Narrator:
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 in 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 clearing houses around the world. And now welcome inside the ICE House, here's your host, Josh King of Intercontinental Exchange.
Josh King:
I shudder to look at the thermometer outside as I'm recording this, but we are in the midst of all time highs just about everywhere. Even the Atlantic Ocean is degrees warmer than it's ever been. The phrase "boiling the ocean" has taken on really new meaning this summer. It's not a new problem. A half century ago in 1972, representatives from 113 nations and more than 400 NGOs convened in Stockholm for the UN's Conference on human environment, which marked the first ever international gathering on that issue. It's the first time the term sustainable development entered our lexicon. By definition, it's the enabling of the present generation to meet its needs while not compromising the needs of future generations. And then five years later, president Jimmy Carter commissioned what was called the Global 2000 Report to help shape long-term US environmental policy. It was rolled out perhaps dead on arrival in what became known as the malaise speech, the president's ill-fated effort to speak plainly to his people.
Then fast-forward to 2015 when the UN held its annual climate gathering in Paris, COP 21, in an urgent attempt to universally agree on how to combat the coming climate change disruptions. The president of COP 21 back then, French foreign minister, Laurent Fabius, kicked off the day with this urgent call to action. I'm going to quote him. "The eyes of the world are upon us and there are great hopes. It is therefore for us to meet our responsibilities head on so that on 11th December we can say to the world the four words that the world is waiting to hear; our mission is accomplished." Easier said than done.
President Barack Obama was in the room that day. Warning, let there be no doubt, the next generation is watching what we do. The next generation is about to have its say, dear listener. It's one of the reasons that our guest today was inspired to write her book, Pricing the Priceless: The Financial Transformation to Value the Planet, Solve the Climate Crisis, and Protect our Most Precious Assets. In a minute, we'll talk with Paula DiPerna, the author and strategic global environmental advisor about her latest book in which she asks the question, how can our markets value things that are dispensable at billions of dollars and the atmosphere at zero? The book explores the answer to that question through Paula's personal experiences and journeys around the world, new econometrics and the rise of carbon markets. It's all coming up right after this.
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Josh King:
Our guest today, Paula DiPerna, is the global environmental and philanthropic policy advisor. She's currently serving as special advisor to CDP North America. Previously, she was the VP for International Affairs for Ocean's Pioneer, Jacques Costaue. Her unique connection to us here at Intercontinental Exchange is that she was the one-time president of the International Division of the Chicago Climate Exchange, known as CCX, the world's first cap and trade system covering all six greenhouse gases, which ICE acquired back in 2010. Much of our current world leading environmental markets were shaped by the work that Paula and my colleague, Brooklyn McLaughlin, our VP of corporate affairs and responsibility began way back then. Welcome, Paula, inside the ICE House.
Paula DiPerna:
Thank you so much. It's not as cool in here as I thought it would be in an ICE house, but it's hot outside, as you just said.
Josh King:
It's great to have you here at the NYSE, which is the setting, Paula, for your chapter on Wall Street and sustainable investing. As a native New Yorker, is this your first visit to the exchange?
Paula DiPerna:
No. No. My parents had a regime of taking us to various New York City landmarks every Sunday. So I think I was here when I was like seven or eight right here in the very spot on Wall Street. My mother used to work down here as a young ingénue. So starting up my childhood as a New Yorker, I've known exactly where NYSE is, and I've been in and out. In fact, CDP rang the bell here a couple of years ago and that was thrilling, and we used to have our annual workshops here on the floor, but the big thrill of course was when we had CCX running and I used to come in and out and try to get various things going here to get companies to join CCX even before ICE acquired us.
Josh King:
You said something that really sparked an interest, your mom as a young ingénue, your parents taking you to various sites on Sundays. What was growing up like here in New York for you? Paint that picture for us.
Paula DiPerna:
So my parents were Mary DiPerna and Frank DiPerna. My father worked for the New York City Department of Health and he would've been what we would call a public health statistician probably today. And my mother worked in various offices. She worked for the Community Service Society. She wanted to be a writer, which is probably why I'm a writer. In fact, I have a fabulous picture of my mother dressed to the nines, gloves, lace gorgeous button shoes that somebody took as she was walking down here. There's a guy in the shot with a straw hat.
Josh King:
About what year would that have been?
Paula DiPerna:
Gosh, she was 19, so probably before the crash, before '33. And she talked a lot as I was growing up, as that generation did, about what happened in the thirties when the crash and what an impact it had. And it almost sort of is an interesting question because at that point everybody suffered from the market crash. It was a real economy event as opposed to today when some people are pretty much buffered from the real economy as our costs, which we can talk about later. But anyway, growing up here was fantastic. I grew up in the North Bronx and in Pelham Bay Park playing baseball and going to every place, museums all around. And New York was just thrilling. And I'm a believer, I love the world. I go all over the world, but I do believe if you can make it in New York, you can make it anywhere. And I love the energy. Last night I was in the city at 9:30 having dinner on Second Avenue and it might as well have been 9:30 in the morning.
Josh King:
Here on the floor of the NYSE, you often hear conversations around this acronym, ESG, but it can mean a lot of things to a lot of different people. Some people really are running away from it now as fast as they can. With the lack of consensus around how to define the term, how do you define it?
Paula DiPerna:
I think we all read too much of the media. They get into ruts and it's not so hard to understand ESG. Environment, social governance, that's what it means. And what it means in practice is that when you are deciding where to invest, that you more or less screen your investments to see what will be their impact on environmental issues, environmental status, social issues or governance issues. Are people on boards? Does the audit committee have a liability awareness of climate change risk? Do you treat your workers properly with regard to diversity and other social issues? And in an environment, you have funds that screen out certain kinds of investments like guns or tobacco. Tobacco is the most obvious comparison, or screen in proper environmental management. So it's not so mysterious what it means. I think the greenwashing story, fortunately the securities regulations, you violate them, it's a criminal offense. We're always going to have some fraud, outright fraud. Human nature is capable of committing fraud, as we know, but I think the greenwashing thing, people running away from it. I think that's cowardly.
