 This book was essentially a giant diagnostic of all the ways which NetZero has struggled to add up. And we identified four unsettled accounts of current practice of NetZero that were going to be the core ditches that practitioners were going to get stuck in. I'll spare you the booktop as of the time, but I bring that up as context because what has been really exciting and migrating is over the last 15 months or so we've been working out solutions. So this is really about how to make NetZero add up, how to make the proliferation of pledges that now cover over 90% of the global economy for global emissions, I should say, under some sort of NetZero pledge. How to make that real, audible and dry, effective carbon markets that will make those pledges add up. So that's kind of the context in which Mark's going to give you his presentation today. Delighted to welcome Mark, Mark has been a fellow with Steyer-Taylor NSFI for now three years. We were lucky enough to pull them from this 25 years of experience in the asset management industry. He has covered every corner of it and we are very lucky to have in an academic setting. It is very unusual to have someone with Mark's background who has both a PhD in economics in the University of Chicago and then these decades of practice. And so it is really very much in the flavor of the work that we do at SFI and STC, which is very applied research and analysis in the service of practitioners where we are charting out the frontier of sustainable finance and energy policy finance, identifying the key problems and barriers and innovations that are going to unlock progress going forward. So with that, I will welcome Mark Preston. Thank you. Thank you all for coming to spend time with us this afternoon. It was about the worst title. I don't want to blame Katie. I didn't give her a different title because we sound very inspiring, accounting for carbon offsets. So I want to frame it as we solve climate change in order to tell you how to do it. I'm going to start with calling it two sets of background topics. One is how the world of climate action thinks they account for carbon today. And the other is how the market, the carbon markets operate today. We might ask why those questions are interesting or important and hopefully I can convince you of that. Carbon accounting is important because we have to diagnose the problem and understand where the carbon gets emitted, by whom and how it will trigger to be responsible for it. Carbon markets are important because it's carbon markets that are actually going to drive capital to the right places to decarbonize systems. And hopefully by the end of this talk, you'll agree with that assessment that those are two really important things that are functioning very poorly today. Let's start quickly with carbon markets. Carbon markets exist in two different forms. There are what are called compliance markets. Some of you may be familiar with California's compliance market, the California Air Resources Board. The state of California basically says that if you meet certain criteria and you want to admit a ton of carbon into the atmosphere, you need to buy a permission slip because that's what it is. It's something between the permission slip and a tax. Legally speaking, it has to be a tax. The permission slip feature just sort of sounds nice. The state of California is saying, hey, if you pay us some money, it's okay to admit, which is going to come back to that when we talk about the carbon accounting. The other kind of market, the other part of the carbon market is the voluntary carbon market. If you've been watching anything in the news in the past six, 18 months about carbon markets, I am particularly partial to jump over segment on carbon markets. But the recent one, was it the Atlantic or the New Yorker about this giant fraud of a carbon trading operation in Africa? There's the voluntary carbon market is the climate activist analog to compliance carbon market. In very few places, we've got California, we have Kurok and a couple of other markets where governments say you can only admit carbon to these permission slips. And the voluntary carbon market is trying to do a similar thing to say, if you want to admit carbon, you need to do something about it. And the need to do something is incredibly big because the voluntary carbon market is basically saying buy something. It doesn't say what you're buying. It doesn't say what you're trying to do. So in fact, the voluntary carbon market sort of splits into two pieces that are often categorized as what are called offsets. So it's something I'm buying that makes up for the fact that I admitted it's not a carbon market. We can split the voluntary carbon market into what are called avoidance offsets and removals offsets. Avoidance offsets are probably the thing you are most familiar with because they are most of the trading volume and they are most of the activity in the space. The avoidance market is the market that says, I'm going to pay someone else to not admit carbon. And that's what is supposed to absolve the of my sin of admitting carbon in the atmosphere. Sounds very odd. It is very odd to say that I can pay someone else to not do a bad thing. And that makes up for me doing a bad thing. That doesn't really make much sense. The other category of offsets are the removals, actual removals of carbon from the atmosphere. So to give you some idea of what trades in these markets, in the avoidance category, we put all of the things that sound like I'm paying someone else to not cut down trees. In the removals category, we put things like I'm paying someone to grow trees that capture carbon. And those are extraordinarily different things. The most important thing for the purposes of this talk is there is an endless supply of paying people not to do bad things. I, you know, stand for students or closely affiliate with Stanford. I think you understand what happens to prices of things that exist in the supply. They aren't very high. They're not very valuable, but don't do very much. The removals, on the other hand, are a really complicated exercise. If I remove a ton of carbon, it can't really give it to someone. I have to basically