Ep84: Mark Carney 'Matching Net Zero Supply and Demand'

Michael Liebreich: Before we start, if you're enjoying these conversations, please make sure that you like or subscribe to Cleaning Up, it really helps other people to find us. Cleaning Up is brought to you by the Liebreich Foundation and the Gilardini Foundation. Hello, I'm Michael Liebreich, and this is Cleaning Up. Welcome to Season Six. My guest today is one of the towering figures of climate finance. It's Mark Carney, governor of the Bank of Canada from 2008 to 2013, and then Governor of the Bank of England until 2020. He was the chair of the Financial Stability Board and founding co-chair of TCFD. That's the Task Force on Climate-Related Financial Disclosure. In 2020, Mark became the UN Special Envoy for Climate Action and Finance, and the adviser to the UK on finance for COP 26. At COP26, in Glasgow, he launched GFANZ. That's the Glasgow Financial Alliance for Net Zero, whose members manage $130 trillion of financial assets and have pledged to invest them in line with the Paris agreements. Please join me in welcoming Mark Carney to Cleaning Up. So, Mark, welcome to Cleaning Up.

Mark Carney: Thanks for having me, Michael.

ML: Now, you look like you might be in the interior of a church or something, it looks austere. I'm in a hotel myself.

MC: It's very austere. Well, the church doesn't have to be austere. It's funny. It's a slightly padded room. It's a curious place to be. I'm in a conference room in Toronto. How's that?

ML: In Toronto? Okay, well, we certainly would not have been able to guess that from the background. This is an interesting time. I mean, we've got the terrible events going on in Ukraine, and we're going to talk about those and their implications for transition and inflation and all sorts of things. But we're also just about almost exactly six months after the COP26 in Glasgow, where you've played such a big role. Have you been reflecting on the half-year anniversary of that meeting which is coming up?

MC: Yeah, I mean, we're trying to move forward as you are, as everyone is probably who's listening to this. But when I look back at it, I'll give a bit of a glass half full approach: it's not perfect, if it were perfect. I mean, it's a COP, after all.

ML: If it were perfect, we would have been done 26 years ago, right.

MC: There's climate change addressed. But you know, I think it is significant. And you've been around this for longer, probably than, you know, both of us care to admit, but been around these issues. But first, the fact that we get to 90% of global emissions covered by country net zero pledges, one and a half degrees. First thing, I mean, if that matters it must be translated into action, it does matter that the objective was tightened to one and a half as opposed to a stretch with no overshoot, as you know, all of that matters. What's unfortunate is the reason for that tightening is just how dire it would be to go from one and a half to two and a better understanding of that. And obviously, the risk of that happening is going up. I thought the side deals weren’t involved in the negotiation side deals, but whether on methane, deforestation, coal, less successful on coal, but still, you know, framework, there. A good innovation and valuable in and of themselves. And I think, maybe we'll get into it. One of the questions for the financial sector is, if you have a side deal that's not global coverage, but covers a lot of relevant places, how do you react to that? Have some views on that. So, I thought that that was good. And then the private sector participation, including the financial sector was important. So that's all to the positive in terms of COP, lots to more than one would have logged on. It was it was hard to do because it took six-plus years, but finishing the Paris architecture, and the legalities, including Article Six, again, welcome. So, several good things. But, boy, you know, there's absolutely no time to backslap, congratulate take a break after Glasgow. In fact, and the last point, one of the things out of Glasgow or in Glasgow, which remains to be demonstrated is we're supposed to come back in about six months’ time now, with accelerated progress and, obviously, current events I shouldn't say, that's a challenge, even at the best of times.

ML: That was one of the interesting things that may not have been noticed by a lot of people. There was this decision to move from five-yearly stock takes and tightening to annual. And I gotta be honest, I'm not sure that was the right thing from a sort of, do we really have the stomach every year to put ourselves through the same wringer or, you know, because one of the things that enabled Glasgow was a technology developed. And but it's more than one year for the Overton windows to change because technology comes along. So, I'm not sure about that. Were you a fan of the single year?

MC: Well, it's an interesting point. I felt that…because I think five is too long. And certainly, with events, is one too short? We'll see. I would say, let me say the following. I'll try and put it in positive terms, which is heavy on mitigation in Glasgow, other issues are obviously addressed or discussed and addressed, but not as prominently. I think we see, and also certain regions not addressed as prominently. So, this natural sense of state and priorities of the Egyptian presidency on loss and damage, think resilience and adaptation, Africa regions, and there is some attractiveness to not trying to do everything at every COP, and have the highest ambition on all aspects at every COP. Because potentially you have mitigation in the biggest economy crowding everything else out, I'm overstating the point. I think it's a fair challenge. Now, that said, what's important in policymaking, whether it's international on a global basis, or on a domestic basis, is to build credibility to build a track record. So if you put down markers, and you agree that you're going to come back and do better, you have to come back and do better and build that momentum. And maybe we'll get into it, if time permits, one of the aspects that we've been trying to support as GFANZ is so-called country platforms, key packages for some of the largest emerging economy emitters, financing packages driven by higher ambition NDCs for Sharm el-Sheikh. So that's part of the way we're trying to honour that one-year window.