Josh King:
Before we get further into your work, Paula, I want to go back again to maybe of different period of your youth after your mom and dad were taking you to landmarks on Sunday mornings, and that's college at NYU and later. You've mentioned in past interviews that you originally had no interest in environmental issues, but always passionate about writing. Perhaps how did the passion for writing really go beyond mom's influence and how did that lead actually to your working with the legendary and famous pioneer Jacques Costaue?
Paula DiPerna:
So no pain, no gain is the expression. So you kind of have to put yourself out there. And I started writing about public schools and I was lucky enough to have a professor when people actually mentored people, named Victor Navasky. Great journalist, great and really terrific mentor, very willing to help people. So I was taking a graduates course with him. I was teaching in a public school and I thought I had a story, namely that the school had been created to be an alternative structure and that in order to retain its budget line, it was being pressured to become less alternative, more traditional, which may or may not have been the right thing. But the point was the story had a contradiction. I'm always looking for a bit of contradiction. So I talked to Victor and he said, "Well, it sounds like a good idea. Pitch it, call so-and-so and tell him I said so."
So I did. I pitched it. The guy said, "Write it, no guarantees. Go ahead, I'll read it." So I wrote it, sent it in, he rejected it. And he said, "This is one of those things where it sounded good, but when you actually read it's boring. Sorry." So of course I was semi crushed. But then that passion, you got to have passion. You got to say, okay, you lick your wounds, you go back and you say, well, maybe I did something wrong. Let me see. So I looked at it and I thought, this is boring. So I redid the lead and I called him up, I said, "I've redone it, would you read it again?" And so he said, "Yeah, I never asked for a rewrite because I figured the writer should want it more than I do." And he read it and published it. So that got me started on writing frequently, I would say, for the Village Voice.
And I had a beat, so to speak, which was public schools. And I wasn't, back to my upbringing in New York City, the Hutchinson River Parkway was as close as we got to forests. My parents and her sisters had a bungalow in Lake Peekskill, and that was as close as I got to wilderness. I've written here and there that I thought Pete Moss was a person. I had no environmental leanings whatsoever. But then a friend of mine gave me a Christmas present, which was a membership in the Cousteau Society. I'd heard of Cousteau, but again, I don't dive. I still don't dive. And I thought, hmm, wonder what this is about. So I looked at it and there was an ad in the newsletter that said they were recruiting volunteers to work on a project, a book. I had asked Victor one time, should I specialize?
And Victor Navasky told me no, be a really go-to generalist. So I didn't specialize, but I thought, let me see what I could pick up in terms of narrative threads. And so I volunteered to work for them and went to an interview as it were, and they kept asking me all these questions and taking a lot of time considering I was going to be a volunteer. And then sure enough, the next day they called and said, "We have one paid job for an editor and a writer and we'd like you to take it." And so I was kind of flabbergasted and I almost didn't take it. I thought, well, I'm doing okay as a freelancer, but then again, something clicks and you think you're not going to get a chance like this again. So I took it and the rest is history. Really changed my life because here was a man who had access to everyone in the world and how did we use that access? And that gets back to stuff in the book. I learned from him, access isn't enough. You have to implement.
Josh King:
I have the images of the Calypso in all of its glory in all of its locales that he would venture around the world. Some of my formative television watching experiences. Was your work tied to Peekskill, New York, or were you able to go along with him on some of these adventures?
Paula DiPerna:
No, I went on all the adventures either ahead of time or before, but not in the period. You may have seen those Sunday night ones. That was not me. I wasn't there yet. But there was an interesting turning point, and again, it kind of goes to the purpose of our talk today, that my book and environment.
Josh King:
Yeah, we're going to get to it.
Paula DiPerna:
But Ted Turner, who was a visionary on environmental issues and on media, he was just creating TBS, Turner Broadcasting and CNN, and he needed content. And PBS, the Public Broadcasting System, which had put Cousteau on every night such to the extent that there were 200 million viewers on the same night watching the same show. So viral before internet, which is why there's a whole generation of marine biologists below a certain age there.
Josh King:
And TBS was the only alternative thing to watch beyond local terrestrial broadcast.
Paula DiPerna:
Exactly. So Turner needed content. Costaue needed another backer because PBS was winding down its contract. And so Turner basically wrote a blank check and we started a series called Rediscovery of the World, which is where I came in. And then from that point on, I wrote about half the films. I had several colleagues, a wonderful colleague, named Mos Richards, who wrote many films too. But I was also a producer and I went ahead and I tried to make sure that we didn't miss stories.
Josh King:
I mean, from working on that book that you were originally working with Costaue on, Costaue Almanac, to meeting President Bush in the Oval Office, what were the major lessons that you learned working with Costaue overall those decades?
Paula DiPerna:
I think there were two. I mean, as I said earlier, here's a guy, he literally could call anybody. And it was also a time when you could call anybody, (202) 456-1414 is the White House, and I know it by heart. And so do you, apparently. And somebody used to answer that number and you could say-
Josh King:
Still will.
Paula DiPerna:
Back to now the President Biden, but when you under the Trump administration, it was a recording. I know because I tried, but you could call and say, "President's office, please." And somebody would answer and you could say, "Hello, my name is Paula DiPerna, I'm calling for Jacques Costaue. I was wondering if we could come and see the president." And you would get the appointment. And okay, maybe one or two more calls. But what I learned from that is what I said earlier, that access isn't enough. Costaue had no patience for process. He felt that if you had power in the world, you should use it and you would use it. And if he threw an idea in there, it would stick and it would happen. I mean, he wasn't naive, but for the most part that's what he thought. But I knew that it didn't work that way.
