Announcer: 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 clearing houses around the world.
And now welcome Inside the ICE House.
Pete Asch: This is your host, Pete Asch. This episode will be coming out a couple of days after Earth Day 2023, which this year has the theme Invest in Our Planet to persuade businesses, governments, and citizens around the world of the need to put capital behind improving our environment and give our descendants a better and safer future.
Our two guests today, UpEnergy co-founders Matt Evans and Alex Rau, are the perfect people to talk about this topic as their company is focused on bringing the global tools of the capital and carbon markets to bear on the problems faced by local communities. Since its founding in 2011, UpEnergy has built 16 projects that leverage climate finance to fight energy poverty, and has reached over 6 million people with life-improving cleaner energy technologies.
Matt and Alex are just two of the dozens of participants at the New York Stock Exchange's Sustainability Leaders Summit being held today. The event brings together NYC-listed companies and thought leaders to address pressing topics around sustainability from a broad range of markets and sectors. The Summit kicked off with a meeting of the NYC Sustainability Advisory Council that discussed topics surrounding board governance to identify and share global best practices.
Before that meeting kicked off, the co-founders agreed to sit down with me for this recording. Our conversation with Matt Evans and Alex Rau on their plan to invest in our planet, UpEnergy's projects to provide life-improving clean technology to the developing world, and the role that ICE's carbon markets will play in the carbon credits linked to UpEnergy's Uganda Cookstove Project is coming up after this brief break.
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Pete Asch: Our guests today are Matt Evans and Alex Rau, Co-founders of UpEnergy Group. Previously, Matt was the Managing Director at Impact Carbon and a Managing Director at WattTime, a subsidiary of Rocket Mountain Institute. He holds an BA in economics and international relations from Stanford and an MBA from UC Berkeley.
Also joining us is Alex Rau. In addition to his work with UpEnergy, he's the Founding Partner at Environmental Commodities Partners. He's the Managing Director of the carbon investment and management firm Climate Wedge. He also co-authored the original version of the Voluntary Carbon Standard, the most widely accepted trading standard for non-Kyoto carbon assets. He has a PhD in physics from Oxford University, a BA from Cornell University, and is a CFA Charter holder.
Welcome Matt and Alex Inside the ICE House.
Alex Rau: Thank you, Pete.
Matt Evans: It's great to be here.
Pete Asch: So we are recording this on March 28th, about a month before Earth Day that I mentioned in the intro. You're both here to speak on a panel entitled, "The State of Play in Carbon Markets." What's the message you want the audience to take away from your upcoming presentation?
Matt Evans: Ultimately, we're here to talk about the opportunity for members of NYSE and others to support decarbonization and the fight against energy poverty in low-income places like the African countries where UpEnergy works.
Alex Rau: We're trying to essentially put forth a message that large corporates who want to do something about their emissions footprint options and have options that can clearly reduce emissions internally, and there's a price associated with that, but they also have options to support projects and companies like UpEnergy, which are doing very important work in communities, especially those that may not have the same wealth and advantages that we do in the Western world. So it's an attempt to essentially link communities and provide, we call it carbon finance, so the flows of money towards the emission-reduction projects, but in places where they may not access the traditional capital markets.
Pete Asch: Matt, how do you get interested in where social impact and finance meet? Where does that come from?
Matt Evans: Yeah. I mean, you go to grad school and you come out interested in a set of problems around poverty in low-income places and around climate, and you kind of get hit by a train that basically shows an opportunity where you can address both of those together. And that's ultimately what led to us basically connecting with somebody who was in the Public Health School at UC Berkeley, working on rigorous ways to measure the way that carbon reductions can happen in people's homes in a way that can tap into carbon markets.
And so it went from that, basically working on those challenges, how do we measure this, to developing a suite of projects, and ultimately, UpEnergy.
Pete Asch: And Alex, I mentioned you have PhD from Oxford in physics. Does that play into measuring things and how do you go from a PhD in physics to decades of investing in finance and carbon?
Alex Rau: Yeah. So my graduate work and training brought awareness of the problem and potential ways you could try to understand it, and in this case, climate change and the driving forces behind it. But very quickly became realization that the practical solutions and actually implementing projects in marketplace or in the field, that's more tangible. And so for me, the shift towards climate finance and working in the climate mitigation space is really to try to address a theory versus practice of learning things in your training, but then hopefully applying it to real world outcomes that have tangible value and impact today.
