Time for carbon credits to be integrated with regulations
The voluntary carbon market has hit maturity and should no longer be voluntary, says Clearwind co-founder Gabriel Eickhoff
2023 will go down in history as the hottest year on record, and when REDD+ carbon credits became synonymous with the word “worthless”. It will also be the year when two key figures in the voluntary carbon market resigned within months of each other.
David Antonioli, formerly the CEO of Verra, the largest carbon standard in the world, stepped down on 16 June after a study concluded that more than 90% of Verra’s forest carbon credits, if used as offsets, did not contribute to global emissions reductions.
Renat Heuberger, formerly the CEO of South Pole, stepped down on 10 November after a series of media investigations found that its flagship carbon project Kariba, did not generate the community or environmental benefits as claimed. The investigations also revealed that in at least two projects, South Pole didn’t develop the projects themselves but instead, bought and resold the carbon credits.
To understand whether REDD+ carbon credits will be, or should be, relegated to garbage status, I spoke to Gabriel Eickhoff, co-founder of Clearwind, a carbon developer with projects in Southeast Asia.
He says that forest carbon projects are critical to stop deforestation. But they also must operate within national regulatory frameworks for deforestation efforts to take effect beyond the narrow confines of individual project areas.
In other words, it’s time for the voluntary carbon market to no longer be voluntary.
This post highlights some parts of our 2-hour conversation. The transcript has been edited for spelling and flow. Listen to the full recording on Spotify here.
The arrival of Verra
Han: How did you first get into the carbon space?
Eickhoff: So if I dust off the cobwebs a bit, the short answer is that it was by accident. It was 2006, and I was just coming out of the University of Chicago and I found myself in Switzerland, in Geneva, job hunting.
I was originally quite focused on the issue of armed conflict and environmental management. And I came across a team based there in Geneva that was linked deeply into Indonesia. They said, hey, we’re working on this kind of new type of sustainable financing for forest conservation work and it involves carbon. And I kind of just said, yeah.
They said, well, why don’t you go down to Indonesia and get your feet on the ground and see if we can identify a great project. Just go for six months and then you can come back. And that was almost 18 years ago. So I sort of never left.
Back then in 2006 and 2007, which is really pre-Verra and at the inception stage of the voluntary markets, it was a big unknown. But there was a vision behind the idea of integrating markets into conservation as a key player that would add to the existing philanthropically-based conservation sector.
When I connected that up from an economic standpoint, it made a whole lot of sense.
Because the problem we were looking to solve at that time was conservation or deforestation as basically a market externality of global commodity production. This was potentially an option to explore creating a market correction through an instrument that would, by pricing nature and creating value out of standing forests and replanting trees.
Han: Could you describe to me what it was like setting up your first project in Kalimantan (Indonesia)? Because back in 2007, there were no Verra standards yet. I don’t think there were any standards to speak of. So how did you do that?
Eickoff: A lot of the world was building on some of the formative work from an organization based out of DC called Winrock International. Winrock at that time had some calculators, they had some tools, they were getting things going. Some standards like the climate community and biodiversity standard, which later came under Verra, already existed. So they formed a bit of a roadmap.
But we knew that we needed something more. So when Verra hit the scene around that time (note: Verra was founded in 2005), that’s when things really started to happen.
It was still another three years or so before the first methodologies came out, and then another year before the first project actually hit the market. I had the privilege of working as a consultant at that time on the Rimba Raya project, which is an initiative put forward by Infinite Earth. That’s how I came to meet the founders of that project.
Rimba Raya became the first project in the world to be validated under Verra. It was the first project to issue credits in Southeast Asia.
All of the projects before then at that time, I think ran into the reality of excitement and innovation and experimentation, kind of butting up against a market that wasn’t ready for them yet, and policies that weren’t ready for them yet. So a lot of the early nature-based projects kind of necessarily froze or failed as things got started.
Han: What I’m hearing is the advent of Verra was actually quite a big milestone in terms of professionalising the carbon industry. Is that correct?
