One of the most controversial topics in sustainable finance is the voluntary carbon market. On paper, these offsets can match companies seeking to cut emissions with projects that can reduce carbon in the atmosphere. But the industry has faced allegations ranging from greenwashing to outright fraud. On this episode of Bloomberg Intelligence’s ESG Currents podcast, BI Senior ESG Analyst Rob Du Boff discusses the future of this market with Tom Montag, who runs carbon-credit management firm Rubicon Carbon after a storied career on Wall Street.
ESG has become established as a key business theme as companies and investors seek to navigate the climate crisis, energy transition, social mega trends, mounting regulatory tension, and pressure from other stakeholders. The rapidly evolving landscape has become inundated with acronyms, buzzwords and lingo, and we aim to break these down with industry experts. Welcome to ESG Currents, your guide to navigating the evolving ESG space, one topic at a time. Brought to you by Bloomberg Intelligence, part of Bloomberg's research department, with five hundred analysts and strategists working across all major world markets. Our coverage includes over two thousand equities and credits, as well as outlooks on more than ninety industries and one hundred market indices, currencies and commodities. I'm Rob Duboff, Senior ESG Analyst. Perhaps one of the most controversial topics in sustainable finance is the carbon offset market. On paper, it sounds like the perfect solution to accelerating the climate transition. Taking an externality like carbon which usually has very low or no cost for companies to actually emit, and putting a price on it to better incentivize both emissions cuts and investment in new low carbon technologies. Sounds great in theory, but there have been several problems historically with these voluntary carbon markets, accusations of fraud, greenwashing, or sometimes just well intentioned projects going up in smoke, both figuratively and literally. Joining us today to discuss this particularly tricky intersection of sustainability in finance is a true Wall Street heavyweight, Tom Montag. Tom is the CEO of Rubicon Carbon, a carbon credit management firm that partners with the world's largest enterprises to help them achieve their sustainability goals. He previous spent decades in finance, holding roles such as Chief Operating Officer at Bank of America, where he helped set up the sustainable finance function, and co head of the Global Securities business at Global Sachs. Montag has also served on the board of directors of Goldman Sachs, Northwestern University NYU, Lango and Medical Center, the Hispanic Federation to Shoots Land Trust, and the Japan Society. Tom, thanks for joining.
Rob, Thanks for having me now.
You've had some very very senior roles at some of the world's biggest investment banks, and now you're in the sustainability space. So that's more than just a random walk down Wall Street. That's a full swerve. So what led you to Rubicon carbon fate?
Perhaps? But I grew up in Oregon originally, and so.
I kind of had environmentalism in my blood from day one. I went into Wall Street, and when I trying to went to too long a story. But when I went into Wall Street, I got involved in derivatives, and derivatives were a nascent market then an opaque market, and I've drawn a lot of parallels between that market and what this market is like now and what has happened to this market. I left Goldman and went to Make of American and was involved in sustainable finance green bonds. We did a lot of things around there, and then when I left, I was approached by some ex colleagues of mine, including Hank Paulson, who was the who ran Goldman when I was there, about joining a startup that TPG was starting, a carbon credit startup called Rubicon, and that's when I came in, and I did not know what was controversial all the time. I have to admit I thought it was like, this is a great opportunity to give back and to help solve a lot of the some of the environmental problems that are going on. And so I was excited to work with people TPG and with the industry and developing this market.
Great.
So talk to me about rubicon.
What is it?
How does it work?
Well?
