In order for ratings to help buyers overcome the kind of information asymmetry, i .e.

the fact that seller knows more about the projects and the credits than the buyer does, ratings have to be independent.

You have to trust that the rating is giving you independent assessment of the carbon efficacy.

And we see this regulated in other markets and how ratings are used.

Obviously, this market is slightly more underdeveloped and nascent, but that independence is crucial elements of how ratings should be delivered.

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Welcome to the Carbon Sessions podcast, where we speak to some of the leading figures in the emerging carbon industry.

Today, our guest is Sebastian Cross, co -founder and chief innovation officer of carbon credit ratings agency BZERO Carbon.

Sebastian, it's great to have you on the show.

I feel like this interview is long overdue and I'm very happy to remedy that.

So if you're familiar with the format, you'll know that first and foremost, we like to get to know our guests a little bit better and find out how they ended up in this still very new space of carbon credits, carbon markets.

So with that said, Sebastian, please do share with us what your background is and what you used to do before all this stuff.

Thank you.

It's a pleasure to be here today.

Thank you for having me on.

So my background, I'm an economist by training.

I studied economics at university before doing a short stint with the Bank of England as an economist and then spent most of my career prior to carbon markets in a bank doing financial markets research and economics research.

So very much came at this from financial markets background rather than...

uh science or or uh you know any of the other backgrounds you tend to see okay and um so that brings us to b0 what moved you to co -found the organization and uh perhaps for those of our listeners who aren't quite familiar what exactly is b0's mission in today's vcm so b0's mission i guess where did we start and where has it evolved you b0's mission today is to make carbon markets work but that that It certainly wasn't how Tommy and I first started the business.

When we were previously working in a bank writing research, it was pre -2020s.

There was a lot of hype, I guess, around the broader ESG themes in financial markets.

And it felt to us like we were kind of on the precipice of...

a huge boost in climate action, you know, coming into the 2020s.

And we wanted to get involved.

And so we left our jobs and started BZERO.

You know, not really with a strong business plan as to what to do, but more of a desire just to get involved and, you know, to figure out, you know, how to make, you know, the kind of mechanics and systems work to drive climate action.

As an economist, it was exciting to me to see that the economic model that we'd seen working for decades to date was starting to shift.

Previously, most growth had come with a matched increase in emissions.

And actually, as we were entering the 2020s, we'd seen a period where the two had begun to decouple in certain places.

Growth didn't necessarily have to come with.

an increase in emissions.

And so the starting point for BZERO was really one of just trying to drive broader climate action.

And to do that, we essentially built a consultancy.

We did lots of different things as a business.

And the carbon rating element was born out of our work looking at carbon market and our background as well in financial markets.

And really the feeling that calm markets had huge potential, huge potential to scale, to see capital allocated to projects that were actually driving decarbonization, but also to see capital allocated from developed to developing countries and overall to help us achieve a more efficient path to net zero.

But when we were looking at them, in the early 2020s, they weren't working.

There was no real infrastructure there.

One of the key factors that we saw limiting the ability of a market to work was the fact that you couldn't understand risk.

You couldn't actually understand what it is you were buying because every single carbon credit was labeled as a ton of carbon, when in fact that wasn't the case.

And underlying that claim, there was huge variations and uncertainties.

And so, you know, from those early days where we were trying lots of different things to, you know, kind of drive to contribute to climate action, we very quickly settled on the idea that this market needed risk metrics, this market needed ratings.

And, you know, we were uniquely placed having come from a financial market background.

to bring some of the learnings from how these things work in the bigger markets, into the carbon markets, and to drive that forward.

And so, yeah, that's how we ended up on just focusing on being a rating agency in the early days.

Fast forward to today, and that has scaled dramatically.

We're now close to 200 people.

We have a team of scientists from...

various different, you know, backgrounds who, you know, are driving some fantastic work in assessing, you know, the myriad of different activities that the carbon market captures.

But more importantly, your ratings are now a thing in carbon markets.

It's very rare that you see the kind of market ecosystem described with our ratings being mentioned.