Pete Asch: Reading up on you, Matt, you got your start in 2008, 2010 coming out of the financial crisis and you wrote the first Gold Standard Cookstove Methodology while you were at Impact Carbon. How has your knowledge from that work, from just living in the world, from your studies, grown and evolved over that time to where you now are able to put real world solutions in place?
Matt Evans: I was a co-author of the Gold Standard Methodology, and actually, a supporting one, so worked on that as a very interesting challenge. How do we rigorously measure emission reductions in a way that is marketable ultimately? And that kind of experience has grown in multiple dimensions.
The biggest challenge that ultimately we faced was with the ability to apply climate finance and to measure the savings, how do we roll out interventions at scale? How can we go from reaching 10,000 people to reaching a 100,000 people to reaching a million people? So a lot of the learning has been with regard to that, how do we build distribution systems? How do we think about the behavior change challenge? Ultimately if we're providing a different technology, it's very difficult to get the change in behavior that will ultimately drive the health co-benefits, that will ultimately drive the income benefits of the stoves that we work on.
So it's been a learning process in terms of how do we work in country, and we have now very, very strong teams that work in these places. And then for me personally, it's been fascinating to see how the markets have evolved and ultimately come to support these types of projects.
Pete Asch: Alex, about this, the market's coming to support it. You've been actively investing in trading carbon markets and environmental commodities for a couple of decades now. When did you have that realization that what had been kind of a niche space was all of a sudden, not just mainstream, but would've been leading the conversations around investing with ESG and the rise of ESG investing?
Alex Rau: I think the space has certainly matured to the point where one of the things we see about carbon markets is they can deliver large volumes of capital to emission-reduction activities, so both removals as well as activities that will actually reduce emissions.
And so the realization that the markets have matured, and this is a powerful way to channel finance towards both reducing emissions and then some very strong outcomes like improving energy poverty in places like Africa, is really when scale comes out. We have a metric which is tons of CO2 reduced as one of the main ways you can measure that. That has to be verified and it's sort of an after-the-fact. It's a results-based kind of financing mechanism in many ways. And when you see the scale that that can achieve to something like distributing efficient biomass cookstoves or safe water systems in Africa, you see that these projects can reach millions of tons of CO2 abated per year.
That's the scale that's on the of order of power plants here, large industrial facilities. And so that's where we would say you're delivering real impact that's having an effect, still small, but it's showing the pathway where you can start seeing larger and larger reductions in emissions and that's meaningful for solving the climate problem.
So that, I think, is one of the major milestones for this industry. It's really only been in the last decade or so that we've seen these mechanisms. The Kyoto Protocol showed, through the Clean Development Mechanism, which ICE hosted one of the larger contracts for CERs, that was another very efficient mechanism that delivered large volumes abatement at scale. It had some issues with it, but these sort of markets, as they mature, are really demonstrating how the impacts and the results are really meaningful in the context of the large problem.
Matt Evans: Yeah. Just to jump in here also, I think while there is some capital flowing to these types of solutions in general, the problem is massive. 2.7 billion people cook on unclean fuel like wood and charcoal, and that's gotten worse, despite the fact that there's been some small investment in that from philanthropic sources.
Recently, the voluntary carbon market has led a bit of an inflow of capital. Now roughly maybe 10% of the overall need is met. So the opportunity here for climate finance in general to power a huge reduction in emissions but also in the social outcomes that we're looking for still exists. It's not realized yet.
Pete Asch: The term energy poverty has come up on this podcast, not just in this conversation but in past episodes. So what is energy poverty? How big is this issue? And then we mentioned Africa and we're going to talk a lot about the work you're doing there, but how global is this a problem?
Matt Evans: Yeah. So energy poverty means a lot of different things to different people obviously. In the developed world, it has an income component. Specifically, people can't afford the energy that they need. In low-income parts of the world, that's also true. So this is in Africa, in Asia, in parts of Latin America, people suffer in lots of different ways. They don't have access to electricity is what people typically think of.
Worse than that, from a health perspective and from an income perspective actually, is the fact that they cook on these unclean fuels. 2.7 billion people, again, a third of the world's population, cooks on wood or charcoal. It's smokey and that ultimate air pollution problem kills about 4 million people a year, according to the WHO, which to put that in context, is more than COVID killed per year, so it's a major public health problem. It's coming from the smoke in people's homes, and ultimately, it's also driving poverty.