Eickoff: Oh, without question. I think Gold Standard was experimenting with nature-based credits around that time. There was always a bit of shyness around credit claiming or credit issuances from avoided deforestation from Gold Standard. But Verra really took it to the next level and it really became more of a mainstream discussion with Verra in the picture.
Han: Some would also say that the Verra methodology, in its efforts to set standards and set the science of how to make a credit, also increased the barriers to entry for a carbon credit project. Smallholders are basically priced out of the market.
Eickhoff: Sure, but it also prices out a lot of fly-by-night organizations. I could tell you around the time I was getting started, nobody had anything to audit for three years after Verra was launched because there was no methodology to even put anything forward.
That period from 2006 to 2009, everything was going haywire. You could be walking down the street in Jakarta and people would stop you on the corner and say, hey, I’ve got a carbon credit. Do you want something? Do you want it?
There was a lot of rubbish and a lot of complete and total nonsense going on. And a lot of scams — people taking an opportunistic approach to a really beautiful story, that was [based on] absolutely nothing at all.
Now, should that barrier to entry also prevent small holder projects or small scale projects from entering? The answer there is clearly no.
But there is this trade off between quality and ease of access. Would you want every single person to just be able to go out and drill for oil? No, you need to meet occupational safety and health standards, you need to refine it in a certain way. And so I think it’s important to create barriers.
Integration with national regulations
Han: Between the time when you first set foot in Kalimantan in 2007 and now in 2023. What are the biggest changes that you’ve witnessed?
Eickhoff: By 2016, the first credits had been issued. Governments like Germany and others were actually dedicating overseas development assistance (ODA) or development funding towards the development of these projects. There was a vision to bring the standards into alignment with national systems, but the jurisdictional approaches to REDD+ under Verra were only just getting started.
There was Lucio Pedroni from Carbon Decisions. His work on project nesting and alignment of deforestation baselines with national baselines and national forest reference levels were coming out. But it was not being heard at the more structural level.
So the World Bank’s Forest Carbon Partnership, the UN-REDD collaboration between UNDP, UNEP, and FAO, all of that top level national REDD+ readiness work was just not listening to the project development private sector community.
There was like this willful ignorance on both sides. On the project developer side, to recognise that national systems were coming into place. And on the structural government level, and the UN level, this kind of disdain for private sector approaches and Verra. Some of the largest voices of that disdain were coming out of Norway.
It’s really disappointing because it’s really like two sets of dogmas. One, let’s create structural change that will trickle down to results on the ground and will create these glorious national systems and everything will be implemented and supported by ODA money. Which is a total pipe dream.
On the other side, there’s a dogma that the markets can drive everything. I also could see that we were also creating “islands of success in a sea of disaster”. So you do a 20,000 hectare project here and you do a 10,000 hectare project there. In the meantime, we’re in this sea of deforestation all around us.
What has changed over time is this recognition that national structural systems need private sector investment. They need project-level activities on the ground, big and small. And the private sector and the voluntary market is still waking up to the realisation that everything that they’re doing and all the investments they’re making are for naught, if they’re not brought into a bigger structural system.
These two sides (private sector and regulators) need each other and they have to stand for each other at the same time.
Han: That comment that you made earlier: Islands of success in a sea of disaster. So there’s a forest, the parts that are protected by carbon projects are islands of success, happy people inside. Everywhere else that is not protected will get chopped down eventually because it’s not protected. So how do we stop that from happening, you know, or how do we change that?
Eickhoff: I think the easy answer to it is whether or not two things hold true. One is whether or not free market capitalism around investments in these types of projects can truly scale the project development sector in a responsible and controllable way. And also, whether or not national policies are engineered in a way that enables that to happen in the first place.
There are a lot of places where these projects can take place, but the national policies aren’t ready, or they are simply just not commercial enough, and the risk profile of investing is far too high. There’s constant mixed signals about asset rights, about taxation, about integration into national systems, about benefit sharing, and about what communities have rights to that.