ML: Okay, now, a lot is going on there. I don't have some sort of, acronym buzzer, but I probably should, because, you know, you've restarted with the NDCs, and the GFANZ and we need to just make sure that, some of the audience knows this stuff, frankly, better than me, and maybe even better. I mean, they're just an extraordinary group, but some of them will be dipping in. So, the NDCs are these nationally determined contributions, those country plans, and we'll get on to GFANZ, and I'll let you describe what it is in a second. But I love the idea that you, although you have a commitment period every year, you don't push the same people for more and more and it's kind of like, we used to have Winter and Summer Olympics in the same year. But now we split it up and there's one every two years and we kind of rotate things around. It gives a little bit of a variety of candidates.

MC: In Canada it’s something to look forward to Michael.

ML: Well, you know, and back in the day myself as well, but you know, when I was still doing those things. Let's move to GFANZ because that was your big focus. You were the UK Special Representative for finance to the COP26. You focused it all on this GFANZ. What does it stand for? What was the thinking and what came out of it?

MC: I have to make a make an amendment to the lead into that, so to remember one I was also for the UN. What we spent most of our time on were 24 very worthy reforms to the plumbing of the financial sector, none of which or very few of which got any headlines, and I can entirely understand because plumbing, isn't that sexy, but it's essential.

ML: This is why I missed them out from my lead into the question about you.

MC: But I'm gonna re-insert them not just out of respect for the people who sweated blood to get them. But because of mandatory climate disclosure, stress testing banks and insurers, development of some new markets, including potentially a high integrity market for carbon credits, all issues that we make get to. All of those are necessary so that we can help achieve a situation where every financial decision takes climate change into account. Just like you know, financial decisions always take credit risk into account. Sometimes it's decisive, sometimes it's just of interest. So, all of those plumbing changes, which were essential, and without which something like GFANZ, which I will now describe, wouldn't really have traction. And so that happened as well. And we spent, I would say the bulk of our time developing that and then as that momentum was there, and we were confident that those reforms were going to not just come in place, but were going to get widespread endorsement by the major immediate economies, which they did in Glasgow, getting the financial sector to shift from the climate as a risk issue, climate as corporate social responsibility issue to being a fundamental mainstream issue. So the Glasgow Financial Alliance for Net Zero, is an alliance of the world's largest banks, insurers, asset managers, and asset owners. So, think in the last group are pension funds of big insurance companies, other big pools of capital, some sovereign wealth funds, and all of them making a commitment that the investments they have and the companies they finance. So of course, they have to deal with their emissions for you know, their offices and paper and things like that. But really, their massive emissions are of their clients of the companies they invest in, and they finance. And the commitment is that those investments, those portfolios, will themselves be net-zero, on scope, one, scope two and scope three emissions, so all the emissions through the supply chain. Now you’ve got me nervous about acronyms, language, etc <laugh> So all of those emissions would be net-zero by 2050 because that's the anchor for the world. But very importantly, they would have their fair share of the 50% reduction that's required by 2030. And importantly, that they would develop five-year decarbonisation plans for their portfolios. And importantly, they would start to have annual reporting of the emissions of their portfolios, as soon as practicable, which basically means about 18 months for banks, and about a year for the rest. And all of that is to bring, you know, bring that future to the present and us to be able to, all stakeholders be able to judge, you know, who's part of the solution, who's part of the problem. And just to put the numbers together, and I'll stop on this, this is $130 trillion of the balance sheet that these various financial firms’ control. That's about 40% of global financial assets. And of course, today, I should, I'll just be clear, today, those assets they're lent and invested in companies in a world that is not on a path for one and a half degrees, if it were we wouldn't need COP. But the important thing is, as new investments are made, as new loans are made as those balance sheets turn over, these firms are thinking about climate change all the time, and they're going to where the emissions are in helping those companies to get emissions down. So that over time, this portfolio is shifting.

