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welcome to smarter markets a free weekly podcast featuring stories from the entrepreneurs and icons of commodities capital markets and technology ranting on the inadequacies of our systems and riffing on ideas for how to solve them together we explore the questions is capitalism in crisis and will building smarter markets be the antidote and now here's your host eric townsend welcome to the 15th episode of smarter markets a weekly podcast that explores how financial markets could be redesigned and improved to better serve market participants and society as a whole smarter markets is made possible by a grant from abex technologies i'm your host eric townsend arguably the most important point we've heard in this series was when goldman sachs commodities chief jeffrey curry told us that the single most important challenge the industry faces is putting a price on carbon in a market system that offers efficient price discovery so my guest this week will be bill pesos a man who's doing exactly that bill is co-founder and ceo of air carbon exchange a company in the business of bringing the trading systems used in the conventional commodities market to the carbon trading market we'll discuss the history of carbon offset trading the challenges the industry now faces and what the future holds for what jeff curry described as the single most important challenge we face and the evolution toward smarter markets that better serve investors and society as a whole my interview with air carpet exchange co-founder bill pesos is coming up next [Music] and now with this week's special guest here's your host eric townsend bill thanks so much for joining me on smarter markets it's great to have you on the program i want to start by going back to a conversation that i had with jeff curry the commodities chief for goldman sachs who said that the single biggest and most important challenge that we face in this whole esg revolution is going to be putting a price on carbon with efficient price discovery i want to come back to that as the the main topic of the interview but why don't we start with the history of this because you've been in this market for a long time a lot of our listeners probably don't know i certainly don't know when did people first start trading carbon credits how did this come about and what's the history of both what's gone well and what's gone wrong from when it started to where we are today well thank you so much eric i'm very pleased to be here the story is uh is a bit of a windy road and interestingly it starts with the united states you'll recall that we used to have acid rain and at the time the united states came up with a cap and trade scheme that basically made power companies uh in the new england region curtail their emissions of socks and nox and actually trade around them and incentivize them with market forces to do so and lo and behold we don't have an acid rain problem today so when the council of parties meeting i believe it was the third one if i'm not mistaken in rio in 92 came about and everybody around the world including the united states rallied around this idea that climate change was real and that it was a man-made problem the united states was the first one to say well we have a solution for you we can control greenhouse gases by using the same format that we used to control socks and nox so it was actually the united states that recommended a cap and trade scheme as a solution for climate change it was not as is the case with a lot of these u.n driven issues it was not until 97 with the kyoto protocol that you had the makings of a global carbon market unfortunately that coincided with a period of of negotiations around the world and political wrangling the biggest problem with the cop construct is that 192 countries around the world or i think it's 196 participate in the cop meetings and they each have a equal vote so you need a consensus around 196 countries to get things done so even though the kyoto protocol which set the stage for the global carbon markets was designed and agreed in 97 it was not until 2005 february of 2005 that the kyoto protocol was ratified by a significant number of countries sufficient number of countries unfortunately the us at the time was the president was bush and so his political background is is in the oil-producing states in the united states and so it was very difficult for him politically to subscribe to the kyoto protocol so the u.s has sort of sat on the sidelines until very recently the cap and trade scheme then began really with the eu putting most of the impetus in the market they created the european emission trading scheme and uh under the european emission trading scheme carbon credits from around the world found a home and that created the first price signal in the carbon markets i think at its peak we were talking about as much as 15 euros a ton for carbon credits in the what's now called the voluntary space let's talk a little bit more about the voluntary versus regulatory markets as i understand it that's kind of the division of carbon trading there are credits that are associated with a government tells you if you do this you must buy a credit for it versus the voluntary space where you know responsible uh people who are traveling on airlines want to do their part to buy an offset credit to you know equalize or neutralize the effect of their travel on the environment how big are each of these markets how how much of the carbon trading is regulatory versus voluntary and where is it headed well i think the biggest the biggest difference between the voluntary carbon markets and the compliance carbon markets it's really that the compliance markets don't use carbon credits so you know you'll find people saying oh carbon credits prices are you know 