Speaker 1:
From the Library of the New York Stock Exchange at the corner of Wall and Broad Streets in New York City, you're Inside the ICE House, our podcast from Intercontinental Exchange on markets, leadership and vision, and global business, the dream drivers that have made the NYSE an indispensable institution of global growth for over 225 years. Each week we feature stories of those who hatch plans, create jobs, and harness the engine of capitalism right here, right now at the NYSE and at ICE's exchanges and clearinghouses around the world. And now welcome Inside the ICE House.
Gordon Bennett:
I'm Gordon Bennett, your host today. This is my first time as a guest host of Inside the ICE House. I've been thinking about this for a few weeks now. Inside the ICE House is slick. It's more than a bit nerve-wracking filling the boots of Josh King and Pete Asch.
So I like to play a bit of golf and I liken this feeling to first tee nerves. In the beginning of September, I was lucky enough to be in St. Andrews watching the Walker Cup, the prestigious amateur golf tournament between teams from the United States and Great Britain and Ireland. It is named after George Herbert Walker, the grandfather and great-grandfather of the 41st and 43rd Presidents of the United States.
This year was a hundred years since it was first played in the United Kingdom, and I was there to watch my old school friend's son, Connor Graham, who at 16 years old is the youngest ever golfer to represent either side. Connor almost ran around St. Andrews with no fear for two days. And so I'm going to use Connor as my inspiration to host this podcast and get comfortable being uncomfortable.
With me representing Great Britain and Ireland as your host, and our guest, thousand-point scorer for Swarthmore College playing basketball, Michael Greenstone, economist, co-founder of ClimateVault, and the Milton Friedman Distinguished Professor of Economics at the University of Chicago representing the United States, we will delve into the world of economics, carbon pricing, and find out where ClimateVault's innovated product sits in the ecosystem to help incentivize companies to compensate for their emissions, unlocking that elusive demand. To dive deep into these topics and more in our conversation, Michael Greenstone is coming up on the first tee after this commercial break.
Speaker 3:
And now a word from Genpact, NYSE ticker G.
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Genpact is transforming supply chains using real-time data to help manufacturers keep goods flowing from the warehouse so cupboards are never bare at their house. We are in the relentless pursuit of a world that works better for people.
Gordon Bennett:
We're recording this podcast following ICE's Climate & Capital Week Conference held at the New York Stock Exchange where I hosted the panel about how carbon credits fit into the climate finance toolkit. This year's event centered around the three interconnected themes of adaptation, innovation, and regulation. With these topics in mind, Michael and I plan to discuss what business leaders need to know when decarbonizing their organizations and how to do it. Welcome Michael Inside the Ice House.
Michael Greenstone:
Thank you, Gordon. Thrilled to be here.
Gordon Bennett:
Before we tip off from this conversation, it's important to set the handicap. While his is my first time hosting, I have guested on the podcast several times and spend much of my stateside time here at the corner of Wall and Broad. Have you visited the New York Stock Exchange before?
Michael Greenstone:
I have not. This is my first time here and no one has shown me the trading floor yet.
Gordon Bennett:
Well, you'll get to see the trading floor later, won't you? So for the front nine or the first quarter, let's take the conversation to your hometown of Chicago. I knew Chicago and in particular the University of Chicago had a stellar representation. However, I didn't really know now until I read the book Trillions by Robin Wigglesworth. Interestingly, Josh King interviewed Robin in episode 287 of Inside the ICE House. Trillions, how a band of Wall Street renegades invented the index fund and changed finance forever. Do you feel the weight of some of the legacy at the school?
Michael Greenstone:
Yeah, that's a terrific question. I think I both feel honored to be able to sit in the same offices and try and carry on the same tradition. And there's some weight associated with that, but it's also quite inspiring. Out of the University of Chicago have come a variety of ideas that have altered the way that we understand the world. And what I find so inspiring about being in Chicago, it's not just a academic pursuit for the name of the academic pursuit. And so it's not just to understand the world, but to affect or influence the world.