And I used to say to him after we'd come out of a meeting, look, it doesn't matter what we just said, it matters what's said now after we're not there. When all the staff comes in and says, "Ah, that's too wild," or it's easy for Costaue to say, but we can never do that. And rain falls on our parade as soon as we walk out. So my job was to put the umbrella up, get rid of the negative criticism and make it happen, which I was happy to be able to do many times. And the other lesson which I referenced in the book, he had a knack for understanding value in price. For example, we would sit around during the Almanac days and I wrote about manganese nodules in those days, hydrogen fuel sales, climate change, everything that we're talking about today is in that book.
We would be sitting around kicking around ideas and or film ideas. And one day he took this dollar bill out of his wallet and he said, "When I was a boy, this represented $1 worth of sweat." And then he said, "But today it represents one dollar's worth of oil." And he had a knack for understanding what is backing up the economy. And I would argue today a dollar is really $1 worth of carbon emissions or ecosystem services backing up the economy or backing up the cost to the economy.
Josh King:
So through Costaue, you meet this commodities' trader, Richard Sandor, at some UN conference who shared, in the way Costaue shared his passions, he shared your passion for environmental issues. How did your relationship evolve with Richard from a mentorship to working with him to really create the first cap and trade system, which would become the Chicago Climate Exchange?
Paula DiPerna:
Yeah, well that's a great question and I haven't really told that story too much. Richard is fantastic. Richard Sandor is a one of a kind father of financial futures, invented interest rate derivatives, very much a man of markets, a man of this building, so to speak, and professor of economics renowned and also one of the world's leading collectors of photography. And I think his visualization, his ability to think visually also is part of his creativity. But anyway, he was at the Rio Conference, which was in between Paris and Stockholm. So '92, he was invited. He had been involved at the Clean Air Act in helping them develop the SO2 cap and trade. He was essential to that. And he was invited by the UN to come to Rio in '92 to see if you could adapt cap and trade to climate change, which he thought was doable and not easy, but doable.
Me, I was representing Cousteau on this follow-up to Rio, again, back to implementation, called the Secretary General's High Level Advisory Board on funding Agenda 21, which was the output in '92. Call it a voluntary version of the Paris Agreement. And Richard was on that same group, and they convened us in Glen Cove, Long Island, speaking about make it in New York, and I was representing Costaue there. And so it was one of those meetings where everyone comes and sits around the table and most people just say what they came to say regardless of what the person next to them just said. And you've been to many meetings, you know those meetings where somebody says, "Hey, I just had lunch at 21 Club," and then the next person says, "I just had lunch at 21 Club." It is exactly, or we should be doing this. And then the other person repeats.
But Richard was the only person there who said anything that I thought was actionable. And these were funders, these were bankers, international bankers who didn't really know how to fund Agenda 21. There was no structure, and today there's no structure, which is what we need. Maybe ICE can invent this new structure. But anyway, Richard simply said, I believe we can use cap and trade for climate change and that would throw off revenue. There'll be transaction fees, there'll be intrinsic to market operations, there will be revenue and that can be directed to a broader purpose. But you never know with trading. He said, "I know about trading, I don't know about climate change. What I know about trading is you don't know until you start it if it's going to work. So let's try it." And nobody picked up on that. That was one of those things that nobody repeated, like the person next didn't say, "What a great idea, Richard." But me, not to brag, I wrote the guy's name down and I thought, that's interesting, but I didn't know how to connect.
So I left Costaue, he died shortly after that. I thought that it was a good time for me to make a move. I gave myself a little time off and then I was recruited and selected, I'm proud to say, to become the president of the Joyce Foundation at Chicago, which is where Richard was, and it was the millennium. And we had, at that time, we were one of the 50 largest foundations in the country before the Gates Foundation. In fact, we were advising them at that point. I called up Richard, I said, look, I'm going to be president of this foundation as of July one. I heard what you said at Glen Cove a couple of years ago. Do you want to talk about it? And so he and I met on July 14th, 1999 at the university club, no paper allowed. And Richard sketched out CCX.
And the premise was, I think we can design it. At that point, this goes to policy. One of the points of my book is we need science policy and capital to work more closely together. So he was anticipating the business model would be that if the Kyoto Protocol kicked in and there would be a mandatory cap and trade at some point, there was a need right then to develop a framework for early adopters. And that he thought a voluntary system could capture a market share and then the market share would stay with that business. Me, I was in philanthropy. I wasn't interested in business, but the millennium was there and I thought, okay, let's do some special grants that would be intergenerationally significant. And so the Joyce Foundation gave Northwestern a grant to help Richard Design what then became CCX.
Josh King:
Right. I think I've seen some of his YouTube lectures in which he talks about those early grants. So those were yours?
Paula DiPerna:
Those were ours, yeah. A little bit more, a million plus. I think two grants. And ultimately Joyce Foundation got paid back in CCX stock, and so that was a first as well. But anyway, I wasn't working with Richard at all. By then, I was advising Carbon Disclosure Project a bit and doing another bunch of freelancing. And CCX opened in 2003. And then in 2005, Richard asked me if I wanted to come and work there, and I left Joyce. In fact, because of 9/11, since we're here on Wall Street, I was so shocked by what happened on 9/11. Living in Chicago, I felt fish out of water that I thought the world would be forever more different and I should get home. And so I left Chicago, came back to New York, and eventually joined Richard and stayed with him until we sold CCX.
Josh King:
In many ways, he was and is a man before his time. I mean, as the world shifts to a low carbon economy, carbon pricing is increasingly important in investment decisions. How today are carbon markets creating new opportunities for sustainable investments in driving the growth of green finance?