30 euros a ton in europe well that's actually not the case so the division is as follows so the compliance markets typically have what are called allowances so they define a group of industries within their borders that they want to cap their respective emissions and they simply cap them by giving them certificates which are called allowances denominated in tons of carbon that basically say you know if you have a corporate that just as an example let's say they emitted a million tons last year the government would give them let's say 800 000 tons of allowances so if they emitted more than 800 000 tons they'd had to go have to go into the market and buy allowances if they managed to reduce their emissions below the 800 000 then they could sell the the additional the the surplus allowances that they were given so the universe of carbon of allowances in any particular market is dictated by the governments and that's why governments play such an important part in in creating scarcity and then by definition creating a price signal the voluntary carbon markets are different basically every carbon credit represents a savings of carbon denominated in tons of carbon below a business as usual so if you take for example i think where you know there's a big emphasis on on forestry projects lately so if you if you take a look at a at a any particular forest and you want to save that forest and and get paid for doing that in the form of carbon credits it's not an easy process but in simple terms the process is the first thing you need to do is quantify how much carbon is actually sitting in that forest right so that people have this vision in their minds where they think forests are are lungs that sort of eternally take carbon out of the atmosphere and really they they're more like a box of carbon right so a forest reaches a maturity level and all the carbon is sequestered in the form of trees and trunks and leaves and branches and and and as they mature they reach a peak and so you have the total amount of of carbon that sits in that box right so the next thing you need to do is determine how quickly that that forest would deforest if you didn't do anything so let's assume that the deforestation rate would tell you that if we don't do anything this forest will be gone in 10 years and let's say there is a million tons of carbon you've quantified there's a million tons of carbon in that forest what will end up happening is that um every year that you've saved that forest from deforestation so by extension you've saved the world from releasing 100 000 new tons of carbon into the atmosphere so you get the project registered it's audited it's super transparent there's a very robust infrastructure for doing this and several registries around the world give you the methodology to monitor report and verify all of this you'll typically you'll you'll hear a lot of mrv being talked to bandied about and you send the auditor in every year and the auditor confirms that the carbon is still in the forest and they issue you a certificate which you then convert into a carbon credit which can be sold to a company that wants to offset their emissions due to their activity that they're unable to to reduce internally so you know you're a bank and and the business model of banks is to fly bankers all around the world you know so in order to mitigate that activity you buy the carbon credit so the carbon credit actually is a way of in essence financing that forestry project so those are the two main differences now jeff curry told us that we don't really have an efficient carbon market you know you look at the crude oil market everybody knows the price of crude oil there's three benchmark contracts everything in the world in terms of different grades and locations is all priced off of those contracts the case of carbon it's kind of one country has these rules another country has those rules what is the current state of this market how would you describe both where it stands right now and where it needs to go in order to achieve that goal jeff described of getting to having a efficiently discovered price on carbon i use this analogy a lot to to explain where the carbon markets are today so if you sort of distill what jeff said was he he's basically saying that the carbon markets are are not trading within traditional commodities architecture and what what he means by that and i i usually use soybeans as an example if you had to create a parallel between the soybean market and the current carbon markets it would be as if you were driving a truck of soybeans around chicago looking for a buyer literally you would let's say drive up to one of the big trading houses you'd have to convince the trader to come downstairs to the street and you would end up having an entire conversation about the truck where where did you plant the beans when did you pick them what kind of beans are they etc that's how the market for carbon credits trades today on a truck-by-truck basis literally if you're going to buy carbon credits today you're going to have a conversation with someone and they will tell you where the forest is when they started the activity where they registered it etc and so today carbon credits trade more like paintings or sailboats and less like traditional commodities is it a goal that they should trade like regular commodities or is there something inherent to them that makes them unsuitable for trading that way well what we are doing at acx is bringing traditional commodities architecture to the carbon markets so what happens in our soybean example is that they you know the exchanges have warehouse networks they agree on a specification of soybeans that they allow into those warehouses they're deposited the the underlying product is deposited into the warehouse and effectively digital receipts that represent