ML: Okay. And that's a very comprehensive, ambitious goal, right? Because you've got the two pieces if I'm sort of paraphrasing. One is those 24 actions, which are about the plumbing and that's about, you know, so that those commitments that are made are not meaningless, because there are no definitions. And there are no platforms, and there's no measurement, there are no services around it. So, you've got the toolset, and then you've got the commitments. And the commitments, I think probably most of the listeners or viewers will know, scope one is stuff you burn or emit yourself, scope two. So, if you admit yourself scope two is that when you buy energy, you're accountable for the emissions, that came from generating it, and then scope three is both upstream and downstream in the supply chain. And that one gives me pause for thought because I can kind of understand at the level of a company why you need to analyse. That's an analysis right the way through the value chain. But for financial players, I've tried to figure out, I'm a data provider in this space or have been, how do you measure scope three at a portfolio level, when there's all of this kind of double counts, and there are things that you don't control and my worry is that that just becomes a consultant's dream because every company just relies on some subjective judgement to know what's in their scope three, and by the time you add it up to a portfolio, you just really can't do it.

MC: Right. Well, first, let's say why scope three matters, aside from the fact that they are emissions so if you're producing a product that ultimately, is relatively carbon light or emissions light. But once it's used it's carbon light in production, including the imputed power, but once it's used, emits a lot of greenhouse gases, and it causes the problem. The question is, do you change the incentive of the who's producing the product? Energy is a classic example. The internal combustion engine and automobiles would be another classic example where the scope three emissions in the use of the ultimate use of the product dominate, you know, all this, but just to state it. So by including scope three, and what tends to be the case in this, and this is a developing area, but it will tend to be the case is, you should include you and I, if we had a business together, I'd be happy to have a business with you, Michael, considering your track record but if we had a business together, we should include those scope three emissions, if they're material, so if it's a big part of the mission footprint of our activity, we should include those. So, I mean, there's becoming a consensus of what that materiality is on scope three emissions. So that's really what thinking about scope three emissions does, is it aligns the incentives from the suppliers for our company and the users of our company, our clients and our suppliers it aligns the incentives and we can work across. So that's why you do it. Now, you're absolutely right, that what you have is double counting and sometimes triple counting with scope three incentives think there's an energy company produces the oil that goes in the automobile, you know, as gasoline. And they both have the scope three emissions when you and I drive it around town, and somebody who has a pipeline even could have that. But what's established is an alignment of incentives to get those emissions down. Now, for the financial institution, here's why, even though there's the double, triple counting, potentially, because they've lent to an oil company and the auto company and you know, the whatever, potentially the business that uses the car as well, right? Here's why it's still relevant to have actually, it's important to have those because for all of those businesses, it is a question of competitiveness, it is a question of transition risk over time. In other words, if the world is going to squeeze out greenhouse gas emissions, it matters if I produce something that's heavy emitting, or my automobile is only internal combustion, not zero-emission, etc., etc. So, all of that matters. And we get the alignment of the various players. And it's relevant for, last point, for the financial institution in terms of deciding whether it's a risky investment, or loan, or it's a sensible one.

ML: If I've got a portfolio and investment portfolio, should I just add up all the scope threes? Or should I try and remove the double counts? And it's a trick question because the amount of data required to remove the double counts are possibly unknowably large.

MC: I think I as my investment portfolio, should know, for each of my investments, I want to know, the scope three emissions of those investments. And that gives me a sense of the vulnerability of that business. Because if it has high scope three investments, its core business, you know, the use of its product is high, has high greenhouse gases is against what the world is trying to accomplish. Now, the flip side, as if to speak as a financier because everything has a price. If the price and the opportunity and the price are low enough for that company, its equity, and the opportunity to get those emissions down is there, when actually it can be very attractive, and the system is set up in a way that members of GFANZ, people who are thinking about these opportunities will flow capital, will invest in companies that can get those scope three emissions down.

ML: Right. I think you use the keyword there, which I think brings us onto the same page, which is each, I think it's absolutely right that in your portfolio, you need to understand each of your investments. But I think we're at the cutting edge of what the methodologies can cope with. It's how you then aggregate it up. And as an investor choosing between two asset managers, how do you choose between them?

ML: Well, just very quickly, and we can why don't I make the point which we can toggle back to if you want. One of the issues and what we're building out within this group now is a sense of net zero plans, these actual plans of the asset manager, bank, etc. And of the underlying companies and a key point, to what extent are they aligned with the transition to towards net zero. One of the questions for asset owners, asset managers, however you're putting your money, your bank, etc., is, well, is that institution aligning to net-zero? Is it making progress? Does it have the prospect of making progress towards that in the process, it's going to capture value, it's going to create value, but it's also going to help solve the and the reason it does so is it helps solve the underlying issue. So, the sense of transition assets and alignment becomes more and more important.