And, you know, that's only happened in the last few years.

It's been a real pleasure to be able to be part of driving that change in the market.

Excellent.

I'm really excited to dive headfirst into your process and vZero's rating framework.

So it's a question that really never ceases to fascinate me.

How exactly does your rating framework work?

And what factors do you look at when determining the quality of a carbon credit?

So carbon is a...

It's a funny market to work in because you're buying an instrument or a certificate that you can't actually see or observe.

And it's not like in finance if you're looking at bonds where it's still just an agreement written on a piece of paper, but you know at the end of the day if you've been repaid on a debt because the money's in your bank account.

And it's not like commodities where you can actually take hold of something physical and see what you've been delivered.

Carbon is intangible.

There's kind of parts of it that can't be observed at all.

If you think about the baseline or counterfactual scenario that projects use to try and work out what's being achieved.

And there's parts of it that you can observe.

But it's very hard to kind of fully observe.

It's not like we measure all of the carbon being reduced or removed by a project.

And so it's a weird mix of intangibles and statistics, I guess.

And this is what the rating tries to unpick.

If you're going to buy a carbon credit that is claiming one ton of carbon, you want to know how accurate that claim is, particularly if you're using it to make a claim of your own.

And this is typically how we see carbon credits used.

They are retired by corporates in order to make a claim against them.

And that claim tends to be on a carbon basis.

And so the whole ratings framework is just designed to pick apart this question.

What is the likelihood that a given credit achieves a ton of carbon?

And to do that, there's three key risk factors that we look at.

that the project activity is only taking place because it's happening through the Carmen project?

What is likely that this would have been happening otherwise?

Carmen accounting, what are all the calculations and assumptions behind the number of credits that are issued?

How robust are they?

The data that's used to make those calculations, where does that come from?

How accurate is that?

And then permanent.

For those projects that have a forward -looking element to them or a storage component to them, what is the likelihood that the carbon will continue to be avoided or removed for the time period that they're being committed to?

And so whilst we have obviously different methodologies for rating each different type of credit or type of activity, All of this comes up into the same overarching framework so that when you see a rating in the market, when you see two ratings in the market, you can put them side by side and they're comparable.

It allows you to put credit from two project activities that are very different next to each other and understand that core claim of...

What is the likelihood that they achieve a ton of carbon?

So how would you say that your ratings influence buyer behavior?

Like, has it changed in any way in recent years?

And yeah, essentially, what does it do for the decision -making process in the market?

so ratings of why as you know the the market has gone through quite a turbulent few years in terms of you know the kind of confidence and and uh growth that the market's seen obviously we we've had you know a number of cases where it's been stories emerge uh questioning the efficacy of certain credits or certain project types and so During that period, ratings have really emerged as a key tool that buyers can use, not only to make decisions as to what they want to buy or what they want to invest in, but also to bring credibility to the claims that they're making using these credits.

And you see this, you know, some of the sustainability reports of big corporates, you know, where they are using common credit, you'll often see that.

uh you know ratings are quoted as a part of a justification for what they chose and and you know the the robustness of a claim that they're they're making against it and so um you know buyers have uh really had to adapt in how they're using the market you know it The market has evolved from one where there is a real push towards the commoditization of credits, the ability to try and treat credits as equal.

And that has been shown to just not be the case, to not really be a valid assumption.

And so for those buyers who are looking to engage in the market, they realize that they have to be a bit more thoughtful in how they go about their procurement strategy or how they build their approach.

And ratings are a key tool that enables them to do that.

They can only do so if they kind of fulfill some core characteristics.

And this is the other element that we've really seen come through in how people want to use rating.

In order for ratings to help buyers overcome the kind of information asymmetry, i .e.

the fact that seller knows more about the projects and the credits than the buyer does, ratings have to be independent.

You have to trust that the rating is giving you independent assessment of the carbon efficacy.