Paula DiPerna:
Well, they're not doing as much as they could, but in part because of the fits and starts of the design and the fragmented nature of it all. But if you stay with mandatory markets and you think about what you're pricing is not really carbon, you're pricing the scarcity of the atmosphere to absorb carbon, which increasingly is scarce. So if you can kind of conceptualize and hold this paradox in your head that the atmosphere is really kind of real estate and the carbon price is an occupancy fee, and the higher that price goes, the less you want to pay it because it's a cost. So what it drives, the higher the price goes, it drives a kind of incentive, one, not to have that cost, and two, to invest in being able to be immune or unionize yourself from that cost, which means get out of carbon.
So that's an incentive to drive pollution down, if you will, and find alternatives within a company. Then when you get out of the direct reduction space, which I believe caps are very critical and mandatory caps are essential, but for the moment, the offset space is somewhat controversial, and that's a project that absorbs carbon, reforestation is the classic, or methane capture and landfills. A number of things, no-till agriculture.
Josh King:
We can talk about that in a second.
Paula DiPerna:
So that carbon price, if I am capturing methane, I'm the mayor of New York City, the landfill is capturing methane. If I can sell that methane credit into a carbon market, that's revenue for the city. So these projects also generate cash for cities or project investors and keep feeding the system of alternative technologies and alternatives to pollution. You opened your introduction talking about boiling the ocean, but you can't unveil it now, we don't have a pathway now except to really undo 100 years of putting pollution up into the atmosphere and now we've got to take it down and basically put it back in the ground where it came from, which is insane. And we need a lot more capital focused on that.
Josh King:
I mean, talking about cities, Paula, over your career, you've served as a special advisor to CDP North America, the nonprofit that really runs the global disclosure system for all these players, the investors, the companies, the cities, like Mayor Adams, states, regions to manage their environmental impact. If the task force on nature related financial disclosures' framework, which is the one that measures the financial risks to businesses due to nature loss and identifies nature positive investment opportunities, how can we actually say that nature is valued at nothing?
Paula DiPerna:
Because of look at the behavior. I mean, we're not acting as if it's valued. I mean except, for example, in these transactions that might occur. And why can a transaction occur? It's because of a quantitative process, which has been evolving as an academic pursuit for some decades where you actually try to, not monetize, but actually put a number on the ecosystem services, the services that nature is providing as an unpaid labor or otherwise. So for example, a swamp looks like it's doing nothing. It's filtering water. Well, how do you price the filtration value of that swamp? Where can you look? Well, you can look at water cost in the neighborhood and you can say, okay, this household is paying X for water. You can look what filtration costs are, chemical filtration, purification costs. You can find a way to put a monetary value on the filtration work that that swamp is doing.
And suddenly that swamp is not just a swamp, it's a highly valuable piece of property, which is probably more valuable as a swamp than if somebody bought it for a low price, paved it over, put a shopping mall. And we're paving over too many places and we're arguing in the Supreme Court about wetlands and we're not really properly valuing these ecosystem services. And until we start really doing that, putting that on a par with the way we value other things, we're just going to, what [inaudible] calls depreciation. It's depreciating. The environment is depreciating just as easily as any other asset.
Josh King:
So that brings us then to, Paula DiPerna the writer, the passionate advocate, the person who worked for so many years under people like Jacques Costaue and Richard Sandor. And the most recent creative work that you've presented and brought to the world, Pricing the Priceless: The Financial Transformation to Value the Planet, Solve the Climate Crisis, and Protect our Most Precious Assets. Why write the book? Why do it now?
Paula DiPerna:
Well, because I've become convinced. I mean, again, back to CDP, our role there is to capture as much information as we can on behalf of investors from companies about their environmental performance. But there's still a gap. There's still a gap. And it goes to something, I don't want to criticize them, but one day I was in San Francisco when Uber was just, well, actually in Dublin at a hotel in the garden of the hotel, and somebody was showing off this new idea called Uber, like as if it was a space shot, except it was just a taxi company as far as I could see. And he was very excited about the company. And then I read that Uber was valued above General Motors. So Uber just is a software product. General Motors makes the cars, makes cars and other things. And I thought, how is this happening?
Why is the market putting so much into Uber, so much into these dispensable nice to haves, when you can't get money to reforest, you can't get enough money to prevent wildfires, you can't get anything like the necessary amount of money invested in removing carbon from the atmosphere? So why is this this imbalance? And so I felt the time for the book was now. But back to Paris, the real impetus I have to say was the Pope in his attempt to add his voice to the Paris Agreement wrote a significant encyclical called Laudato Si'. And in there are a couple of paragraphs in there that derided carbon pricing as false and as a disguise of action. And I thought, if he's going to diss the very thing that is our only chance to begin to price this indispensable atmosphere, then that's going to be bad. So I tried to talk him out of it.
Josh King:
This is part of what you wrote to his holiness, Pope Francis, I'm going to quote you here. "Carbon markets do not privatize or exonerate. They are simply accounting, like any other, that assign value where the failure to assign value to date has led to obscene denigration of that which we've considered ours to use freely at no cost. I put myself at your disposal. I would travel to Rome if desired, to discuss the topic." And walk us through then how that idea to put turned into writing a letter to him and then actually getting an audience. What were you able to accomplish at the meeting?