In addition to that, people spend about 20% of their income in a lot of urban areas in Africa on fuel specifically. And so by reducing the amount of fuel or eliminating the need to pay for this expensive fuel like charcoal, there's a huge opportunity to improve their incomes also.
So the scope of energy poverty is huge and it also is causing a lot of emissions. The problem is roughly on the order of magnitude of aviation. The estimates are that cooking with wood and charcoal broadly drive about 2% to maybe 3% of emissions every year, and aviation is somewhere between 2.5% and 3.5% or 4%. So it's a massive problem that needs to be solved, but it has all these great impact co-benefits for the people that are suffering from energy poverty.
Pete Asch: So just to go back to something you mentioned in your answer, you said 20% of their time, money, resources to heat and cooking. What does that actually look like? I mean, are these people... Is this just cash out of pocket or is it really going out and finding the fuel?
Matt Evans: Yeah. It can take a couple forms, but you can imagine what would be considered a very low-income community in a capital city, in an African capital city, where you have fuel coming in that's very expensive in the form of charcoal that's basically made by slashing forests that are typically protected and bringing that wood into the capital city for sale. So in those contexts, it's a very, very expensive process and ultimately the fuel ends up being very expensive. And so people spend a lot of their income.
In a completely other context, there's a whole set of people that we try to reach with electric cookers who cook with wood. And so ultimately, they're often collecting wood. Women will often wake up early in the morning and walk for an hour or more to basically find the wood that they need to cook for the day. They bring that wood home and it's typically cooked in a context where the smoke from the wood, it's like a campfire in your house. So you can imagine how that ultimately impacts people as well. But women are at risk when they're walking early in the morning, and ultimately, they spend a lot of their time not doing other productive things but ultimately searching for fuel.
Pete Asch: So now that we have the problem, tell me about that moment, the first moment you guys get together and realize not just are you both focused on the same issue, but that the two of you could really serve as multipliers for each other and get what would eventually become UpEnergy.
Alex Rau: Yeah. So I believe it was 2008 or 2009 when we first met. I had spent already a number of years probably focused more on the energy sector, so large in energy and industrial opportunities to reduce emissions. And these are typically discreet projects like a large wind farm or a large waste heat recovery project. And it's very clear what your impact is there, but the hunt is always for scale. How can you be more effective, both in channeling capital and investing in projects, but really in delivering those outcomes?
And so it was really a sort of chance encounter with Matt. I think Matt had reached out. You were, at that point, looking to negotiate a few sale and purchase commodity, sale and purchase agreements for some of your early projects, and so I had the opportunity to come in. We're both based in San Francisco and essentially helped Matt and his colleagues at Impact Carbon at that time understand what does it take to go through a sale of purchase agreement? How do you structure these and come to the right terms that are suitable for the developer?
But in the process of dialogue, it really became clear to me, again that question of scale. So a single cookstove may reduce somewhere between two and three tons of CO2 per year in an average household's usage. I mean, that's quite small on its own, but the fact that a company like UpEnergy can set up, spin up a large operation very efficiently managed to get these stoves into people's households at scale, and quickly you're selling 10,000, 50,000, 100,000 stoves a year, that's starting to drive impact again of order of some of these larger energy system projects.
And so I think it was that point about scale that was really compelling, that this is an area that you can channel carbon finance. It was relatively undiscovered at that point still from the carbon markets and that's meaningful. You can have sort of tangible outcomes.
Pete Asch: So Matt, Alex is talking about the scale that's out there. 90% of the UpEnergy team work in and are from the countries where your projects are operating, but you're working from California, you're trying to find this on-the-ground team. How do you identify people that can get your message into homes? And it's not just selling a product; it's adapting a whole new lifestyle in terms of using new technologies. How do you make that happen and how has that blossomed over time?
Matt Evans: Yeah. As you point out, UpEnergy is based in Kampala, Uganda, so it's Africa-based. You're talking to us because we're here in the US and we're the two people at UpEnergy who are based here in US and based in San Francisco. But the foundation of the company was really that focus, and the team itself is based there, trying to solve those problems.