hold it for them forever. That makes for very difficult accounting, makes for very difficult descriptions of transactions, both intuitively difficult, but also legally very difficult. So there are all sorts of challenges we face in voluntary carbon profits. Are the transactions real? Are they transactional? Something that exists? Are they transactional? Something that doesn't really exist? What do they need? This brings us back to carbon accounting. I raise your hand if you have any idea what scope ones go to, scope three. So a good number of you. The greenhouse gas protocol is the standard tool that the climate world uses to describe what's going on with carbon emissions. It's a very fun structure. It was originally designed as a risk management tool about 20 years ago, a little over 20 years ago, and the idea was at the time that carbon taxes or actual carbon constraints from governments were right around the corner. And what the greenhouse gas protocol did is it described roughly the big risks to a company from a potential tax or potential constraints on carbon emissions. So scope one are actual combustion emissions into the atmosphere. So the most common examples of scope one are things like power plants burning gas, power plants building, burning coal. Scope one emissions are combustion emissions. And so for the case of this discussion, we'll just say combustion emissions. So like burning fuels and power plants, burning gasoline and cars, those are direct emissions from combustion. Scope two emissions are the emissions that result from purchased power, I'm sorry, purchased electricity, heating and fuel. Again, roughly speaking, that's mostly electricity. Scope three emissions are supply chain emissions. So that is the emissions in my corporate supply chain from all of my upstream suppliers. So when I, you know, I were holding my Samsung phone, I would say Samsung has scope three and upstream scope three emissions from every single component it gets delivered in order to produce my phone. Downstream emissions are very complicated, all encompassing a nearly arbitrary. So for example, I'll, Alicia is always entertained by my crazy examples of what could be in scope three emissions. If I wedge the gas pedal down on my car using my cell phone, that's arguably scope three emissions from Samsung. If I am running a simulation of an oil rig on my cell phone, then one could argue that is scope three emissions of all the oil coming out of the rig on, say, the tag to Samsung. The whole problem of scope three emissions is that the boundaries and what's covered by downstream emissions are totally unclear on the upstream emissions. Samsung's phone has hundreds and hundreds of components in it coming from probably almost as many suppliers and their suppliers, suppliers and their suppliers, suppliers, suppliers. Samsung has no idea who their upstream suppliers are. So now come back to scope one, scope two, scope three. Not all of these things are emissions. Only scope one emissions enter the atmosphere. Scope two emissions are counting someone else's scope one emissions. Scope three emissions are counting an unknowable number of parties upstream and downstream emissions. The result is that the greenhouse gas protocol is not a functioning accounting system. A functioning accounting system needs to count emissions once and it needs to count all emissions. It needs to be mutually exclusive and comprehensively exhaustive for those of you in here have worked at McKinsey or aspire to work at McKinsey. It's really important that you know the term we see because every McKinsey chart you ever see is we see. So the problem is that the greenhouse gas protocol cannot function as an accounting system because you have no idea what it's counting. Many times Phillips will say well it just double counts and the problem is no it doesn't double count it unknowably over counts. And so we're left with saying we have no ability under the greenhouse gas protocol to correctly attribute emissions to companies or emitters or households or consumers. So what we need to do is come up with a scheme that says we can actually do carbon accounting. Why do we need to do actual carbon accounting? Because if we're going to hold people accountable for their emissions we have to be able to say that they can be held responsible for them. So just as an example in the United States under U.S. law there is no chance that we can ever hold a company legally responsible for something out of their control. And that's what you know the greenhouse gas protocol attempts to do. So even if it were right even if we could calculate the likelihood that it will hold up under U.S. law to hold someone responsible for this is nearly impossible. We've had discussions I actually had a very funny discussion with a Stanford law school professor who I said isn't it crazy that we spend all this time trying to make scope for a mandatory and then it will take years and years to work its way through a course for someone to finally say no there's no hope. And the inspiring answer that this professor gave me is it's not going to take very long. There's just no chance. So you know we agree we need a real accounting system. So where does that leave offsets and carbon markets? Another funny thing about capital markets and investment activities is the investment activities and markets are generally exercises in matching assets and liabilities. So the entire banking business the entire insurance business most of financial services even your retirement plans I know all these students have very large retirement plans but the purpose of a retirement plan is to say I have assets to match the future liabilities of what I'm going to consume in my retirement. Virtually everything we do in finance is about asset liability action. The problem here is that if we don't have carbon accounting we don't know what the liabilities are. If we don't know what the liabilities are we have no idea what assets are that are necessary to match or diffuse the liabilities. So what our work is about doing is saying rather than using greenhouse gas protocol we can use a system that is called the liability accounting which is developed off of cost