Building Trust in the Carbon Markets with Rubicon

Nov 11

Tom Montag, CEO of Rubicon Carbon, joins us to discuss the world of carbon credits. Tom has had an illustrious career, previously serving as Chief Operating Officer at Bank of America, President of Global Banking and Markets, and a member of the executive management team. He joined Merrill Lynch as Executive Vice President and Head of Global Sales and Trading in 2008, just before its merger with Bank of America. Before that, he was with Goldman Sachs, co-heading the Global Securities Business and serving on its management committee. He currently serves on the board of directors of Goldman Sachs Group Inc. and is a board member of Northwestern University, NYU Langone Medical Center, the Hispanic Federation, Deschutes Land Trust, and the Japan Society. He is also a former BlackRock board member.

In this episode, we dive into why, after such an accomplished career, Tom chose to dedicate his next chapter to carbon markets. We have a fascinating conversation about the current state of voluntary carbon markets and how Tom views them in relation to the financial services industry when he started his career in the 1980s. We explore why carbon credits matter, the circumstances under which companies should use them, and the origin of Rubicon Carbon, including the role of TPG’s Rise Fund. Tom also discusses Rubicon's approach to bundled credit offerings and addresses some of the trust challenges facing the carbon markets today, as well as where he believes they are headed.

Episode recorded on Aug 22, 2024 (Published on Nov 11, 2024)

In this episode, we cover:

[2:19] Tom's financial background and career pathway to Rubicon
[5:21] The state of the voluntary carbon market, including its size and growth potential
[7:41] Parallels between the early derivatives market and the current carbon markets
[11:41] Challenges around additionality, financial hedging, and trust in the carbon markets
[13:41] An overview of Rubicon Carbon
[20:55] Regulatory and compliance considerations around carbon markets
[26:30] The need for more standardization and risk adjustment in the VCM
[33:44] Examples of Rubicon Carbon's projects and partnerships
[36:08] Role of oil and gas in the future of VCM
[40:12] Bull and bear cases for the future of carbon markets

Cody Simms (00:00):
Today on Inevitable. Our guest is Tom Montag, CEO at Rubicon Carbon and our topic is carbon credits. Tom has an illustrious biography. Previously he was the Chief operating Officer at Bank of America, president of Global Banking and Markets, and a member of the company's executive management team. He joined Merrill Lynch as executive vice president and head of Global Sales and Trading in 2008 prior to the company's merger with Bank of America. Before that he was with Goldman Sachs, where he was co-head of the Global Securities Business and a member of the company's management committee. During his 22 years with Goldman Sachs held a number of key executive roles. He was co-president of the firm's Japanese operations and co-head of Asian FICC inequities. And earlier in his career he ran the firm's global derivatives business. He was named a partner at Goldman Sachs in 1994 in managing director in 1996.
(00:56):
He's on the board of directors of the Goldman Sachs Group Incorporated and he is also on the boards of Northwestern University, NYU Langone Medical Center, the Hispanic Federation, Deschutes Land Trust, and the Japan Society. And he is a former BlackRock board member. I was fascinated to talk with Tom and hear from him why after all of his career success, he decided to make his next chapter about carbon markets. We have a fascinating and deep conversation about the state of the voluntary carbon markets today and how he compares it to where the financial services industry was when he started his career in the 1980s. We talk about how and why carbon credits matter and when companies should use them. We talk about how Rubicon carbon got started including the role of TPGs Rise fund and how Rubicon structures their bundled credit offerings. And we talk about some of the trust issues that the carbon markets have been navigating and where he thinks things are headed. From MCJ. I'm Cody Sims and this is inevitable. Climate change is inevitable. It's already here, but so are the solutions shaping our future. Join us every week to learn from experts and entrepreneurs about the transition of energy and industry. Tom, welcome to the show, Cody. Thanks for
Tom Montag (02:17):
Having me. Looking forward to it.
Cody Simms (02:19):
Tom, I am fascinated to learn from you because you have spent your career really at the pinnacle of finance and banking and now are spending this current chapter as so far as I understand it, applying what you learned in that to the problem of carbon finance and carbon credits. And so maybe let's start by having you explain the path that got you to where you are today at Rubicon.
Tom Montag (02:44):
I dunno how far back you when I go, but I was born in Oregon and I always tell this story because my family, when they came over from Europe, eventually we made wood-burning stoves, so it was called Montag Stove Works. I have a Montag stove myself, and I thought it was the irony of my family starting making Woodburn stoves and that carbon that my family's Woodburn stoves burned that wood because those carbon politics are still in the air. I was drawn to this when it came and I thought about it in some way that it was full circle for me to get into this space. This
Cody Simms (03:18):
Tom, my grandfather founded a small mom and pop oil company in Kansas. I feel the same pull you do,
Tom Montag (03:26):
Yeah, just the journey to get to Rubicon. After I left Bank of America, I had been around the world with Bank of American Goldman Sachs. I decided to come back out to the West Coast where I was from and figure out what my next step would be. And in looking at different things, a couple of people I know Hank Paulson, who I had worked with at Goldman, and a gentleman named Mark Vinky who I had worked with at Goldman were involved in the TPG Rise fund and they came to me with this idea they had regarding starting a kind of institutional grade carbon credit company. And although I had been involved with sustainable finance and green bonds and things like that at the bank, I wasn't that familiar quite frankly with the voluntary carbon market at the time, but it seemed like such a great thing to do and so interesting. And so in addition to a woman named Ann Uchin from the bank, I was also joining them in this venture. So Ann and I joined Rubicon. I joined about November a year and a half ago, almost two years ago to join Rubicon Carbon.