So we support on the climate finance side, but all of the work to identify what is the right technology, how do we deploy it, how do we do distribution in a way that will drive people to use it and help them to value the technology so they realize the benefits, that is all happening in country by a really great team that we've been fortunate to accumulate over the last 10 years.
Pete Asch: And it seemed like a strange connection, but we had some people from Kimberly-Clark on recently and they were talking about working in local jurisdictions. Each individual country has their own rules, ideally all have their own decarbonization and sustainability projects. How are you interacting with local enforcement of those kinds of rules, or are you actually able to prescriptively help those local governments make new rules around carbon use and indoor cooking and things like that?
Matt Evans: Sure. So we try to work very carefully with local ministries of energy, local ministries of the environment to make sure that the work that we're doing is very much aligned with the objectives that they have and they will ultimately set objectives that they don't have financing for. And so that's, again, where the climate finance component can come in and support us to work with them to achieve those local objectives.
We also will spend a lot of time getting to know ultimately the market ecosystems where we work. So there will always be already some market for things like cookstoves in a place where we work. We do distribution in a way that makes it much more affordable for people to achieve these based on carbon finance to acquire the cookstoves, but we are doing that in a way where we're very much coordinated with local markets and local authorities to make sure that we're in line with their goals.
Pete Asch: How are you able to target to specific use cases with your products?
Matt Evans: Every context within a country is different, and then as you mentioned, countries are very different where we work across Africa. We have different products that we bring to users to basically serve needs in those places. So in a more urban area where there's access to electricity, we're working to do electric cookstoves that completely eliminate the indoor smoke problem and ultimately actually can reduce the cost of cooking as well because electricity, when used efficiently, actually has benefits in terms of saving our end users money.
As we get a little farther out from a capital city, often the electricity is less reliable, and in certain countries, the electricity is less reliable. And so in those cases, we're often using stoves that are more efficient that just reduce the amount of charcoal, for example, that an end user needs to use basically to prepare their meal.
And we also do safe water systems. So boiling to ensure water is safe is a major use of energy across the continent, and in lots of different places, there are opportunities to provide people with access to more regular safe water because often, boiling doesn't happen all the time, only when people have enough money for the fuel. And by providing a water system, we can actually improve the quality of the water that people drink regularly, and on top of that, reduce emissions.
Pete Asch: We're talking very specific use cases, but you're also using globally identified indicators to categorize your projects. I've noticed that, if you look on your website, you can see the exact number of the SDG, that's a sustainable development goal based on the UN's Sustainable Development Goals Report, that you are meeting with each project. Those goals can be things like no poverty, zero hunger, clean water, affordable clean energy.
How are you using data to make sure that not only are you meeting the goals that you set for the company, but that you can show that you're also meeting these other goals as well?
Matt Evans: Yeah, so UpEnergy is data-obsessed as an organization. We are constantly trying to improve the ways that we capture data about our end users. There's a few different ways that we collect data. We interact with them via SMS messages if they have phones, many of them don't. We also do surveys where we have teams that go out into people's homes to basically understand what's the impact of the product, how are you using it, how can we make it better? And then in addition to that, for the verification of the carbon reductions, third parties do the same work. So they go out and they assess how much of the products that we have being used, and based on those usage numbers, we can then estimate what's the reduction in carbon emissions?
Pete Asch: And as we head into the break, the reason why we're reducing carbon emissions is too slow, and hopefully reverse, climate change. And on this podcast, we've talked about the fact that richer nations are now creating these loss and damage funds to respond to climate crisis. This was agreement reached at COP27 last year with the goal of bringing clear recommendations to the table for this year, which time is now running out for that.
What are the things, Alex, you're watching as this committee gets together on working on that proposal?
Alex Rau: Overall, loss and damage and this concept of equitable sharing of both the opportunities but then also the responsibility around impact. So adaptation is one of the major areas of historical discrepancy or disagreement in the UN process. And so the achievement in Sharm el-Sheikh around the loss and damage fund is very helpful, setting up the institution that will be housed within the UNFCCC to start channeling money towards those countries, in particular in communities that are suffering the most acute impacts of climate change. So that represents one side of the overall challenge, which is really adaptation and trying to channel finance towards essentially making communities more resilient from the effects of climate change, and particularly those that may not have contributed to the problem historically.
