We recently met with Rene Velasquez from CBL Markets to discuss the update and benefits of carbon offset programs. Rene shares great insight into the leadership that airlines like IAG and Delta have taken and how they created momentum in the airline leadership teams to consider carbon neutrality as a core strategic objective to ensure long term recovery.
CBL Markets provides access to the world’s energy and environmental commodity markets, facilitating the secure and seamless trading of commodities like carbon, renewable energy, water, and gas.
‘Thanks for joining me today, Rene, for this interview in which we want to explore the validity and strategic value of carbon offset programs for airlines.
You have worked in carbon offset market for nearly 15 years now: in your expert opinion, how has adoption across all markets changed in this time and why?
Over the past five years, we have seen a paradigm shift in the way business leaders, policymakers, and society view the urgency of the climate crisis. I believe the Paris Agreement was the watershed moment that galvanised wide-scale recognition by enshrining a commitment that every country has to take concrete steps to reduce emissions. Since then, we have seen business leaders recognise the importance of private-sector action.
It should be stated, however, that the action of the private sector has come about due to pressure from two equally important sides: the world’s youth urging climate action, catalysed by the “Greta effect,” and BlackRock CEO Larry Fink’s letter to CEOs in which he stated, “climate change is the defining factor in companies’ long term prospects” — the world’s largest asset manager recognising that climate risk is investment risk.
Now it’s common to witness corporate leaders developing ambitious climate goals, as evidenced by myriad carbon-neutral and net-zero pledges. Carbon markets have benefited from this paradigm shift, efficiently directing capital to activities that measurably reduce emissions. As a result, we’re seeing carbon markets evolve to adapt financial market structures such as standardised contracts, centralised marketplaces, and greater market transparency. These are all positive signs the market is growing, maturing, and becoming more accessible to all participants.
In your opinion, what is the main driver to increased adoption of Carbon offset programs – regulatory / governmental environment, societal pressure or the ability to articulate an ROI on the bottom line?
All of the above — it’s a mix of bottom-up and top-down pressure that has ensured that carbon-offset programs are a critical path for reducing emissions efficiently and at scale.
What would you say is the leading market industry for offset and why?
Aviation clearly stands out — it’s the first sector that has developed an emissions reduction scheme in the form of the Carbon Offset Reduction Scheme for International Aviation (CORSIA). Aviation set a goal to cap emissions from 2020, and for carriers to offset emissions above that baseline through 2035. Furthermore, the sector has a commitment to reduce emissions by 50% through 2050. It’s an admirable system and one that other industries — like the maritime sector — are looking to for inspiration.
What are the reasons for the successful adoption in those markets? Are the barriers to entry lower, consumer pressure higher than in others?
In the case of aviation, it’s the recognition that decarbonisation is a complex task that encompasses industry collaboration, effective regulation, technical innovation, as well as offsets — especially in the near term. Industry projections of total demand for aviation offsets will exceed two billion tonnes by 2035. Importantly, the sector has a history of collaboration to address common issues like safety. CORSIA is a perfect representation of these values. And finally, the aviation sector recognises its impact is visible to customers; most passengers realise the environmental impact of air travel and want to reduce it. So, you could also say the reason for adoption relates to the social licence to operate.
How do airlines compare to those markets in terms of engaging approved offset programs?
Voluntary passenger programs have typically had low uptake due to design flaws. They have been “opt-in” by nature of the booking process. Some airlines, like Qantas and Delta, have seen high participation levels because of effective marketing efforts and engagement with corporate clients. But it also helps that they walk the talk.
Delta in particular is a perfect example of an airline demonstrating exceptional leadership. Since 2013, the airline set a goal to achieve carbon-neutral growth, meaning that they offset all emissions above the baseline set in 2012. This important milestone should not be ignored as it helped to validate the industry-wide goal set out by CORSIA to achieve carbon-neutral growth. Then in early 2020, Delta announced a commitment to become the first carbon-neutral airline globally and pledged $1 billion over 10 years to make this commitment a reality. They maintain this commitment, despite the impact of the pandemic.
Interestingly, as it relates to their voluntary passenger program, the airline has seen continued transactions for offsets, despite a significant drop in passenger volume. Full disclosure, I have had the pleasure of working with Delta for many years by helping the airline access the carbon markets, and our company CBL Markets operates Delta’s passenger-offset page. So, I’m letting you in on a little secret, but I’m sure Stephanie Zhu, Delta’s Sustainability and Climate Change Manager, won’t mind me telling you. (Shout out to Steph!)
What are the core trends you observe regarding carbon neutralisation programs for airlines?