Cody Simms (04:22):
You so casually mentioned a former treasury secretary inviting you to join a company. Clearly there's some real interest in what this market can be that TPG and former Secretary Paulson saw to get this company up and running. What was the pitch? What was the story you said you weren't super familiar with it. What brought you in?
Tom Montag (04:41):
I wasn't super familiar with the voluntary carbon markets and how they worked. I knew there had been other in the early two thousands. I remember Richard Sandor, who was the king of the futures market, had started things around the climate that didn't work so well, but the voluntary carbon market, and remember this was on the heels of a lot of companies starting to do net zero pledges and it became a movement at the time and they showed me the facts and figures around where the market was, who was going to use it, what was going on. It felt at the time this is going to be something that will do a lot of good for the world. It's voluntary and I would be learning the whole time. And so I thought this would be a great, interesting, fun and cross my fingers successful venture.
Cody Simms (05:21):
Now for all of the media about the voluntary carbon market and the attention, it's actually still a relatively small market today. I don't know the exact numbers. I'm sure you might maybe walk us through the state of it today and obviously you've got a bull case and a bear case in your mind. I'd love to spend a little time on how you think about that.
Tom Montag (05:38):
Yeah, I'll probably misquote numbers, so excuse me, but I saw a lot of numbers. There's a group called BNEF Bloomberg that does a lot of numbers around the carbon market and these numbers really stuck in my head roughly. I think they're roughly 40 gigatons of carbon emitted annually around the world. And if you look at the top net zero companies have claimed they're around half that. They're around 20 to 21 gigatons of emissions a year, and by emissions mean scope one, scope two and scope three. And if you look at those companies, about 17% of that 20 gigatons is scope one and two, and the rest is scope three of course, which is your supply chain. And people that which meant 17 gigatons were kind of out of their control in a way that's around 83% of that 20. And so that's the target market for us.
(06:23):
It's the idea that people can do a lot about their own emissions and their power. It's really hard to control your supply chain and how long that's going to last. And so we really believe in a dual structure that you work on your own and you work on projects that help remove or avoid in the future. Our market right now, if you look at how many carbon tons are retired each year it's around 300 million and it was the same around three to 400 million, and that's compared to the 17 gigatons I said of scope three emissions. So you can see right now it's a very small percentage of the scope three emissions, forget the whole thing. And if you think about the whole 40 gigatons versus 300 million, it's an infinitesimal percentage. It gets a lot more pressed than it's impact right now on what's going on, quite frankly.
Cody Simms (07:10):
And that's at a total sort of dollar volume size of what around one to one and a half billion dollars annually, give or take. Is that sort of the size of the market today?
Tom Montag (07:19):
Yeah, if you look at the average price of a ton, let's say it's it is $10 or $5, it would be one and a half billion tons. It's a relatively small, if you think about it, relatively small market. It's not like a tradable instrument when you retire, it goes away. I guess bonds mature, et cetera, but there's not a lot of trading of it. There's investing in it. There's some trading, but mostly it's buy and retire.
Cody Simms (07:41):
I want to spend some time on your career in the financial industry and things that we take for granted today, right? Mutual funds, ETFs like derivatives, trading. This stuff isn't actually all that old in terms of being mainstream product today. And so I'm interested in how you saw some of these things come online in the just general financial services industry and any parallels you might draw to where the carbon market is today.
Tom Montag (08:10):
Sure. I started my career mostly doing derivatives starting in the late eighties, early nineties, and the growth of that market to what it is today, which is giant trillion dollar industry. But at the beginning of course it was bilateral contracts between people trying to find arbitrages in the fixed and floating rate markets or hedging things, but it wasn't a well known market. It didn't have standards, people didn't know how to account for it necessarily. I was involved in that market from the beginning. I actually was on the board of something called ISDA, which is Zen called the International Swap Dealers Association. That was called the International Swaps and Derivatives Association, where we were setting up standards where the industry got together and set up standards to allow for a common way to talk about things and how to transact and all that going forward. And so when I look at this market, I see a lot of the same things.
(08:59):
There's not really standardization, there's a lot of different registries out there and a lot of different way people look at things. Payment terms aren't defined terms aren't necessarily the same for everything. And the other thing that happened in the beginning of the derivatives markets was there was misuse cases. There was many, you can go back in time at the different ways it was pitched and what people thought they were getting and what they weren't and how we had to go through that phase of the market's growth to get in a place where it was more tradable, understandable and more belief in the market to get where we are to today.
Cody Simms (09:34):
Something gave you confidence early on on just the potential size of derivatives as a solution. Do you see any parallels to that relative to the size of the carbon markets that you think we could have in the future?