accounting that says through this supply chain process so go back to all of the parts of my Samsung phone every time Samsung is buying a part of a collection of parts from a supplier the supplier sends them an invoice that says I just sent you you know 62,000 chips and these 62,000 chips cost 42,000 dollars and in their entirety contain I don't know a thousand kilograms of carbon and that happens at each step of a supply chain it's very much like an entire accounting role functions today through keeping track of dollars all we're saying is going from step to step in a supply chain you keep track of carbon so when I take all the pieces into a good that I want to produce I get my pieces I know how much the components cost I know how much carbon is in them I'm going to use electricity or I may use actual combustion to combine my parts into my product I now know even body carbon in my product and I pass it to my customer and at each step along the way I'm accumulating these carbon liabilities the question is what is it that matches what's the asset I need to own that matches that liability and that's where carbon markets are going to come in so if we say committing a ton of carbon in the atmosphere is a liability then can anyone take a guess of what the asset needs to be to remove correct thank you the idea is if we emit the ton of carbon we have to remove the ton of carbon that's very different than the offset market operates today because the offset market set today more or less allows for this idea that if I emit a ton of carbon I'm good if I pay someone else not to emit a ton of carbon but you can see that that doesn't add up I can always pay someone to not emit a ton of carbon if that absolves me of continuing to to drive emissions we're making no progress so in essence when we start talking about how to account for offsets in the paper that I wrote that Bob Kaplan at at Harvard and Carter Lamont at Oxford we talk about how to deal with the accounting problems of carbon removal assets and we very clearly distinguish between the first thing to say is we're talking about voluntary carbon we're not talking about compliance carbon because under current practice compliance carbon trading is simply permission slips to commit carbon has nothing to do with the liability and then we say in the voluntary market we distinguish between avoidance and removals and being very clear of the state that avoidance isn't an asset it's a really nice thing it's a perfectly reasonable thing to do but it's not absolving you of therefore you have to focus on removals then what we do is we describe the liability and what we're saying what we say there is if you emit a ton of carbon into the atmosphere basically it's there for a very long time we make the argument in the paper that let's call it a thousand in their liability because if you emit the CO2 into the atmosphere you know it's not like it really I mean it sort of decomposes into something else I'm not a chemist I don't like your blood but in a very very long time sure the CO2 may break down into something else but the problem is that doesn't happen you have what we have is trees nature to a degree we have the ocean but when the ocean absorbs CO2 that's really not much different for the most part than dumping CO2 into the atmosphere we dump it into the upper ocean and it changes the ocean when we deal with trees and you know what we could call photosynthetic capture it's temporary it doesn't have the ability to meet the terms to meet the duration of the liability so what we talk about is this idea all right if emitting a ton of carbon is a thousand-year liability your responsibility as an emitter is to say I have to remove carbon for as long as I put it up into the atmosphere that's the only way to balance the accounts that's a very hard thing to do it's a very expensive thing to do the reason we think this is so important is it it lays down a very hot bar for when it's acceptable to emit carbon because in fact under rules like this whether voluntarily imposed on ourselves or if we eventually get to a point where a legislative body will do anything we can impose these rules in a mandatory fashion that sort of removal asset is extremely expensive so today a carbon removal that is durable for a thousand acres is running roughly five hundred dollars a ton but that means is that if we are decarbonizing using this strategy then a company will spend up to five hundred dollars a ton to not emit carbon in the first place because it's always going to be cheaper to not emit it then remove it or at least for a long time it's going to be much cheaper to not emit rather than remove it. Does this make any sense? Questions? Do you have any questions from the government? Do they have to account for what they're talking about? That's a it's a great question. There are a number of companies that are saying they're going to do that. I think that's a that would be great. The challenge is if you want to move to the sort of compliance mandatory regime it would be very hard to go back and actively estimate past emissions in order to say we're going to require moving assets to match past all of those but yeah there are a number of companies to set to have a pledge that they are going to undo all of their past emissions but it's actually unclear how how they're coming up with those numbers but for example and so sorry let me just take a step back so for example what we describe is this notion of carbon solvents it says if I emit you know x number of tons of carbon I have to own removals that match my liabilities so my assets have to meet or exceed my liabilities and we describe that as carbon solvents where this becomes particularly interesting around corporate pledges is I'm sure you've all heard of companies making net zero pledges the problem today is that net zero pledges don't mean it basically net zero pledges today roughly speaking means something like in 2040 or 2050 I'm not going to emit any more carbon no one says how they're going to do it no one says how they're going to understand how much carbon they have emitted or how they're going to identify whether or not they have emitted any carbon under the way we talk about carbon