ML: I think that alignment to a transition to net-zero is… that's got to be the goal. And then the question is, is how you measure but the question around scope three I wanted to come back to is around oil, gas, coal, fossil fuel, fuel producers, and of course, they have this huge scope three footprints much bigger than anything that they emit themselves. And by the way, just for the information, I should also disclose, which I always do that I'm an adviser to Equinor. But in no way does that change my views on any of these questions, which are complicated enough without trying to play stakeholder games. But I worry that the focus has of a lot of climate policy and a lot, certainly a lot of activism and have this kind of scope three thinking it serves to I'm not sure if I should use the word demonise, but it serves to drive up the cost of capital to put it in our terminology for fossil fuel producers, and thereby chokes off investment and drives up and causes inflation in energy costs before we've got the clean solutions in place, so we've penalised the fossil producers, but we've not clamped down at the same speed on fossil users, whether those are businesses or frankly, whether those are ourselves, and therefore there's an inflationary pressure and an injustice.

MC: Yeah, so a couple of things. One is that what is clear is that there are key elements, the key levers of the transition, and policy levers are demand management. So, changing all our demand for carbon-intensive activities. So, whether it's driving an internal combustion vehicle, car, flying, or whatever we're doing using plastics. And the second is the supply of clean energy. And the rate which and, you know, just to be clear, and you know, this is that you know, the investment in the supply of clean energy, wind, solar, hydro, etc., is running at about a third of the rate that needs to. So, the big shortfall is in the supply of clean, even though it's ramped up quite quickly, it's not ramping up fast enough. And those demand policies are not yet strong enough to reduce the demand for this. It's almost easier to explain it's much, to some extent, a greater focus on the supply of fossil fuels and the financing of fossil fuels, as opposed to focusing on what we really, you know, the primary drivers of a true transition. Now, that said, on the fossil fuel side, one of the things that needs to happen is we need to be much clearer about the transition pathways for those fossil fuels. And when it comes to financing, what's the use of proceeds of financing for fossil fuels? A lot of it is the transfer of fossil fuels from one to another, or fossil fuel infrastructure pipeline gets sold from one company to another, you know, that's not going to change the climate. But particularly now, we're talking about major investments in fossil fuels for energy security reasons because of the Russian invasion of Ukraine. Well, the question becomes, okay, but over what horizon do these fossil fuels run? And do they run into a horizon that's consistent with the transition? You know, if that question can be answered, it should be answered. And in parallel, because we must walk and chew gum at the same time, are we ramping up? Are we doing more things to ramp up that supply of clean energy at the pace that’s required? And I agree with you that I don't know. I will use the word demonising although that's the word you use, that limits the policy responses, and it won't fully get us to where we need to go. Because we need to push these other levers.

ML: We've got to find some kind of sweet spot where supply is reduced at the same rate as demand. I mean, otherwise, we're going to get these big macro impacts on the economy. And I think that if we fast forward from just before the Ukraine invasion, what we saw already was this enormous energy price spike. I would argue that a lot of that is because we ratcheted down the fossil fuel investment before we had figured out how to ratchet up the clean energy investment. But we also can't go too far in the other direction of just allowing fossil fuel companies as they do to say, well, you know, hey, you know, what, we are at least keeping the lights on? And so, get our case, so there's got to be some kind of sweet spot. How do we find these?

MC: Well, I think I think I agree with what you're saying. Now, so let's but let's start to build out from what the sweet spots are. There are two broad approaches we could take to this. One is to take an approach, and we always must look at the carbon budget and climate physics and say, okay, what can we still afford to have fossil fuels in this rapidly declining carbon budget? And that, in effect is what the IEA and the IPCC have done in various scenarios where they've said, you know, over what horizon should we run down oil, coal gas. For reference, and this is an important point to make that those scenarios this decade, are somewhere in the $400 to $600 billion a year of financing for that industry. So the answer is not zero. We have a lot where people imply the answer should be zero and anything is too much. That's not right, for the reasons you're saying. But it's also not unbounded. It's specific. So the first is to have that the second I think, is to be clearer about the horizon over which a project is going to be run, certainly any new project. And so when I think about LNG, for example, new LNG to Europe. Well, it's not going to be a 50-year horizon for new LNG to Europe. Back in the early 90s. I worked on 40-year LNG, you know, financings because people weren't thinking in you know, the time horizon was different. But it's a 15 or 20 year, that's quite a different set of economics that's necessary. But it's also grounded in that. And so I think, and then let me make one other point, I said there were two approaches, one is based on that, which is the carbon budget, and that needs to be grounded there. The second is more ambitious. And this is where your skills as a data manager would come in, which is that if you think about the trajectories for the own emissions, not the scope, three emissions, the own emissions of all the downstream users of fossil fuels, you have a number of estimates now: Mission Possible, Science-Based Targets, other attempts in various industries, to say, well, what's the pathway, for best practice given technology for these industries? Well, if everyone's at best practice, the sum of those best practices is the drive demand for fossil fuels. And that gives you a sense of what the pathway should be consistent with what is possible today and potentially tells us how much further we have to go with other investments and other technologies.