Tom Montag (09:46):
One was how much debt. It was outstanding on companies balance sheets all the time, and at that time it was interest rates, but of course it's become the ability to hedge all sorts of things. It can be equities, credit spreads, all that. At the beginning, for me at least, it was mostly around interest rates and you just knew that people needed the flexibility to be able to be fixed or floating like mortgages have become over the years. You have the ability to have a fixed rate mortgage or a floating rate mortgage.
Cody Simms (10:15):
This was corporate debt in particular that you're talking about,
Tom Montag (10:18):
Corporate debt in particular, and then the fact that different markets in the world had different premiums for what a company would have to pay for fixed and floating. It's kind of like comparative advantage in basic economics, how you can make, even though it's more expensive to make something in the United States in a comparative basis versus someplace else, you do comparative advantage and you swap those comparative advantages when you do trade. Same thing here where you looked at comparative advantage of fixed and floating rate date and creating products around that so that people could hedge and you just knew a lot of people wanted to hedge. They wanted the flexibility to hedge and it became a hedging product and then it became also an investing product, the ability to create different profiles for people if they wanted to invest in different ways, so to speak.
Cody Simms (11:03):
So starting with solving a problem for individual corporations and getting to the point where other people could participate in that problem solving and just do it purely from the point of making money on solving that problem,
Tom Montag (11:15):
They would hedge against it. They would look, I'll give you this, and then they would go, how do I hedge? I'll fix in your rate, how do I hedge when I gave you that fixed rate, you paid me fixed and I paid you floating. How do I hedge that? What do I do in the market though? I go and use different instruments myself and I take risks between the basis of those things, but I do lots of trades and lots of things and try to find the other side of each transaction and manage those cash flows.
Cody Simms (11:41):
It strikes me then when you think of the carbon markets to have a similar kind of dynamic, you would need the ability to borrow against risk with the assets that you're maybe buying, the credits that you're buying, that you're not retiring today, that you're holding for the future, et cetera. Are corporates able to do that today at all?
Tom Montag (11:58):
Not really. For markets to function really, you need to be able to go short and long something, but you can't really go short in the carbon credit market, so you don't have that ability. You don't really have the ability to borrow against the asset you bought. So if you buy a carbon credit from somebody and you don't want to retire it yet, you can't really pledge. There isn't many places you can go pledge that asset to get money back to help fund that. Like you could have stock if you bought stock today, Cody, you could go to your broker and maybe borrow against the stock that you had, but it's hard to go with your carbon credit and go and borrow against that carbon credit so it doesn't have the leverage component that you might have in other markets yet or the tradability that you would have in other markets. I hope that made sense.
Cody Simms (12:43):
Yeah, for sure. And in terms of the liability that big companies feel today, much like in the early days of derivatives, you said they had this liability of this debt on their balance sheet that they couldn't really do anything with. The liability they have today is market pressure that they are emitting and they've made these pledges that they need to navigate against and they don't have enough R&D capacity in house to solve it. What's that sort of market pressure that needs solving?
Tom Montag (13:05):
That's right. Your carbon footprint is, it can be just the market pressure because people want you to have a net zero target. They want you to help make sure global warming doesn't overwhelm the planet. But they're also just, a lot of times it's part of the fabric of the company and what messages they want to set going forward, be it the industry they're in, where they are the geographically, they're investors or their employees. There are all kinds of parts of your organizational framework that probably demand and would like you to do something against this, but it's hard because they have to figure out what their carbon footprint is and how can they change it. It's a real journey for a company.
Cody Simms (13:41):
So what is Rubicon carbon?
Tom Montag (13:42):
So Rubicon carbon was set up to be a institutional grade counterparty in a world of startups, basically. And the idea was that I like to apply it to the BlackRock of carbon credit. So now if a company gets a lot of money, they usually don't set up their own money management firm and go out and pick stocks and pick bonds and all that. They usually have outsourced it to BlackRock. They might outsource it to other private equity firms, whatever. They might do that here. When companies go on their journey and then remember they emit carbon every year. So to the extent that every year they're trying to offset what they're doing as they get a handle on that, that they would need to have this be part of the fabric of what they did and they would need to work with somebody, the institutional quality person, to enable them to see and understand the markets, the projects, what their choices were.
(14:34):
And it's a seamless and hopefully safe and quality, a really high quality set of projects because it's complicated. There's lots of projects and lots of places in the world and they're not necessarily being run by people you've heard of and they're literally in almost every country in the world. And so our role was to be the person that would help them do that. And the first product that Rubicon had was called the Rubicon Carbon Ton, and that was meant to be like an ETF in essence in that if you bought a Rubicon Carbon ton, you were buying the right to a curated portfolio of credits that we had purchased that we were constantly curating to enable you to have diversification and quality in that. And then when you retired your ton, we would retire the pro rate amount of all the projects that we had under that ton. So that was the basic premise. Basically an ETF has managed, of course, the price appreciation. We managed just a quality of the ton. And so we have a great science team that we've set up run by Dr. Jen Jenkins, that's always looking at, and we have the Rubicon Carbon Integrity framework and scores, et cetera, where we continually populate and measure the portfolio we have.
