Digitizing Environmental Commodities with Xpansiv
John Melby is CEO at Xpansiv. Xpansiv operates what they claim to be the largest carbon offset exchange in the world, purportedly covering 40% of the voluntary carbon market volumes and 90% of exchange traded volumes. Beyond carbon, Xpansiv provides global market infrastructure for registering, managing, trading, settling, retiring, analyzing, and reporting a wide array of data-driven environmental commodities, from water to renewable energy to digital fuels and more.
John and Cody have an in-depth conversation about what it means for something to be an environmental commodity, how these environmental commodities are bought and sold, how registries exist, how commodity marketplaces work, and a lot more. At the end of the day, our conversation is about incentives and the role that financial services can play in enablement of environmental outcomes.
Get connected:
Cody Simms X / LinkedIn
MCJ Podcast / Collective / YouTube
*You can also reach us via email at info@mcjcollective.com, where we encourage you to share your feedback on episodes and suggestions for future topics or guests.
Episode recorded on Nov 14, 2023 (Published on Dec 18, 2023)
In this episode, we cover:
[02:11]: An introduction to Xpansiv
[03:04] How registries and marketplaces differ
[05:46] How standards ensure offset quality
[08:28] Offset buyer preferences beyond carbon impact
[10:00] Xpansiv's standardized offset contracts
[11:49] How standardization enables market efficiency
[15:41] Pricing offsets based on special attributes
[18:26] Xpansiv's institutional customer base
[23:42] The role of traders in providing market liquidity
[29:09] A comparison of voluntary and compliance markets
[32:35] Preventing double counting at the international level
[34:00] How startups can use bilateral and exchange trading
[37:00] Xpansiv's portfolio management system
[39:22] Water rights trading in Australia
[41:16] Using markets to efficiently allocate resources
[46:19] The origins of Xpansiv
-
Cody Simms (00:00):
Today on My Climate Journey, our guest is John Melby, CEO at Xpansiv. Xpansiv operates what they claim to be the largest carbon offset exchange in the world, purportedly covering 40% of the voluntary carbon market volumes and 90% of exchange traded volumes. Beyond carbon, Xpansiv provides global market infrastructure for registering, managing, trading, settling, retiring, analyzing, and reporting a wide array of data-driven environmental commodities, from water to renewable energy to digital fuels and more. John and I have an in-depth conversation about what it means for something to be an environmental commodity, how these environmental commodities are bought and sold, how registries exist, how commodity marketplaces work, and a lot more. At the end of the day, our conversation is about incentives and the role that financial services can play in enablement of environmental outcomes. But before we start... I'm Cody Simms.
Yin Lu (01:08):
I'm Yin Lu.
Jason Jacobs (01:11):
And I'm Jason Jacobs. And welcome to My Climate Journey.
Yin Lu (01:17):
This show is a growing body of knowledge focused on climate change and potential solutions.
Cody Simms (01:22):
In this podcast, we traverse disciplines, industries, and opinions to better understand and make sense of the formidable problem of climate change and all the ways people like you and I can help. John, welcome to the show.
John Melby (01:37):
Thanks, Cody. It's great to be here.
Cody Simms (01:39):
Well, John, I am excited to learn from you today all about the notion of environmental commodities. We've had multiple conversations about various parts of, in particular, I would say the voluntary carbon market as a subset therein of this broader notion of environmental commodities. But from what I've seen, Xpansiv, your company plays across a very broad spectrum of solutions in the space of products that are in one way, shape, or form helping to drive positive environmental outcomes. So maybe with that, why don't we start with you and just an overview of what Xpansiv is.
John Melby (02:15):
Xpansiv is a market infrastructure company that's focused on helping scale the energy transitions. So that for us means that we operate registry infrastructure. We operate the largest registry infrastructure for environmental assets across the globe. We operate a portfolio management system that connects into the registries that we both operate as well as those that others have built, give them access to bilateral markets as well as exchange traded markets. And we operate the largest exchange, spot exchange for carbon offsets in the globe. And then on top of that, we also provide data for transparency in the market, so think of things like end-of-day pricing for various products or thinking about the difference between a nature-based product and a direct air capture or some other type of environmental commodity.
Cody Simms (03:04):
Why don't we start at the top just to help orient everybody, what is the difference between a registry and a market or a marketplace?
John Melby (03:14):
With environmental products you're buying and been retiring attributes. So you can think about it, for example, in renewable energy, every time megawatt of power is produced, a renewable energy certificate is created. That renewable energy certificate has a unique serial number and then it's transferred to make either marketing claims or to meet compliance requirements. That process is all within a registry, so it's issued that first issuance gets a serial number in a registry and then it's transferred an account. For instance, if I sold my REC to you, it would be transferred from my account to your account. And then if you were to use it to me to compliance requirement or a marketing claim or however you're going to use it, you would retire it in that account. So it's a system of record for environmental commodities. It's the same thing in carbon offsets, allowances, the various environmental products that are all in registries because you're taking delivery of an intangible asset.
(04:10):
On the market side, it's really the place where you see price discovery. It could be a bilateral market or it could be an exchange traded market. Xpansiv operates a market we call CBL, and that market is the largest spot exchange. As I said, for carbon offsets. We had over 90% of all the carbon offsets that were traded on exchange, traded on our platform last year. And what that is that, in technical terms, a central limit order book. So one place where bids and offers are stacked and when they cross, the transaction occurs. In layman's terms, it's just an open market where you can see prices and transact.