And we see this.

regulated in other markets and how ratings are used obviously this market is slightly more underdeveloped and nascent but that independence is is crucial elements of how ratings should be delivered and also transparency yeah we we've made our ratings public from day one in the belief that um you need to reduce transaction costs in the market right you need to be able to get this information and use it in a way that makes it as easy to transact as possible.

Because if everyone has to come in the market and do deep due diligence on everything that they're going to buy, it prohibits the market from scaling.

It stops the market moving away from just being dominated by a few big buyers.

And so making our ratings public means that they can be used to varying degrees of depth.

Some people will just use the headline rating as a way to make their decisions.

Others will dig into the full rating analysis and the other tools and analytics that we provide.

But that transparency means that ratings can be like a language in the market.

They can be used by anyone to communicate risk and communicate the robustness of claims being made.

I'm just curious, can any project get in touch with you and ask to be reviewed by B0?

How does this work exactly?

Yeah, so anyone can commission a rating, including project developers.

And so that is one area of, I guess, contention in the market as to who can commission a rating.

Our view is that ratings should be available to...

everyone in the market and it down to, you know, as a rating agency to show through our practices and show through our transparency that, you know, we are independent in how that is offered.

It is something that, you know, is an important question for regulation in this market in order for there to be complete trust in the independence of a rating agency.

We do think it's helpful for ratings to be regulated.

But obviously, Anyone in this market can have a preference towards the outcome of a rating.

Anyone commissioning a rating can technically be conflicted in how they want the rating to come out.

We find that by making ratings available to project developers, actually, this is the...

area where ratings have the ability to have the quicker impact in the market and how you see projects improve once you understand the ratings framework once you understand what's being assessed and you see this feed into how developers think about the design implementation of projects you see these changes actually manifest themselves very very quickly and you know it can lead to better projects, better management, better implementation.

And it's down to everyone to then use the transparency of the rating to assess that.

But it is an area where we are actively calling on government to regulate because you have to be able to have complete trust and confidence in order to scale the market.

And governments are a useful arbiter of it.

Absolutely.

And I will get back to that in a little bit.

But before that, since you mentioned that, you know, like suppliers can change the way they do things based on these ratings and based on the fact that they're publicly available.

Can you provide any examples of how you've seen the supply side change in recent months or years, maybe even?

Yeah, I mean, there's lots.

I guess, you know, firstly, if you look at where...

Our rating can be applied at any stage in the project lifecycle and increasingly we're finding that demand for ratings is in the very early stages of project development for exactly that reason.

You have the most flexibility in terms of the design and implementation of the project to adjust it according to what the rating is telling you is best practice and is good risk management.

And so that demand...

or ratings in the early stage of project development is actually leading to the risk factors featuring in how project developers are actually designing their projects.

But that's not to say that you can only influence this change at the start of a project's lifecycle.

We're also seeing projects that have changed design mid -issue, in between with their monitoring reports, We've seen projects that have changed practices, that have implemented better risk mitigation measures, or have gone about more conservative assumptions and how to calculate baselines or factoring leakage into how they do their calculations.

There's a whole host of projects that have actively adapted to what the rating is telling you.

This is so important to how the market functions.

Because if you look at the way the market was before ratings, there was nothing that could change the incentives in that way.

Because you were only rewarded...

Well, to frame it another way, the fact that carbon performance was not a factor in price meant that as a developer, you faced no incentive economically.

to outperform the minimum of what a methodology was asking you to do.

Follow forward to today and the positive correlation between ratings that are actually measuring on performance and pricing means that developers now have an economic incentive to ensure that the credits that are issued are the best estimate of the actual calm performance of the project.

And that has completely flipped the dynamics.

And it now means that the market has gone from one where there were systematic risks of over -crediting to actually one now where the incentives are much better aligned for the market to be a true reflection of what these projects are achieving.

So you can't underestimate that shift and the impact that's happening.

That's fantastic.

On a slightly different note, perhaps, since you also touched on government's regulatory support, we're seeing entire countries already organizing themselves around the international trade of carbon credits.