There's a famous quote from Milton Friedman, who had offers always to be able to go somewhere else and owned an apartment in the Bay Area, about why he didn't go there sooner and why he stayed in Chicago, and he said, "Well, it certainly wasn't the winters, but rather it's kind of an ethos that you're only as good as your last idea." And similarly, no assumption goes uncontested.
Gordon Bennett:
Yeah. So I was going to ask is that what's in the water in Chicago?
Michael Greenstone:
It's in the water. It's in the culture, in the walls. It's in the lunchroom. It's standing in line for coffee. And at times, that can be challenging. I tell my graduate students, "I've never left giving a seminar at Chicago thinking that anything but that was the worst possible seminar anyone had ever given. And you can either kind of curl up in a ball and give up in response to that, or you can try and take the criticism seriously and think about how to sharpen your ideas."
Gordon Bennett:
97 Nobel Prizes have been awarded to scholars, students, or faculty of the University of Chicago. What makes the city and school a special place?
Michael Greenstone:
One thing that's really powerful about Chicago is its location. It's in the middle of a city where there are lots of inequalities and lots of social problems. You can't help but walk the streets and feel them and notice them. And I think being confronted with that all the time, I find it just an incredibly fertile ground for developing ideas and improving ideas.
Gordon Bennett:
You joined the Obama administration as the chief economist in 2009 following your time at MIT. What prompted this move? Did you view this as an opportunity to get some of your ideas out of academic circles and influence policy?
Michael Greenstone:
My dad was an academic and I think probably I inherited from him the desire to understand the world. And my mom was a social worker and she was probably not super interested in understanding the world. She was into social justice. And so I think I was trying to find the intersection of what they were doing. And so the Obama people called and I jumped at the chance. Obama had promised to start a cap and trade market for CO2, and I had been offered a chance to help design it. It was irresistible.
Gordon Bennett:
During your White House tenure, you played a pivotal role in creating the social cost of carbon. Can you break down what this means and why it is important in solving climate change?
Michael Greenstone:
Well, in English, it's just saying if you put an extra ton of CO2 in the atmosphere, here's how you're going to make the world worse off through the whole length of time that the CO2 is in the atmosphere. And so my idea was we better have a consistent social cost of carbon, and that has proven to be the straw that stirs the drink for driving climate policy.
Gordon Bennett:
So let's jump into carbon markets specifically now. I often refer to the atmosphere as the ultimate scarce resource and therefore you can use economics to solve for that. What's the purpose of carbon markets and what are they solving for?
Michael Greenstone:
Currently, you can pollute into the atmosphere for free. It does not take an advanced degree in economics to realize things that people can do for free, they do an awful lot of. And yet each time they put an extra ton of CO2 in the atmosphere, they're causing about $200 worth of damages.
So what carbon markets do is they cause people to recognize the costs associated with pollution or those damages. And so the way that is often done, kind of the biggest example is the EU ETS. They set a total allowable level of emissions. I think it's roughly a billion tons of CO2 from all emitters in the EU. And then they ratchet that down each year.
And in doing so, they're forcing all the participants collectively to reduce their emissions. And what's so appealing about it from an economic standpoint is it doesn't specify who has to do what. And it unleashes the power of markets to figure out where the cheapest reductions in CO2 are available and you can then kind of have your environmental cake, that is reduce the rate of climate change without imposing undue costs on the economy.
Gordon Bennett:
So you're going into the carbon allowance markets, often referred to as the compliance market. ICE hosts many of those and they're the most liquid carbon markets in the world, an annual notional value of a trillion dollars. So that's a liquid market. And I suppose the other beautiful thing about it is it creates demand because the government says you are a polluter and you have to pay and you can't have a market without demand. And as the government stipulates, you are the buyer. That's a great thing and that's why we have liquid carbon markets.
Michael Greenstone:
Exactly. And it's incredibly important. Even beyond that, dynamically there's benefits of it as well because what you're doing is there might be some man or woman who in the classic American example has a great idea and is quietly working on it in their garage, but if they don't have anyone to sell to, they're unlikely to do it. And so by setting a price on carbon, it gives an incentive for those potential innovators to come out of the woodwork. And we get new ideas from that and that's terrific.