Cody Simms (04:44):
A commodity, for my basic understanding, would be a good or service where one unit of a thing is fairly indistinguishable from another unit of the thing somewhat regardless of where or how it was produced. Is that accurate?
John Melby (04:59):
Yes.
Cody Simms (05:00):
To me, something like a renewable energy credit, which you used as your example from a registry perspective would make a ton of sense as a commodity because a unit of electricity is somewhat the same regardless of where it was created as long as it was created according to some renewable energy standard presumably. It's an electron that was created through solar. It's an electron that was created through wind. It doesn't really matter where it was created necessarily. As you get into some of these other commodities in the environmental world, is that as universally true? An atom of hydrogen, for example, can be created in lots of different ways, presumably a carbon removal. I think in nature-based solutions are the ones where there may be a much wider variability of how the credit is ultimately derived.
John Melby (05:46):
We're the registry infrastructure for the majority of the carbon offsets that are created in the world. We're not the standard though, so it's really important to understand. So last year over 85% of all carbon offsets that were issued in the world were issued through our infrastructure. But the standards, the ones that are deciding are helping determine how much carbon was removed from a certain project is something different. And those standards have PhDs, they have policy experts, they have peer reviews and they have years of refining protocols. You think about it, for instance, a forestry project, it goes through a series of steps before it gets issued a credit. And that process could take years in some cases to go through that. And it starts off, do you own the land? The real simple level. Then you apply to a standard. And then there's verifiers that go out, third party entities that go out to check that it's there and then ultimately issuing body. So from an earlier guests that you had, I think you had Verra on.
Cody Simms (06:45):
Yeah, David Antonioli when he was the CEO.
John Melby (06:47):
Yeah, yeah. They're the largest of the standards providers. They are the folks that would go out and say, "This is what counts and doesn't count." But in that infrastructure, you need to make sure it's not being double counted. If it's transferred, that you can be assured that the seller isn't selling it multiple times to various people. And that's all done through the registry infrastructure. But from a standard perspective, those entities largely not-for-profit organizations go out and develop protocols for different types of technologies. So you can think of things from repairing the forest to better use of agriculture to wetlands to, as you said, direct air capture or other industrial products. Early days it was things like refrigerants, how do you destroy your refrigerants without just putting it in the air.
Cody Simms (07:32):
Clean cooking fuel in Africa is another one.
John Melby (07:35):
It's a great example. Then they have things like co-benefits. There's the carbon reduction, but in the clean cooking fuel, it's often bringing benefits to the communities. Those are usually captured within what's called SDG reports, Sustainable Development Goals under the UN.
Cody Simms (07:52):
If I'm following what you're sharing with us, the goal for any one of these producers of a commodity here, in name any one of the categories you just went through, the goal is that their end product should be relatively indistinguishable from anyone else's end product in order to be able to be listed in a registry and traded as a marketable commodity. It meets these standards. Someone who's wanting to buy can ultimately, in an idealized world, I think, make a bunch of different choices between where it was produced, who produced it, et cetera.
John Melby (08:28):
Yeah, you're hitting on an interesting spot in the market. Your question is standardization. It should be that it's a ton of carbon removal. That's the measurement that everything is in this one ton of carbon avoidance or removal. But then there's a little bit of difference in the market when you start thinking about things like a offset project may be more valuable to an end user because it's in a community that they have otherwise do business. So for instance, if you have a bunch of employees that are in South America, you may want to have credits coming from South America, or maybe you have data centers that are in Indonesia and you may want to support the local communities. The atmosphere aspect of a carbon offset, the CO2e doesn't have any locational attributes associated with it. There's also things where, as you mentioned, cook stoves may be something that has other co-benefits that the company wants to support.
(09:23):
So you see those types of things, but one of the things that we've worked hard with in the marketplace is to help get some level of standardization because then you have price transparency. With that price transparency, you start to see the development of things like a forward curve, meaning that people can look at an investment. If I look at it a year out, two years out, three years out, what it might look like. And it's a lot easier to deploy capital. And at the core, what we're trying to do here with these types of markets is deploy capital to preserve our forests, our natural sinks, things like that, and really drive a positive outcome, as you said at the top. So there is differentiation.
(10:00):
What we've seen happen is there's two major differentiation. There's the industrial type products. We created a standardized contract called the GEO, which I'm sure we can get into how it started associated with the airlines, and then we also then created a nature-based product. It's called the NGO. It's a nature-based and GEO stands for Global Emissions Offset. It's a basket of offsets that fit into each one of those types of products, and that really became the first standardized products that got adoption in the marketplace, and that made it a lot easier for people to deploy capital. And then ultimately you started to see a futures market develop around that too. So you see people trade futures, so you can buy or sell products out a couple of years onto the futures exchanges.