Cody Simms (15:39):
So a basket of different credit solutions. You mentioned you are buying them, so are you the offtaker of record with the project developers then?
Tom Montag (15:47):
Yes. So we have our own store of credits, so to speak, where we have both purchased the secondary market and we also develop on source. So we develop into new projects and we also have with some of our clients, we have marketing agreements where we've agreed in part to sell their product. We really like it and we've bought some and we have an agreement to be able to buy more should it demand.
Cody Simms (16:09):
Okay. So you're going out, you're finding projects either directly from the project developers or through the secondary markets, you're doing quality analysis on them, you're buying a basket, you're buying credits from each of these, and then you're bundling them almost like an ETF or mutual fund to these corporate buyers who can purchase them. Are they able to pick and choose what's in their RCT on a per company basis?
Tom Montag (16:32):
You're getting it. You're getting it. There's three RCTs that are curated for you. One is a nature-based, one is a industrial kind of industrial avoidance, pipe leakage and things like that. And third is removals. And we also have what we call build your own. So if you want to build your own, we have a great website that we put together where you can go and pick different projects and we have a whole writeups on them and great science analysis and develop and see what the price is if you put those projects together. And so on. One other feature, I should just mention that I think the first to this was we have a risk adjustment feature if you want. There's been all the noises, Cody about some of the projects being over credited. I'm from the World finance where you have projects and you think they're going to get here and they're still good projects, but they got to 90% of where they thought they're going to get to or 80% or whatever it may be.
(17:20):
So we have also the ability we risk adjust, not only do we put the good ones in, but we say if you want a risk adjustment feature, we can also put that in. What that means is our science team has said, oh, we think this is over credited by 30%. IE, the projects still a good project, but they've received 30% more credits than we think they should have gotten in the risk adjustment process. We would over retire so that you only got credit for the tons that we thought that were really there and we so to speak, tore up the excess ones so nobody ever got credit for them. So we would make sure what we say is a ton is a ton when we risk adjustment to the best of our ability
Cody Simms (18:01):
Is that an attempt to solve the problem of eight years down the line Someone says, oh, they were using this methodology back then that nobody likes anymore, and those projects, even though you paid X for 'em, they're worthless. Now are you trying to solve against that problem?
Tom Montag (18:14):
Not the ones that they say they're worthless now, but we're trying to solve against the problem that it wasn't a hundred percent, they got a hundred and in retrospect then maybe they should have gotten 75 or they should have gotten 85 or 95, whatever in the finance world, if a bond came at a hundred and now they think the company can only pay back 90 people will pay 98 89 because they think that's the value now. So we feel like the market, and this is getting back to the markets thing that for projects that didn't quite get there, then there should still be even a market for that and we can risk adjust for that in our purchase as long as the company isn't taking credit for tons that people would say they're greenwashing, they're taking credit for tons that weren't actually avoided or weren't actually removed. And so it's an attempt to make sure the tons that you actually use for your own journey are real tons.
Cody Simms (19:05):
There's a crediting hedge involved in that regard. Then is there a financial hedge for you in that product as well?
Tom Montag (19:12):
I dunno what you mean exactly by financial hedge, but we would charge a little bit for that, right? Because we're saying as long as you have the Rubicon carbon ton, we will be risk adjusting that portfolio until you retire. We don't do it for the next a hundred years. We do it until you retire to the best of our ability. So based on what we knew at that time, I always believed in that you've made a decision you thought was the right thing at the time based on all the factors you had and you felt a ton was a ton as a ton as of the day you retired it.
Cody Simms (19:39):
How do you think the market will evolve in terms of the role of pure speculators? So people who participate in it who are not themselves trying to drive their own emissions footprint to net zero but are purely financial players in the market, is that a good or a bad thing? What do you need there?
Tom Montag (19:57):
Yeah, I think market makers can always be a good thing because I think for people that are buying these projects, one, their outputs might change. So they might have bought now because they wanted to buy them for emissions they think are going to come in two or three years, but let's say they have a breakthrough in part of how they're running their company or how they're fueled and they don't need so many anymore and the ability to have liquidity to sell them back to the market makes you feel more comfortable investing in them in the first place. If you thought when you bought them you can never sell them again, you're going to be pretty hesitant to buy. And also if you change your mind about the risk profile of what you bought, there's great to have liquidity where I can trade those out to somebody that has a different risk profile and to buy something I like better. So I think that liquidity and the ability to be able to manage the carbon offsets that you've purchased is really good for the long-term health of a market.
Cody Simms (20:49):
You've been in the role now for a few years, what have you been most surprised about in this whole space as you've dug in so deeply?
Tom Montag (20:55):
Oh, how much controversy there is in the space. I always thought when I was coming in, I'm a big believer in climate change and I've done other things around the environment and my home state of Oregon, I thought this is going to be great because we're all going to be working for the same goal and the same thing and what could be bad about investing and saving the rainforest or what could be bad about this particular project? And there's just been a lot more, I dunno controversies, but certainly discussion and comments on whether or not carbon offsets are valuable in this journey. And there's obviously at least two camps, if not 20 camps of people that have different opinions about it. And I was a little surprised about the lack of let's go forward together, let's try every solution we can. Let's find the way that we get the most impact as soon as we can.