Rubcon was set up to be I think the idea was and this is set up by IPG kind of in twenty twenty one leading into twenty twenty two, an institutional grade counterparty for lack of a better word, if you think about when you talk to the opening about people and when they did these transactions and there's some fraud and all those that this industry needed institutional grade counterparties, and so they wanted to set up an institutional grade counterparty that would offer carbon credit portfolios that were curated by a science team. So we set up a science team run by doctor Jen Jenkins that would look at projects and it passed them to be in our portfolios. And we offer the buyers three portfolios or nature based portfolio of carbon credits, a industrial based group, and a removals based group. And it's a cure underneath that if you buy what we call a rubicon carbon ton in removals, so to speak, you buy the right to retire a portfolio that we're curating underneath that ton whenever you want to. Future we also let you build your own. In addition to packaging and curating the portfolio, we also have a Rubicon Carbon Capital Group which is developing new projects around the world to further develop good quality projects, but also to fuel the demand that we see for our rubicon carbon tons.
Got it.
So, talking about the voluntary carbon market, there's a number of industries where completely zeroing out emissions is just not feasible, right, So that's why we need carbon markets. But on the flip side, there's a lot of skeptics out there. They see it as a way to cut corners to get to net zero. Basically, just throw money at the problem and make carbon go away, you know, let.
Someone else deal with it.
So what do you say to those critics.
Well, if we could just throw money at it and it went away, that probably pretty good. The question is whether it's if it's really going away it actually guess does.
It actually go away? We're a believer that you have to do both.
You have everyone has to focus first and foremost on their decarbonization of their company scope one, in scope two as you know, but the scope three is very difficult and wherever the belief carbon will be part of our lives for probably longer than we like it to be. And for people that can't literally can't get it out of their chain, their supply chain, the ability to remove or avoid issuance is a great thing to do. And together those two things should be able to put together to allow us to reach net zero faster than if we didn't do it. And I think speed is of the essence I always talk about in money time value is an important thing. It should be in carbon two. And so if we can augment your own efforts with projects that are literally removing carbon and avoiding more carbon, it seems like a win win for everybody if we find the proper balance.
So there's currently, as I understand, in a hodgepodge of international systems for generating and verifying these credits. How do you get investors more comfortable with with the product you're selling.
Well, one way was to have an institutional grade counterparty like us. We kind of envision ourselves like the black Rock of carbon that. You know, if you think about companies that have money, usually when you have a lot your company has a lot of money, you don't hire traders and bond pickers and analysts. You go to money managers and they manage that money for you. I think for companies, we wanted them to come to us because we would be able to look at and provide the due diligence on projects and others. So what you need is you need a great science team that looks at the projects and does due diligence for you. But you also need standards around the world that people kind of are comfortable that people are meeting those standards. And you know, a lot of there's a lot of countries. I don't know, there's something like one hundred and thirty countries that have carbon credits in their countries, and there's different standards in many of these places have different standards in each other. So bringing those standards together would be a good thing for that as long as there are high enough standards when you bring them together.
And are we moving in that direction getting to a standard way to look at carbon collection, Well.
Yeah, I think we all.
I mean we're yeah, if you look at the things that are going on with right now with even the registries are changing their standards. So you know, you have the registries changing their standards as well as v CMI or I v CM and things like that having different guidelines and standards, and then governments having standards, and so I think there's a there's a collection of people helping to get better and better standards as you go forward, and hopefully that's that's going to lead in the right direction.
We think it is great.
And you talked about kind of the three avenues for generating in the carbon credits. You know, obviously you have natural carbon sinks like planting trees, or there's more industrial carbon capture. Now we have direct air capture, some maybe more robust than others. So you know, how does Rubicon deal with this variability in quality.
Well, it's not just quality, it's also price.
I mean, if you look at the price of some of the the things you're talking about, they can be in the hundreds and hundreds and hundreds of dollars per ton versus other things that can be ten dollars a ton, And so it's not just the product, but like how the permanence, the additionality and all the other things that go into measuring a carbon project. We do it by having our science team go out around, we talk to developers, we visit on site, and we have what's called a Rubicon Integrity scorecard, where we have a we have a score for every project that we have. We have a score that the clients can read, and we break it out by different sectors, so you can look at what we think of permanence, and what we think of how much carbon there is, and what we think about the community impact of what they're doing. So there's lots of factors that go into the quality of anything that you do.