Paula DiPerna:
Well, the letter actually got to the Pope because I enlisted the help of a member of the delegation to the UN for the Vatican Sea who read the letter. I thought I would just feed through the idea through him. And when he read the letter, he said, "I think the Pope should actually see this letter. I'm going to send it over to Rome in the pouch." For people who don't know, there's such things as diplomatic pouches where one of a kind things get to be sent. And so who knew what would happen after that? And then I got this email from the secretary to Cardinal Peter Turkson, saying, Cardinal Turkson has received the letter, and he was the right-hand person to the Pope on climate change and other things. The Pope had just had a kind of conference. And Cardinal Turkson, thanks you very much for the letter. Period
And so there was a phone number on that stationary. So I called and I got this wonderful assistant to Cardinal Turkson, and I said, well, but what did he think about the letter? It's nice to say you got it, but what do you think about the content? And I'd like to talk to the Cardinal. So I finally got an appointment to speak to the Cardinal, and I made my pitch. And of course he said what I expected, which is, "Well, the Pope has already said what he's going to say, he can't unsay it." And I said, "Well, he can't unsay it, but he could say something else to supplement or nullify what he said before." Cardinal Turkson said, "Well, let me think about it." And I said, "Well, would you mind if I came to Rome to chat with you in person?" And he said, "No, come."
Like he probably never thought I ever would. And as soon as I got an opportunity to be anywhere near Rome, I did call and get an appointment and we chatted more. And then I said, "Look, you have this newspaper, the Observatory Romano. Why don't you just put an editorial in there that corrects a bit the record?" Now simultaneously, there were a group of people meeting with the Pope on carbon pricing also. So I can't say that I completely reversed the view on my own, but I certainly weighed in. And then I did suggest to the Cardinal that to try it out, if you think the markets are so bad, try them out. Find out. Back to Richard, you don't know. And I said, "Why don't you declare the Vatican carbon-neutral and then you'll have to buy offsets to be neutral, and we can talk about that a little bit later. And then you'll see are they verified? You'll see what they do."
And the prices are so low for those offsets right now, which is why they're not incentivizing what you referred to earlier in the voluntary market, you won't have that much of a bill. And I'm sure that there's somebody out there in the world.
Josh King:
The Vatican Bank can afford it.
Paula DiPerna:
The Vatican Bank could afford it, and there would've been anybody who would've covered that, and he said he'd take that under advisement. But that I did accomplish, not by myself, with a couple of endorsers, but that idea came from me and it was done and it was announced. So I feel pretty satisfied about all that.
Josh King:
I mean, as we head into the break, Paula, let's just expand the aperture a little bit because you've explained in a lot of recent interviews that the missing character in economic measurement is nature. And I want to just go beyond sort of what we perceive that the sort of example that you mentioned of the swamp that is filtering water and better off for society than another strip mall in a parking lot. But speaking about the value of nature, in a recent interview you spoke about the rhino bond in Africa. How is this an example of pricing the priceless in action today? Are there other such examples of that?
Paula DiPerna:
Yeah, I mean, the rhino bond would be very specifically targeted to biodiversity. So you have a white rhino population that's threatened for a number of reasons, not the least of which was the COVID epidemic, which most people who don't live in Africa don't understand that tourism to Africa, which is a huge part of the economy, based on biodiversity. So right there, whatever the value of the tourism industry is accrues to those animals, right? So that's at least the minimum they're worth, if you want to call it worth, apart from the metaphysical. And the tourism to Africa went to zero, literally nobody going to Africa when COVID, especially when the so-called Botswana, South Africa variant hit the newspapers. So crash in tourism revenue, squeezing public service budgets all through Africa, including conservation budgets, anti-poaching police. These countries in Africa are holding onto the stewardship for the world of these animals with very little money.
And particularly in South Africa, any money that was spare was used to offset costs for people, more vaccinations, more public health, more people in hospital and so on. So there was no money left for rhino protection. And of course, in Zimbabwe there was total corruption. The poachers were so successful there, they couldn't find Rhino anymore, and they were starting to move into South Africa. So the bond, the World Bank securitized it with the GEF, Global environmental facility. But basically what it does is they were able to attract private sector investment, cash upfront, securitized by the public, the multilaterals, and the idea was to get cash immediately into the conservation police in two specific parks in South Africa.
And the bond would be repaid by the beneficiaries of the bond and by the public facilities to the private investors if there could be proof of an increase in the population of white rhino as a result of these upfront investments. And so you could argue that the face value of the bond is what the animals are worth, but you could certainly go beyond that and say that tourism in South Africa is at least what they're worth. And then you get into these metaphysicals about that's way too little. And how can you put money on the life of a rhino? That's not what I'm arguing. What I'm arguing is these animals have a value that you can quantify, which so far we haven't recognized.
Josh King:
After the break, we're going to dive deeper with Paula DiPerna, author of Pricing the Priceless, on her stories, strategies, and solutions in her book, and her active role in developing the world's first cap and trade system, the Chicago Climate Exchange back, in 2010. That's all coming up right after this.
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Josh King:
Welcome back. Before the break, Paula DiPerna, author of Pricing the Priceless: The Financial Transformation to Value the Planet, Solve the Climate Crisis, and Protect our Most Precious Assets. Paula and I were discussing her career as a writer and also as an environmental strategist and advocate. Paula, one topic that we're hearing a lot about from our clients is biodiversity. We've talked about it a little bit so far, which was the theme of last year's COP 15 in Montreal. You focus a lot in your book on coral reefs. And just last week, ABC News did a feature on Hawaii's reefs and what researchers are doing to restore their ecosystems. And talk a little bit about the superficiality of media today, but I want to hear what was said in that by one resident of Hawaii, Auli'i Cravalho, who's best known for her leading role in Disney's Moana, on the importance of protecting our coral reefs.
Auli'i Cravalho:
I was born and raised on the big island of Hawaii in a really small town called Kohala. And growing up in Hawaii, I saw firsthand the impact that climate change has had. Rising sea levels, ocean acidification due to human-driven increases in carbon dioxide, and also the rising temperature is causing coral bleaching. I have always been aware of our coral reefs, and I'm used to it being plentiful with fish and very colorful. And over the years I've noticed that it has significantly degraded.