ML: Right. So broadly speaking, the methodology is the science tells us what the budget is, and then we should sort of flip to the demand side and make sure that our demand is in line with that, and then that should determine the supply. I guess the question then is, what happens if those demand-side policies are either ineffective or for whatever reason, because then if you've not made the investments on the supply side, you're going to get an inflationary energy price spike. You know, as a macroeconomist, you'll, you know, translate that into what it does to the economy. I would also argue we should look at what it does to poor and vulnerable people because you and I will be able to heat our house and drive where we need to go and all those sorts of things. But for the poor, vulnerable, even in the developed world, or the developing world, that is a catastrophic failure, that will turn the clock back on human progress.

MC: Without question, and it's why several things have to happen. One is clarity on these demand-side policies, a rapid ramp up on the renewable clean energy side. Thirdly, and relatedly in very much for the emerging and developing world where energy, I mean you start from a position of grinding energy poverty in many of these countries and then layer on top of that, that energy which people have access to, you know, can consume their entire disposable income and beyond with price spikes. We need to put in place high ambition you know, the country's high ambition, energy strategies for those countries and financing packages that meet those, and those financing packages will have a component of government, I'll call it government finance, official finance. But really for the scale of investment that's required probably three quarters, something like that will need to be private finance. And that requires certain conditions for it to happen.

ML: Right. Now the question that I want to come back with is, how much of that sort of balancing act between supply and demand and Science-Based Targets and getting everything right? I mean, it's like, you know, it's kind of a well-tuned piece of clockwork that we need. How much of that can be delivered by the finance world, the financial sector, and its various regulators and central banks and so on? Is it reasonable to put them under the spotlight? Rather than energy policy, transport policy, housing policy, building standards, agricultural policy, trade policy, all these other levers? Can we do this all just by manipulating effectively the cost of capital and liquidities?

MC: No is the short answer, we cannot do this by manipulating the price of capital. I mean, that is as a default, if that's the plan, then we're going to, we're not going to succeed. Let's take an example, I'm going to use an example. I'm in Canada, as I said at the start of this. And so, in Canada, as you know, there is a carbon price, there is a legislated pathway for that carbon price, it goes up to 170 Canadian dollars per tonne by 2030. It's $50 a tonne today. So, there's certainty or there's a high degree of confidence about where it's going to go. And importantly, so that does two things, one, it's a very strong signal for the type of investment that's needed for the transition. Secondly, it gives the government a lot of revenue. And what does the government do with that revenue, it gives it back to Canadians. And so those Canadians who are the least well off, and in this case, that stretches to more than two-thirds of Canadians, I'll round it down to two thirds, they come out net ahead, they get more money back from the rebate from the carbon price than they pay in terms of their consumption for various carbon-intensive goods. And that's a kind of structure we need. Now, if we just did it through the cost of capital, you know, the rent would end up going to the producer of the fossil fuel, who you know, is as well-meaning as they might be they would not, would not spread it widely across Canada.

ML: Right. And I guess, you said that manipulating the cost of capital won't do it. And by the way, I love the Canadian idea of the carbon tax with the rebate. I mean, I love it in the sense that I think my there's the only way really to do a carbon price that's not inflationary and not unjust, and so on. So, I hate all other versions, and I love that one. But is there a role for the central banks at all, to try to do anything other than maintain a level playing field? Because you also mentioned stress tests and stress tests are justifiable on the basis of risk? Eliminating macro-prudential risk, that's clearly okay. But should central banks be going beyond that at all? Or should they then be just saying, Well, look, you know, we hold the ring, we manage risk, we ensure transparency, but then it's really up to the other departments of government, and then the private sector and so on to actually deliver the change.