accounting what we say is all right if I you know at any point in any given year I know how much carbon I've emitted because I've kept track of my liabilities and if I'm going to claim my company and my products are net zero then I have to be able to say I'm selling products that have no embodied carbon so for example you can do that two ways I can squeeze all of the carbon emissions out of my supply chain which is going to be extremely difficult or when the components of my products or my service whatever when those things arrive in my facility I know the embodied emissions that came from my upstream supply I add it all up and I say I am going to buy removal assets that will match the embodied carbon of my products and therefore I should pass on my cell phone to my customers and say I have retained all the carbon liabilities of this product and therefore you are buying a product that has zero carbon liabilities I'm responsible for carbon liabilities I hold the assets my carbon balance sheet can be part of it I know that my carbon assets exceed my carbon liabilities and you're good it's not your responsibility that's what a carbon neutral product or a carbon neutral up to a zero net zero product or a net zero company need in a very precise way the one of the most important characteristics of this approach is that it doesn't require any budgets so it basically says nobody's allowed to incur anymore because we have no way of managing a budget we have no way of allocating a budget so we don't have a budget and so this says everyone's at zero that's it it makes it very simple very straightforward now we can obviously you know violate those rules if we figure out a way to allocate a budget but that's a longer discussion once we match once we understand the liabilities and we understand what the assets are what the asset must look like to match the liability we can then say what do we do in the carbon markets what do we do about all these things we see being sold in the carbon markets what do they mean for example you know again I go to my John Oliver example John Oliver talks about you know just not cutting down trees and he sort of says I want to I'm going to pay me some money and I'll cut these trees down 15 minutes later now imagine that is an avoidance offset but imagine John Oliver said well I grew these trees I grew for 15 minutes and now we're dead what happens well today nothing really happens because the way the carbon market functions today is I I don't know if any of you have seen carbon markets in operation but you go out and you buy a certificate your certificate says you know you own a one ton carbon offset whether it's let's assume it's a removal not an avoidance so you wait I would wave around the room here's my one ton of carbon that I bought I removed a ton of carbon yeah it's here I'm such a good guy that's great what do I do immediately after I buy the thing I leave it around the room I actually tear it up and throw it away because what happens in the carbon market is as soon as you make the purchase you retire it retiring it means you call up the company that issued it to you and you say I'm done I threw it away and no one else can own it so what does that mean that means I don't care what the certificates work is I tore it up and threw it away the company that issued the certificate is thrilled because at least they know I'm not going to come back and complain to them about what I bought more importantly the underlying project that the certificate pointed to is absolutely thrilled because they have no need now to actually maintain the car so imagine I'll be a little bit more concrete unless you know snarky about this someone develops a carbon removal project in a way to say I'm growing trees they grow their trees they sell their certificates the trees could last a reasonably long time the trees are unlikely to last a thousand years but that's okay because I buy there's a there's a certificate issuing company that cuts a deal with the person is growing the trees they say yes you're growing trees according to our principles and our procedures we will issue the certificates the certificates have nothing to do with the trees trees are there there's a company over here that issues the certificates the certificate points to the trees over there and I buy the certificate from someone who chooses to sell the certificate that doesn't give me a legal right to the trees doesn't give me a legal right to the carbon it doesn't even give me the right to sue the guy if he doesn't grow the trees forget about the scenario where 50 years from now the trees burn up but that's where it becomes very handy that I tore the certificate up and threw it away in the world we envision of the future it says the emissions are a liability I gotta buy a certificate that actually entitles me to the carbon so then I have an asset I also have to hold on to the asset I have to hold on to the certificate I can't retire it because I need the proof of the certificate to match my liability because I have the liability for a thousand years I've got the certificate whenever I'm doing my financials I have to make sure that I still have assets to match my liabilities if the forest burns down my assets impair and I have to buy new assets to match my liabilities so again in this like future world in which you know that we are driving toward that we actually think we're making some serious progress that's not just to be clear this is hard but we're making progress instead of reading stories in the Guardian because like nine times out of ten there in the Guardian that somebody says um there's a problem you know this gigantic project over here that claimed to have removed this many millions of tons of carbon from the atmosphere it turns out to be a fraud carbon markets are a fraud the world that we want to live in is the one that says okay this forest in Africa burned up or this forest in Uruguay got some terrible infestation and everything's dead what's the result um these 16 companies took a you know two million dollar impairment for each of them because they lost their carbon assets and they replaced them the next decade it just doesn't matter once we have actual