Josh King:
Now, that may serve for some viewers as sufficient amount of background from her. Let's dive a little deeper and get into the substance of it, Paula, because according to the US Geological Survey, live coral provides food protection benefits to more than 6,800 people living in Hawaii and 836 million in averted damages in economic activity. The effort to restore coral reefs, as you know, is laborious and really a Costaue-like effort. And I've seen videos like this before and my thinking always is as I look at these sorts of gray bits of dead coral, like there's no coming back from this. How does restoration actually happen and how are the costs of it both quantified and justified?
Paula DiPerna:
Well, your statistics there I think speak to the importance of restoring the reefs because they are in fact the nurseries for fisheries. And one of the points I try to make in the book is not only do they nurture fisheries, but they're buffers. They're basically like barriers for storms. And so even let's say, okay, 50% of the reefs are dead, which is a metaphysical tragedy, and you can't, as we said earlier, unboil the ocean. So maybe that's it. Maybe that can't be restored. And the generations who, like the woman you quoted, grew up understanding what a beautiful reef is like. Maybe most of those kids won't see, other than in film, what reefs used to look like, but there's still 50%. Now, the restoration process is laborious and very, I mean coral reefs, especially hard coral, that's the other point, back to why I wrote the book.
You suddenly become aware of time. Everything that nature represents has taken thousands of years to get to this stage. And we've expended it in less than three generations, less than 100 years, pretty much. This death of the coral reefs has occurred recently, certainly relative to its history. It's like a pinhead of time. So we can't just sit by. And so the restoration, as I said, is painstaking. What people are trying to do is buy time and develop coral that can withstand higher temperatures, because you can't unboil the ocean, that are stronger when it comes to storms and try to replant, reseed, actually grow coral in a laboratory that you can then put back in the ocean. So that in itself is mind-boggling. But the coral reef, so where are you going to get the money for that? Back to normal budgets are based on what people can afford to spend, not backed up by the inestimable value of the reef itself.
If you look at what the reef is worth and you look at what's being spent by public budgets to protect, there's no relationship. So at some point, you have to move a lot more money into the restoration part of the business, so to speak. And that's hard because all public budgets are stretched, but you can do something. And the fascinating thing is this coral reef insurance, which most people, they have a car, they insure it, they have a house, they insure it. Now, we could probably talk about wildfires and why people aren't going to be able to insure their houses, but we get into haggling with insurance claims mostly, but parametric insurance doesn't involve any haggling. When the wind speed hits a certain level, it is known that the damage to coral reefs is likely to be significant, and that that wind speed triggers a direct correlation with potential damage, physical damage.
And I've seen videos where reefs are just smashed to smithereens by hurricanes in general, but these more lasting hurricanes, more frequent hurricanes, banging on the reefs constantly. And if you don't get into the water to actually fix the reefs, they will die. And so the parametric insurance is a pilot, but again, could be deployed anywhere in the world where the wind speed hits a certain level, it triggers the insurance payout. The owner of the policy, which in most cases would be national parks, gets an immediate infusion of money and can put divers into the water, which they have already trained and have pre-positioned waiting for that day when that wind speed is high enough. They get the money, those divers jump in the water and literally use drills and string and they try to put Humpty Dumpty together again.
And if you can put most of the reef back together and restore some of the branches and places where the fish would hang out, then it's there for another day. Hard coral is basically cement. So the divers are part of this cadre of people who are funded by this interesting new formula, which is the coral reef insurance. And so there again, that is a monetization of the value of the reef in the future. It's not a response to the destruction of the reef in which people say, "Well, that's really a disaster. And it happened."
Josh King:
So we spent a little time in New York City. We've wandered into Chicago, we've meandered as far west as Hawaii. Let's keep on going to perhaps one of the most consequential areas of the world right now for the future of the environment, superpower relations. China, the Taiwan Straits, the Pacific Ocean, et cetera. During your time working for the Chicago Climate Exchange under Richard, he said this about the next steps in carbon pricing, quoting Richard, "We felt success in China could speed progress and maybe save the world a decade on gripping the climate change problem." What potential did Richard and you see in China as a catalyst in the carbon markets at that time?
Paula DiPerna:
Well, at that time, it was obvious that China intended to be a leader in the world. It was coming out of a shell, so to speak. It had come through the Rio process. In Rio, China was considered to be a developing country, but I knew from those days, as did Richard, that there had been already a tremendous investment in understanding the problem. And China played a very significant role at Rio, even though at that time it was considered a developing country and did not have to reduce its emissions. But it built up a generation of knowledge and a generation of interest. And we knew Chinese like to trade. They're traders, commerce. So we knew that if we could get a carbon market established there, it would become worldwide significant because just the economy of China was on its way to what it has become, which is this behemoth.
So it was a hunch, but it was also backed up by a sense of history. And we felt that between Richard's acumen as a trader and his record as an economist, me as the implementer, even though I don't speak a word of Mandarin, and the drive in China to be first and be best, and the hugeness of it, that if we could get those pieces to work together, the Chinese market would be and is likely to become the largest commodities market in the history of the world. So you don't walk away from that. And we felt that we could help them get ahead and understand carbon pricing and then knit that back together through CCX to the EUETS and to the remaining or the other markets that were at that time in gestation. And had we been able to do that, you'd have a global market today, you'd have integrated pricing today. And so we did lose that decade. And I don't know if we can get it back.
Josh King:
Talking about getting it back, where do you see things today under Xi Jinping? How many steps backward have we taken?