As per Article 6 .2 of the Paris Agreement, I remember around this time a year ago, how much uncertainty there was around this as it was kind of up in the air, whether there'd be an agreement reached on this at COP.

Now, a year later, almost, BZERO is already conducting independent risk evaluations of international carbon credit projects, again, under Article 6 .2 for the government of Switzerland, which congratulations on that.

It's a noteworthy milestone for sure.

Can you tell us more about this work and what it means for BZERO and for the integrity of international carbon markets at large?

Yeah, for sure.

And thank you.

It was fantastic to be able to carry out the work.

So the Swiss government have kind of been pioneers in this space for a while.

They've been, you know, purchasing credits and looking to foster activity in Article 6 markets as they've been developing.

And so, you know, we've, well, yes, there was the opportunity to provide risk assessments for them to help them, you know, understand.

Any risks there were to the projects that they were looking to procure from and laid down the line to help them.

But I have to feed into the framework for how they think about which projects they'll look to procure from in future.

What's exciting here is this is obviously a government procuring from...

another government, as you say, in a market where the rulebook has only just been determined.

The infrastructure of this market is being developed today.

And if we look at the last time that we tried to develop a kind of UN -led market, one of the reasons that the CDM struggled was because every single credit was treated as exactly one ton of carbon.

And when it turned out that some of them didn't achieve that ton of carbon, it led to a crisis of confidence across the market because there was no way to differentiate between those credits that were achieving that and those that weren't.

And so it's so important this time around as we scale both 6 -2 transactions and the 6 -4 market.

that we actually take risk into account, that we take that performance risk into account as we build the kind of mechanisms and frameworks.

And yeah, that's what the Swiss have done here.

And that's what we're seeing other governments that we're engaging with looking to do as well.

And it stands us on a much more sustainable foundation to actually build a scalable market.

Do you think that your expertise in this deal or this risk assessment will set the foundation for regulatory and political support for carbon markets in Switzerland and perhaps even in other countries?

I hope so.

Obviously, it's hard to tell as an outsider what the impact is.

But certainly, if you look to other markets, it is best practice to have An independent assessment done of the risks involved in something you're investing in.

And so this is not, we're not recreating the wheel here.

When the government indeed both issues its own debt and looks to purchase from others or when it looks to regulate the activity of some of the key...

different markets.

Banking is the prime example.

Ratings are the tool that governments use to dictate the risk that people are allowed to take.

And that applies to bank capital, it applies to pension funds for insurance companies.

And so carbon markets should be no different.

And to get an independent risk assessment as a buyer, it is giving the government...

a third -party independent opinion on how effectively the resources have been allocated.

And as you said, early days in this market, I think the risk tolerance will probably be higher today than in future, given that there's a lot of early innovation having to take place.

But it is a very important precedent that's been set here.

to have that as part of the process and, you know, for others to see that as integral to, yeah, best practice in the market.

Opinions tend to vary a little bit on this subject.

And I was curious if you don't think that this might create tension between public and private approaches to market oversight, like if there were more regulation.

In what way?

Well, proponents of the idea of a free market would argue that any government regulation would essentially harm the market.

Got you.

Sorry, I thought you meant the other way around with...

Private market tools being used by the public sector.

No, for government involvement in private market.

Yes.

So look, it's a weird position to take as a co -founder to ask the government to regulate you.

And particularly when there's a lack of broader regulation in our markets on the voluntary side.

But this market has...

struggled with trust and confidence in the past and we we have to ensure that it's going to scale and so you know i see regulation uh of us as a racing agency fulfilling two things firstly it can help the voluntary market to regain that trust and for ratings to be a key driver of it but secondly it will also help with the integration of racings into compliance markets You know, governments don't want to use tools that they can't trust.

And the easiest way for them to build trust is to know that, you know, that all is being regulated.

And, you know, that's where we see most of the growth in carbon markets coming from at the moment, whether it's, you know, course year, whether it, you know, the discussions going on in the EU.

You know, governments are actively considering using carbon credits to meet their climate targets.

