BRIAN KENNY: Today on Cold Call, we’ll talk about something we all have, but many of us have no clue what it is. I’m speaking of a carbon footprint. It’s a term that helps to describe the total amount of greenhouse gases, primarily carbon dioxide, released into the atmosphere because of human activities that contribute to climate change. Your footprint includes emissions from things you do every day, like driving, heating your home, eating, and shopping. The average carbon footprint in the US is the equivalent of 16 metric tons of carbon dioxide, which is about three times the global average. The good news is that you can reduce your footprint by simply doing less of those things. But if that’s not an option and you want to make a big reduction fast, you can turn to carbon credits. Global carbon markets are valued at nearly $1 trillion and growing fast. As organizations and nations race to comply with carbon reduction goals, it’s a complicated and chaotic landscape. Today on Cold Call, we welcome Professor Mike Toffel and guest Duncan van Bergen to discuss the case, “Calyx Global: Rating Carbon Credits.” I’m your host Brian Kenny, and you’re listening to Cold Call on the HBR Podcast Network.
Mike Toffel’s research examines how companies are addressing climate change and other environmental and working condition issues. He’s also a fellow podcaster as creator and host of HBS’s Climate Rising. Mike, welcome.
MIKE TOFFEL: Thanks so much, Brian.
BRIAN KENNY: Haven’t had you on the show in a while. It’s great to have you back.
MIKE TOFFEL: It’s great to be here.
BRIAN KENNY: And today we’re really pleased to have the protagonist in our case, Duncan van Bergen, who is a co-founder at Calyx Global, who previously worked at Shell and McKinsey, and he is a graduate of Harvard Business School. Duncan, welcome.
DUNCAN VAN BERGEN: Thank you. Thanks so much for having me.
BRIAN KENNY: I felt like I had to explain carbon footprint at the outset because I don’t understand it, and I’m going to assume a lot of our listeners don’t either. I actually made an attempt to understand what my carbon footprint is, and I’m embarrassed to say that it’s not 16. It’s like 23.4, which to use a Boston slang term is wicked bad, I think.
MIKE TOFFEL: Yeah, it’s probably driven by flights, is my guess.
BRIAN KENNY: So today we’re going to talk about carbon credits and the carbon market, and Calyx is at the center of that discussion. It’s complicated, right Duncan?
DUNCAN VAN BERGEN: It can be a bit complicated, indeed. Yeah.
BRIAN KENNY: We’re going to get into some of the details of what makes it complicated, but Mike, I thought I would start with you. I always like to ask our faculty what inspires them to write a particular case and why they think it would make for a good discussion in the classroom. What was it about Calyx?
MIKE TOFFEL: Yeah, that’s a great question. The voluntary carbon markets is a really interesting space because when we think about the need for companies and countries to reduce their carbon footprint, we often will think about organizations making investments in-house to, for example, change their heating from natural gas to electrified heat pumps. And procuring renewable energy to power that, or other attempts like that. Those are certainly important. They also can take action in their products to make them more energy efficient, but at the same time, there’s lots of expensive items after they get through the first few. And so what carbon credits do is they give you the opportunity to pay others who have cheaper methods of reducing their carbon footprint, and then you get to claim credit for it. There’s a definite number of activists and other concerned people who don’t view this as equivalent in the carbon space. And part of that reason is that there’s been a number of scandals that have shown that those who are taking the action, whom you’re paying to reduce emissions, are not necessarily doing the calculations correctly, they’re exaggerating, or there’s efforts to reverse. Sometimes there’s a forest fire or there’s subsequent development that might take out some trees that you’d planted, that they’d planted on your behalf. And so there’s been some controversy around this.
One of the interesting arbiters of this to enter the market to try and help buyers figure out which of these carbon credits are more legit than others are carbon credit rating agencies. Calyx Global is at the center of that, along with a few other companies. And I met Duncan a few years ago at a HBS reunion where he sat on a panel that I moderated about climate change. And that was the first I’d really heard of this market. And the first I’d met Duncan, and subsequently I’ve met him and his colleagues and it’s a super interesting space.
BRIAN KENNY: Yeah. Duncan, let me turn to you for a minute, and I’d love to hear more about Calyx, about why you were involved in founding it and what were some of the things you were trying to solve by getting involved in this space?