MC: I think the principal thing for which the central banks have responsibilities, particularly those who are supervisors and have so-called system-wide risk responsibilities, like the Bank of England, the principal thing that they need to do and their contribution is to say, well, what if the society succeeds? What if we get on track to one and a half degrees? What does our financial system look like? Is it well prepared for that? Does it have, will it have lots of stranded assets and lots of risk and losses as a consequence of still lending to old polluting industries or investing in those that aren't ready for the transition when it happens. So it is more about a risk management and a preparedness and resilience of the system for the climate transition. Now, you have to layer unfortunately, we have to layer on top of that, the very real physical risks that are only increasing because we're not succeeding with where we're going. That's the core role for the financial from central banks and its core contribution. I'll make one other point, though, which goes back to what we just talked about. The other big contribution. This is a point Janet Yellen and I have been making for the last few years is that one of the lessons of central banking has been that if you're credible, if the market knows how you're going to respond to certain events, then the market does some of your work for you. And this is the thing with climate policy. So one of the good things I'll take a different example than my Canadian carbon price, which is the end of internal combustion engine vehicles by 2035, on average in many European countries UK as well, you can't sell new ones. Okay. That tells and if that's credible, and I think it is a credible point that tells all the automakers and all the auto infrastructure people, okay, it's, I've got to get ready for that I've been in pull forward investments adjustment, and I'm going to be ready for 2035, or I'm going to be out of, you know, I'm not going to be selling new cars. And that combined with a financial sector that's forward-looking, that's thinking about the transition means a lot of investment today, and it smooths the transition in a way that isn't possible obviously, if you stood up, you know, when we're behind the curve in 2013, we say, okay, five years from now, it's all over in terms of internal combustion engine. So that kind of credible forward-looking policy combined with the financial system we're getting can really help address some of the important questions that you're raising.

ML: That's a great example. I love it, particularly because we had Pasquale Romano, who's the CEO of ChargePoint, the leading EV charging infrastructure player in the US. And I asked him what single policy would accelerate EV rollout. And he said, just more clarity on those vehicles, those internal combustion bans doesn't matter which year actually can be 2040, 2035, anything doesn't matter, but clarity. And that drives everything else. So you're, you're in agreement with him very much so.

MC: Yeah, the best is often the enemy of the good. And policy wonks can come up with very complicated policies. And sometimes for the big things, keep it simple. I'll give you another example. Both Canada and US, I think differing degrees of seriousness, I might say, at this stage, have an objective of a clean grid and clean electricity grid again, by 2035. And, you know, people in Canada sit around thinking, okay, well, how are we going to finish off the last 15% of the grid that is not clean.

ML: Now, I want to move into a sort of rapid-fire round, and then we'll come back to the sort of current events in Ukraine. But I've got a few questions that I would be sad not to ask. What is the role of taxonomies? Because that is something that, you know, obviously, Europe has pushed ahead or the EU has pushed ahead very quickly, ahead of any other major player. I don't want to lead the witness by saying what I think of them, but what's your view on the role of taxonomies?

MC: I think they have a limited use, they have a use, but it's a limited use. It tells you whether something is truly green. This is a transition. I mean, I know it's kind of like, odd like, but it's 50 shades of green, that's what we need, we need to be transitioning from, you know, dark brown to all of all the way through to green and getting capital to those businesses that can get emissions down and reduce and get that alignment that we talked about earlier. I think the problem the problem with taxonomies is by definition, is most things we wouldn't be in the situation, most things aren't green, and we can't just shut them down. We need to transition them off. And so, we need a framework for that. And that's what we're building out.

ML: Okay, so if I could paraphrase sort of, you know, kind of useful, but insufficiently nuanced to do much the heavy lifting.

MC: Yeah, I mean, useful for telling whether something's green, but not useful for the transition. And this is largely about the transition to become green. So, spend more time on the transition.

ML: Okay, next, in the rapid fire around, offsets. You talked about a high performing offset market, but what will the role of offsets be and how do we enshrine that in some of the plumbing?

MC: so I think offsets or credits as they're now referred to, yes, credits for those aspects of emissions, that technology does not allow companies to you know, it can't be they can't get rid of and so, actual reduction, removal, sorry, removal offsets to be clear removal offsets actually taking carbon out of the atmosphere. There are companies like Microsoft, others who want to go to net negative missions, obviously, they have to then remove to make up for history, but very important role for carbon credits. I think there's a strong argument I've made this argument that companies should be compensating for the emissions that they have at present so as they transition and measures there, there's still this integral of emissions that's happening there this phase of emissions, and they should compensate and there's a role for carbon credit markets there.

ML: Let me just see if I've understood that it's kind of that, they should be framed around removals and then a credit markets that you can then trade them between different players.

MC: What I've what I should have said at the very start was, look, this is almost all about absolute emission reduction. So the responsibility of companies is to get their absolute emissions down, financial sector to help with absolute emissions down, that which they can't get down, ultimately, because of technology shortcomings, they should use carbon credits to remove the carbon that's still being emitted.

ML: Right. And what is the role there? And I'm trying to figure out the way to phrase it and ask a question, avoided emissions have we now moved on completely. And when I say we, you know, you as well as everybody, are we now really closing the door on avoided emissions as a source of credit, are we only going to be giving credit for removals?