liabilities that have to be matched with actual assets and we maintain this notion of solvency then things going wrong like that happens all the time in the corporate world you know every time we have a hurricane companies lose assets and they have a stock of losses they are truly insured they replace the assets they fill the holes in their balance sheets so in the world in which we see good carbon accounting for emissions assets of emissions liabilities and properly structured carbon markets where carbon removals are treated as an asset that has the natural liability this whole problem sort of cleans itself up any more questions just keep going while they walk in sure people like are honest about like before the carbon emissions they make you play any emissions are liable against but quite true okay so um there's always fraud like you know we have financial fraud all the time it's not a good thing but in essence the goal of the reliability accounting method is that it's auditable and verifiable so right now um scoping the greenhouse gas protocol emissions are not auditable they're not they're not structured in a way that they can be auditable because there are too many discretionary decisions to make so for example companies declare their own boundaries for scope three emissions so my silly example of I want to wedge the gas pedal down in my car without like sure we can all probably agree that's probably out of the scope out of the range a reasonable scope of Samsung scope three emissions but in fact there are no rules it just says downstream usage um so the point of a better accounting system for carbon is so that it's all auditable so in in in this system both the liabilities are auditable at each point in the supply chain and the assets are auditable because they're they are actual carbon somewhere like you know we can go into and verify yeah uh this is this is great this is very helpful uh a couple of questions one was building up on the last question Samsung as an example or or any other major tech company as an example the information is that it exists at the absolute base levels of apart the manufactured inner village in india and philippines elsewhere so reporting becomes difficult from that level and and that allows a bit of discretionary part of that company to assume or or have a modeling software that that allows you a bit of leeway into the accounts that come in so how does and this is more to the question about how the system works and i had a quick follow-up because a forestation or or planting trees seems to be the easiest example but but i was wondering as the timescales changed wouldn't the so bio oil injection or ccs u in those cases where you're looking at 700 years thousand years yeah the consideration of asset the valuation of the asset would go up because you have a larger type scale against which you have removed that car okay so let me let me understood so to your first question in we can have a trend there the way the greenhouse gas protocol works everybody's estimating everything so if i'm samson i have to sit you know at my desk at samson and estimate all these things going back to you know pulling more on ground that's absolutely impossible if we had a system that said everyone's required for the work and in fact we could simply have a number of large customers say we're going to demand that everyone reports and if you don't report we're going to give you a hell too late so again as by example the greenhouse gas protocol sort of says if you don't know the number use industry estimates well once you're saying use industry estimates nobody has any incentive to do anything to reduce industry numbers because they're basically going to say i'm going to wait for someone else to reduce it because i'll benefit from their innovation that reduces it if we say um you can use industry estimates for another three years but starting in mere four you're getting it with a 90th percentile if you're getting estimates you're going to get better than estimates or you're going to change your suppliers you know it's as simple as that so we have the ability this you know this is no different that happens in you know many financial contexts where you know you basically say look i don't do business i don't do business with people who don't get audited that's very common in financial counter financial counter parties or if you risk your counterpart all we're talking about the risk to counterparts i don't want to do business with people who won't give you real numbers doesn't mean they won't be fraud i lost track of the other question it was about the timescale of the assets yes okay so what we describe in one of our papers is this notion that a natively good asset and by that i mean an asset on its own it can match the liability is basically a reference asset so in the paper we talked about um direct direct capture of mineralization so if you you know you do direct direct capture you pump the co2 into a underground high pressure slurry basically if it sits there for two years undisturbed by seismic events it will turn to rock that's good like that's going to last a very very long time the problem is that's 500 bucks a ton everything else much much like i don't know how much you all know about capital markets but in in fixed income markets everything in the world trades is a spread to u.s. government bonds so if we think about direct air capture and mineralization like a 30-year treasury bond a very long needed riskless asset everything in the capital markets trades as a spread to traders so then we can say okay in the carbon markets everything that is less permanent or riskier than direct air capture and mineralization is going to trade at a discount to direct air capture and mineralization so for example take the trees this tree example in most tree-based removal transactions today someone's probably very legitimately saying we're going to grow trees they will store this amount of carbon and they will probably store it for 50 years let's say barring some catastrophic event because you know the trees will die and start decomposing losing carbon which is a reasonably slow event in and of itself but what will happen is someone's going to see