So carbon finance to us represents one aspect of that as well, which is that those emitting nations or those emitting countries that may have a particularly high cost of reducing their pollution, that's what we call the abatement cost, and that is something that you can more or less go about in a systematic way to price out, and say, whether you're a smokestack or a country, what is your cost of reducing pollution?
To a certain extent, there is the compelling logic that if you have a high cost of pollution, we know from climate change and the climate science that for the most part, CO2 and greenhouse gases are evenly mixed in the atmosphere, so the location of where you would reduce those emissions isn't as important. And so that gives the opportunity to channel the cost or the financing flows around those costs to those communities where you may actually have some leverage effects, so you can actually reduce more for the same amount of expenditure or price or impact on the raising of the cost of energy.
So in some ways, that's also an attempt to... We would view carbon finance, and this isn't particularly the opportunity to do global carbon finance where you're supporting projects that Western companies may be supporting projects in Southeast Asia or Africa, it is to help channel some of those flows to those communities so that they can participate in these energy transitions as well.
Pete Asch: How are you balancing this prioritization? You're basically asking countries that did not cause the problem to bear the weight, and hopefully in a sustainable way, of solving it. So when you think about COP28 coming together in the Middle East, do you think that there's been too much a focus on basically asking those developing countries to bear that weight?
Alex Rau: It's a great question. I think this is the big challenge and this is why the UN Forum has thus far achieved a certain amount of consensus but hasn't really... We have to see how the Paris Agreement will go into effect, for example. And COP28, being in the Middle East again this year, has the opportunity to focus on the fossil fuel industry, which is the source of a lot of emissions, but also has a vital role to play in the current configuration of the economy. And a funding mechanism associated with that that can help channel sort of financial flows towards emission-reduction activities or carbon-removal activities as well in developing countries is a way to help level the playing field in that sense.
So that's why even though the opportunity that's coming up in COP28 where we hope to see substantial progress on what you'd call Article 6, which is the rule book, if you will, around how global emissions will be accounted and then how you have the opportunity for countries or companies to share that burden and obligation, so the main mechanism of sharing is sort of carbon markets and carbon trading. These are major questions, quality, the accounting, how are these going to work, over what timeframe? Achievement on some of these terms would really help channel financial flows much more efficiently to emission-reduction activities.
Matt Evans: I think that's really the other side of the opportunity here. You mentioned loss and damage, which is basically to compensate for the damage that's already been done. In terms of financial flows to low-income countries for decarbonization, that's another huge opportunity to benefit people in those places, not just to help decarbonize countries in Africa, for example, but also to drive outcomes for the people who are most threatened by climate change, the low-income people who are dependent on subsistence agriculture for example, much more at risk than we are here. And so the view that the solution should, as a starting point, really have how can we do decarbonization projects in these low-income places that have benefits, should be, from my perspective, the starting point.
Pete Asch: And after the break, we're going to continue to discuss a lot of these topics, including how UpEnergy is working with ICE to run carbon auctions for your cookstoves programs in Uganda. That is coming up after the break.
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Pete Asch: Welcome back. Before the break, I was talking to Matt Evans and Alex Rau about their background and UpEnergy's purpose.
Recently, UpEnergy and ICE announced plans to host a carbon credit auction for UpEnergy's Improved Cookstove Programme in Uganda. Matt, can you tell us specifically how the cookstoves work, how they use less charcoal, and also how it's really directly dealing with what Uganda's facing, which is only 8% of their forest remains?
Matt Evans: Yeah. So the work that we do in Uganda is to develop cookstove technologies that can be made locally that allow users to reduce the amount of charcoal that they burn by about 50%. What that means is a metal stove that's made in local factories that we help to upscale so that they can make more durable products that save more fuel, and then a clay liner that goes inside that metal piece, and that clay liner insulates the fire and helps the air flow in a specific way that reduces the amount of charcoal that's used. And on top of that, it actually increases the temperature where the fuel is burning and that leads to more efficient combustion.
Pete Asch: UpEnergy recently announced the sale of the first electric cooking carbon offset. It went for $52 per ton, which for the audience, is about five times what we're seeing in our normal household carbon credits. What does that higher cost represent and how does that then help you even more do what your work in Africa is doing?
Alex Rau: Yeah. So that's a great example of what we would argue that, in particular, some of the voluntary markets have a role to play in demonstrating new technologies, new ways to reduce emissions or remove the emissions from the atmosphere. And in many cases, you see companies who are willing to support these new technologies or new approaches to abatement with higher prices in the early years.