Paula DiPerna:
Well, I never met him, but what I understand and what I read, it's way more rigid and autocratic. But if you read between the lines of China, Ford Motor Company was just a piece in the New York Times about their collaboration with a CATL, the major producer of batteries in the world. If Ford doesn't know how to make them, they need the Chinese to support it. The largest creator of solar cells, article in the Wall Street Journal the other day where people are criticizing the Biden IRA bill because so much of the tax incentives are going to, quote, "foreign companies". But guess what? We don't have the expertise. They do. So while we've been kind of hemming and hawing in this country, the Chinese have built up tremendous advantages in the, quote, "green economy". And so whether the current communist party and leadership are more or less autocratic, they certainly are. They've gripped, they got the green economy message, and if we don't, it's to our detriment.
Josh King:
Last fall, we hosted Chandler Van Voorhis, co-founder of GreenTrees, who talked about the science of sequestration. You mentioned it earlier, Paula, this economics of pricing nature and really ICE's plans to host two carbon credit auctions for GreenTrees' reforestation and carbon removal efforts. I want to hear a little bit of my conversation with Chandler.
Chandler van Voorhis:
So William Petty back in 1600s really revolutionized this when he said We need to treat land as capital and to release its value requires labor. What we would argue today in this industry is that we need to widen our lens. We need to see the value that trees are providing. We need to incorporate that into the capitalistic order. And what's going on with the natural asset companies is an example of the evolution of this and how we're using tools from other parts of the capitalistic order and applying it into nature and pulling it in and embracing it. So I think we're really at the beginning of Capitalism 2.0.
Josh King:
We're at the beginning of Capitalism 2.0. You mentioned it earlier and Chandler's classic example is something very similar to the rainforest swamp that is filtering water. He's doing it in the bayous of Louisiana. In your book, Paula, you state that capitalism is not the enemy of environmentalism. That said, where do you see the role of capitalism in helping aid the global energy transition and this big idea, the financialization of nature?
Paula DiPerna:
Well, I think Mr. Chandler said it well. I mean, and I've been asked this before, am I unaware of all that capitalism has caused in terms of world duress and extraction? It's all been based on extraction. Fossil fuel industry is still extracting, et cetera. And of course I am. But what I know is that there's billions of dollars of capital floating around in the world that is maybe going in the wrong direction and either we harness it, or we don't. And Bob Costanza estimated the value of "nature" some years ago at $125 trillion a year, these ecosystem services. $125 trillion. That was more than the global GDP annually. World Economic Forum, $45 trillion a year. So somewhere between $45 and $125. But still, that's a ton of money, and that is a hidden subsidy filled with risk and price signals, transparency. That's the heart of capitalism.
And if only at a risk level, we're not seeing where that subsidy is falling and where it could stop falling. That being said, we have to work with the system that's at hand. Look where we are. We're in the New York Stock Exchange. Billions of dollars are coming through this building, or at least the screens of this building, every single day. Why shouldn't they go towards protecting nature if indeed the premise is true, that there is value there? And the difficulty is to, one, get over the skepticism that you can value nature without further demeaning it conceptually or otherwise. And here we are, there was a yellow smoke in New York City. I'm sure you were here. God knows what it was like down here in Wall Street in the canyons, but horrifying wildfires. And there's something in my book called the Forest Resilience Bond, which is basically the answer.
And it was a creature of four NBA students at Berkeley, the Haas School in 2016, they started with a $4 million face value bond, and now they've got two $25 million bonds plus an aggregation portfolio for aggregating projects, mostly about preserving rainforest resilience. Again, similar to the rhino bond. Money upfront through beneficiaries. And you could have one series of bonds for the whole country of Canada. You could have for the whole country of the United States or regions. The gap is in understanding that these tools exist and how they can be made to work in a situation relative to the calendar, the environmental time clock, and relative to acceptable return. You need more patience maybe, patient capital, but you can still, hand on heart, make money doing these things.
Josh King:
Hand on heart, make money. We've had these tools available, Paula, to correct the market failures of pricing pollution and valuing these carbon sinks. Why have we failed as a society to use them more widely?
Paula DiPerna:
Well, discounting the fact that maybe there is a tendency towards extraction because it's easier. I'm being somewhat wry. Of course, we have had the tendency to go to what's easier, but in this book, and you asked me earlier, why do the book now, partly because I wanted to discover money as a character. I felt that wow, money really has a personality. Finance is a flow that can go one way or the other. And I discovered and enjoyed discovering finance and money as a character. I didn't go to business school. And I find when I talk about the book that there still are these silos. People who are in the capital markets don't really necessarily talk daily about environmental issues. It's a kind of a superficiality, and you can't expect them necessarily to specialize. Just the way, when I talk to environmentalists, they don't have a clue how capital markets really work.
And people I talk to don't know that if the carbon price is high, it's good for the environment. They think it's bad for people. They think the price is falling on the people. It's not. It's falling on the polluters. So this gap in understanding between the sectors and the specialization, I think is one reason. The other is regulatory uncertainty. As much as lobbyists like to lobby against regulation, and this again going back to CCX, we lobbied intensively for a national cap and trade, the Waxman-Markey bill. Why? Because our business depended on regulatory certainty, and most businesses do. The level playing field, and we haven't had that either. So without certainty, companies are a little at risk. Maybe I'll have to be taxed if I declare my emissions. Maybe I'll have a tax, maybe I won't.
Josh King:
Based on a report that we saw from the Financial Times, as we wind our way to the end of this conversation, Paula, reaching net-zero by 2050 is going to require a permanent increase in the price of carbon. What would you say is the likelihood of that happening?
Paula DiPerna:
Well, the only hope, there are two or three hopeful signs. I think one is what we're experiencing, unfortunately, the recognition. And today the IPCC came out with a categorical statement that the extremes of weather that we've been experiencing are related to climate change. Whereas up to this year or last year, they were kind of tentative about it. Now, unfortunately, there's enough data. So now you have this categorical statement about the science, and back to science policy and capital. So the science is pounding away. You're beginning to see more aggressive policy initiatives, certainly in Europe, not here, but in Europe. And what we've been saying, the numbers of dollars now that are screened for ESG and looking into, as I just said, the Forest Resilient people, the FRB, they've had astronomical success because their model is so irresistible. Pay now for prevention for benefits you're going to get later, and you don't have any risk and you'll get the money.