This makes it difficult from a reputational standpoint, and from a commercial standpoint. So how do you scale out? It needs to be enabling policies that say, hey, come in and please invest.
The Philippines has done a brilliant job in the last two years. The Forest Management Bureau and the Department of Environment and Natural Resources in the Philippines are truly to be commended for some of the foresight that they’ve taken. There’s still work to be done, but they’ve really taken some important first steps.
For a country to say, please come in, explore opportunities, invest, apply, register your project, develop it under international standards, and we will work through how to integrate that into our national system and our national accounting. That is what’s needed. Most countries in Southeast Asia haven’t been able to lay that level of clarity out yet in policy.
So the policy framework has to be there number one. And then we have to bring investment in a way with developers that are responsible enough to design projects properly, treat local stakeholders respectfully and fairly, and incentivize them because they are really, at the end of the day, those that are on the ground that are going to be doing a lot of the work and participating and driving these projects. The thing I worry about is that neither of those two things happen.
Han: There seems to be a trend of governments nationalising their carbon assets, which goes to what you were talking about earlier, like integrating carbon credits into a national framework. So case in point would be Indonesia. So it has a carbon registry now, carbon credits coming out of Indonesia have to go towards the nationally determined contributions (NDC) first and then it can be traded off. Do you see that as a positive trend and will that impact the projects that you have?
Eickhoff: I don’t think there should be a voluntary carbon market in the way that we currently understand it. I think we should be looking at all of these things as nature-based emission reductions and increases in storage, whether they are achieved through private sector investment or national systems and national policies.
We have to stop thinking in terms of compliance and voluntary and everything else as CSR and ESG commitments that don’t really matter that much. What is needed is full integration and respect for the fact that the voluntary market of the past has established a very solid starting spot for international standards. And that those standards don’t mean anything at scale without adaptation into national systems.
If you look at Indonesia, they finally get that. It’s not efficient yet, but they are working towards it. The Philippines gets it, some states in Malaysia get it, and I know that Singapore definitely gets it. If you look more broadly, Peru gets it. It’s got a really advanced marketplace that’s also struggling at the moment, but the way that they set it up, it was the right integration.
So Indonesia is the front runner. And I hope that effectively gets replicated throughout the rest of Southeast Asia.
Winning over local communities
Han: I want to go back to the point when you mentioned the local community now has a piece of land and they have a choice. Do they sell it to a mining concession? Do they sell it to a palm oil concession? Or do they work with you to create a carbon project? So you’re basically a competitor to a mining company. Do you have an advantage over them?
Eickhoff: I think it depends on your point of view. Let’s start from the standpoint of a power dynamic. Certainly not. The market cap of the entire voluntary forest carbon market is, I think, roughly on par with the global market cap of girl scout cookies right now. I think it’s also on par with fingernail clippers.
From a power dynamic, the answer is no. Mining, like logging, like large scale industrial agriculture isn’t just big business. It’s deep into the power dynamics of the families that pull a lot of sway in countries. That power dynamic plays out at national levels, it plays out at provincial levels, it plays out on the ground.
Is the opportunity that we bring more powerful? I think the answer is without question. And if the demand side of the market can get its head on straight and send clear signals without vacillating between $2 and $18. And if companies don’t commit to nature-based solutions in one year and totally abandon it the next, then we can deliver a cohesive and consistent narrative that can be backed up and trusted.
When you approach a local community and say, look, you’re losing forests, is that what you want? The answer is no. When you say to the average person in those areas, are you earning from these mining opportunities? The answer is no. Some are, but not everybody, and certainly not collectively.
When you approach it from the standpoint of, do you want to participate in a project that protects these sacred forests, protects the biodiversity and the non-timber forest products that your communities relies on, and introduces new forests, agroforestry, sustainable agriculture, and do this in a more integrated and comprehensive way where you actually get to decide on how the money that is earned by your community is used, rather than purely a top-down system, and earn an income that that doesn’t result in the total exploitation and loss of your ancestral land, I’ve never heard a single indigenous person (IP) say no to that. I’ve never heard a single community in Laos say no to that. I’ve never heard a single community in Indonesia say no to that.