Cody Simms (10:44):
I guess the thing I'm getting at in trying to understand myself is you look at something like recycled PET, recycled plastic, yeah, there's a backstory to where these Coca-Cola bottles came from or whatever, but for the most part, a buyer of recycled PET is just buying it at the cheapest price they can get it and turning it into whatever product they want to turn it into as a commodity. With most of the products you're talking about, yes, there is standardization that matters. There has to be a baseline level of quality to some extent. With renewable energy, anything other than that is maybe a little bit less important. But for almost all these other products, there's a story element to it that does actually matter. It seems like it impacts who might want to buy this thing. It might impact price, it might impact marketability of it to that company's own stakeholders in some way, shape or form. I guess what I'm trying to understand is how does that impact the ability for these things to be broadly tradable if you have to find these nuanced criteria that underlie any one transaction?
John Melby (11:49):
Maybe explaining how we built the GEO might help give a little insight on that. We for years have worked with airlines. And the airlines trying to develop programs where they could provide solutions for their customers that were concerned about the emissions associated with it and then ultimately for the broader business of the airline itself. And then what happened is that a number of airlines realized that they took off in Paris, and they landed in Montreal, then they landed in California and then say they went to Australia. They would have a different carbon regime in each one of those locations, so it's going to be very costly for them to manage that process. So they came together and they created the first industry-wide compliance program effectively. They came together and said, "Well, we'll reduce our emissions, worked with the UN, worked with a number of countries and NGOs, and came up with a program that capped the emissions of the airline industry and then over time it reduced it similar to how a compliance cap and trade market works, but they have a couple of vehicles by which they could use that.
(12:49):
They could obviously fly less, which is a very difficult proposition for the airline. They could have more efficient planes, which just takes time. So technologies to develop and deploy capital and what multi-year capital deployments. The development of sustainable aviation field, which was something we're actively and very excited about, actively involved in. At present, there's not a lot of sustainable aviation fuel available to the world. It's just the early stage technology. And then the next piece was offsets. And from an offset perspective, then the question became, what offsets would qualify for that program? Those offsets that apply for the program went through a multi-year process to come up with what basket would qualify. So where from where are they from, so Verra, ACR, the big standards for instance. And then, what protocols within those standards? So would cook stove projects count or would industrial projects? They went through this vetting process and create what's called CORSIA, and that's the airline program, CORSIA eligible credits.
(13:49):
What we did as we were working with the airlines, we were fortunately selected by their association, it's called IATA, the International Airline Transportation Association, to develop it an exchange for them. So we did that, and when we saw that people wanted to buy this curated list, if you will, of credits that were considered of quality that are under the CORSIA element, so not just airlines but a corporate wouldn't have to go out there and try to do all the background work to figure out if this is a good credit or not good credit.
(14:18):
We created then a market product for them, which we call the GEO, which is inclusive of that basket, or actually it's a little bit subset of that basket. If you buy it, you're assured that it qualifies in that program, and that what we call the GEO. And so that made it a lot easier for companies to buy. So you don't have to have teams of consultants out there thinking about things. As I mentioned, there was a demand for nature-based. So you see that basket of nature-based, they traded different prices and interestingly, depending on the time and other factors in the industry, the GEO may trade at a premium or add a discount to the NGO. But those are the two major benchmarks that are traded globally.
Cody Simms (15:00):
The NGO being the nature-based basket.
John Melby (15:03):
Exactly. It trades on our exchange, but it also trades bilaterally. What's really interesting about when you create a standardized product, somebody then can trade, and this is the same way other commodities markets work, but you could trade GEO Plus. So for instance, if you think it has something special, maybe the project is in an impoverished area and has done something good there, built to school, it's woman-owned, whatever it may be the various attributes on there, that maybe it's worth a little bit more, but you have a benchmark of the GEO, so you could sell GEO plus 30 cents, GEO plus a dollar or whatever the price may be. And then it starts to create a market for these products.
(15:41):
And what's great about that is then it enables investment into these projects because it's very difficult to invest, if you were to ask what the price of an offset is and someone tells you it's 75 cents and someone else tells you it's $150, and it's all over the map. It's because they're not in any way managed. So we really just took and built out the same type of infrastructure that you see in other commodities. So for instance, if you were to trade oil, which is obviously not an environmental commodity, but if you're trade oil, there's really two or three benchmarks in the world, yet there's over 125 different grades of oil that's traded. So you trade the benchmark plus or minus, and so it's a common way, and that really helps these markets scale.
Cody Simms (16:23):
In this case, then you are buying, to some extent, a little bit of an indistinguishable basket of things within the definition set of what you're looking for. It's less around, "I'm specifically looking for this project in this rainforest where this particular attribute was the case." That may be some kind of custom purchase that your sustainability team goes out and does, where they're looking for a very specific outcome and they may have a custom price for it. Your solution like GEO or NGO would be more around, "Hey, there's an underlying set of quality and an underlying set of criteria, and we're going to buy X number of tons that meet what we know this baseline is."
John Melby (17:01):
To be clear, we also provide product by product on our marketplace. So you can go in, I was just came back from South Africa. We have a partnership with the Johannesburg Stock Exchange to help build out environmental markets in Africa. So we're just down there. And if you were a buyer in our marketplace, you could click on our platform and say, "I'm interested in Africa specific continent." And then maybe it's South Africa and you can click on South Africa. And then you could say that, "I only want to have forestry projects." And it would pop those up and then you could see the projects. And you'd see offers to sell on the platform. You could click on the project itself and see all the documentation that's in it. I've spent my career in commodity markets. I've actually never seen another commodity where you can see that detailed information on a market infrastructure.