Prior to the pandemic, we saw a bit of an “arms race,” for lack of a better term. It all kicked off when IAG (group parent for British Airways, Air Lingus, and Iberia) made a commitment to achieve net-zero emissions by 2050. It was, and remains an audacious goal. From there, we saw other airlines making similar pledges, including Qantas and Air France-KLM. Jet Blue and British Airways made commitments to become carbon neutral for their domestic business, EasyJet for its international business, and Delta for its entire global business (meaning domestic and international). Interestingly, all of these airlines have maintained their commitments, despite the decrease in traffic as a result of the pandemic. Just this week, the 13 airlines that make up the OneWorld Alliance made a commitment to achieve net-zero emissions by 2050.
When I speak to airlines today, there’s a resolute commitment to the environment for when they emerge from this downturn. Their carbon-neutral and net-zero aspirations have become an important part of their identities, which bodes well for the future of the industry. Add to that a willingness to build capacity and prepare for compliance under CORSIA, and I believe airlines are ready to embrace carbon offsetting—for both voluntary and compliance—for the long term.
Which types of airlines are your largest segment of customers (LCC/FSC, Tier 1/2/3/4), and why?
As touched on earlier, CBL is in a fortunate position because of our partnership with the International Air Transport Association (IATA). Together, we have developed the Aviation Carbon Exchange (ACE). The ACE is the first centralised marketplace for carbon offsets for the airline industry. It provides airlines with the ability to identify, select, and transact both voluntary and compliance carbon offsets via a simple, secure electronic interface. As a result, we count numerous airlines as clients. The ACE helps the sector by providing transparent price signals and actionable market insights to help build better market intelligence, thus ensuring airlines can meet their long-term decarbonisation goals. Unlike intermediaries or brokers, the ACE operates a centralised exchange that provides a fully transparent, level playing field for all participants. Now airlines have parity as it relates to price discovery and market access. Whilst the ACE is currently in its pilot phase, we have seen a willingness from airlines to join. So far 15 of the 30 largest carriers globally have indicated their intention to join ACE. We are currently onboarding airlines with a view to formally launching the ACE in Q4 of 2020. So stay tuned, as we’ll have some big announcements in the coming months!
This is exciting news and we would like to stay close to those developments. What are your observations when dealing with airlines in comparison to other verticals you work with? Do airlines display the same ability to adopt a different way of trading/purchasing offsets and agility as other sectors?
What we have seen is a remarkable willingness by the aviation sector to adopt new technologies like the ACE because they recognize the long-term benefits. I touched on the power of price discovery, but another aspect of a centralised electronic marketplace is that all parties agree to a single set of terms and conditions that define an electronic contract. The result is a streamlining of an airline’s procurement process because they can purchase offsets with the click of a button — no more negotiating contracts with vendors, complex onboarding, and conducting KYC with countless parties. Now they can access the entire market 24/7/365 and trade via an anonymous electronic interface.
What are the key barriers to adoptions for airlines? Has the partnership with IATA allowed you to overcome those and how?
The partnership with IATA has been incredible, helping validate our technology and providing visibility. We have received great feedback from airlines about the ACE. The momentary challenge, of course, is the decrease in passenger traffic due to Covid-19. But again, this is a long-term commitment. We are building market capacity because we know that when the sector recovers, they will rely on us to provide accountable market solutions.
In a world where we measure growth success by passengers boarded and yield, do you think fighting climate change and therefore showing a strong commitment to carbon offset programs can be a strategic element of an airline’s commercial strategy, or is it primarily a PR exercise?
The simple reality is that the sector recognised that its financial success is tied to its environmental credentials. The recognition of the social license to operate is paramount to future success. The tide has turned, and corporations in every sector must now account for the environmental impact of their operations.
Given this and considering COVID recovery plans are underway: do you think carbon offsets are a strategic move that airlines need to engage to retain a social license to operate as part of the broader sustainability strategy?
100% agree. Finding measurable, accountable ways to offset carbon output is now pivotal to business success, and the aviation industry is no exception.
How do AI and the markets have the power to solve climate change in your opinion? What should an airline CEO take into consideration when writing their business & sustainability strategy for the coming 10 years?
I love this question — how long do we have? The reality is that AI, machine learning, and other emergent technologies will be driving forces for change across all industries and all areas of our lives. Business leaders that reject this notion won’t be around for long. Put simply, it’s because their competitors will beat them on efficiency, whether it’s innovation or purely on margins. For the aviation sector, AI will play a significant role in enhanced security via biometrics and facial recognition, material sciences, booking optimisation, and countless other ways. When it comes to the growing role of chief sustainability officers, transformative technologies like DLT and innovative supply-chain analysis will enable the sector to embrace differentiated commodities. A perfect example is what our sister company Xpansiv is doing via Digital Feedstock, an immutable file that captures and codifies production information, enabling markets to reward superior practices. We’re expanding the definition of “value” to include vital context and environmental impact. For the first time, producers can capture data about natural gas, for example, and pinpoint important ESG attributes, essentially creating a “digital twin” that can be bought and sold on the market. This digital twin contains important information that differentiates the fuel product according to proven provenance and environmental impact (i.e., methane leakage, CO2 content, water, SOX, etc.). This way, buyers of these commodities can affect real change in their supply chain. From this point forward via our pioneering technology, markets can help transform industries based on ESG impacts. AI, IoT, remote sensing, LIDAR, and myriad other technologies can be utilised to capture, refine, and aggregate data so there’s nowhere to hide. We call these Intelligent Commodities.