So it's a matter of education. This new generation of concern, there's a lot more people coming in. But back to practicalities, if the cap and trade, the mandatory markets are not immediately, almost immediately integrated with the voluntary markets, if they don't open up, and thanks to the TNFD, which you referred to earlier, if these mandatory markets continue to be allergic to offsets because there could be some fraud in them, then you won't have the magic, which is this acceleration towards a price signal, which is high enough to drive incentives to the alternative to carbon decarbonizing. And that's a heavy lift. But I've been asked, and I'll say it right here, the most important thing we can have is an integrated mandatory cap and trade system worldwide. And so that carbon trades like currency across borders, and without that, we probably don't make it.
Josh King:
I began our conversation asking sort of a somewhat provocative devil's advocate skeptical question about ESG. You wrote something about this. Bloomberg Intelligence projected global ESG infused assets are going to exceed $54 trillion by 2025, and that'll be roughly one third of global assets under management. With the increase of screening for environmental impact, we're also seeing some pushback from pension funds prohibiting investment in ESG funds. Where do you see that netting out?
Paula DiPerna:
Well, at the end of the day, if you don't fight ignorance, you'll be subsumed by it. And the idea, and I meant cowardly relative to a non-threat, what could happen? Sticks and stones can hurt my bones, but words can never harm me. How can you be a leader state like Florida, where the homeowners, the people, all these environmental costs are not hitting the real economy? They're landing on the people of the United States. If we're talking about here, either through insurance premiums, FEMA budgets, or you lose your house. So how can you be in Florida running the state, knowing that most people will never be able now to get proper flood insurance knowing that there's water coming up in the streets of Miami? How can you be in charge of that state, and at the very same day that it's announced that there won't be any more flood insurance written in Florida, you prohibit your pension funds from doing the prudent thing, which is to at least look at the environmental risk faced by their investments?
Now, that to me is essentially criminal. Now, if I was an investor and I bow to that insanity of political partisanship, then I don't have the backbone I need. Now, I understand that there are risks and there's backlash and maybe you lose your tax credits or whatever, but we have to fight this kind of craziness. And I say craziness, I mean, it sounds a little bit extreme, but it doesn't make any sense.
Josh King:
As we wrap up, Paula, if we go back in time to 1977, President Jimmy Carter flagged the future impact of climate change when he commissioned that global 2000 Report to the present that I mentioned. I just want to hear a little bit of a clip from the malaise speech and pick up on the backside of it.
Jimmy Carter:
Why have we not been able to get together as a nation to resolve our serious energy problem? It's clear that the true problems of our nation are much deeper. Deeper than gasoline lines or energy shortages, deeper even than inflation or recession. And I realized more than ever, that as president, I need your help.
Josh King:
President Carter now at the end of a long life in hospice care in Plains, Georgia. But back then, so candid in that speech from the Oval Office dismissed back then as too gloomy. Reflecting on what he said and the broader lessons from the speech, what can we learn from the ignored warnings really over three decades ago to prevent further harm to our environment?
Paula DiPerna:
Well, sometimes it takes a while to learn things and history has taught us that. But I would put my finger on at least two things. And I've seen environmentalism now from 360 degrees as a funder, as a supplicant, as a creator, as a book writer, as a carbon markets person. And we failed entirely to excite the public that this was an opportunity. This was a re-industrial revolution We had the industrial one had a lot of inequities, but a lot of people got jobs. The same will happen if we start re-industrializing without carbon as the central energy source. We never talked enough about the jobs' creation. We never put it forward as a positive opportunity. And you just heard the President, it was kind of gloomy. And of course you should wear a sweater at home. Why keep pumping the heat up? But it was gloomy and heavy.
The other thing is that I learned from Costaue, which sounds so simple, but we see it now and it goes to why does Oppenheimer break all records the same weekend that Barbie breaks all records? It's because the public wants both. They want a moral compass and they want a little bit of fluff. And one thing I learned from Costaue was people will protect what they love and not much more. And that was his secret. It was beauty that he was inspiring people by. And when you go out, do you want to see smoke or do you want to see forests? If you're a diver, do you want to see dead coral or live coral?
It doesn't take much to inspire people around the things they already love. And what's been missing is a channel for that passion and love back to passion into their operational systems in people's lives. Where they invest their money, how they invest it, what their bank that has their $200 of their checking account, where's that money going? What's the operational pathway to implement protection of the things that I love? We figured out how to do that for kids. Parents protect our kids. Well, the earth is like our kids. We have to protect it with that same categorical dedication.
Josh King:
People will protect what they love, and not much more. The immortal words of Jacques Costaue, and also captured in your book, Pricing the Priceless: The Financial Transformation to Value the Planet, Solve the Climate Crisis, and Protect our Most Precious Assets. Paula DiPerna, it's been great talking to you. Thanks for coming in the ICE House.
Paula DiPerna:
Thank you so much. I've been inspired. It's been great. Thank you.
Josh King:
That's our conversation for this week. Our guest was Paula DiPerna. If you liked what you heard, please rate us on iTunes so other folks know where to find us. And if you've got a comment or a question you'd like one of our experts to tackle on a future show, email us at [email protected] or tweet at us at icehousepodcast. Our show is produced by Isabella Bazzone, with production assistance from Pete Ash. I'm Josh King, your host, signing off from the library of the New York Stock Exchange. Thanks for listening. We'll talk to you next week.
Narrator:
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, expressed 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, as 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.