Cody Simms (17:50):
So if I use a stock market context as just a retail stock market investor, you have the equivalent of basically mutual funds, which are these GEO or NGO baskets of things that are defined by the manager of whoever put them in the basket, and then I have the ability to go buy individual stocks or individual projects, if you will, if I wanted to.
John Melby (18:10):
Exactly. That's a great example. And to the next level on the market on those products, you could click on the same way using that same example and get the perspectives of the company, get the auditor financials, all that kind of information. It's all available on the platform.
Cody Simms (18:26):
And in terms of who has access to be a buyer, it sounds like sellers have to go through the registry process, have to get approved to be listed, and we can talk about retiring and all of that stuff in a minute. Let's make sure we come back to that. But in terms of who has access to be a buyer, let's take your CORSIA based program, which turned into GEO as I understood it. In that case it started with this consortium of airline buyers, but it sounds like now the marketplace is open for a broader set of market participants as well. Is that just a public market? Can anyone go buy or are there requirements that you have to fulfill in order to get a seat as a buyer?
John Melby (19:04):
This pretty stringent KYC process. We're not a retail market, so we provide services to wholesale. Wholesale for us would be energy companies, large corporates, airlines as I mentioned, banks. But what you see is a lot of smaller retail, which meaning smaller companies or even individuals. There's other solution sets, but they connect into the wholesale market. We are the wholesale market or a major part of the wholesale market, but there are another solution sets. So for instance, there's companies that every time you swipe your credit card, you maybe buy a small piece of an offset. We're not in that business, but those types of companies may buy their offsets or renewable energy credits or other environmental products through Xpansiv infrastructure.
(19:52):
Likewise, the large banks often serve their customers. So the customer may say, "I need to buy these things," and the bank will go buy it on their behalf. And then the bank may very well come to our marketplace and buy those products. The same way that you can think about FX when you're dealing with FX, transferring money from one place to another, I'm not likely to go onto the exchange and do that myself. I may go to my local bank account, Morgan Stanley, Goldman Sachs, whomever you work with on that and then have them buy it for you. We're the wholesale marketplace, not the retail.
Cody Simms (20:26):
To that end, I understand the very clean use case you laid out with the airline buyers who came together, set a set of standards of the types of offset programs that they wanted to have access to, agreed amongst themselves, presumably got their own stakeholders involved and said, "Yeah, this is all the right set of stuff." Now that we all feel comfortable, we're buying similar things, so that one airline isn't buying a bunch of cheap, terrible, low quality credits and one is spending money buying high quality credits and they're both claiming the same amount of carbon neutrality. That makes sense to me.
John Melby (20:58):
There's one step even more on that just to make sure it's clear. They worked with NGOs and governments to get their buy-in as well, so it was just airlines coming together. It was a series of NGOs and governmental agencies including the UN that were involved in that.
Cody Simms (21:13):
So that all makes sense to me. In traditional energy markets, you have a lot of middlemen in these markets. You have a lot of day traders, you have a lot of arbitrage happening. People who are buying things just purely on price speculation. One would think in climate that wouldn't be great. You're not wanting to just appreciate the price of offsets for the sake of it. You're wanting to drive direct environmental benefit. I don't know though. That would be my assumption. How do you think about the role of traders arbitrage, people who aren't direct consumers of these offsets being participants in the marketplace?
John Melby (21:55):
There is an important role that they do play. I use an example, go back to renewables, maybe easier to wrap our brains around. In the renewable market, there's either quarterly or annual reporting. So let's say that you have to report in December the renewable bunch of credits that you purchase. As a buyer, you're likely to want to wait until close to December for cashflow reasons. Now, we can argue, is that a good strategy or not from trading? That's a whole nother conversation. But they typically wait till that timeframe. On the seller side, you'll have very small entities often that are the renewable projects. So you and I could get together and invest in solar panels to put in a field somewhere or a wind farm or whatever it may be, and we're likely not to be very capitalized in that business.
Cody Simms (22:44):
A 200-acre farm that's doing some soil carbon thing, right, for example?
John Melby (22:49):
Precisely. And these entities typically aren't very well capitalized entities. They put every penny they have into the project, and the second that they have a certificate available that they can sell, they want to sell it. So you have an arbitrage opportunity or time opportunity where the seller wants to sell at a certain date and the buyer wants to buy on a different date. The fact that somebody comes in the middle, provides that liquidity, keeps the market from swinging, seesawing around because, in theory, the price would drop massively in the time that these people want to sell and then go up when the time people want to buy. These people come in that provide liquidity to the marketplace. There's real value to that. That's different than some of the speculation stuff you talked about perhaps, but there is a value to people that come in and buy and sell this marketplace. It's important for the investor in the projects to know that they'll be able to sell and meet their debt requirements, things like that. I think there's a role there.
Yin Lu (23:42):
Hey everyone, I'm Yin, a partner at MCJ Collective here to take a quick minute to tell you about our MCJ membership community, which was born out of a collective thirst for peer-to-peer learning and doing that goes beyond just listening to the podcast. We started in 2019 and have grown to thousands of members globally. Each week we're inspired by people who join with different backgrounds and points of view. What we all share is a deep curiosity to learn and a bias to action around ways to accelerate solutions to climate change.