So this is electric cookers, UpEnergy's program with PowerUP in Uganda, this will be the first issuance of credits from an EPC. We call it electric cookers. And so there's a premium associated with that, that the companies who are willing to support these early projects can use to channel that flows into those technologies. As, of course, these projects scale, we expect the cost to come down and so the thought is over time that you achieve economies of scale and the prices, the cost of reducing emissions, comes down. But in the early stage in rollout of new technologies or new programs, new concepts, the market is supporting essentially the innovation.
Matt Evans: I can speak to the on-the-ground piece of that electric cooking equation, which is a pretty new and exciting development. Particularly in Africa and in East Africa, you have a lot of grids that are mostly run off of hydro, and more and more people are getting access to electricity, which is opening up this ability to use a new, and probably the cleanest, fuel. Even here in the US, we're just starting to think about how we can use electricity as the cleanest possible fuel. That's also kind of an exciting opportunity in Africa, but it's a completely different kind of cooking.
And so we do a lot of work to identify the right ways to create cookbooks. In general, find ways to both distribute the product but then also get people excited to use the product because it's replacing probably a wood fire that's really smokey in their homes or a charcoal stove that's less smokey but still smokey in their homes. So it's a very kind of fun process to see people on the ground go from, "I don't know if that's the right thing for me. Maybe it's expensive to use," to, "I love this thing. It cooks my food three times faster because it cooks under pressure and I never want to use something else."
Pete Asch: Are you also running classes? Are you using word of mouth? How is that happening on the ground to get that out to the overall population?
Matt Evans: Yeah, great question. We basically have a team that develops those ways of interacting with our clients there. So there will be demonstrations in some communities. There will be agents who basically interact and try to create a way of thinking about these cookstoves as desirable, as modern, as part of what a modern household would want to have, et cetera.
So we do word-of-mouth marketing, we try to do some social media, we do all the different things that work in different places, and we just test them and we find what works the best. And the cool thing is we test them in terms of who accepts basically a device, an electric cooker in this point, but also then we're monitoring the usage on the follow-up. So ultimately, any reduction in carbon is not driven by the fact that the stoves ended up in somebody's house. It's driven by the fact that they used the product, and so we're myopically focused on that usage ongoing.
Pete Asch: Alex, the credits are going to be verified by Gold Standard as a Verified Emission Reduction. ICE will be holding two auctions for UpEnergy, each one for 250,000 credits. Each credit, for listeners, represents one ton of carbon emission reduction. How does this process work, for those who may not be familiar with how those auctions are run, and then actually how they play out in the real world?
Alex Rau: Right. So underlying is the project has been implemented, stoves and electric cookers are in the field and being used and emissions are being reduced, and so there's a verification. So a trained, essentially, environmental auditor comes through and verifies that the reduction happened as was stated according to the methodology.
So you have verified issued carbon credits that are now deposited into an account by the developer at the Gold Standard Registry, so the credits themselves are housed at a registry. It's a little bit like a ledger that's maintained by the same organization that generally sets the rules for how you go about both designing and then implementing and then monitoring the data, the the performance and the amount of emissions that are being reduced. That methodology and the Registry go hand in hand. So the credits are issued in the Registry and now, essentially, it's a spot market transaction.
So UpEnergy does a whole host of ways of interacting with the market through its career long-term forward off-take agreements with buyers who want to support particular projects, through to essentially the merchant component where we would be generating reductions and holding them available to the market for sale in the spot market.
So for UpEnergy, the opportunity to partner with ICE represents a way to get large distribution to corporates in particular who we think would be interested in the message, as well as the support to these particular projects and communities. It's an auction, a spot market sale conducted through the distribution that ICE has to large corporates, and so we're really excited about the support that we may find from buyers in the auction for these projects.
Matt Evans: Ultimately, what that local monitoring looks like is we hire a local firm that goes out and does surveys, visits people who have never had a visit, never participated in a survey before, asking about how is the product, how do you use the product? And looking for evidence also because there's a lot of response bias and surveys that we try to eliminate. So that third party does those surveys. Then we have an auditor come in, this is an auditor that's approved by the Carbon Standard to audit the way that survey work was done and to audit all of the different pieces of our project to make sure that we're ultimately implementing it the way that it should be implemented.