someone will someone can make the decision of well i can buy 50 years worth of trees you know 20 times that's fine that looks like an endowment so how much does it cost me to undoubt an entity that can buy 50 years worth of trees every 50 years it's probably less than the cost of the direct air capture and mineralization today until those prices come down or someone says well i'm going to buy trees once i'm going to buy trees for 50 years i'm going to insure my trees for 50 years and i'm going to buy a 50 year forward on direct air capture and mineralization because 50 years from now direct air capture and mineralization is going to be much cheaper so what we'll see what we think will happen is carbon markets will develop these forward curves for delivery of carbon much like financial markets have forward curves for delivery of everything so that's how we deal with the timescale and the riskiness so we think about carbon removals as like you know and we get into some of this in the paper on accounting for carbon offsets this notion of you've got delivery risk and you have parallel risk so if i set out today to say i'm going to sell shahab a ton of trees he's going to say mark has no credibility to sell me a ton of trees because mark's never planted a tree in his life even though he lives on the side of a mountain covered in trees so he says yeah mark you want to sell me a ton of trees i'll wait till the tree is there when you point to the tree that you planted you're going to sell me the ton of carbon they'll pay for it so that's shahab worrying about mark's performance of actually delivering the carbon that's a very different risk than i deliver the carbon in the tree and it becomes impaired because it burns down so it's all about these these very well understood capital markets techniques of adjusting their different kinds of risks yeah for carbon offset sorry the energies the net energy consumption or that carbon emissions from that carbon offset included in that total value of that total carbon value of that offset for example ccs if you're using a bunch of a big bunch of carbon natural gas to power the ccs that include the actual carbon offset itself right that's a that's a really good question we actually are about to release a paper that talks about a very important related idea that is saying um we're actually looking we're talking about it in the context of scope to emissions this idea that scope to emissions covers all of the carbon related to electricity but it doesn't it doesn't include all of the upstream carbon because the greenhouse gas protocol puts that in a different location so the best example of that is i don't know how many of you have heard all of the descriptions of different colors of hydrogen like there's a rainbow of hydrogen colors and the rainbow of hydrogen colors is a really short hand for how did i get the electricity that powers the electrolyzer because the hydrogen has zero scope to emissions the problem is i can power an electrolyzer using wind i can power it using solar i could you know burn trees to you know generate the electricity that runs the electrolyzer i mean i could you know i could burn whatever i want and the whole problem scope to doesn't capture that so one of the things we talk about in this paper is let's stop talking about scope to emissions and simply talk about the liabilities in the electricity complex but it's the exact same thing as the removal question you have to look at the net result so as you're you know when i deliver a product that is a ton of direct air capture uh and see what you know direct air capture mineralization carbon i have to account for is there a net gain of transaction and that's easy to do with the liabilities it's almost impossible to do under the greenhouse gas protocol similarly thanks thank you um how do you think about the challenge of adoption for this carbon accounting method given the first mover advantage that the greenhouse gas protocol has for example i'm pretty sure the last year's secon disclosure rule and i think it's going to finalize soon is rooted in the ghc protocol is it some of the bar council to clear rules here okay very good question and um we actually wrote a comment to the sec saying um stop trying like it's like so you know we basically said use liabilities don't use the greenhouse gas protocol the greenhouse gas protocol cannot function as a mechanism it seems pretty well understood at this point that the sec rule is not going to include you know if the sec manages to get a rule through it's not going to mandate scope free emissions because it just doesn't it doesn't make sense it's not going to hold up to legal challenges um that said you know a lot of what you know we do others are working on is how to prove that we can implement liabilities and why it's a better approach and we're you're very frequently talking about pressure points where we know it's going to break so for example the most obvious one is the you may have heard of something called c-map it's car the carbon border adjustment mechanisms in europe it amounts to a tariff on embodied carbon the problem is the greenhouse gas protocol cannot calculate a number that anyone is willing to accept as a basis of attacks it's it's fundamentally unknown um under degree house gas protocol so one of our i don't know so high probability beliefs is that um as europe implement c-map um people are realizing and you know like so what much of what we're trying to do is say look here's an alternative it's a real accounting system just substituted in and everyone to go about the business so there are companies that have been piloting using e-liability accounting who are also you know dealing with the the challenges of c-bam and you know they are on the front lines of this saying we cannot do c-bam using the greenhouse gas protocol we can use c-bam using the liability account it's a different it's a it's another step forward to get people to say we're going to treat our emissions as a liability in order to match it with assets and you know that's one where we're making some amount of progress it's obviously extraordinarily hard to go to a company and say we suggest you impose a thousand-year