(24:09):
Some awesome initiatives have come out of the community, a number of founding teams have met, several nonprofits have been established, and a bunch of hiring has been done, many early stage investments have been made, as well as ongoing events and programming, like monthly women in climate meetups, idea jam sessions for early stage founders, climate book club, art workshops and more. Whether you've been in the climate space for a while or just embarking on your journey, having a community to support you is important. If you want to learn more, head over to mcjcollective.com and click on the members tab at the top. Thanks and enjoy the rest of the show.
Cody Simms (24:44):
Helpful context. Let's make sure we hit on the seller side of the market. So when I sell a credit into this marketplace, you said a big role of the registry was to ensure that a credit can't be sold twice, that it can't be double counted. As I understand it, you can buy and sell a credit without retiring a credit. This is this whole middle person, middleman sort of role. I can buy the credit from you, but I don't take credit for it on my books as a carbon offset. I just hold the certificate so that I can then resell it to someone who then can actually claim it in their carbon accounting and "retire" it. What does that whole end-to-end process look like in terms of how the registry is then re-involved at some point?
John Melby (25:27):
The credit never leaves the registry is an important concept, so if you're a buyer or seller of that credit, you have to account in the registry. The initial seller, maybe that project developer, you can use an example, we're going to do a cook stove project in Ghana together. Let's say that you and I decide to do that and we go into business after this. We start that project, we think it's a great idea, then we find someone to help back it, and that backer says, "I'll put up the initial capital for it, but I want 50% of what comes out of the project," or whatever number. That's really their collateral. The registry systems will ensure that transfer occurs so that you and I don't just walk away and sell it to someone else because the price got better for us. So that enables them to more confidently deploy capital and invest in the project.
(26:15):
Say they get that 50% of whatever those credits were created, they then onsell that to maybe it's their customers, it could be a grocery store chain, it could be an airline, it could be a telco company on the other side, what would happen in that registry use, it would go from the registry account of our project to that entity and then from that entity onto their customer and then owning, as you pointed out, the offset is not a marketing claim. You can't say own it and say, "Hey, I've got all these offsets." You have to actually retire it. And when you retire, you can put in a permanent state in the registry for everyone to see. So it would say that it's retired on behalf of XYZ grocery store chain on this state for this purpose, and it's in that registry forever. The registry really is a system of record for these products.
Cody Simms (27:06):
And so then for a product that is listed in one of your marketplaces as one of these bundled products, like GEO or NGO, is the individual product it sounds like it is also available in the registry as its own thing as well. It's just if you buy it through one of these commodity baskets and then it's somehow included in a retirement through a multiple tonnage purchase through these commodity baskets, all of those would then go back down on the registry level and get retired as well.
John Melby (27:38):
Little clarification, the way the basket works is through our systems, you're able to make sure that you get delivery of what qualifies in there, but you're actually getting a certificate. There may be a couple different certificates that would qualify for it, but you're assured you're going to get one of those. You're not getting a basket of products, so it isn't like buying an ETF or crypto or something like that. You're actually getting physical delivery of that certificate.
(28:04):
What physical delivery means in this market though is a transfer from one registry account to another registry account, and that happens in the infrastructure. You're getting a GEO eligible, for instance, offset, but you have that, you can sell it. If you were buying it, say, you weren't planning on retiring it, you can sell it back in the market as just the offset that it is, or you could sell it back into the GEO, or you could use it to retire. Really important to point out, taking delivery isn't the same thing as making environmental claim. You have to retire it in a permanent state for it to be eligible for any kind of environmental claim.
Cody Simms (28:39):
An environmental claim would then allow you as a large corporate, for example, to count it as part of your carbon accounting and to say, "Hey, we are this closer to our net zero goal," for example.
John Melby (28:48):
Precisely. And there's a lot of work being done internationally on those accounting standards.
Cody Simms (28:54):
Compliance market's totally different. That would be a legal regulatory requirement that you actually are buying and retiring X number of credits relative to some target that you have on your company. You guys don't play in that space though, as I understand it. Is that correct?
John Melby (29:09):
There's a convergence of these two markets very much. Historically, the big compliance markets, the EU ETS is the largest, so it's the European Union Emissions Trading Scheme. That market has been around for a little over 10 years. What it has is really an allowance-based market. So basically it's at a right to admit and then each year the number of rights gets reduced. And if I'm able to say, I have a factory that's cheaper for me to reduce my emissions than it is for someone else, I can reduce them by more and sell them my right. Again, it's a right to admit. And those are the same programs that you see that California has AB 32 market under the Western Climate Initiative. There's a lot of acronyms here, sorry. But those types of markets, and there's a couple of them around the world and they're important policy tools.
(29:54):
But the other piece of it is how do we as a society invest in projects to protect the natural sinks for instance? And these are the physical reductions or avoidances sometimes of carbon. And what we're starting to see is you can use those offsets to meet part of your policy. So like an allowance. You can either use an allowance or an offset in those compliance programs. And what happens is you're unlikely to see the allowances, say, from the European Union be qualified in, say, California because these are government-issued items. But the offsets, you're starting to see them be compliant in multiple markets. So they become the connective tissue globally and it leads into some of the work that you're likely to see out of the UN conference that comes out next month around what's called Article 6. And that's really how do you use these offsets in various countries?