Hopefully we do it, we do it well. Yeah.
I mean you mentioned additionality, and I know that that's kind of one of the you know, I know there was a you know, there's been a couple of pieces on this about how, you know, maybe not cutting down a forest that is protected anyway, and so I think that's definitely in permanence as well as I alluded to. You know, if you're putting a lot of hope and planting trees that are unfortunately with a warming climate, those can you may not be as permanent as you would like.
Yeah.
Yeah, the permanence is is a big deal. And of course trees eventually fall down and you have to you know, you have to repent them, and what do you do?
What do you do with them?
And and so that's important and then you know, then then there's permanence of director capture and where do you.
Bury it and how long does it stay buried?
You know, there's still sciences always different scientists think different things about this, and so it's important to get the full you know, the full fulk if of opinions out there. But there's a lot to you know, additionality is a big deal because that's like should you get carbon credits for this project? I would this project have happened without the carbon credits. And that's just that's a hard thing because as you know, for investing, rob you might invest in a project that I wouldn't because you're it met your return threshold but not mine. And so it's hard to know if somebody is investing just for carbon because of the carbon credits or not if that is enough to put them over the edge. So you know, it's some of this stuff is fine tuned to me a little bit too much. If you want to get as much money into this as we need. We have to open this big a little bit. If you look at the IRA right, you get carbon credits for you get tax credits for those things. No matter if you would have been the project anyway, it's it's it went to itceivive a lot more people to do it, and hopefully justtionality, we can ascentivize a lot more people to do it too.
Great and can you give maybe some specific examples of projects or customers you work with.
Sure, I'll give you kind of the biggest and smallest, not in stature, but just in the and who were doing so. In the last month, we announced a project with Microsoft. So Microsoft, you know, was one of the most active people around and we worked with them on a project in Panama. It's called Pontera, which is going to be a kind of a reforestation project of significant size and quality. And we're really proud and happy to work with them. So we both we invested in the project and then we they've they'll buy carbon credits from the project, and we ourselves are buying some carbon credits from the project and helping that project happen. So that we announced a few little while ago and just I think it was a week ago. On the other end of the scale, we announced a project with a Formula E driver and Lucas Degrassi. I don't know if you ever followed Formula E for you've heard of Formula one, yeah, so think about its Formulae would be the same concept but without.
Not gas cars but electric vehicles.
And so Formulae is is affiliated with Formula one and they just had a a race in Portland, Oregon that I attended, and Lucas de Grazzi was one of the first drivers that came from Formula One into Formula and Lucas de Grazzi has been an environmentalist for a while and he we got to know him and he bought a rubicon carbon tend to offset his footprint over since he started racing. And so we have a partnership with Lucas de Grazi. So he came in and he liked it because we were able to show him curated projects. He's the idea of him going out and picking projects is almost impossible. It's they're very difficult, but you know, he liked our the way we did it. No, we also offer risk adjusted so you know for all the risk that there's been in these projects for clients that if if they're over crediting, we have a risk adjustment feature for clients if they want where we make sure a ton is a ton in essence. And so he bought a risk adjusted portfolio from us, and we also announced a partnership with him going forward. So we've gone from Microsoft to the biggest perhaps in the world. To Luke looks to Grazzi basically an individual doing on his own and we've also done stuff for many concerts around the world and things like that on an individual basis.
It's amazing.
Actually, you know, you think about these big industrial processes, but then yeah.
I think it was Coldplay.
I went to a cold Play concert a couple of years ago and there's a video at the beginning about you know, all they're doing to you know, the investments they're making carbon captures.
So it's pretty cool. They're very they're very specific about what they do.
I mean they they do a very good job of saying we did this, we invest in this, and the actual projects and organizations they get involved with.
It's pretty amazing.
Yeah, now do you get your sticker on the Formula E car or.
What do you know?
Yes, we did so ruber kon Carmen sticker was both on his helmet and also on the I can send you a picture if you do.