liability on yourself however many companies especially like the leading climate activist companies are doing a pretty good job like you know they are no longer buying avoidance offsets they are only buying removal offsets they are being quite conscientious about the kinds of removal offsets they're buying and so you know i would it it would not surprise me if you know some of the household name companies that you all know that are quite active in the climate activities they're probably in the ballpark of a 20 to 50 year liability that they are actually holding assets they could match a 20 to 50 year liability so for example one of the mechanisms for implementation we talk about is oftentimes today people's net zero pledges amount to saying matching our assets of liability for a one-year liability right i match i admitted 10 000 tons of CO2 this year i bought 10 000 tons of removals probably and i just tear them up and throw them away and i'm good so we sort of say that's great you're net zero with a one-year liability tell us how you're getting to retain your liability tell us how you're getting to a 50 year liability and so to a large degree this is almost you like you know in the weakest sense we can describe this as a way to be very precise in describing what a company is doing with their climate action and how to apply pressure to tell them to do a better job so again even under a voluntary regime this can work because people can say okay look the net zero pledge you made two years ago doesn't mean anything let's talk about what you mean to say you're carbon solvent under what we call emissions liability management for a one-year period that's a really easy thing to do a one-year duration on the liability tell us how you're going to get to tap tell us how you're going to get to that's the pressure we should apply because every time a company extends that duration what they're doing is imposing on their supply chain a higher price on not committing use price it is not our view at all that companies are just going to continue doing what they're doing they're not and they're just going to buy removals it's too expensive that's the whole idea what we're doing is saying we're giving we're endogenizing a price and we're saying you set your liability the market's going to tell you a price of the asset you need to match the duration of your liability and then you are going to beat your suppliers over the head up to the dollar amount that cost you to remove because better to not admit it in the first place and have to remove it after the fact that's it I'm just going to chime in on that this is a really important question because it's sort of the risk we run into it's being too academic and being right over the corner a lot of analysis goes off of this little thing it's fatal so just to come back to some of the things Mark said and hit up with maybe a little bit finer point because again I think this is really important so sec proposed rule hasn't issued final rule lots of time in between in that intervening time you know Gensler is very aware of the liabilities and in fact it's very much a pain if I dare say of the liabilities but it's common is who's doing this like you I can't write this in if it's not being done that was 18 months ago in that intervening time we've got a bunch of work out but there's also not only public liability institute that exists in the world as a non-profit that has run now it doesn't pilots that are getting the kinks work through in the and the understanding work through to the point where there can be guidance there's now sort of a private gap going on where there's where where where big companies are writing into supplier contracts the like emissions efficiency that's required based on their understanding now if having done these pilots for their suppliers that's sec in the meantime you've got California that got out way over at skis with SB 253 which even though it's now past Newsome has gone on record saying this has a lot of kinks that still need to be worked out good luck carb so there's still more to be that's not a done deal and it's very unclear how that's still good so there's opportunities still and we've got our foot in the door there to make sure that carb maybe takes this out of a tailspin and puts it into more of an accounting structure you've got issb which through international sustainability standard support which through its s2 guidance has scope 3 in there too but again they're also working in recognition that they don't have an accounting standard they have a disclosure standard there's the isb that governs international accounting that is still needs something on climate so there's there's door there's work the goal here is keeping the door open to get actual accounting while this disclosure work moves forward but also reaches its limits and the flip side of all the progress on disclosure is anyone's now here in the term green hushing but there's now the companies who have made their pledges are frozen because they can't make good on them with the tools that they have and they've gone on the record saying they're doing these things so in addition to C-Vam you've got this sort of pressure now on companies where they're kind of stopped what they're doing and realize they need to either walk these things back or get a new toolkit and no one's making new pledges so there's a lot of pressure this square peg in the round hole that is the GHG protocol in an accounting framework which it is never built to be is breaking and so there's this is the opportunity to have a better have a round peg for around thanks for the talk I was actually going to build on this question because well and from Brazil so we kind of have some problems there about a lot of companies understanding that climate change is important so my question is about enforceability I mean like someday we're going to have to make this mandatory somehow and I'm sure you're going to discuss CLM truth eventually but the difference I think is that if I have a liability of natural liability in the end I'm going bankrupt should we have like a carbon bankruptcy mechanism or something like that how to make this actually enforceable for companies that