Gordon Bennett:
That's one side of the coin in terms of carbon markets available to us, the allowance market. We're now going to jump down the gopher hole in terms of the voluntary carbon market and carbon credits. You've spoken before about how you think supply side to traditional voluntary carbon markets is ineffective, yet companies who voluntarily commit to treat their emissions as a liability and comply with that commitment are using this market to compensate for their liabilities. We would argue that carbon credits are an important tool as they allow for investment in carbon savings, reductions or removals, and do allow companies to address the market failure in the absence of a government doing it. So then they're effectively incentivizing to go and abate in the same way that you're incurring the cost for an allowance.
For our audience, can you remind them of what we mean by a voluntary market and where you see the inefficiencies?
Michael Greenstone:
So there's a lot to unpack there and maybe we'll do it in a couple of breaths here. Let's just start with the voluntary carbon market is not people reducing their emissions because they're inside of a cap and trade market or because the government has set some rules to say they have to, rather it's they're choosing to do it on their own. They might be choosing to do it to satisfy their stakeholders, be it shareholders, employees or customers or whatever it is, but they're choosing to do it on their own. And it's a totally laudable goal. And I think there's been a large increase in commitments to do this voluntarily in the last few years, which I think reflects, by the way, government's failures around the world to implement real stringent carbon policies.
So that is terrific. And we now have lots of demand for these voluntary carbon reductions. It didn't exist even a few years ago. So let me just pause there. Is that all tracking?
Gordon Bennett:
Yeah, absolutely.
Michael Greenstone:
Okay. So now if we want to form a market, we've got all this demand. On the supply side, what does that mean in this case? You have to find someone somewhere else who is willing to undertake carbon reductions. And then the demanders can purchase those reductions from the suppliers.
The challenge is that there has been a voluntary carbon market that has existed since the mid-1990s. It existed at a super low level. You could think of it primarily being driven by greeniacs, people who really, really cared a lot, and not mainstream corporations. And everyone was kind of happy with that market who was participating. No matter if they got the full carbon reduction or not, they were directionally feeling good and getting some warm glow for that.
We have now reached a change, and that change is that all these organizations have made these net-zero commitments because they view it as a matter of importance for their business. And so when they make a transaction to get a thousand tons of CO2 reduction, it can't be the case that they don't actually get the thousand tons. And the problem is that the suppliers who have existed, these are often tree projects or clean cook stove projects or various other things like that, for the last 30 years have failed to deliver over and over and over again.
And so the market is in a bit of a pivotal moment. If new sources of supply don't emerge, I am very concerned that the demand will disappear and we'll have to wait for a special moment, which may not come for another decade.
Gordon Bennett:
It feels to me that the sort of demand in terms of wanting to buy a carbon credit now is disappearing. People are still investing in it, described earlier around that it's like Steve Jobs building something that people haven't figured out that they want to buy yet. I did a video with my son a few weeks ago where I called it Schrodinger's VCM, and I was debating with myself whether the voluntary carbon market was alive or dead and I concluded it was dead on the basis that is pretty nuanced.
For me, the voluntary act is treating your emission as a liability. If you do that, then you have to participate in the carbon market. You have to buy something to offset that liability. If you don't volunteer to treat it as emission, there is no market. So you either have one or you don't. And so the VCM for me is kind of like the wrong labeling. Then my question to you would be sort of how can we get companies not mandated by governments to treat their emission as liabilities?
Michael Greenstone:
Look, I think the answer is simple. Outside stakeholders have to continue to pressure them, but if there's no credible sources of supply, even the most committed companies are going to have a very, very hard time justify spending money on something that doesn't happen. Imagine if you went to the grocery store, you put 10 tomatoes in your bag, and you came home and there was one. You might let that happen once. Maybe you'd even let it happen twice. The third time you'd be like, "I'm not buying any more tomatoes." And that's what's happening right now is people are contracting for a thousand tons of CO2 and they're getting 10, or they're contracting for a hundred and they're getting one.
And until there is reliable supply so that when you put the 10 tomatoes in the bag, when you come home there'll be 10, it's going to be very, very hard for that market to take off. And people who are a little bit on the edge of being committed to doing this will have a very good reason to say, "You know what? This is not how we should be spending our resources."