But very cool, very cool, you know.
I guess you know we're talking about this big customers like Microsoft all the way down to sports and entertainment. But you know, it seems like the market gets a lot of talk, but it's it's still really small, right, so you know, how do you think about growing it and making it more robust.
I love you said that, because it gets it seems it gets way more written about it than it's impact right now in the markets. I use the bloom B and EF numbers. I like these numbers just to give some perspective for people. So bing F to say that around forty gigatons of carbon is omitted a year in general, forty gigatons. And if you look at the top net zero companies that said they're going to be net zero, they're about half that. They're around twenty gigatons. And of those twenty gigatons for the big companies, eighty three percent of that, or around seventeen gigatons, is SCOPE three. So only seventeen percent is scope one and two, which we talked about they need to focus on. But Scope three is eighty three percent, So that's seventeen gigatons of Scope three emissions for those companies alone. If you look at the carbon how many carbon credits were retired last year, it's going to be somewhere in the three hundred to four hundred million. So you compare the three or four hundred million to these seventeen gigatons. The growth to get to half of the scope if you said, oh, we're going to allow companies to offset half their Scope three with carbon credits, you need to grow from three hundred million to eight and a half billion, which is an incredible growth rate. And so that's why we talk about additionality and wanting client wanting to be to attract money into this place because the difference between what's going on and the volume of carbon that's being emitted is enormous. And to make a true difference, we're just going to have to get more people to invest in more projects. And it's obviously a small market three hundred million right now to four hundred million.
And do you think the bigger challenges on the demand side or the supply side, in other words, companies looking at buy credits or you know, actually finding these projects.
I really think it's the demand side, not the supply side. I think if you see consistent demand, you'll find the supply side coming in. But you know, two things are important. We have to be We'll find one way that as we change standards over time, an old project doesn't become worth. It isn't a binary thing that you go from oh it has value to it has no value because people that do things under the standards they used to have and now there's new standards have to have a way or mechanism to be able to adjust to the new standards. I think for people to make long these are long term investments, as you might imagine, you have to think. You have to have a long term perspective when you do some of these projects. You know, ten, twenty, thirty, forty fifty years. It's kind of like commercial real estate or something. So it's the demand side and then the consistent, consistent demand equation that people will do it. So I think if that happens, then you'll find supply side coming in. You even see more coming in now by the way you do see people raising funds that are investing in projects more kind of removal based stuff, some high text but nowhere near the numbers obviously, versus what's going to be necessary if we truly, if we truly let people use this against scope three going forward.
Yeah, you know, the other thing I think about is, you know, it's twenty twenty four, so we have to talk about AI, which is the sheer amount of electricity coming into the system. I mean, I think that's going to drive demand either directly though even if these server farms are all powered through renewable that's still kind of sucking some of the renewable capacity out.
Of the market.
So yeah, well it's funny. I don't know this for a fact. I think just reading the paper when Microsoft talked about how much they've bought, but they still haven't made a dent in what they have to buy because the growth has been so much faster than they ever thought the growth was going to be, right, they can't keep up with their own growth. And that's happening, I think to all these people in kind of the AI space.
Remember five years ago we were.
About crypto He's using all the power, and now we're not so much crypto but now it's AI really is the power think that people are chasing.
Yeah, I mean I remember not to go off topic here, but just youah, during the crypto bubble or I don't know if it's fair to call it a bubble, but you know, everyone was talking about how, oh, it's going to drive demand for renewables, but it's it just seems like, if you know, if we're going to build all these renewables, is that the right purpose for it. And I'm sure I'm gonna get hate mails for saying that, but certainly, you know, I would imagine AI at least has a little bit more public utility than crypto.
Yeah.
Well, but it's using a lot more and it's using I think it's using a lot more, a lot more energy now than they ever thought possible. And my guess is the growth is going to continue. There's nothing that tells us it's not going.
To so great.