How do you see the role of the Chief Sustainability Officer in airlines? Will it be part of the standard airlines C-Suite?
A few years ago, the role was on no one’s radar (excuse the pun). But now it has become an incredibly important role. I’d liken it to what the role of the CIO was a decade or so ago. Increasingly, the CSO will have a strong voice in the C-Suite and help shape company strategy.
We agree with you full heartedly and have founded Arvensis Partners so facilitate the CSO talent search for our clients. So, if Carbon offset should be at the core of the Sustainability strategy, it needs to be funded and staffed with top talent and resources. What are the main skills gaps you have observed in comparison to other verticals when you deal with airlines?
Talent, talent, talent. It’s a recurring theme, these days. I’m a commodity trader in my day job, but it’s become clear that our industry needs to continue our education efforts to help develop talent in the ESG movement. It’s the rate-limiting step if we’re going to achieve our decarbonisation goals. Anyone with more than a decade of experience has an obligation to help develop the next wave of passionate individuals looking to save our beleaguered world. We need to be willing to share our insights and experiences if we are sincere about helping the next generation take us even further. For me, I look to the veterans of our industry for inspiration. People like Dirk Forrister and his IETA team who have dedicated their careers to advancing carbon markets and policy. I believe that IETA has done a great job building a community that recognises that we are all fighting for the same cause, and they have created an environment of collaboration. Dirk has been a great mentor to me, and I aspire to take up that gauntlet during my career.
As for skill gaps, it’s more than teaching people technical components; book smarts only get you so far. What we need to develop is the passion young people have to work for companies with a purpose. They will learn technical skills on the job and one day become subject-matter experts. But you can’t teach passion — you can only nurture it. Inspire it. Passion ensures you remain steadfast in your commitment. That’s the kind of people we need to develop; people who work and work and work at something until one day they’re the best at their craft.
So, you are saying that there is a skill & knowledge gap that cannot be solved with additional human resources alone. Whilst at leadership level you need the top talent, but for immaculate execution, airlines require rather technology solution which allows them to de-risk and maximise the value?
Human resources are part of the solution. Ultimately, business success comes down to having the right leadership, the right strategy, and a willingness to evolve and learn from mistakes. Having good people makes this easy because they’re willing to learn, iterate, and challenge the status quo. They are the agitators that make things happen. But as I mentioned above, I believe technical knowhow is only part of the solution. It comes down to passion, so if sustainability is in your blood and you can check your ego at the door, then you can roll up your sleeves and help solve the world’s problems.
Again, we agree with you, Rene, and, having moved to the sustainability aspect of the travel industry, I can vouch for the passion and lack of ego of the people I speak with every day. I would like to understand more about your offering: how does working with the ACE platform help the Sustainability / Carbon offset team achieve this and work with minimum risk and maximum benefit?
ACE de-risks and simplifies the entire procurement process. The standardized offsets traded on ACE are verified, which addresses a key area of concern for market participants. Also, our exchange model enables equal market access for all participants.
ACE runs on a bespoke version of CBL’s core exchange platform, which is proven technology. From the core matching engine to clearance and settlement, the technology supports straight-through processing to streamline operations and minimize errors. Trading accounts are established at leading global banks. The accounts are established in the customer’s name and control. The exchange is permitted to move funds only to facilitate transactions.
In addition, we remove delivery risk through our design — the exchange requires that all offered offsets are encumbered, meaning they can’t be sold more than once. So when an airline executes a trade, they are guaranteed to receive the carbon offsets into their registry account. We remove complexity by having electronic contracts that ensure delivery versus payment, and we ensure same-day delivery. In sum, the ACE offers minimum risk and maximum benefit.
Rene, this was a super insightful discussion with someone who has great exposure to the airline sustainability community. One last question, what would your top tip be for a sustainability team in an airline to ensure carbon offset is on the CEO’s front of mind and gets invested into?
If you’re late to the party, show them what your competitors are doing and the benefits they’ve reaped. The airline industry is notoriously competitive, and carriers hate being shown up by their competitors. I would also say that any airline CEO should already be aware of what Willy Walsh / Luis Gallego and Ed Bastian are doing with their respective airlines and realise that they have thrown down the gauntlet. The world has changed, and the corporations that have the foresight and leadership to lean into this era of accountability will survive, thrive, and help ensure a better future for us all.’