(21:43):
And so that was the biggest surprise. The other think that has surprised me is money, time value means a lot. If I told you I was going to give you a dollar in 20 years versus this year, you would want the one this year. I think before you would want the one in 20 years, Tom, I'll take the one this year, but in carbon credits you can see the net. We're making claims out to 2050 that there doesn't seem to be as much premium put on saving it right now versus that and the journey to me, there's a lot of benefit in being able to do things now even if it's before you're able to get your own scope one and scope two down. The impact of your money now obviously keeps that carbon molecule out of the air today as opposed to 20 years from today.
Yin Lu (22:23):
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Cody Simms (23:25):
And what is preventing these large companies from doing more and more today given that they have these lofty goals, there's some risk there. They're concerned about clearly
Tom Montag (23:34):
One, they're just money. They're just the money of the two is the risk by the way, of all the risk you've seen of the project you decided to do becomes a project that wasn't good and therefore you look bad and people then paint you as doing something wrong even if you weren't doing anything wrong, you thought you were doing something right. And so the risks around it and then of course there are the risks around how the SEC is going to make you disclose it, what you're going to have to say, what commitments mean? Am I going to get sued by investors till I made a commitment and now I'm short of my commitment? And so there's just risks around it and it's a new market and so I think the combination of all those things makes people at least make sure they think it all through, which hopefully is part of the value of Rubicon Carbon and the people that not only back us at TPG, but also the people that we have involved have a long history in financial markets and other things that hopefully and a great science team behind us
Cody Simms (24:27):
It sounds like it's also just internal expertise at a lot of these companies. They may not have a staff full of people that can go through binders full of different projects and try to make the right choices and that's where the evolution of firms like yours can also play a very important role there.
Tom Montag (24:40):
But think about the stock market and how many stocks there are. If you went through the stock market, all these stocks, you'd go, who are these guys? And this is a market where there's rules and you have to put out 10 Ks and 10 Qs and there's standards and there's accounting standards and it's still really hollered to pick who's the investor. So if you can think about these projects which are all around the world and have different impacts and people, they're also interested in the impact of many projects beyond carbon. Many of these projects have all sorts of other environmental attributes in which they provide value or communities that they have, and so it's a much deeper dive into all the good things that come out of this project because there's so many kinds of projects in so many places, it's a real journey. Hopefully we can help people on that journey get comfortable with what they're doing.
Cody Simms (25:24):
You've mentioned things like changing SEC regulations in California, you now have pretty significant legislation, this new law, SB 253, et cetera. What do you think will happen in terms of companies being required to account for and report on their activities here relative to it continuing to be a voluntary choice if you will? I guess there's required on reporting and there's requirement on purchasing. Those are probably two different types of requirements
Tom Montag (25:51):
I think from some of these things are common sense. Some of the rules are we the sellers of the carbon credit should be making sure the disclosures accurately reflect what you're selling. That's kind of common sense. There's fraud laws, you can't fraudulently sell anything anyway and it's giving more guidance as to how should we describe the risks of this offset and what it means and what it could mean to you. There's that aspect of it and then there's the buyer's aspect of it, which is more of the SEC thing in what you disclose. Is that the question or
Cody Simms (26:23):
Yeah, and I think in addition to that, you've seen in Europe like a heavy compliance market. You see now there's California, there's a compliance market. Presumably those markets have very strict standards around what is reportable, purchasable, sellable, et cetera. But I don't know, I don't know how different the sort of what's allowable in those markets is relative to some of the products that you are enabling through the VCM, the voluntary carbon market
Tom Montag (26:48):
In the California market cap and trade market's been around for a while where California sets what your limits are and what you can do and then basically they issue more every year and it's up to them what they're going to do, but they also allow some offsets to be attributable for your cap. So they do allow offsets that affect California, there's a limited number. You can go to a place like Columbia and South America, their offsets can go against it. Other places don't allow it against it. So state of Washington put in a cap and trade this year, which I think is going to be under a vote here this year, but a state of New York is looking at one. So you're going to see more I think cap and trade in various states, but it isn't widespread in the US yet. Of course
Cody Simms (27:28):
That's a really helpful distinction for me. I don't live and breathe this stuff per se on the market side that the compliance markets are more about buying and trading access to your own emissions and what you do or don't do as opposed to buying offsets from a third party sort of source that can presumably offset your emissions profile. Am I understanding the difference there
Tom Montag (27:48):
And for some company, I'll give maybe a kind of a real example but not real. Some people like the cap and trade better even companies because they know exactly how it works and what the rules are. So if you ran a plant here and you put on a filter that was reducing what was coming out of your company that what your cap was, you actually create value for yourself that you can sell in the market. If you go and do that same thing in non cap and trade state for example, you're hoping a registry will say that was an additionality to get a carbon credit. You don't know that you're going to get a carbon credit. The registry may say, no, I don't think you needed our money, IE the carbon credit money to do that. And so the company actually doesn't have the same financial incentives to do it if it's financial because they can't recoup the money from doing that because there's no cap and trade in that state and the registries decided it's not an additional thing, so they would've done it anyway.