But “please tell me more”, I’ve heard that.
So the challenge is then just making that happen. Developers are placed in a really difficult situation involving determining supply-side standards, a constantly changing demand-side market, and really complex discussions on the ground about behavioural change and land utilization. It’s a very difficult position to be in as a developer as compared to the rest of the part of the stack.
Thoughts on South Pole
Han: Kariba has been under fire since the beginning of this year and the New Yorker just published a pretty damning exposé about it. So what happened? What do you think happened?
Eickhoff: I think you could tell the most recent story of Kariba in kind of a three-part act.
Part one is the reality that Kariba was developed at an earlier stage in the development of the market and under the methodologies of that time.
And [Kariba] passed validation, verification, and verification audits by Verra. And if they did so in a way that was, as claimed by the Guardian and West et al. and others, inflated, then Verra has to own that.
You can blame the developer, but at the end of the day, it’s the job of the standard to ensure that the numbers are right. So I also think you have to look at it in the historical context of those standards transitioning and those methodologies transitioning.
There are something like five, maybe six methodologies that can be applied on avoided deforestation in projects like [Kariba]. When they are applied to the same area, they all deliver different types of results. There’s clearly an issue here, which is why more than two years ago, Verra set out on a mission of consolidating all of these methodologies into a single one, which is to be released at the end of this year.
So when The Guardian hit last year with some of their first hard-hitting pieces on this, it wasn’t news. We all knew that was an issue that needed to be resolved, and that’s what science is. It’s like let’s try this, then improve on it.
Nature-based solutions are not like measuring the number of emissions coming out of a valve after you replace a filter on a gas-fired power plant. There’s higher levels of inaccuracy, but that doesn’t mean that they’re worthless. It means that there’s a higher tolerance if you also want all these other co-benefits that come along with it. It’s the nature of working in really complex landscapes.
The second part in that story is what it means to set up a well-designed, well-operated project. And that’s where I think that [South Pole] really dropped the ball. I think South Pole and their local operating company did not own their operations on the ground. I think that’s what comes out in the New Yorker piece. That’s on South Pole, completely.
That’s why developers have to put a premium on design and ownership and control of what they’re doing. Otherwise, you end up with irresponsible behaviour on the ground.
Then the third act is how the media largely has treated these first two pieces. From Clearwind’s side, I think we’re extremely disappointed with The Guardian, not in raising the issue [on REDD+ standards], but that they appear to have been driving an agenda pretty transparently and willfully and knowingly, ignoring key facts about the story that they’re telling.
That leaves the readers ill-informed about the market and the transitions that it was already in the process of going through, in order to create a story that created a lot of alarm around a really nascent and fragile sector. And that’s on The Guardian.
On the other side actually, I would praise the New Yorker and their piece. I think it was a great piece. And it’s a cautionary tale to my colleagues in the development space about how to implement and how not to.
Han: I think Kariba is especially shocking because imagine if South Pole dropped the ball, who else did? South Pole is a giant. So who else can we trust now, I think is the question.
Eickhoff: One of the points made by the New Yorker is that at the end of the day, especially when it comes to nature-based solutions, I don’t really buy it that South Pole is actually a developer of nature-based solutions. A developer owns their projects. They don’t just own the supply of credits that comes out of it.
When I say you own a project, I mean you know what’s going on. You designed it. You made the plan. You operationalised it. You have people wearing that South Pole T-shirt on the ground. That’s not the case with South Pole, at least not in Kariba.
Other developers take a much more hands-on approach. I can’t think of a better example than Wildlife Works and their work in Kasigau in Kenya, or the Wildlife Conservation Society and a lot of other developers out there. They really take the operations and the fairness in the design very seriously.
$5 is the bottom line
Han: So in keeping the balance between commercial viability and sustainability, what would your strategy be if carbon prices crashed? What would have to give?