you know the the product the commodity in the warehouse it is what trades on the exchange and no one within the commodity space ever thinks about you know that truck of soybeans anymore so we're doing the same thing at acx the idea is that we instead of warehouses we create trusts the definition of those trusts are along market demand so for example the first trust that we created securitized credits that were eligible under the international aviation scheme which is called corsia and so if you have a carbon credit that's eligible under that under that process what you do is you send it into our exchange and we create a digital receipt on our exchange which you can then trade and they're completely fungible no one then needs to say you know is this a good project is that a bad project etc you know this you know the general specifications of the asset class and it creates immediate price discovery with the tight market if you if you look at again if you look at traditional commodities architecture let's think of soybeans again on on one side you've got farmers and on the other side you have food companies but they represent maybe let's call it five percent of the total trading in the market the other 95 is actually you know speculators hedgers banks financiers you know liquidity providers etc in the carbon markets that's flipped around 95 are project developers and corporates that are buying for retirement and only five percent are actually providing liquidity and all of the other price pressure on on on carbon credits and the bottleneck for that money to come into the market is the structure of the market itself it's structured like you know buying a carbon credits like buying a sailboat so it's very difficult to make a call on going long the asset class and you know there's literally trillions of dollars in the hedge fund industry that that is aware that we're moving into a carbon constrained world and you know they just don't have a vehicle to put that money to work uh we're hoping to do that by you know securitizing credits into tradable instruments let me make sure that i understood what you just said right now i happen to be long crude oil futures because i think between secular inflation and the supply destruction that occurred in the covid crisis and an expected return of demand prices are likely to go up it sounds like you're saying there are hedge funds and other financial actors who would like to speculate and be long carbon futures because they can see that the the whole future of where society is headed is toward a more environmentally conscious outcome a green energy revolution if you will it sounds like you're saying right now there just is no way you know in other investments you can invest in the companies or you can invest in the commodity directly when it comes to green tech you can invest in the companies but you can't really invest in the commodity directly right now is that a fair summary in the carbon market yes you know there are some of the larger industry producing entities out there have come up with carbon indices but uh when you sort of mine down into what they've created these indices are imperfect at best you know they're a bit of a dog's breakfast they they include in the same index for example the california cap and trade scheme as well as the european trading scheme so both of those have exactly zero in common so other than they are both sort of climate focused so it's a very it's very difficult for companies today to gain exposure to the asset class in a pure way is the asset class something that there's reason to have a secular bullish view on i mean certainly i believe in the the green energy revolution it's going to change the world that we live in completely it's a major trend but you could look at that one of two ways you could say well therefore you want to invest in carbon credits because there's going to be much more demand for them or you could say wait what the world needs to do in order to make the world a better place is we need to make carbon credits more readily available at lower prices so that it's easier to buy them to offset our consumption and therefore there's perhaps no real reason to expect price appreciation in carbon credits because hopefully the outcome that we get to is one where prices don't appreciate but rather the credits become more plentiful and more available does it make sense to to speculate on the long side of of carbon credits for the purpose of price appreciation yes it definitely makes sense i'll give you an example of several maybe about 10 years or so ago the price of carbon credits was at about 11 euros a ton and i personally invested in and owned a part of 22 pig farm bio digesters i don't know anything about pigs but i can tell you that i was very willing to invest in the bio digesters because i was creating carbon credits at about two euros a ton and the market was willing to pay me 11 euros a ton for that so the higher the price of carbon the more private equity and long-term funding is released into climate mitigating activities the lower the price of carbon the more difficult it is to finance climate mitigating activities so it's it's um you know having low prices of carbon credits simply it means that either we've solved climate change right so if we we get to a point where there really is no longer a climate question so we've all moved to ev vehicles and we've sort of cracked the nut on storage and we've you know changed our behavior and all of that the price of carbon should float down to zero we are decades and decades away from that point the other you know negative influence on the price is again if there's zero political will right so if you get government leaders that come in and say well you know climate change doesn't exist or yeah it exists but we can't afford it or you