DUNCAN VAN BERGEN: My co-founder, Donna Lee, and I basically came in our own very separate ways from a place of what I’d say is firsthand understanding of just how complicated it can be for a buyer of carbon credits. And a lot of the buyers are companies to know which credits actually deliver on the claims the credit makes. And just to get that out of the way, the core claim a carbon credit makes is that it stands for one metric ton, of removed or reduced emissions. Just like Mike explained, they buy this credit on the belief that, hey, it really stands for a ton, and I can compensate for a ton of my emissions for this one credit. And we knew firsthand, we had seen and lived firsthand, that it can be quite complicated to know which credits actually fulfill that claim and which don’t. And we both come from a place where our core assumption is that buyers want to have real impact, that this is more than just window dressing, and that they want to be able to make the right choice. And the flip side of that is obviously also true, is that companies don’t want to be called out for having bought junk credits and claims of greenwashing, follow that, et cetera, et cetera. But again, it can be a little bit complicated to separate the wheat from the chaff in this market. And that’s where we come in with Calyx Global. We want to make it easy for companies to make a choice for more real impact with carbon credits.
BRIAN KENNY: Yeah. Mike, maybe you can give our listeners a better understanding of, we’ve got the voluntary credits and then we’ve got the mandatory credits. How are those different and where does Calyx fit sort of in the landscape of the voluntary credit space?
MIKE TOFFEL: Yeah, so the origin of carbon trading really comes from the regulatory space and the UN treaties that allowed countries to meet some of their goals by buying credits from other countries, whether that’s within the EU for example, or globally across less developed countries, investing in projects, selling to more developed countries. So that was the origin. But then the diffusion and the spread of countries signing up for goals to which they would be held legally accountable in a somewhat weak international framework, really didn’t take off beyond the EU and a few other countries. In response, a lot of countries and even cities and organizations like Harvard have said, “We think this still needs to happen.” And so they’ve sort of filled in the breach with this voluntary carbon market. And so, you see net zero targets or science-based targets, a whole litany of voluntary commitments, other commitments just say, we want to reduce our carbon footprint by X percent by a given date. Harvard University has said that we want to reduce our fossil fuel emissions to zero eventually. And in the short term, we want to reduce our fossil fuel emissions. We want to neutralize them having net zero fossil fuel by 2026. That means not only reducing our carbon but also reducing the health impacts of fossil fuels.
And so for that, we’re trying to figure out what are the right actions internally and externally to figure out the package of activities to pursue. So, for example, and this is an area where I’m working with our university colleagues to try and help figure this out. We recently announced that we are investing in some new renewable capacity across the US to try and offset, we don’t call it offset there, but we say neutralize, the power, the fossil fuels associated with the power production, the electricity that we purchase.` But then we have fossil fuels that we combust on campus for heating and for the buses and trucks that we operate. And we’re trying to figure out how much of that and how rapidly do we decarbonize those shift to electric in most cases, versus thinking about `what type of carbon credits should we procure? And for that process having, we actually have a contract with Calyx, we’re a subscriber to their service so that we can see their take on various carbon credits, and we have access to their experts. We’ve had many conversations with Donna, Duncan’s colleague, about how to think about the market. So I’m not only writing a case about them, but I’m also getting a perspective from, yeah, the client perspective and from a team that’s trying to figure out how do we meet these goals.
BRIAN KENNY: Yeah, that’s a great transition to a question I have for you, Duncan, which is, as you’re thinking about the rating system, can you tell us what makes for a high-quality credit? What are the sort of biggest red flags that you see where it comes to low-quality credits?
DUNCAN VAN BERGEN: For starters, let me perhaps emphasize that we look at three different dimensions of quality when we say we rate credits. The one that everybody thinks about is what we call greenhouse gas integrity. Does this credit really represent one ton? And that’s definitely one area that we focus a lot on, but there’s two others. One is what we call SDG impact. And SDG impact looks at when credits make claims of having impact on one or more of the UN sustainable development goals, is there substance behind that claim? And often people think, Hey, that’s just a little layer of marketing on top of the credit, but we believe that it’s possible to analyze that as well. And third, we look at something called environmental and social risk in terms of, does this credit in any way present a risk of harm to the community in which the project is operated or the environment where it takes place?
But let me go back to that first one, which a lot of people ask about is okay, well, how do we assess greenhouse gas integrity? It’s really a three-step process. First, we assess the carbon crediting program, so the set of the infrastructure, if you will, that is used to create credits. There are a number of standards that have been used for a decade or two like this around the world, and we rate these standards, if you wish, in terms of as a setup, as a structure, as an infrastructure. Do they actually work with enough transparency, with enough scientific content, et cetera to really be able to guarantee the delivery of good credits?
The second step is we conduct a very in-depth review of the methodology used to create the carbon credits. So as you can imagine, credits from capturing methane coming off landfills are very different in nature than what Mike was talking about before, planting trees or some of the more advanced technology approaches like things like enhanced rock weathering or biochar production or things like that. They’re all very different and each has their own methodology. So we review those methodologies.