MC: To be clear, in terms of being at net zero, the only way you can be at net-zero is by truly being at net zero in terms of your emissions. So absolute as low as possible. If there's anything left, you've got to pull it out, that carbon out of the atmosphere. Now, we have a massive issue in the world, in case anyone hasn't noticed, which is called deforestation. I'll give you one example. So and we have a commitment in one of the big side deals, 100 plus countries in Glasgow was to avoid illegal deforestation. There is a role for a properly structured avoidance credit market to help with that. But that is distinct from what we've just been talking about that is distinct, that is not, you cannot use avoided emissions to be net-zero. The question is whether companies have a responsibility, they have an obligation to compensate for the emissions that they have distinct point from the removals. And I think that's what's being debated now, you have to have a very high integrity market to do so, that's what these core carbon principles which are about to come out, that's, that's part of the role that they play. That is the core role that they'll play. And we'll see whether that can be developed. I think that market can be developed. But it's got to be to the highest integrity. Last point. And the only players in those markets should be companies that themselves are committed to net-zero and making progress on achieving net-zero.

ML: Right, right. So, some role to pay forestry owners, landowners not to deforest but other than that, the whole avoided thing’s gotta be about removals and reduction. That's it, that's the only game in town.

MC: So you're arresting decline at a time when we have a very limited carbon but arresting decline.

ML: Now, final rapid-fire, GFANZ, $130 trillion. But there are in the world, depending on whether you'd consider just financial assets or all cumulative assets, somewhere between 300. And I think it's 320. I'm not sure what the latest figure this year, I believe might even be $450 trillion. Certainly a few years ago, it was 400 trillion. So you've got I think you've used the figure of 40% of financial assets covered by GFANZ. How do you stop a filtration process where the bad dirty emitting companies and assets are owned by people who are not in GFANZ? And the GFANZ members are all virtuous? But actually, overall, the world is nowhere near on track for net-zero?

MC: You do a couple of things. One is you grow GFANZ. And I think the first question is, if somebody is not in GFANZ, why not? I mean, why would they not be part of the solution? Why would they not be committed to net zero? 90% of the world's emissions are covered by country objectives. That's what people want. Why aren't you part of the solution? So I think that's the first thing is growing it. And we're working hard to do that. The second is that, you know, most of not all, but most of the world's largest financial institutions and major providers of debt capital, are in GFANZ. And when I mean debt, capital, I mean debt capital to companies. And most times when somebody has an asset, it has some debt on it. And of course, so the GFANZ member owns the emission, owns part of the emission of that asset, even if the asset itself is owned by somebody who's not in GFANZ. Michael, it's not perfect, but it means there's more discipline on it. So I think it's a combination of the two of those that insure it. And then the last thing I would say, the third point, which is one of the things we're doing, is we want to create a system that it's where you can responsibly phase out a stranded asset transparently, responsibly phase down a stranded asset. So again, it's got to be consistent with that time path. We talked earlier about oil and gas, but it's more broad than that. And, therefore, there's not the incentive for the GFANZ member to push the asset off their balance sheet and have a quiet life because, you know, they don't own the steel mill or invest in the steel mill, or something related to fossil fuel as opposed to, they still do that, but it is clear, and it's objectively clear that it's, it's being managed in a way that's consistent with what the world wants.

ML: Because, you know, this is the issue raised by Larry Fink, saying, well, it doesn't help if people just sell the dirty stuff, then they look virtuous. But as such a big asset owner, that doesn't help him, he doesn't actually get to net zero, and particularly worrying about private equity, and worrying about some of the sort of, you know, Asian High Net Worth families or state-owned enterprises that might end up owning very substantial amounts of polluting assets.

MC: So, a couple of quick comments, one is, so you know, working with major private equity players to get them into GFANZ, and I think the direction of travel is encouraging on that. Secondly, working to expand in Asia, you'll be seen a number of announcements in and around our presence in Asia and activities in Asia. And then thirdly, when somebody you know, like Larry Fink says that this is an issue. You say, yes, Larry, that's an issue. That's why we're making you co-head of the working group that's gonna solve this issue, which is what we've done alongside Jane Fraser of Citi and Thomas Buberl of AXA.

ML: Okay, and now, so congratulations, you got through the rapid fire round, we now click it up a level we get to the more difficult, the most difficult level of this conversation, which is how do we do all of this, whilst also dealing with Russian aggression on Ukraine, which, you know, as I see it, in the short term, is likely to distract and probably is distracting even from the preparations for COP 27. And for the net zero agenda. Certainly, in the UK, I don't want to say it's taking a backseat, but it's under enormous amount of short-term pressure. And then, of course, long term, it feels to me like the two agendas, you know merge, security and climate, you know, come together, but what are the conversations you're having? And how are you helping people think their way through the short term and the long term pressures of what's going on in Ukraine.