know whatever it is then you've put yourself in a situation where prices will collapse and that's what happened post 2012 let's talk more about where this is headed as things stand currently it seems to me like where we kind of stand is everybody agrees there really needs to be a carbon market but nobody's really sure what the definitive central carbon market is so there's a bunch of little ones and there's no real clarity as as to what the global standard is if you will is that what we need as a global standard or is it a matter of there being other problems that need to be solved first in order to make these carbon markets more appealing what are the challenges and what needs to happen in order to get that vision of efficient price discovery for the price of of uh carbon credits and carbon emissions on a global basis i think what needs to happen is actually happening you know governments around the world are are adopting processes and policies that at the end of the day put a price on carbon and once you've put a price on carbon you start changing the way people behave so for example with abex we're working very closely on providing an instrument that would allow the shipment of lng from point a to point b for example to be to to have a carbon contract attached to it that would in essence deliver a carbon neutral lng experience and you know that that's easier said than done it involves addressing a standard and having the industry coalesce around a global standard that's acceptable now i'm very skeptical of any activity that is that is initiated from the top down i think if you know you mentioned a couple of oil contracts like brent etc uh those were contracts that were sort of organically uh created they weren't created on a you know on a uh with powerpoints in a committee and that sort of thing they they basically became benchmarks and there's you know wti etc and so i'm i'm more of the i believe that you know the carbon markets will i think at last count i think there are about 27 different carbon markets that were coalescing around the world the importance of the voluntary market is that almost all of them are accepting voluntary credits in one shape or another and so the global price of carbon is going to be a sort of average of all of these competing local markets so i think we're moving in that direction we're moving well in that direction but we should be very leery of any attempts to sort of top down design a market i think that's a that's a misguided endeavor with respect to fungibility of these credits it seems to me that i would think there would be a big challenge to that in the sense you know if you look at the crude oil market you've got a contract like brent which pretty much sets the seabourn price for crude oil globally and everybody just sort of agrees on that there's no pressure for anyone to say there has to be a different market in in my country because everybody's happy to price off of that contract i would think that governments if what you're saying is we're going to create these carbon credits which people are going to buy well most governments would be saying i i want the projects which are going to focus on reforestation and and you know building environmentally friendly things i want them happening in my country i don't want people in my country buying credits on some futures exchange which means that you know canadians or americans end up getting all kinds of environmental projects built at our expense i want that money going into my country am i misunderstanding it is that something that's a real concern i would just be afraid that governments would want to over control what i would otherwise hope would be a free market for carbon credits that's an interesting point governments are currently fighting it out if you will at the council of party meetings that it's set up by the united nations framework convention on climate change the cop meetings the next one is in november the 26th meeting and it'll be in glasgow there under the paris accords there's something called article 6 that establishes the framework for global a global carbon offsetting scheme or global trading scheme on a global basis the biggest issue amongst countries is what they call corresponding adjustments so under the paris accords every country puts in a voluntary cap on their emissions they agree to trade and what article six basically brings into the mix is that if a country has an excess of credits over and above their stated cap they can sell it to a country that doesn't and vice versa so you're creating sort of this this global infrastructure to to trade credits the the biggest issue there is what's called corresponding adjustments and the voluntary space overlays this entire space so just to give you an example let's say i don't know apple in california buys credits from a forest in indonesia you have to make sure that indonesia is not counting that as their reduction if apple in california is also counting it as a reduction so you can imagine how unwieldy that can possibly be so there's a there's a lot of there's a lot of cross-border issues that in my mind you should keep away from the voluntary space it just becomes a little bit too unwieldy you said earlier that we should not try to design a market from the top down and i agree with you completely it makes the most sense to allow free markets to figure these things out in a lot of cases but with respect to that how far along are we in the process what are the the next few hurdles if you will that we need to overcome in order to eventually evolve toward that vision of fungible and efficiently price discovered carbon credits well i think one of the things that happened you know about 18 months ago or two years ago i think now time does fly is that icao the international civil aviation organization which