Cody Simms (28:43):
That's super helpful. So the compliance market mostly revolving around very strictly defined set of protocols that a company is doing in their own operations and whether they're relying on those or not.
Tom Montag (28:55):
Well yeah, it's just one broad thing. You say you can put out 10,000 tons a year if you reduce it below 10,000, you have that extra can get compensated by selling that to somebody else who's going over. But you know the rules here, the additionality test, which is good, but it leads to somebody saying you don't need the carbon credits to do it. Now they might not do it if they don't have the carbon credits is not really the measure. The measure is they don't do it again. Now there are some issues for me at least around additionality, not carbon additionality. There's two measures of additionality. The carbon is carbon really being removed or avoided. Then there's the financial additionality, carbon additionality is great financial additionality. I think there's discussion points around that.
Cody Simms (29:35):
This is whether or not this project would receive third party investments on the merits of its own return profile or not. Does it have to be purely impact driven?
Tom Montag (29:43):
Yeah, if you look at the IRA, you get the tax benefits no matter if you needed them or not, whether you would've done the project or not, you still get the tax benefits in carbon credits if you didn't need the carbon credits to do the project. Even if you're creating value there, you don't get the carbon credits. The IRA, if you did the same project, even if you weren't doing it, you didn't need the tax credits, you still get the tax credits. So as you can imagine for investors, that's a little risky decision. You don't know whether or not you're going to get them or not and what your returns necessarily are.
Cody Simms (30:14):
Yeah, for sure. It's an interesting point that I don't know that I've fully heard anyone argue that side of it.
Tom Montag (30:19):
Here's a good example because it becomes more clear when some of these new projects that are being done, they might be both carbon and timber or carbon and let's say you're growing coffee and so the developers developing replanting an area of the world with coffee trees where there was nothing by the way, and so the trees obviously absorbing carbon and they're also producing a plant. Let's say there's two potential sources of revenue. There's the coffee and there's the carbon credits that you get and then let's say the price of coffee's really low and so you really need the carbon credit. Then all of a sudden the price that coffee goes through the roof and now somebody's going to say, now you don't need the carbon credits. But the two things that I take issue with that with one is that it doesn't look necessarily backwards.
(31:01):
How much money did I lose on coffee before I got my commodities or as you know, volatile prices of foods can be volatile and the other thing it doesn't take into account many of these projects now the way they fund them is they go to, I'm going to use Starbucks name, but a coffee buyer. The coffee buyer says, I'll pay you this much per bushel of coffee out of your project and then a carbon person comes in and says, I'll pay you for carbon coming out of here. So the carbon person isn't benefiting from the this is how it's funded by the way the coffee person isn't benefiting from the carbon, so investment has been bifurcated into a carbon buyer and a coffee buyer,
Cody Simms (31:39):
The counterside of that argument would be a large company taking carbon credits for this coffee project. That was going to happen anyway because there was a financial buyer of the product
Tom Montag (31:49):
If they're the owner, but a lot of times these aren't really funded that way necessarily. A lot of funding is the two different buyers. And so now if you're a carbon buyer, you have to really think, I might also have exposure to coffee. If the price of coffee goes up, I'm going to lose my investment that I made in this. And think about if you want to encourage investments into these things, if you introduce commodity risk into the carbon buyer, you'll just have less people investing in the projects. By the way, by the way, nobody says at the beginning you needed those at the beginning, so you never even would've built it without the people spending that money in the first place. It's the five years later test that sometimes can be problematic.
Cody Simms (32:25):
I hear that the additionality argument the most on renewable energy credits, which is to say the solar project already pencils out better than gas. Why should you issue a credit around it as well? The utility already wanted to buy it in the first place. There's cases where I think it probably makes sense, right?
Tom Montag (32:41):
For sure. But remember I was giving you two things. When you have one source, if your only source is one thing, then it's a much easier thing to understand. The argument of course against that particular one, which I understand by the way, I understand why it's a discussion, is that at the time of inception, of course it has to be measured that way, but it never would've been built if that wouldn't have happened. So it's after the fact taking something away from somebody. By the way, if the project did worse than it thought it was going to be, nobody's giving them extra money because it didn't do that. That's why if I was an investor, I don't like the asymmetry of that, that I take all the downside, the upside you take away from me because something I don't control, which is the power of power went up. That's the other side of that. I think
Cody Simms (33:23):
That's the whole sort of hedging mechanism you were talking about, which is that the current carbon markets don't really have a risk adjustment capability. You were talking about risk adjustment from the perspective of, hey, this project was issued and this number of credits and in reality it really only should have had this number. But there are all these other factors involved as well on how successful these projects might turn out being, I presume
Tom Montag (33:44):
For sure.
Cody Simms (33:44):
Let's hear a little bit from you about how it's going in the market. Who are you working with today? Where are you seeing traction in terms of increased purchasing activity of credits and corporations or whomever leaning in to the solutions that you're putting in market?