like don't care about rewatching in the end not sure if I make myself clear sure sure absolutely so there are um I want to first talk like or build up to a decent answer for questions and your visual ads and things but if if we think about how like one of the questions I think you're asking is how do you get companies to adopt a liability that they don't have to adopt the laws around retirement plans did not exist in any form really until 1972 or 74 I can't remember what year this was but the employment retirement income security act of 1972 set out all of the rules for retirement plans companies had retirement plans long before you had codified federal law it said if you break these rules you go to jail the retirement plans that were put in place before then were companies saying we choose to impose these liabilities on ourselves as a competitive advantage because we want the employees that will get if we impose this liability and provide something to our employees and what happened is prior to the passage of irisa companies sort of saw the writing on the wall where irisa was going and so the leading actors were imposing irises obligations on themselves long before irisa passed and like is I think it's such a good analogy that we've actually done a little bit of work to investigate could we actually technically use irisa to do this it's a really aggressive stance I still think it's theoretically possible one of the funniest things I've heard from more than one lawyer is no lawyer is going to go on the record about this because their clients will be so upset because they're you know their clients don't want just want to help me so irisa lawyers won't won't really talk about it publicly because that's been my personal experience in talking to irisa lawyers but the point is even the leading actors who did this one of the first things that happens as companies voluntarily impose this on themselves is they are saying we need removals now and they are going to push up the price of the available nature-based removals so therefore the relative price between what are today very low-cost nature-based removals because the nature-based removal prices are being pushed down by the existence of the avoidance offsets because there are plenty of people who are trying to credit on avoidance offsets not even nature-based removals but the more companies you have saying you're only willing to buy nature-based removals shifts the relative pricing between nature-based removals and technology-based removals and it makes it clear that there's a market for technology-based removals so those of you who are you know capital markets players like all that goes through my head when I say this is it's a yield curve trade right you're driving up demand for the short-term removals which is making the long-term removals you know economically more interesting so it drives capital allocation I the other you know funny analogy I like to this is nobody has anything good to say about the US health care system it's terrible I don't you know whatever political view we have everyone agrees our health care system sucks the one interesting thing to be about it is the United States has such ridiculously expensive drug prices that we voluntarily impose on ourselves and therefore we make all the we drive all the drug innovation that the rest of the world gets for free so what we can think about is the leading companies that impose this liability on themselves the carbon markets in useful directions are actually going to drive reduced cost reductions to technology-based removals and that's an incredibly valuable thing to do especially as we move to a compliance regime when do we get to a compliance regime I don't answer that question it would be you know it would be nice if we had a compliance it would be nice if we had a way to impose a budget but we really don't One of the things that the greenhouse gas protocol and climate activists for a long time had this fleet and usefully done is focus attention on reducing our increase or actually halting emissions. The actual goal is to not increase atmospheric CO2. Like I don't know how many of you are, have you all seen the Bloomberg carbon clock? It's this, you know, okay, that's actually my cousin who designed the Bloomberg carbon clock. And I, you know, I joke with him all the time, like, isn't the goal to just stop the clock? His answer is, yes, all that matters is stopping the clock. It doesn't matter how you stop the clock. So I absolutely think the Bloomberg stone success as it's been in the world where direct air capture and sequel and mineralization is so cheap. Pick up the answers who cares. So again, if you think about the cost of removal as a price signal for driving carbon out of the supply chain, or you can flip this question around, are you familiar with the term social cost of carbon? Okay, so the social cost of carbon is this attempt by economists to figure out what the current value of the harm of a ton of carbon into the atmosphere creates. There is a funky math card in there that those of you who understand the math will agree that it's not very hard in one of those models. It's actually I can almost inevitable out of those models that the mean social cost of carbon, the mean that is the social cost of carbon doesn't exist. The distribution of the possible outcomes of the social cost of carbon is a distribution that doesn't have an expectation. It's just a math matter concept. And therefore, the social cost of carbon doesn't exist. What our system does is it says social cost of carbon is what it says is the price that matters is the cost to remove. The social cost of carbon is on the length of the stream that it may exceed the cost of removal. So all we're trying to do in fact is drive down the cost of removal because it's driving down the cost of removal that's going to cause people to repeat the carbon storage. That's all it acts. Stopping error loss is called. Stopping still on. Yeah, so what we can do here, Mark's not going anywhere. We're not going anywhere. You're going anywhere. I was looking at that clock. I thought it was dead on. Yeah, well, you could be dead on. Yeah, I don't know what that's. Thank you, Mark.