Gordon Bennett:
I think there are also plenty that do what they say on the tin. They do deliver the tons. But I agree with you that there's this, if we look at renewable energy certificates, no one doubts that one wreck equals a megawatt hour of clean electricity. They believe it. They don't know how the monitoring, reporting, and verification process works. But I agree from a ton, a carbon credit, a carbon saving, very few people believe they're getting a ton. And the MRV process seems to me to be critical to unleashing more.
Michael Greenstone:
Absolutely. Or an alternative is to say 30 years of trying the same approaches are not working and we have to come up with new sources of supply.
Gordon Bennett:
Great. So after the break on the back nine, we're going to dive deeper with Michael Greenstone, co-founder of ClimateVault and the Milton Friedman Distinguished Professor of Economics at the University of Chicago on the role of ClimateVault and how it aims to unlock demand for climate finance and incentivize organizations to compensate for their emissions.
Speaker 7:
Connecting the opportunity is just part of the hustle.
Speaker 8:
Opportunity is using data to create a competitive advantage.
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It's raising capital to help companies change the world.
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It's making complicated financial concepts seem simple.
Speaker 11:
Opportunity is making the dream of home ownership a reality.
Speaker 12:
Writing new rules and redefining the game.
Speaker 13:
And driving the world forward to a greener energy future.
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Opportunity is setting a goal.
Speaker 15:
And charting a course to get there.
Speaker 7:
Sometimes the only thing standing between you and opportunity is someone who can make the connection.
Speaker 16:
At ICE, we connect people to opportunity.
Gordon Bennett:
Welcome back. Before the break, I was talking to Michael Greenstone about how he got his start in academia, the social cost of carbon, and the most important tools in the carbon finance toolkit. Michael, let's turn our attention to ClimateVault. Can you talk about the genesis of the nonprofit that you founded at the University of Chicago?
Michael Greenstone:
So maybe about a decade ago or a dozen years ago, I started to pay attention to the voluntary carbon market. And as I mentioned before, it was pretty small and boutiquey. And I just couldn't believe the way the transactions were taking place. You have some guy who is claiming that he's about to cut down his trees unless you pay him some money. And then there's someone on the other side of the transaction who does pay him the money. And there's somebody in between who's probably taking money from both sides, who's validating that yes, in fact he would've cut down the trees and in fact he did not cut down the trees subsequent.
And it just struck me, the interested party who is not at the table is the atmosphere or the planet. And it wasn't surprising to me that these very, very complicated transactions were time and time again being shown to fail to produce a desired reduction in CO2. In fact, the EU ETS had allotted for a fair number of them initially and then severely cut it back when all this came to light.
And what struck me as nuts was, well, here's this complicated solution. There's a really, really easy solution in front of us, which is that we have government-controlled, managed, mandated compliance markets where the government each year prints a limited number of permits or compliance certificates, and that's the total emissions that's going to happen inside that jurisdiction. And that's enforced with very, very severe financial penalties that are so large that it's always enforced.
And instead of writing this complicated arrangement, why not go into those compliance markets, outbid polluters for some of those permits, and you could get guaranteed reductions in carbon debt. You could free ride in the enforcement capabilities so the governments run them. And I thought, this is such an obvious idea. Somebody's going to do this. I'm going to go about my regular old business and write my academic papers. And it just didn't happen and it kept not happening. And eventually, I got so irritated by it. And thinking back to trying to find some way to contribute to fighting the climate challenge, the climate problem, I said, "Well," got some friends together and, "Why don't we start a nonprofit that would try to do this?"
And I should mention, one of my co-founders, Don Wilson, had this very clever idea that he and I were able to fuse, together we fused my idea, which was, hey, the world really, really needs carbon dioxide removal technologies. Those technologies don't exist today. They're never going to exist unless there's a clear price signal for them. Maybe we can fuse the first part of using the compliance markets to incentivizing innovation and ultimately carbon dioxide removal. So that's kind of the genesis.