And it's so important that...

they have the tools to choose those that are actually achieving the climate outcomes they claim to.

So yeah, we see regulation as just enabling ratings to be put to full use.

Understood.

Thank you.

So far, we've talked about...

how the market has improved, what changes have been made on the buyer side and the supply side.

But it's certainly no secret that the VCM is also riddled with struggles and challenges.

What would you say are some of the biggest challenges or criticisms that BZERO has faced and how do you respond to them?

Well, so it's obviously interesting launching a product into the market that's never really had this product before.

And so you can imagine we had lots of interesting conversations in the early days.

with people saying like, what are ratings, who are you and why do we need you?

You know, and particularly given that we took the approach for our launch of just publishing the first 200 ratings that we'd done to the market, you know, freely available and, you know, watched the impact that that had.

So, you know, one of the biggest challenges for us as a business has been almost an educational one you know you you have to try and rewire how people think about this market in order for them to realize that uh ratings are you know we were perceived in the early days as just being you know somebody who's come along to say that the market no good and and and uh you know that none of these things your common credit shouldn't be used which is you know ironic because it's the complete opposite of of what ratings are trying to trying to achieve But yeah, it really is kind of a fundamental rewiring that's required for people to see the use case of ratings and why they can actually be a tool for scaling the market.

People, you know, it's comfortingly simple to think of all calm credits as achieving a ton of carbon.

And so to kind of break people out of that and for them to see that it's...

that kind of risk assessment is best delivered by an independent third party rather than through just improvements methodologies or other factors has taken a lot of time and patience and some people who like the old market structure and don't want to see it change.

And commercially as well for us as a business, it is an ongoing challenge and it's a challenge that we now see in our engagement with government in the same way that we saw it with other market actors in the early days.

We're having to educate them about risk.

I don't mean educate in a condescending way, but to show them where risk exists in the market, why it sits at the project level, what it looks like.

in order for us to be able to prove that we are useful.

And so I think that is an ongoing challenge because being given the opportunity for someone to be willing to even be convinced of this argument, they have to put the time into engaging in it.

And so that is an investment on their part.

And it's obviously a hurdle that you have to get over initially.

So I think it will be an ongoing challenge for us in this market.

It continues to evolve.

But it is a very rewarding one because, as I was saying earlier, you look at the engagement with other market actors.

We've gone from a world where ratings weren't a feature and people didn't really know why the market would need them.

now, you know, them being, you know, a firm part of the market ecosystem.

So it can be very challenging at the time, but it's a very rewarding challenge to try and unpick with people.

Yeah, I was just going to say that it may be an ongoing battle, if you will, even, but it's one that you're winning slowly but surely, or at least that's what it seems like based on how the market is evolving.

Yeah, it's, you kind of, You don't have a full, you never have a full appreciation of the extent to which you're winning or not.

You kind of get it in little sound bites back to you of, you know, hearing people reference the rating or talk about it or, you know, seeing it influence decision.

But it's not even one where you, it's not like, you know, an exam where you kind of get your mark back at the end.

It's just an ongoing campaign that you're trying to win.

Excellent.

Seb, I have one final question for you today.

And that is, what does BZERO have planned for the distant or not so distant future?

What updates can we look forward to?

So we continue to make a big push on the government front.

We have a big report coming out in the coming days looking at the EU and the potential use of comm credit there and how, in our view, carbon credits have the ability to potentially save the political mandate for climate action in the EU because they can achieve more cost -efficient decarbonisation if you choose the most effective ones.

It's a theme that we see not just in the EU but in Japan and elsewhere.

Governments are really waking up to the power of carbon markets to help them achieve more cost -effective decarbonization.

And so, yeah, for us, we're very excited about the role that ratings can play in that.

And we'll continue to be advocating for a very proactive use of this new form of carbon markets, so to speak, that have sophisticated tools and infrastructure to actually make them work.

Fantastic.

Sounds like very exciting times indeed.

Seb, thank you so much for being here and for having this conversation today.

It was lovely to have you on the show.

Thank you.

Thank you for having me.

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