thank you very much for having me.