Gordon Bennett:
You're basically bridging the gap between carbon reduction and carbon removal so that you've got these government-backed allowances and you're storing them in the vault as I think you're doing. And then the other side of the coin is the Tech Chamber. Can you tell us a little bit more about how the Tech Chamber works?
Michael Greenstone:
Yeah. Let me just use an example. So Northern Trust is one of our largest donors. They wanted to reduce their carbon footprint by 70,000 tons of CO2. They said to us very clearly, if they could, they would go right and buy 70,000 tons from some carbon dioxide removal company. But it doesn't exist. And yet they had a demand for reducing their footprint and becoming carbon zero today. So they came to us, we purchased 70,000 permits on their behalf, we put them in our proverbial vault, and then we announce to the world we will buy 70,000 tons plus all the other tons from the other donors of carbon dioxide removal and we'll do that swap whenever we find technologies pass our bar.
And now to your question. Your question was, well, you're an economist, Michael, and actually, probably you like basketball too much, and why in the world should anyone think that you're any good at judging which carbon dioxide removal technologies are valid? And the answer is you shouldn't, except that I have good friends who are.
And so we set up something called the Tech Chamber. It's chaired by Ernie Moniz, who's the former Secretary of Energy. Has faculty from Harvard, from Scripps, from Princeton, from MIT, all of whom are experts in various different parts of carbon dioxide removal technology space. And they're tasked with making judgements about which technologies are valid and which ones are likely to deliver. And it is their job to set the standards for the world on what's going to qualify as carbon dioxide removal.
Gordon Bennett:
And are people coming to the Tech Chamber already?
Michael Greenstone:
People are coming. So we had the first RFP and we got eight applicants from that, and I thought that was okay. We were sending out a price signal, kind of a very big advanced market commitment. We'll buy a million tons. Ultimately, the Tech Chamber dug into all eight of those, it was like watching a vivisection in real time, and rejected them. And now we've done the second RFP and there were 50 applicants. That's exactly what we want. We want the price signal to be drawing more people off the sidelines. And they're meeting on Monday. I expect that they'll winnow the list down and then there'll be kind of a second more thorough round of investigation after that.
Gordon Bennett:
Will you cross the bid offer spread in terms of the removal technology and value sitting in the vault?
Michael Greenstone:
Yeah. So Gordon's question I think is very important is, well, the value of your permits is maybe 25 bucks a ton or something. And we all know direct air capture is a thousand dollars a ton, so how would you ever buy anything? And the truth is there's lots of technologies that qualify as carbon dioxide removal. Not all are direct air capture, and some are much closer to our $25. At this point, we want to keep them as pure as snowflakes. We're not asking them to make judgements relative to the price. We're just asking them to pass a technology at any price. And then it'll be up to us to figure out the economics of how to do off-take agreements with the firms that they approve.
Gordon Bennett:
So I read an excerpt from Myron Scholes recently stating, "Time and uncertainty are linked to new ideas, ventures, innovations, and their development. A key economic observation is that infrastructure to support innovation must follow innovation." Thinking about ClimateVault, does this innovation effectively allow the carbon credit market infrastructure, including the support, control, and governance to catch up and allow organizations to compensate for their emissions under the safety of a market with strong regulatory oversight and a store of carbon value?
Michael Greenstone:
Yes. And so effectively, you could think of what we're doing is we're solving this time consistency problem. Northern Trust wanted to buy carbon dioxide removal. Today, they couldn't. But the most important thing they wanted to do was reduce their carbon footprint. And we're effectively through the use of the vault and converting the CDR, we're effectively bringing carbon dioxide removal into today's existing compliance markets in ways that it's not currently admitted.
Gordon Bennett:
Is it fair to say that ClimateVault takes away the get out of jail free card from organizations who don't compensate for their emissions because they say they can't invest in the carbon credit market as it's not mature enough to investible? It sort of removes the argument that supply side quality integrity is meeting demand.
Michael Greenstone:
100%. We like to think of ourselves as, I think it's the Office Depot or Office Staples or one of those chains that's probably gone now. They had the red easy button. You could press it and it would say, "Oh, that was easy." And yes, we're trying to make it very, very easy. And we believe we've made it very easy and removed the explanation that many organizations offer that there's no way for them to do it and say, "No, there is a way. It's very easy and it's less expensive than you might think."