basically rules global air travel set up something called the tab the technical advisory board and they came up with corsia which is the carbon offset reduction scheme for international aviation it's an interesting concept in that corsias has set a baseline of 2019 as the as the airline's baseline airline industries baseline the first phase goes from 2020 to 2023 and post 2023 the airlines will audit their positions in terms of how much extra travel they did over and above the 2019 baseline they will quantify that in tons of carbon and on in 2025 they will deliver to their respective regulators carbon credits to offset that emissions those emissions the tab has defined the carbon credits that are eligible for that program so it's the first time you ever have a carbon specification that's actually global in nature and cross uh cross border so that's a huge breakthrough in the market so you know how you were talking about the the the sort of strengths of brent as a as an index and it's something that um as a price point as a benchmark corcia has the possibility of becoming that benchmark it's a it it is a controversial benchmark but it is one nonetheless because the airline industry accounts for two and a half percent of the world's of the world's greenhouse gas emissions and and so it's an important benchmark however you know the i think the total the total supply of carbon credits if you on the defined basket that corsia is uh has outlined is about 178 million tons total demand prior to covet for the first phase was expected to be about 90 or 100 million tons so it was over oversupplied and now with covid it's highly likely that actual demand for corsea eligible credits will be nearer to zero and as such there you know i think on our platform it's trading at about a dollar 20 now is the bid price on uh the buys the buy side on on corsi eligible credits so the corsia benchmark if it becomes a benchmark is currently controlled by the aviation industry or by iko which is the the aviation industry's sort of self-regulatory body in your opinion is that a good place for it does it i mean sometimes these things just evolve and they either make sense or they don't make sense is this something where if it evolved that way and iko was kind of in charge of the benchmark carbon contract that all other industries were using would that be a good thing or a bad thing it's a it's it is a thing uh it's it's very difficult to say if it's going to be an excellent if it's an excellent idea or not i think it's it is a good thing personally and the reason my reasoning is is sort of couched on the on the technical advisory board which which we call the tab it's comprised of 19 individuals i believe from different countries around the world extremely knowledgeable individuals within the carbon markets representing 19 different countries these are you know individuals that have represented their countries respectively at the council of party meetings uh they have a a very deep understanding of the carbon i don't want to say carbon markets but of capping of carbon credits and and such and so what ends up happening is that you have you know 19 very large players in the aviation industry which by default are also probably the 19 countries that actually matter in terms of mitigating climate change negotiating in a room around a benchmark and so what you find is that you know it becomes it's a it's a globally negotiated benchmark it's almost like a microcosm of the un negotiations the broader cop meetings instead of having 196 countries you have 19 countries around sitting around a table negotiating a standard that then goes for approval across the across the iko membership but what's interesting about iko even though it's a un body a simple majority is necessary for getting things done whereas in the cop meetings things are done on a on a consensus basis on a full consensus basis so i think it i think it's it's a it's very worthwhile it's divided into different phases so you know i think the first phase being a trial phase being a negotiated phase they allowed carbon credits that are maybe not as rigorous as as some people on the on the green side of the spectrum would would want there's enough rigor in it that the airline industry is not completely comfortable with with the specification and as time goes on every single phase i think the tab will tighten the screws in order to get to the climate goals that they've set now you said earlier that one of the things that you're looking at is trying to get rid of that trucker talking to the trader model where instead of having each uh each project selling its its credits wherever they can find a buyer that you really apply the the systems and the disciplines of commodity trading to this how ready is the world for that and what are the things that you're doing what are the challenges how are you approaching this it's it's an interesting paradigm i think what's what's happening in the carbon markets today is that a lot of the buy side activity at the corporate level is within the purview of the marketing department and the sustainability team the c-suite of most corporates are looking at the purchase of carbon credits and offsetting lesser and lesser to a lesser and lesser extent but still are looking at it as a uh marketing cost and not as a an actual business cost you know that's that's changing you you know you've just seen you know the likes of larry fink and and blackrock basically saying that you know c-suites that don't quantify and establish their climate change risks on their balance sheet are are basically negligent so that that that's changing but as the price of carbon starts increasing that activity of buying carbon credits for offsetting emissions is going to move away from the marketing department away from to a certain extent from the