That audit report is then submitted to the Carbon Standard, in this case, the Gold Standard. It's reviewed again, and when it's reviewed again, if it's approved, then carbon credits are issued, are created.
Pete Asch: And talking about carbon credits, Alex, you are instrumental in the creation and launch of the original Voluntary Carbon Standard in 2005. Here at ICE, we've been talking a lot about removing that term "Voluntary."
Gordon Bennett, who we were speaking about earlier, we actually quoted him a few episodes ago and we're going to quote him again now. He says, and here's his quote, "We need to pivot away from the debate around compliance and voluntary markets and focus more about the purpose and the underlying instruments." Do you agree that, in some ways, "voluntary" is holding back the markets and maybe just a misnomer at this point?
Alex Rau: Yeah, I do. I think Gordon's exactly right on that front. I mean, for us, what these are are carbon-reduction projects, so whether they're done in a voluntary context or in a compliance market, some of the larger and more liquid carbon markets like the EU ETS, or what used to be under the Kyoto Protocol, you really want to just channel the financing to these high-quality emission-reduction projects.
So voluntary has come up in the last 10 years in particular in part because we've seen the retrenchment of compliance markets after the end of the Kyoto Protocol. And so you have regional programs like the EU ETS that has come up a cap-and-trade program for Europe or in California's market, and some of these programs will include offset projects in certain parameters, certain types of projects, certain locations.
So the question becomes, well, energy poverty in Uganda, distributing clean cooking stoves right now, none of the compliance markets really will accept those credits in. So really, the focus therefore has become the voluntary market and those corporates and other actors, could be airlines, who want to compensate for their emissions or maybe a position for, for example, future compliance under a system like the CORSIA regulations on airlines that will lead to a fairly robust carbon market for aviation in our view, this is really the vacuum of compliance market activity. We think this, over time in particular with the direction of the Paris Agreement, will lead towards more of a blending of what's really voluntary in compliance.
So for us, it's really the focus is on high-quality ways to reduce emissions. Many of those will be in the form of projects or programs of activities in countries like Uganda and Sub-Saharan Africa. It's not likely that those countries will undertake cap-and-trade programs of their own in the near term, so this is really an opportunity to connect these emission-reduction projects to the markets that will value those abatements. And so I do agree with Gordon. Over time, I think we're going to see a blending of the lines here, and we will get towards a market that is just recognizing high-quality reductions for where they're best suited.
From the project developer's point of view, like UpEnergy, that looks a little bit more like optionality. So UpEnergy would have the option to essentially sell to the voluntary market or to a corporate buyer. But in the history of UpEnergy for the last 10 years, we've had a lot of success selling to some of the sovereign governments, for example, in Scandinavia where they were using some of these credits for compliance with their Kyoto obligations. That's more of a compliance function. So we hope to see an emerging use case in multiple markets and that optionality is, I think, what is, in many ways, the opportunity for a developer to harness.
Matt Evans: UpEnergy itself as an organization is focused on how do we combat energy poverty in the countries where we work and in future places where we'd like to work? We're more or less agnostic to where that support comes from. Ultimately, the Clean Development Mechanism did provide support in the compliance context. Right now, the voluntary market is the only option to step up, and so there haven't been other international flows of finance, and so that's what we have now. But ultimately, there are lots of different places where that support can come from and there are a lot of organizations like UpEnergy, developers, that want to have the impact locally and ultimately need either markets or other sources of finance to step up.
Alex Rau: Originally when we started the Voluntary Carbon Standard, the idea of voluntary there was really more non-Kyoto. So where you had the Kyoto Protocol had established a framework for how you conduct carbon offset projects under the Clean Development Mechanism. There were certain eligible countries, eligible project types, but being an American, the US wasn't part of the Kyoto Protocol. So what does that mean for the US, for example, and if you're rolling back the clock to the mid-2000s and you wanted to conduct emission-reduction projects? Well, that's what voluntary originally was more like non-compliance from that perspective.
And then we've had the 2010s, there really hasn't been a regime between the Kyoto Protocol and now what we think is coming in the Paris Agreement. But as we move back into the Paris Agreement, it really is all countries are more or less included in that mechanism and they have their own commitments as well as the opportunity to host emission-reduction projects. So that's, I think, also where the trend is going towards, back to a world where everything is really covered under one or more set of standards and therefore the lines between voluntary and compliance are significantly blurred.