Cody Simms (30:51):
Presumably different countries are either trying to protect natural resources that are important to their country or they're just trying to set a standard for their own accounting practices in their country of what a company in their country is able to claim essentially. Is that the idea? Like, "Hey, renewable energy may or may not count in our country, but forestry avoidance does or vice versa," as an example.
John Melby (31:15):
There's absolutely that. And then a number of these offsets are aimed at things like protecting the rainforest. And those rainforests are often in countries that don't have a lot of demand. They're on the supply side. Whereas you can think of much of the US, Europe as being more on the demand side. We don't have as many forests to protect compared to the industry we have. You'll see the transfer from rainforest in Brazil or mangrove in Indonesia or whatever it may be for credits likely to go from country to country. How do you then hold countries accountable? So under the Paris Accord countries committed to reducing their carbon emissions.
(31:58):
So those emissions in their country, if I am to buy or you were to buy here in the US a credit, does that get counted against the US government's goal or does it get counted against, say, the Brazil goal? And how do you account for the difference? And so this is what this Article 6 is effectively what you have to do is, if it gets moved from Brazil to the US, it has to be a bilateral agreement between the US and Brazil and the actual accounting in both countries have to be changed. So it gets moved, you have to add one. You can't double count. It is the purpose.
Cody Simms (32:35):
There's the accounting that happens at the corporate level of, "I bought this and I'm retiring it." And then separately, in order to do similar accounting at the nation state level, any purchase is also having to go through reconciliation at the international level as well.
John Melby (32:49):
And by definition, the voluntary activity is above and beyond what people have to do. It's companies that are typically much more forward-leaning in climate policy.
Cody Simms (32:59):
We talked about how producers can be relatively small, someone who owns a few hundred acres of farmland, someone who builds a relatively small solar project, et cetera, clean cook stove development in a city in Africa, for example. We're also seeing now the advent through the "climate tech movements" of companies looking to create credits that can see considerable scale, whether you're talking sustainable aviation fuel, green hydrogen, carbon removal, et cetera. Many of them aren't there yet, but that is the goal. Most of these companies come from the, for lack of better term, Silicon Valley orientation of hiring a sales team and going out and doing direct business development. How do you see that playing in a marketplace-based world? Do you think they will do direct sales and list their products on these marketplaces once there are standards and things like that that they presumably could qualify for?
John Melby (34:00):
Yeah, absolutely. Been around long enough in the commodity space to have seen a few products come along. Early days of renewables, early days of electricity markets going back to the late nineties. And what you typically see in any commodity market is, it starts off, like I have my glass of water here and I just happen to know that you want to buy this glass of water and I'll sell it to you. And then we'll do that for a while. It probably feels great. You got your water, I've sold my water. And then someone like a broker will come in and say, "Cody, there's about 10 other people will sell you water and you might get a better price for you." And likewise to me, bunch of people might want to buy water. That's the next step in a commodity market typically goes through. And then what happens is once that happens, you get to a certain level, spot exchanges start, they start organizing the structure and saying, "Well, a glass of water really has this much water in it."
(34:51):
Instead of just a random statement about a glass of water, let's get some standardization around it. And now we can have price transparency. And it's not always good for everybody. It's generally good for the broader marketplace. The reason I'm say not always good for everybody, if I happen to know that the price of water should be a lot lower than what I'm selling it to you for or it should be a lot higher than what you're buying it for. You're not going to like that. So price transparency usually gets a little bit of pushback in the beginning, but it's ultimately much more efficient. And if the markets are going to scale, you have to have confidence in them. So exchange is great confidence. And then another thing happens that's really important on these platforms is you're end up selling to entities that don't otherwise have credit with one another.
(35:33):
They don't otherwise have contracts with one another. If you knock on the door and you want to go sell, then you're going to have to go through KYC them, make sure that they know your customer stuff, make sure that they have the proper credit to do a transaction. Then you're going to have a legal agreement that you have to put together. So the transaction costs are very expensive. If you use a platform like Xpansiv, but there's others as well, you use those platforms, you have an ability then to go onto the marketplace, sign up in one place, and then have a level playing field. And even if you don't trade on the screen, you and I could agree to a price and then bring it to the marketplace and clear the transaction or transfers really settle the transaction on the platform and it takes away all the counterparty risk, all the contracting needs, and it just really moves frictions. So almost all markets move that way.
Cody Simms (36:22):
That's super helpful. And it sounds like you had mentioned this idea of GEO Plus back at the beginning of our conversation where you could have a product that has some unique attributes and thus you're able to sell it at a premium above the standard commodity in your category. And so for these companies that maybe have some degree of new innovation or whatnot, you could be listed in the baseline offering and then also offer your product through the market exchange at this premium price. And presumably you could still do direct sales of it too. The buyers would choose to either buy through the marketplaces or buy direct from you and you would de-list the product.
John Melby (37:00):
And often they would do both. They would use whatever vehicle makes most sense for them. And in early days, I should also say, especially in big projects, so you're talking about green hydrogen, you're spending billions of dollars to build this. You want to be assured that you have what's called an off-take agreement. So they'll lock into a long-term contract with somebody who may be able to use it on the other side. And those are usually very structured deals. The buyer's taking risk that you're actually ever going to build that green hydrogen facility.