sustainability department and into the lab of the treasury department so the treasuries of these corporates are going to look to the sustainability team and say what are the characteristics that we're going to buy that group will determine the definition of what carbon credits are eligible for that company to buy and that will end their part of the of the conversation it will then sit in the treasury and it will be the treasury that will be motivated more than anything else by price and when that happens a lot of the barriers that we're finding today in terms of people not wanting to trade contracts because they're they they're just fixated on what is behind that contract that's going to melt away we actually saw that during the first kyoto phase when the european trading scheme told the 14 000 companies that comprise the european trading scheme that you know these are the carbon credits that are eligible for you to tender into the the first phase of the uets they immediately went and found the less expensive carbon credits now there's nothing wrong with inexpensive carbon credits that is the that's that's the point of a carbon credit market it forces the individual to find the absolutely less expensive way to mitigate a ton of carbon you're still mitigating a ton of carbon you're actually using the profit motive to to direct traffic first towards the most inexpensive way of mitigating a ton of carbon and then secondly you know the next cheapest and so forth so that is that is the the sort of driving force behind the carbon markets so you know there's nothing wrong with a cheap carbon credit it just means that you've successfully found the the less expensive way of mitigating a ton of carbon bill let's talk about elon musk obviously a very prominent and incredibly uh charismatic and persuasive personality who seems to influence a lot of people's thinking not mine so much but quite a few other people one of the narratives that you hear out there is tesla's not in the car business they're in the carbon credit business that's the way they make money is selling carbon credits not not making and selling cars is there any truth to that and let's take that question broader too if that's not true what is true and what does this market really look like and what is the impact of influential people who may have their own agenda such as elon musk yeah i've been hearing uh a lot about that lately and it's it um it's it's somewhat amusing you know within within the united states within california specifically they've instituted a a system that is similar to renewable energy credits around the world so renewable energy credits are set up in order to promote you know clean clean energy and so what the the renewable energy credits work the way they work is that they every megawatt that gets put into the system by a solar or a wind power project for example is given a renewable energy credit and every coal-fired power plant that puts a megawatt into into the grid needs to buy a renewable energy credit and attach it to that megawatt and so what that instrument that renewable energy credit actually is is a certificate that transfers capital away from polluting technologies to non-polluting technologies effectively you're making polluting technologies more expensive and non-polluting technologies less expensive it also promotes investment in renewable energy which will th n change behavior because as the industrial park or the the power plants the dirty power plants become obsolete they are replaced with clean power because of these these uh wrecks make it more expensive to to sell power so the california market instituted that same concept in the electric vehicle in the electric vehicle market so they came up with instead of rex uh they're these uh i can't remember the name of them right now i'll have to i'll have to look it up but i believe it's like zevs or something like that so they came up with these certificates that polluting vehicles have to buy these certificates when they sell a carbon credit into the california market and and elon musk and tesla receive these credits when they sell the vehicles into the california market so what ends up happening is that it's actually gm and ford and all these other companies that are transferring capital into elon and tesla's pockets in order to make that electric vehicle more competitive now if you take a step back and you think about the billions of dollars that were necessary in order to make that investment in those in that plant and take that risk of creating that entire infrastructure that would not have been possible without having that sort of renewable energy credit type of structure and now that he's taken that risk that he's put that factory in place and that the cars are being manufactured and sold it's it's now that that you're seeing the benefits of it but you know there was a lot of risk that was taken early on before we got to this point bill let's talk next about how these markets work and how secure they are from a fraud and credibility standpoint because it seems to me if i'm buying a physical commodity like crude oil or copper okay it's possible that i could buy a million barrels of crude oil in a tank in cushing oklahoma and i get to the tank and it turns out it's empty and the guy i bought it from has taken off to south america and i've lost my money frauds happen but you know they're really easy to find out you get there the tank is empty on the other hand if i bought carbon credits which requires somebody somewhere has supposedly planted a forest or or not cleared a forest or whatever the case is how do i know they didn't sell the same credit to two different people it just seems like there's a lot more opportunity for fraud and deception in a market where what you're buying is a credit that describes something somebody