Eickhoff: It depends on why the price has crashed. So if the price crashed because I was looking around and seeing a lack of systemic demand like apathy, then I would be doing something else. I would be innovating some other solution that achieved the same goal.
That’s what I did at Lestari Capital. When we got going during the cold winter of carbon, it was a period of innovation and trying new things using similar principles.
If I looked around and the price crash was based on a drop in market confidence due to a temporary period of uncertainty in alignment between science and policy, that was driven by the media, then I would be doubling down. Because I think we solve these issues.
We solve the policy issues and we solve the science issues. I have no doubt about that. And that’s what we’re doing at Clearwind.
Han: Would you have to make any sacrifices on the sustainability or developmental side?
Eickhoff: I think it would change the types of projects that we went after. I think we would probably go after projects that are a little bit less risky, a little bit more straightforward, and manage our investment strategy and our cost strategy in order to achieve the outcome.
There is a point at which prices are not sustainable in these projects and you just can’t do it. No matter how much risk you’re willing to take, or how long you’re willing to wait, it just can’t be done. Even operating a lemonade stand, there’s a point at which it costs more to buy the lemons in the water than you’re getting in sales. And you have to stop.
I would rather stop and not create confusion in a local community than drag them into a long drawn out process that may never manifest.
Han: Do you have a number in mind? How low would carbon prices have to fall before you say, no, I’m out?
Eickhoff: Again, it depends on the project type and the cost profile of the project. And the demand side of the market is fragmenting quite a lot in terms of pricing. Blue carbon, forest carbon removals from replanting trees and natural forests, versus prices related to avoided deforestation, things like that.
I think generally speaking, prices below $5 are very risky to the market. I think they’re very risky. You can do it, but everybody, including the community partners on the ground, have to make sacrifices and they have to be really in it.
I think I started to see the first glimmer of hope in 2021 when prices were above $15. That’s when it was like, wow, okay, let’s run with this. So I think that there is kind of an unspoken floor, below $5, that we got to get out of that.
Crypto-native carbon credits
Han: There’s a trend within the crypto sector for crypto-native carbon credits. So the idea is to have a framework for small holders to issue carbon credits directly on the blockchain quickly and as cheaply as possible.
So just to explain, I kind of see that as a different category of carbon credits compared to what you do, which is pretty much like the premium level, right? You invest in a community, you actually have a developmental plan.
Whereas the crypto native carbon credits would probably be a commodity for people or small companies that just want to offset quickly and cheaply and just very, very efficiently. Do you have any thoughts on that? Is that a positive sign or is it one of those new and shiny things that aren’t going to last long?
Eickhoff: People have been toying with this since probably 2018. The cynical refrain is that blockchain is a solution looking for a problem.
I think anything we can do that creates a real reduction on the ground and protects forests is worthwhile. And if there is systemic demand, do it. If there is a way to get those claims integrated into a national system, that ultimately needs to happen.
If the market needs to fragment into a broader carbon market versus corporate sustainability commitments and corporate sustainability claims, that’s fine. As long as those claims don’t have anything to say about that company’s overall regulated targets under its government.
I think what’s really dangerous is you have NDCs being out there and all the respective ministries have to regulate their sectors and people start offsetting with credits that aren’t really integrated in accounting systems and saying, oh, no, we’ve offset it, it’s fine. That’s not what meeting an NDC is about.
If we can more clearly differentiate between the part of the voluntary carbon market of the past that needs to integrate, and the part of the voluntary market that needs to stay purely voluntary and claims-based, then that’s fine.
But I think the word offsetting is dangerous, because it implies that it is working towards some greater structure and system. If you develop a system that is tech-based like that, that’s wonderful. But unless it’s integrated in, it shouldn’t be called an offset. It should just be called a claim of some sort.
I think that’s my two cents on it. I do think that there is a desperate need for getting climate finance of any kind into the hands of smallholders and into small-scale projects and in the hands of individuals. That I agree with. And I applaud and I encourage more innovation in that and if blockchain is an avenue to doing that then great.