Gordon Bennett:
Great. So you mentioned Don Wilson. The power of a market price, I wanted to talk a little bit the power of a market price. And Don's a co-founder, another University of Chicago alum. So I listened to a podcast that he was on earlier this year talking about the power of the feedback loop of the market. Price gives you choice, and from a carbon pricing perspective, if it works well, then this is our feedback loop to tell us how good or bad we are doing preserving the atmosphere rather than relying on a blunt ex-post feedback loop of physical climate events telling us how we're doing.
Michael Greenstone:
Yeah, this is, I think combined with what we understand from climate science and climate economics, what ClimateVault is offering is a way for about $25 a ton to prevent about $200 of climate damages for every ton. And we don't have to let our children and ourselves, as we're increasingly seeing, experience at $200 a ton.
Gordon Bennett:
Final question before we head to the 19th hole for a refreshment. What do you do in basketball after you finish a round? I mean, finish a game. They're not called rounds in basketball.
Michael Greenstone:
No, they're not. Well, what did I used to do? I would spend a lot of time thinking about the mistakes I made and how not to make them in the future. I think one thing that I really loved about basketball as a team sport was that there was a group of people who came to practice every day for three hours. And on Thursday afternoon in February, you're probably a little bit sick of each other. Season started in October. And yet you come every day. And through that, this bond forms. It's kind of hard to describe, but this bond forms through working together towards a common goal. And I think that was one of... That might've been my favorite part of basketball. I should also say I liked winning, but I hated losing much more than I liked winning. And so probably that common bond and try not to lose.
Gordon Bennett:
You're here at ICE's Annual Climate and Capital Conference. What will be your big takeaway from the event today?
Michael Greenstone:
My big takeaway is a reminder of the power and importance of markets in solving really critical social problems. I think oftentimes people think about, oh, markets and stock prices, this and that, and what does it have to do with anything? And what today and this whole conference has been so good at emphasizing is that there's a long history of markets solving very, very intractable and very challenging social problems. And I'm leaving more optimistic that markets can be used to help solve the climate problem that we're currently dealing with and that generations of people in the United States and Scotland and around the world are going to be confronting.
Gordon Bennett:
Yeah, I think that's a great conclusion. The way I look at it myself is net-zero energy transition, no one knows the answer to it. It's so complex. So if you don't have price and that the market gives you the price, and then, as we talked about with Don, you can then express your view of value in the market. If you think something is priced too low, you can buy it. If it's too high, you can sell it. So it really sort of pushes you to make a decision of what your view of value is.
Michael Greenstone:
Yeah, I think without price, you're in a model of the world where you're hoping for unicorns and rainbows and fairies and ponies and all kinds of things that sound great, but if you really mean it you're willing to express it through price.
Gordon Bennett:
Yeah, I call that greenwishing, which I think is a bigger risk than greenwashing.
So thanks so much, Michael, for joining us Inside the ICE House. That's our conversation for this week. Our guest was Michael Greenstone, co-founder of ClimateVault and Milton Friedman Distinguished Economics Professor at the University of Chicago. And as my fellow Scot and avid golfer said in the movie The Untouchables that was most definitely...
Speaker 17:
"The Chicago way!"
Gordon Bennett:
If you like what you heard, please rate us on iTunes so other people know where to find us. If you've got a comment or question you'd like one of our experts to tackle on a future show, email us at [email protected] or tweet at us @ICEHousePodcast. Our show was produced by Jess Tatham with production assistance from Pete Asch. I'm Gordon Bennett, your host. Thanks for listening.
Speaker 1:
Information contained in this podcast was obtained in part from publicly available sources and not independently verified. Neither ICE nor its affiliates make any representations or warranties, express or implied, as to the accuracy or completeness of the information and do not sponsor, approve, or endorse any of the content herein, all of which is presented solely for informational and educational purposes. Nothing herein constitutes an offer to sell, a solicitation of an offer to buy any security, or a recommendation of any security or trading practice. Some portions of the proceeding conversation may have been edited for the purpose of length or clarity.