supposedly did that you don't really have any direct way of verifying is that something we should be concerned with and what is being done in the industry to assure that there is accountability behind the carbon trading market that's actually a good question but i don't think it's a problem in the carbon markets in the voluntary carbon markets there's a very robust registry system across two of the major registries one is the gold standard and the other one is vera voluntary carbon standard vira in particular probably accounts for 60 plus percent of the total voluntary carbon market registration process and the way to register a carbon project is extremely public in nature so it requires a carbon project developer to register their project with the with the registry and in that application they put all the particulars of the project including location etc that's evaluated by the registry itself but it's also within the process of doing this it is opened up for consultation worldwide so anyone can sort of handhold the project and keep an eye on a project as it goes through the registration process it's an extremely rigorous process and it's a very transparent public process once the project is registered as a carbon project it needs to do what it says it was going to do in the carbon in in the project itself get that activity audited and then take that audit certificate to the registry and the registry then issues the underlying carbon credit to the to the project developer so it's an extremely long process it's very transparent there is the possibility that a project owner could pick two different projects and decide to you know tweak the the underlying uh information somewhat but i believe that's that's extremely unlikely what is what is more likely is that someone could buy carbon credits announce to the world that they have mitigated carbon using those specific carbon credits and then sell those carbon credits onto the market without retiring them so that the underlying carbon credits would be used twice again that is relatively i i think that's that rarely happens and the reason for that is that the upside especially at the current market prices the upside for doing that is the the downside actually outweighs the upside by a country mile so i don't see as much fraud as a problem in this in this market let's talk more about what it means to bring the structure of commodity trading to carbon trading because as i think about commodity trading you know there's separate markets there's a spot market which is where most of the physical purchase and sale of commodities that actually get physically delivered occurs but most of the price discovery for that market actually occurs in the commodity futures market before the delivery occurs and i suppose in the context of carbon credits since there is no physical delivery of a carbon credit as a you know a thing that gets put on a truck someplace i guess you don't need a spot market you'd only have a futures market how would that work well we are at acx we are a spot commodity market so we we only operate in the spot market so any carbon credit that's purchased on our exchange is actually securitized on the exchange we are in the process of developing a forward market we have recently found out from the monetary authority of singapore that we our current regulatory framework is sufficient in order to to develop a futures contract and um and and so we are doing that we expect to launch a futures contract towards the end of q2 that's basically how the market is structured today now i saw a recent press announcement that our sponsor abbex technologies made a strategic investment in your company and i know how josh crum's mind works so he didn't do that just on a whim there must be a strategic partnership in mind here is the idea that abex would work with you to develop the futures contract to support your spot market or what's on the table here well i think the synergies are much more than just the futures market for us it's very very interesting that you know abex has a rmo licensed clearing clearinghouse in in singapore and we would like to sort of hang our hat on the avex platform in order to develop a futures product for for our securitized carbon credits so that's sort of the first point where we can work together the other point where we can work together which is which is very interesting is um is in the lng business itself so abac's technologies has a majority owned subsidiary in singapore uh which is a avax uh lng exchange the abex exchange and we are working hand in hand with them to develop carbon products to offset the the carbon footprint of delivery of of lng cargoes and that's a that's an extremely exciting opportunity for us because it marries you know two commodities and and will open the door for for for a lot of other activity so it's it's it's a very exciting um it's a very exciting association for us now one of the ideas that i've heard thrown about i don't know if there's any uh reality to this is the idea of an integrated carbon trading model where instead of buying the the crude oil futures contract or the natural gas futures contract you'd buy a green crude oil futures contract and the act of buying that contract would automatically transact an offsetting carbon credit so there would be effectively one stop shopping for the buyer to buy your energy and automatically transact whatever carbon credits are necessary in order to make that a carbon neutral energy contract does that make sense or does it make more sense for people to buy their energy and buy their offsetting credits on separate markets no i think i think it makes sense to a certain to a certain degree i think that the decision to offset and by extension when i say decision i mean the cost of offsetting should happen at the point where the