And and you did mention, you know, government support and the IRA. So the White House actually recently released a Joint Policy statement for the voluntary carbon markets. What role do you think government can or should play in developing the voluntary market?
Well, I think it's great they did that because I think the market kind of needed the effect. No, these are these are good tools and a tool that should be used again in concert with doing your own work on your own, on your own decarbonization, and so it's really important that they do that. I'm about to say what they should or should not do. You know, compliance markets can work. Compliance mar Here in California, there's a compliance market that works that allows offsets as well as compliance, and so there seems to be ways to make them work together that would be good. But I was I think there's obviously if you look back in a couple of years, you see how much momentum we had around net zero in this country. So I still think it's possible to do it this way with the with the right with the right infrastructure around it right.
And I'd say one of the biggest criticisms of the voluntary carbon market is they are indeed voluntary, not a compliance market like you discussed in California. So so how do you think about price discovering a market like that, Well.
First of all, there's not very much you know, in my world of the markets, there's price discovery in that people, there's brokers out there, and there's many people that will quote you prices, but the liquidity, there's very little liquidity, and so you know, you have to search for the bid offered to be people to buy things back to you that you bought. The bid offer is going to be very very wide and something like that, so you have to go wide to find that. So but there is price discovery. You can find those things. It's just not liquid and it's not right in front of you. And remember remember not only that, you have to remember it's not like the stock market, where if I have a share of stock of Microsoft, every share is the same, right you got to you have the whole concept of vintages, so like what year was this from? So it's more like wine, I guess in that sense, like a twenty seventeen vintage credit from one product, the same project of the twenty nineteen vintage credit isn't the same thing.
And so you can see you.
Can see very high different differences even there in the pricing. So it's definite there's not liquidity. And the other thing you can't do right now is really you can't really borrow against them. You know, one thing that makes markets liquid is when you're able to borrow against your assets. Like you can borrow against stocks, you can borrow against bonds. Even the power market now they can oftentimes the companies that get PPA agreements can borrow against those. But in this market, there's not a lot of borrowing against carbon credits, and so you again no little liquidity. Price discovery is difficult and you can't borrow against it, so it uses all your cash when.
You buy it.
So is there anything that can be done on the market structure side to maybe make the market more efficient.
Yeah, it's like the standards that people Yeah, the standards that people are saying. And then I think you can develop if you think about the forward rates, the forward purchases that people are doing. I do think you can get a robust forwards market going because the counter parties are usually very highly credit rated there and so people will be willing to lend against those. When people are going to lend against something, I think you can start to get more of a robust bid offer market against it and more people providing bids offers and liquidities, and that's liquidity in that space. So I think it's we do think it's possible.
And then in terms of kind of cross border pricing, you know, obviously carbon itself is a very global commodity, if you call it that. Global warming is obviously global. But you know, if you're talking about pricing carbon, you know in different countries in different ways, does that create a problem where you're not really seeing that.
Well, it's not a problem as long as you know understand how it's done, like, but sometimes you know it's the unknown, like how is it There's still unknowns about jurisdictional credits and who's taking credit for that, and who gets credit for that, how much goes to the local government versus how much goes to the developer, et cetera.
So I still think there's.
Some rules that haven't been written or tested is maybe a better word. Do people really have tie to that land or not title to that land? In a lot of countries that real estate ownership is a difficult thing to prove and find out. And remember many of these projects, they're just difficult projects to do. You can imagine where they are and the work you have to do. There's a lot of just learning as you're doing it because of the difficulty of doing it. So I think it's hard, but I think it's doable. I mean almost every country has its own stock market and can have its own rules for listing stocks in those markets. You just have to be aware of what they are and just know the risks that you have from investing in it.
Got it all right, Tom, Thanks again for joining us this week. Listeners can find more information on topics like this by going to BI ESG on the Bloomberg terminal. Also, if you have an ESG quandary you would like to ask bi's expert analysts, send us an email at ESG currents at Bloomberg dot net.
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