Pete Asch: Is there a need for sort of a simplification of all of this to have just one overarching set of rules or do you think that, as things develop, we just have to adapt to different rules, different standards based on locale?
Matt Evans: I would say that I think that voluntary markets have actually been a very interesting innovative place where project types can get developed. So some of the ways that cookstoves are monitored with very careful in-country fuel weighing has actually influenced the way the entire market, and probably the Paris Agreement, will ultimately think about these types of projects. So innovation in the voluntary market actually can drive innovation in compliance markets.
Ideally, in the future for a group like us, we would love to see a much more monolithic source of financing, but ultimately, if there are ultimately voluntary buyers that want to be doing something outside of a compliance regime and tackling energy poverty is a big reason to do that.
Pete Asch: As we begin to wrap up, whether the baseline is at one point or the other, you've mentioned a few times you're just getting started, money's just starting to flow in. How close are we to be able to say that we're having a real impact on climate change, not just with what UpEnergy's doing, but what the entire carbon market is trying to do?
Alex Rau: We look for scale in particular in the initiatives that we back, and so scale is millions of tons of CO2 reduced or abated over time. And so certain project types, certain activities, clean cooking and efficient cookstoves have achieved that scale. Still, as Matt was saying, a long way to go to achieve total emission reductions from that sector.
But you're seeing already in certain markets, for example, a price on carbon in Europe right now has gotten to the point where coal-to-gas fuel switching on their electricity sector grid is, until recently, until the Russian invasion of Ukraine, was essentially being perfected through the price on carbon. So the price on carbon was pushing up essentially the cost of generating electricity from coal more than from gas. And you saw the market respond quite efficiently, that coal was pushed out of the merit order.
So it's small winds like that right now, but it's showing the effect of the mechanism and the effect of what happens when you actually price CO2 or price greenhouse gas emissions. You will achieve over time, the market will deliver that abatement and that fuel switching or whatever the outcome is. And so we're hoping to see that more wide scale, so not just in the power sector in Europe, but now in places like Africa, a lot to do in the US with fuels. There's a long way to go, but it's showing the power of the market mechanism here.
Pete Asch: We talked about cookstoves, we talked a little bit about water. What are you both most excited about in the pipeline for UpEnergy, whether it's a new market to break into, new products, or a partnership that may be in the works?
Matt Evans: Yeah. The most exciting thing for us is that ability to really do the energy transition by thinking about how do we get people off of these dirtiest fuels completely and onto what really can be the sustainable fuel at scale, which is electricity?
So we've invested a lot in actually a company that's engineering electric cookers specifically for the African context and soon for other low-income country contexts as well called PowerUP. And we're at the forefront having just issued the first electric cooking credits. We're really excited to be thinking about how can we drive that energy transition as parts of Africa, Asia electrify and basically can support, through cleaner fuels, the solution to this part of energy poverty, which is the smoke that people breathe and the amount of their income that goes to their cooking fuel?
Alex Rau: I think the opportunity to expand and to bring this model to other countries in both sub-Saharan Africa, but also Latin America and Asia, those are really exciting opportunities for UpEnergy as the markets span and expand globally.
I would also say it's just the opportunity to prove and to demonstrate that carbon finance can touch those people at the bottom of the pyramid, so to speak, and bring channel flows towards those communities that wouldn't normally access cleaner markets for energy or cooking. I think that's really powerful. So touching people with the carbon finance outcomes that this mechanism, which is very abstract in some sense and very sort of large scale, but bringing it down to the individuals, I think that's really powerful. So hope to see more of that.
Pete Asch: We do as well. Thanks so much, Matt and Alex, for joining us inside the ICE House.
Alex Rau: Thanks, Pete.
Matt Evans: It's great to be here, Pete. Thanks.
Pete Asch: That's our conversation for this week. Our guests were Alex Rau and Matt Evans, Co-founders of UpEnergy Group. If you like what you heard, please rate us on iTunes so other folks know where to find us. Got a question or comment you would like one of our experts to tackle on a future show? Email us at [email protected] or tweet us @icehousepodcast.
This show is produced by Jess Tatham with production assistance from Ian Wolf. I'm Pete Asch, your host, signing off from the New York Stock Exchange Library. Thanks for listening. Talk to you next week.
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