emission is actually created so if you have if you think of for example the lng life cycle the shipping industry is moving that lng from point a to point b for example and it is adding to the carbon footprint of that lng reaching its ultimate destination so i would i i think it makes a lot more sense to have the shipping industry offset that point or that additional emission that was caused and so if if the if the shipping industry says okay i'm going to deliver from point a to point b when i get to point b i will deliver it on a carbon neutral basis and so you what you find in in looking at emissions in that way is that the onus of offsetting the additional emissions falls on the company that's that's creating that emission there's a much more sort of one-to-one relationship between the cost of that emission and the cost of offsetting it and the last person in in that life cycle to actually burn that molecule and release it into the atmosphere then the onus is on them to buy carbon credits for that molecule by itself and not have to enter into an exercise that looks all the way back through the value chain and tries to sum up each one of those activities that is a very unwieldy process you know it's sort of like one of these it's not as crazy but it's one of these questions like how big is the universe right i mean you go to until what point do you stop counting the carbon footprint of that molecule so it makes a lot more sense for companies to do it as they go along bill final question i feel pretty excited about where this carbon market is headed i think it's the future but you know what there have been quite a few i'll call it false starts in this industry going back to the original kyoto protocol and beyond that where it seemed like okay cap and trade is the new thing and it it was talked about for a bit and kind of lost its steam and never really went anywhere it feels to me like it's different this time and i guess the reason i say that is just because especially with the new administration in the united states it seems like the political commitment to to green energy and green and and more socially responsible policy in general seems to have taken grip politically but is there a risk that maybe this is another false start and you know the the world's not ready to really take this thing seriously yet you know i'm i'm a bit of an entrepreneur so by definition i'm a bit of an optimist but it feels it definitely feels different this time the skeptics are are running for the hills the oil companies have sort of abandoned their efforts at you know financing think tanks that cast doubt on on on climate change and the um and the notion that men that humanity is involved in in creating climate change so all of these sort of skeptics have have disappeared and on top of that we have a very powerful ally this time around in the form of mother nature you know you see what's been happening just this week in texas it's very dangerous to talk about climate and point at weather because uh climate and weather are different things but what's happening is and i think it's very difficult to to to argue against is that you know we're definitely moving into a period of global weirding to quote friedman one of the the worst things that happened to climate change was to be called global warming because it's not as as as descriptive as it actually should be we're actually moving into a world of climate weirding and and we're seeing that more and more so i think that the other thing that's that's interesting this time around is that it's being adopted and green activity is being adopted as a solution to the problem as opposed to a a nice thing to also have you know that we're looking at how to attack the effects of a global pandemic on our economy by directing you know tax dollars towards green activity and innovation so it it definitely feels different and i think we have powerful allies in in washington now it just it just feels different i think you know acx and and and our company is uh is definitely poised to take advantage of of our move into a carbon constrained world bill thanks so much for a terrific interview the inaugural episode of smarter markets featuring billionaire mining executive and financier robert friedland remains a listener favorite to date robert will be returning next week for another interview this time focusing on what it will take to green the global economy that's coming up next week right here on smarter markets listeners please help us get the word out about smarter markets it's not every day you come across a podcast with guests on the caliber that you've heard here on smarter markets and we have a veritable who's who of industry legends lined up for interviews in coming weeks your ratings and reviews on apple podcasts and other podcast platforms mean the world to us as does your help spreading the word about smarter markets via word of mouth for the macro voices podcast network i'm eric townsend see you again next week for another installment of smarter markets [Music] that concludes this week's episode of smarter markets for free episode transcripts visit smartermarketspot.com smartermarkets is 100 listener driven so please help more people discover the podcast by leaving a review on apple podcast or your favorite podcast platform smarter markets is presented for informational and entertainment purposes only the information presented on smarter markets should not be construed as investment advice always consult a licensed investment professional before making investment decisions the views and opinions expressed on smarter markets are those of the participants and do not necessarily reflect those of the show's hosts or sponsors smarter markets its producers sponsors and hosts eric townsend and avex 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