Cody Simms (37:27):
You're going to deliver, yeah. That's a futures contract in that case more so than a spot market transaction?
John Melby (37:33):
Well, yeah, it's forward technically, but yeah, it's the same idea as a future. It looks like a future, but it's bespoke. So there's a real reason for that direct bilateral. But as it starts to become more standardized and there's enough supply and demand, it usually gets, as I said, to a brokered market, then do an exchange traded market. As I mentioned, we provide market infrastructure, we support bilateral markets through brokerage type markets. We support those. We support the underlying infrastructure necessary. It's incredibly important when you build any new product, especially an environmental product where you're taking delivery of an attribute that you have a central place that it's tracked. And so we'll build out registry infrastructure for these new markets and we work with others and then we give access to a number of them to the marketplace. So for instance, we're not the registry operator for Puro.earth who's on your podcast as well.
Cody Simms (38:22):
Yep, we had Antti on.
John Melby (38:23):
But they're connected to our marketplace through our portfolio management tool. So you can log into our system and you can see into that system. And that makes it just a lot easier for people to transact and then get the benefits of all the stuff I was talking about before. We don't necessarily have to contract with the third party. You just have to be a member of the platform.
Cody Simms (38:40):
And in terms of the types of commodities that Xpansiv today serves, we've talked about carbon and carbon credits a lot, we talked about renewable energy a little bit. I believe you also work in various forms of fuels and biofuels and the like, and you also work in water. Are those the other big categories?
John Melby (38:57):
Yes. So fuels, renewables, water and carbon. So really think about this as energy transition. These are all related commodities. They're all attribution based and global in nature.
Cody Simms (39:09):
And I presume the renewable energy side is mostly trading renewable energy credits or RECs from one project to another. Water, it would be transacting access to clean fresh water, is that the idea?
John Melby (39:22):
In Australia, there's a very vibrant water market. And the way it works is you have each landowner effectively has a water right. And the water right is a different size depending on the number of factors. And every year the water authority, it says, "Well, it's been a great water year. We'll get 90% of the allocation." So again, using my cup example. My cup is this big, 90% of the cup is my allocation. And over the course of the year, I get to use that amount of water out of the water system, but I can't take any more out. And if I don't use it's a use it or lose it over the course of the year. Let's pretend that you have a cup that's twice as big. You get 90% of that cup.
Cody Simms (40:02):
These are municipalities, these are jurisdictions?
John Melby (40:05):
Yeah, It's jurisdictions operated by the state, Victoria, New South Wales. The water can be bought and sold by the landowner. So think about it like a farmer. And use an example, let's use a rice farmer. A rice farmer has a very water intensive crop and the crop itself is not really high value in the marketplace, and another person has a vineyard or an almond farm where the crop is expensive. And if you don't water your plants, you lose years of yield. Whereas, rice you plant every year, the water in the field, if the price of water goes up, that rice farmer very well may want to sell their water to the almond farmer, but it's their choice.
(40:46):
So it's a market-based mechanism. They have a choice to do it. And it's just an efficient way of allocating a scarce resource in Australia around water. That market's really developed quite well, and there's a number of regions around the world that are looking at similar type markets. So it's really about water availability off the system. There's other types of markets that exist for water around things like nitrogen in the water, things like this. In Australia, it's really about water that can be taken down out of the water system by municipalities, farmers, other industrial users, things like that.
Cody Simms (41:16):
It's interesting, so I'm hearing, with the exception maybe you mentioned nitrogen in the water, that would be managing an externality, but water itself is access to a thing, fuels are access to a thing, renewable energy credits are access to a thing. Carbon is managing an externality. It's interesting to think about how these different broad-based categories of outcomes become tradable in the first place. It's a very human nature sort of oriented study to dive into, I guess.
John Melby (41:46):
If you can put a price on something, you can drive behavior. I don't know what that says about humans, but it drives behavior. I think the lesson learned in a lot of these environmental commodities is that it's cost way less than people expected and it's happened faster when there's a price. So like renewable energy, I can remember the early days when states were talking about the first renewable portfolio standard, which is a compliance market for renewables, basically a requirement to buy a certain percentage. It was started in Texas and then California followed and, well, actually New England followed first and then the Mid-Atlantic followed. There's a whole model that went around the country and then you had governors starting off and one governor would say, "We're 5%." And then another one say, "Well, we're going to go to 7%." And then 10%, and then I remember 20% by 2020 and there was no real tieback to policy.
(42:37):
Even advocates like myself that thought that it was the right model to go forward with thought, "Well, wow, how are we getting there?" And we got there a lot faster in those markets and it was a lot cheaper than people expected. Similar thing happened in the NOx and SOx markets, used to be acid rain, people would refer to it. And the NOx and Sox market were created and it was going to be incredibly expensive. It turned out to be a lot less expensive, and we're not talking about acid rain anymore. I think there's a real promise in the utilization market. That's not to say that markets are the solution to everything. There are certainly things that should be regulated separately, but it is a very, very powerful policy tool from our experience.
Cody Simms (43:14):
Are there counter examples where you've seen marketplaces be relatively vibrant, but outcomes, not so much?
John Melby (43:22):
I've seen some analysis of the offset market has actually created more reductions than the compliance market because the compliance market just sits and then it slowly cap drop, whereas every ton in the offset market, well, every credible ton in the offset market is a ton of reduction in the marketplace.