Tom Montag (34:00):
Sure. Some of it's public, so I guess I could talk about it. We recently announced a project in Panama that we were doing with Microsoft. Microsoft's of course been the big future. They have a great team and their needs keep growing faster and faster than their ability to actually find carbon credits because of I think the cloud and AI and those kinds of things. And so they're very smart, they're very knowledgeable, they're very great to work with and we've been fortunate enough to do a project with them that we're really excited about, which is a replanning of native forestation there. But we've done everything from Microsoft to, we recently announced a partnership with a driver in Formula 1 named Lucas di Grassi who used to be an F1 driver, went into the EV world and we got to know him and he's become a big fan of our product and he actually offset his lifetime, his own calculated lifetime footprint since he started racing in Formula E. So we see certainly the tech world in the US is very involved in this and doing a lot and very forward thinking. Certainly there's individuals, we've worked with many concerts and offsetting their things and those kinds of things and individuals and companies, but there's still so many companies that we think need to, but still yet to date have not bought much. They bought a little, they tinker in the market, but they haven't done a lot.
Cody Simms (35:15):
The Lucas di Grassi story is certainly a fun one and Formula EI just learned getting up to speed on our conversation here is basically Formula one with EVs, right?
Tom Montag (35:24):
It is and it's great and I actually went to one of the races in Portland, Oregon, my hometown as I mentioned, and it's funny, they don't have pit stops, so the way they race is managing the power so that they go across the line as the last volt comes out of their batteries because you charge a little bit back almost hybrid. You manage the charge you have going around and then of course the noise they make is, it's like a noise as opposed to a rumble
Cody Simms (35:51):
When they probably want the absolute minimum sized battery they can get because they're heavy, right?
Tom Montag (35:55):
Yeah, they're heavy. Everything's formalized and there's very difference in the batteries. They're doing some amazing work and so we have more stuff planned with them, but Lucas is a great guy. He launched his own zero summit a while ago. He's a Brazilian by background.
Cody Simms (36:08):
I'm really curious about that. You look at Formula One and you look at their big sponsors and I don't know who they are today necessarily. You see names like Aramco and big industrial oil and gas companies, heavy industry. One of the questions I have on the voluntary carbon market is are we going to start to see those kinds of companies leaning in more and more companies who have real balance sheet problems when it comes to their carbon footprint?
Tom Montag (36:32):
I think so the market's really concentrated. Now other you can go every month we look at the retirements and see these are off, but globally, maybe 150 companies make up 80 to 90% of all the retirements. And at times in the US you'll see that 80 companies in the us, 80 companies make up 90% of what happens. So there's lots of people doing little things and there's some major companies doing big things, but there's a big untapped. We do 300 million is a year is what people do, and there's 17 gigatons to do. Just half of scope three is like a 60 times growth rate and the amount of money you need to go into this space and develop those projects is immense to be able to do that. The nice thing about the project, of course there's projects for everybody. There's high tech projects and people want to get involved in high tech and there's saving force type projects.
(37:24):
And so it's everything in between and hopefully it appeals to everybody at some nature the projects are doing and they start doing more and more in their own companies. But many companies have a pledge, I think almost 5,000 companies are in SBTI now who are working on their targets and what they're doing as they go along. They're going to see bumps in the road and hopefully those bumps happen. We can help them offset their carbon story. Can I tell you a little story that I read recently about Brown University? So there was an article, I know we can send it to you, but it was from I think the associate professor of sustainability at Brown, and excuse me if I get some of the facts wrong, but basically they wanted to get to net zero. And you can imagine they had a group that was tasked with doing that and they got down to 50%.
(38:07):
And when they got to 50%, they realized, he said furnaces, I don't know exactly, but they knew it was going to take them a decade or decades before they go from 50% to zero. There was nothing more that they could do. There wasn't the technology that allowed them to do that. And they realized why am I waiting a decade or two decades to help solve a problem when there's things like carbon credits today, and I think the title of the article was something like I used to not believe in carbon credits, but now I do. And they did a study and they went in, they bought carbon credits so that they actually were taking molecules of carbon out of the air today and not waiting 10 or 20 years. They're still going to do it in 10 or 20 years, but they wanted to accelerate it to today and not sit around while they're waiting for things to happen. So once they got into this wall in their journey though, we want to still do more now. We don't want to wait until technology catches up with us. We don't know when that's going to happen. I think as people go along, that's going to happen more and more. You're going to get as far as you can get. I'm not able to push this any farther myself. Carbon offsets are a great way to invest in projects and things that are removing and avoiding carbon emissions while I finish my journey.
Cody Simms (39:16):
And even within the basket of credits, some credits are attributable now and some credits you're buying for maturity years from now. I assume you're also helping your clients manage that overall time horizon within the RCT bundle that they're buying
Tom Montag (39:32):
The Microsoft project that I mentioned to you, of course, those are forward purchases of they were purchasing forward as were we from a project. So those are commitments you make now to get the carbon credits in the future, but the investment is made now and that means the carbon's going to be start removing from the atmosphere now, which is better than waiting 10 years. Of course for that to go in, that's 10 years of carbon that doesn't go in the atmosphere. So that was the story of Brown, but yes, that's what companies are doing and we're doing in buying forward offtake agreements.