The third and final step is reviewing the actual individual projects that create carbon credits. So that individual project where methane escaping from a landfill, you can almost imagine it, is being captured and either flared into less heavy greenhouse gases or is captured to produce electricity from. And so we look at that project and we look at a whole series of risks. And these risks are fairly commonly accepted in the space. They include additionality: would this project have happened without carbon finance? Because the principle is if a project would have happened anyway, then you shouldn’t get credits for it. Things like permanence. Mike was referring to it earlier, what type of mitigations are in place to make sure that if reversals happen, that those are properly accounted for? Things like linkage: are the emission savings or removals not just being displaced to another area when say we protect a piece of forest, how do we make sure that protecting this piece of forest doesn’t lead to more deforestation a hundred miles to the east or west? There’s a number of risks like that, and those are certainly some of the more well-known ones that we assess as part of this process.
BRIAN KENNY: Yeah, you’re not the only ones doing this, right? The case talks about some other people in the space or organizations that are in the space. I’m wondering how alike or different are your ratings from theirs, and how does this sort of shape the impact of the market?
DUNCAN VAN BERGEN: Yeah, you’re right. There are a couple of other raters in the space, and I think it’s a good thing that there’s choice in this space. And I think it’s an important point because sometimes I go to conferences and people try to challenge me and say, well, hang on. Not everybody even agrees on what quality means in carbon credits. And I’d say, “I think that’s wrong. I think everybody’s pretty much aligned.” And I would point to the core carbon principles of the ICVCM, the Integrity Council for the Voluntary Carbon Market. As 10 really good principles that outline what a carbon credit must comply with or the standard that should be met. And I can say, I think all the ratings agencies approaches are plugged into those core carbon principles. I’d say beyond that, yes, there are some differences. Some of the risks that each of us assesses are we assess them a bit different, and that can lead to different ratings for a similar project. And it also means that say a double B in one rating system doesn’t mean exactly the same as a double B in another system. It’s a young industry. I expect that gradually there will be convergence as we all become more and more transparent about how we do it, and we get to benchmark our approaches. I’m sure there’s going to be some learning going in all directions.
BRIAN KENNY: And we know technology has a big impact, and the advent of AI is impacting pretty much everything. I’m wondering what you see as the future of technology in credit and carbon ratings.
DUNCAN VAN BERGEN: I’m going to immediately lose every shred of credibility that I’ve built up in the last couple of minutes. I’m going to launch four or five buzzwords in one go and then defend that they all apply. And when I say digitization it’s kind of an obvious one, but then I’m going to say remote sensing and geospatial, then I’m going to say blockchain, then I’m going to say AI is the cherry on top. But I think they all are relevant. And I’d start with digitization. I’d say this ecosystem is still in a process of digitization. Many parts of this chain that are being done with PDFs and some fairly basic methodologies. There is a very commonly used process for measuring the girth of trees. It’s called measurement at chest height. And a lot of the documentation is being handed from one player in the ecosystem to another by using PDF documents that are uploaded and downloaded onto registries. That’s obviously not the way it’s going to be. This is going to become more digital. Every player is going to have the digital record out there, and we hope and look forward to being able to plug into a more digital version of this ecosystem. Remote sensing and geospatial is much talked about in the space, and the advances have been tremendous over the last couple of decades. And the availability, the ubiquity of geospatial data, has also just exploded. We use it extensively. We make the case that you can’t do away with all aspects of quality analysis just by saying, “Hey, I’ve got satellite data.” But we think it’s a very useful tool, and both developers and ourselves make extensive use of it.
And then you get to things like blockchain and AI. I’ll just mention it because if you think about what blockchain is good at, it’s about making sure there is a clear chain of custody along a whole series of players, and you need to be able to make sure that whatever changes are done, that there is a clean record of it. Now, I think that’s kind of almost the textbook case for that type of distributed technology, and I haven’t yet seen anybody really crack how it would play a role here, but I have to expect that that’s going to be the case. And then finally, AI, I think is going to play a big role in terms of helping accelerate things like data ingestion and interpretation. And we are heavily experimenting with how we can deploy that smartly, both in our own kind of back-office process as well as for helping our customers. But I’ll say one thing on that and then I’ll stop my buzzword fun fair.
BRIAN KENNY: I’ve enjoyed it. I’ve enjoyed the buzzword-
MIKE TOFFEL: Buzzword Bingo.
BRIAN KENNY: Yeah.
DUNCAN VAN BERGEN: I wonder where I learned that, but I was listening to another podcast—not quite as good as this one—
BRIAN KENNY: Thank you.
DUNCAN VAN BERGEN: —of The Economist the other day, and it was about the importance of data in the whole AI revolution. They were saying there’s three things, right? There’s compute power that’s increased tremendously. Algorithms and data. And what we find ourselves sitting on at Calyx Global is one of the biggest troves of deep insights into what makes certain methodologies work and not work, what makes certain project types work and not work. And so we’re really focused on making sure we continue to curate that best and biggest set of information around how carbon credits work, how carbon crediting projects work, how quality works, how these different standards and methodologies work. And we think that’s a