Cody Simms (43:41):
I guess depends on what baseline of quality you start with.
John Melby (43:45):
Interesting you bring up baseline. That's the hardest part, the spectrum. If you do an industrial product, you put a meter on, it's pretty easy to track, but then you're missing I think the boat if you're not also thinking about natural carbon sinks like the forest, how do we protect these forests? How do we protect the lungs of the earth. And those types of things, you have to start with the baseline and the baseline is the question of, what would've happened otherwise? Because you're not going to give someone a credit for doing something that would otherwise happen. It's called additionality, is the term that's used. There's an incredible amount of good work that's been done by the NGOs on that, and they refine it and refine it and refine it, but by its very nature, you're trying to prove the counter positive this is something that would've otherwise happened.
(44:27):
It's hard, but to give up on that to me is a colossal mistake because you have this opportunity to really inexpensively, in relative terms to all the other stuff we do in the commodity world, deploy capital in the developing world. It has all these co-benefits, schools, clean water, clean cooking, protecting animals, still talking about game reserves in places like Africa, and then certainly all the benefits of the rainforest, mangroves, the ocean. If we just give up on that and say, "Hey, we just want to have things that have a meter on it," and we don't do the hard work to figure it out, I think it's a bad, as I know, mistake.
Cody Simms (45:04):
Unpacking that a little bit further, you can meter the amount of clean energy driven through a solar project. You can meter the amount of carbon removed through a giant direct air capture fan, but what I'm hearing you say is some of these other things that may be harder to measure if they don't have economic incentive to them. The individual person on the land may have to make a short-term economic decision of, "Cut down the forest and raise cattle on it, 'cause I can get paid for doing that. I don't get paid for just leaving trees on my land." But we all know that the long-term effects of that are deleterious to everybody.
John Melby (45:39):
The technology and the methodologies to measure that forests are getting better and better and better. That's really what the voluntary markets pioneered. It's just years and years of iteration on that. Renewable energy is incredibly important. Direct air capture has good promise for the future, and the reality is we need to do it all and probably much more. We shouldn't be saying this one's better than that one. We should say, "How do we enable all of them to happen? And keep thinking about more and more and more that we can bring to bear. And I'm an optimist. I think that we put ourselves in a bad place sometimes as humans, but we're also pretty good about innovating, so hopefully we can innovate our way out of this.
Cody Simms (46:19):
John, give us the quick innovation story of how Xpansiv came to be in the first place. It seems like a number of mergers and partnerships brought it together over the years, but maybe give us the story and the story of your role as part of that.
John Melby (46:33):
I was on the board of two companies, one called CBL Markets, the other one I'll call Xpansiv 1.0. In August of 2019, we brought the two companies together. Xpansiv 1.0 was built out to be that next generation data business that I was talking about, how do you track down a forest or a molecule going from here to there and all the things that happened to it. And Xpansiv was a spot exchange that was starting in Australia that was focused on developing carbon offsets and renewable energy credits.
(47:02):
We brought those companies together with the vision of building out market infrastructure. And we knew that it needed to be integrated from our perspective because you have all these various nuances of these markets and you had to make it simpler for people to transact. So you had to put a price discovery mechanism of the exchange on top of a registry, which is with Xpansiv 1.0 was built out. So that became Xpansiv 2.0, if you will. The company that we're at today, we've done a number of acquisitions in the space, as you mentioned, actually nine transactions since August of 2019, which is quite a lot. Anybody's been around the space, now we're the largest registry provider in the world. As I mentioned, we're over 85% of all our carbon offsets, about two thirds of all the renewable energy credits that are registered or registered on our infrastructure.
(47:48):
We acquired then built out a portfolio management tool that managed a billion assets last year, which is more than the underlying market, meaning that it supports a lot of the transactions bilateral. That happened. We own now an exchange that had over 95% of the carbon offsets that traded on a spot exchange, develop the largest benchmarks in the space, and then along with our partners really building out an ecosystem. So we're quite excited about it, but it's early days in the energy transition. We're talking about how do you develop fuels markets like we were talking, you mentioned, how do you deploy solar globally? How do you do things like electrification of cars? All that's going to require tracking, measurement, price discovery. We're quite excited about the future, been pretty busy.
Cody Simms (48:33):
John, is there anything else I should have asked or anything you wanted to make sure to have shared with us?
John Melby (48:39):
No, I'm quite happy to be on here. I think it's great what you're doing.
Cody Simms (48:43):
Well, I appreciate you for joining and helping all of us get smarter. I know I learned a ton in this last hour and hopefully everyone else who's listening decided they did too. So thanks for joining us.
John Melby (48:54):
Yeah, thank you for having me. Take care.
Cody Simms (48:57):
Thanks again for joining us on the My Climate Journey podcast. At MCJ Collective, we're all about powering collective innovation for climate solutions by breaking down silos and unleashing problem solving capacity. If you'd like to learn more about MCJ Collective, visit us at mcjcollective.com. And if you have a guest suggestion, let us know that via Twitter at mcjpod.
Yin Lu (49:23):
For weekly climate op-eds, jobs, community events, and investment announcements from our MCJ venture funds, be sure to subscribe to our newsletter on our website.
Cody Simms (49:33):
Thanks, and see you next episode.