Cody Simms (40:01):
What do you think is the bear case in this space? If you're going to take the other side of this trade, what arguments would you be making? And these are things obviously you're going to have to help the industry overcome.
Tom Montag (40:12):
It's funny, I always thought of the bear case of climate change. I always thought if I was wrong about climate change, that's actually okay. No, it's not going. But if you're wrong about climate change, we have a real problem. And so I'd rather be in the side if I'm wrong. I'm actually happy in a way because the climate change didn't happen and all those things. But I think it's worth balancing our world and working hard to make sure that doesn't happen. But that wasn't really your question. Your question is more around the market itself,
Cody Simms (40:37):
The bear case of the carbon markets. If things don't accelerate at the pace that you expect them to, what would've gone wrong? Why would that have happened
Tom Montag (40:45):
That the distrust of the market is such that not enough people come in and are willing to do it and they do what they can and they convince themselves they've done what they can, which is their own operations and that's the most I can do. And it becomes more of a philanthropy thing and not a think you or your company basically decides to do
Cody Simms (41:04):
So. It's not a theoretical lack of projects, it's not a theoretical lack of corporate interest, but if corporates can't trust what they're buying, the market won't develop and then it'll end up, forestry projects will be reliance on goodwill
Tom Montag (41:18):
Or if it's just too expensive for them, like some of these high tech projects can have pretty high price tags per ton. And going back to Bloomberg, they'll show you these charts about some of the margins companies operate at and the emissions they have. They can't afford to pay X hundreds of dollars per ton, and so you have to have quality projects that are at a price point that doesn't cause them to be uncompetitive with other people. So you do have that kind of competitive element of how much can I afford to spend on this while I'm hoping for something to bail me out.
Cody Simms (41:51):
And from a bull case perspective, we've seen the market go down a little bit over the last year or two relative to sort of 2021, 2022. I'm guessing you're arguing that's just a momentary blip on a markets go up and down all the time, but on an overall upward trajectory path, would I be assuming correctly?
Tom Montag (42:09):
Yes. Markets go up down all the time and I do believe they're going to go up. You always have this issue in this market where, and I use the example of a car that we change car standards all the time, but when a car standard was changed, they didn't tell you, Cody, you throw away your car. It's worthless of ever. See you driving it. I'm going to put you in jail. We have to have an ability to be able as we change standards to not hurt the person that rightfully used the old standards, which they were told to use, but now we're saying the new standards, I'm sorry, nobody's going to buy your standard. I always thought you have to have ways to get things cleared out and markets cleared out so you can have the thing go up. Now, there's so many things they have overhang in markets.
(42:45):
There's so many credits out here. The unknown, that overhang just keeps prices down because of the unknown. And so there's the quality of the projects and then there's just the demand side. And so both of those kind have to be in place when it happens. We truly believe as you get toward 2030 and 40, you're going to see a lot of demand because the Brown University case, I think it's going to happen to a number of people and they are going to start investing in these things, which is good by the way, because a lot of the money can go to the Global South when we do this, a lot of great technologies can be developed and it'll be good for all of us.
Cody Simms (43:15):
Do you see this market becoming liquid over time where there's a spot market that's instantly tradable?
Tom Montag (43:20):
I think it can be. I think it can be. I think once you have standards around that people trust and you can start borrowing against those things in the PPA market, you can do that eventually. I think we'll have that kind of thing where you can be able to pledge for the money so you can borrow and do things with it. I think you can have it and then people will be more willing to buy into it and not feel like they made a decision that's irreversible when they do it, and also they'll be able to finance it. So I think both those things make the market a better market and hopefully a more liquid market and will, you'll have more information and ability if you make a mistake to get out at a cheaper price.
Cody Simms (43:55):
You mentioned one or two like the Microsoft project in Panama, but any other projects you guys are currently buying from that you are excited to talk about?
Tom Montag (44:03):
There's another one we're doing in South Africa we call Spec Boom project, which again is a native species going back into South Africa. We're doing with a couple of our partners down there. And so those are the two public ones we have outstanding now and we have two or three more in the hopper that should come out soon. So we're pretty excited about it.
Cody Simms (44:21):
Tom, anything else we should have hit on today that we didn't talk about?
Tom Montag (44:25):
No, I just think it's such a good product that, and I go back to my derivatives days when I look at the bad uses of derivatives and people learn from those and get better and get more information out there. And then once we do that and we engage good people in this, that this is really good for the world. And so it's great to have a voluntary market where people are all doing this to do a good thing and we hopefully we're part of that journey that people feel comfortable and hopefully we can stop global warming.
Cody Simms (44:52):
Tom, thank you for joining today. I learned a ton and I appreciate you sharing and I appreciate you taking your career's, learning and applying it to the space.
Tom Montag (45:00):
Thank you, Cody. It was great talking to you. And hope we can talk again
Cody Simms (45:03):
Inevitable in an MCJ podcast. At MCJ, we back founders driving the transition of energy and industry and solving the inevitable impacts of climate change. If you'd like to learn more about mcj, visit us at mcj.vc and subscribe to our weekly newsletter at newsletter.mcj.vc. Thanks and see you next episode.