MC: So first thing is, it unquestionably makes the situation more difficult. You have I mean, absolute humanitarian catastrophe, unjust war, in and of itself, also an environmental calamity on top of the humanitarian catastrophe, and then a scramble for hydrocarbons in the short term because of the rupture of the global energy market, it's going to mean, we are using collectively up more of our carbon budget faster than we would have thought prior to the invasion. And we don't get that carbon budget back. So that's, you know, there's unquestionably bad news, then the issue becomes the medium to longer-term and as you just said, actually, the Venn diagram, the overlap between energy security and sustainability is pretty high. Once it's built, you know, whether it's wind, solar, hydro, storage, and potentially hydrogen as well. You know, nobody owns the sun and wind, hydrogen is virtually everywhere. So you have this overlap of domestic energy security and sustainability. There's some supply chain issues in the construction, but probably manageable. So the issue is whether in the decisions taken over the course of the next year, people are thinking in terms of the carbon budget, climate sustainability, and recognising this overlap on security. And the big things as you know, Michael, that move the needle on energy supply, they take three to five years to put in place anyways. So, and when you look in that horizon, the competitiveness is there so it should move now, early returns on this, not decisive, early returns. We've seen the European you know, whether it was the first side first steps and then the follow up tripling of hydrogen by 2030 ramp up and you know, offshore wind and solar as well. The question is whether these hydrocarbon components of the strategy are bounded by the carbon budget, open question. The UK government came in at the energy security strategy very heavy on I mean, it's it's heavy on low emission basically, it includes nuclear, people have different views on nuclear, but it's heavy on low emission offshore wind, solar, again a tripling of hydrogen by 2030. All, you know low emission, but with very near time horizons for energy policy. So early returns are encouraging. But I'm not going to sugarcoat it from a, you know, a tough situation, a terrible situation, but a tough situation from a climate perspective.

ML: Now, in the UK,  actually came in… The UK energy strategy came in for a lot of criticism. And I think justifiably for emphasising nuclear that really is going to be 10, 15, 20 years out, but not saying anything about energy efficiency. And in the short term, what can we do? In the short term, we can do energy efficiency, we can shut down industry, which we really don't want to do if we can avoid it. And we can go to coal, to manage the immediate situation, and everything else to my mind is, you know, is out there and some longer, I don't wanna say non-urgent, but it's probably not going to happen in the timeframe required to help Ukraine?

MC: Well I think I agree with you on the energy efficiency point. Absolutely. And it goes back to our earlier discussion on the demand levers. So, you know, again, low on demand levers, and that leg of the strategy needs to come in, without question. However, I would say that, you know, on the wind side, and the, you know, that can ramp, I mean, that's not 12- 14 years out type thing. So, there are components of that there that are relevant. So, it's not a… and I would, you know, I think having the baseload nuclear, if it can be built is good policy.

ML: So I studied nuclear, and I'm, you know, I'm fine with it. I'm worried about the economics, the impact on prices. And, in fact, my final question that we'll have time for, but it's to do with the price spike that we saw prior to Ukraine, and now this huge price spike, particularly in the gas markets, do you worry that that will not just work its way out as a pulse of inflation, but that it actually will drive longer-term inflation. And that that will empower those who really don't want to undergo the transition at all, they will say, Look, you know, you've had your decade you've gone on and on about green this and climate that, but people are suffering, and we now have to just forget about it. And you know, you'll get yellow vest, type protests, Net Zero Watch in the UK, you know, another big push back from, you know, potentially even in Canada against the carbon price that you talked about, are we risking, is inflation going to put all of this in doubt now?

MC: Let's put this in context. So, the United States dramatically increases its oil production and becomes virtually self-sufficient in oil. And, today, it's learning that it's a global oil market. And so the price spike in the United States, and they don't have a carbon price, they don't have any of these environmental, really, policies in place. And you're seeing, you know, the quadrupling of the gas price, I mean it and you get an underscoring of the very brutal and dangerous geopolitics of energy security, and really the folly of a fossil fuel-based global energy system, apart from the sustainability issues, just from an energy security and a consumer perspective, is a system that is prone to these price spikes. And I recall as well, that part of the reason why we had the collapse in supply, you'd notice not everyone will follow it is that you had a huge boom and bust in US shell, and that had nothing to do with environmental aspects that was just, you know, that's the market getting ahead of itself, I think it's anyways, we don't have time to go into all of that. But it's like that, the housing boom and bust in US playing out in the energy market underscores the need for the shift. And you know, the prospect of cleaner energy domestically produced, lower cost, all of that makes sense. And can you know, it's not just the right policy, but you don't have to be that good a politician to be able to sell that I would think, to people who are suffering. What you do need to do is help bridge people from where they are today. And the circumstance and, you know, if they didn't think it was an exceptional circumstance, you know, Russia, violating the territorial sovereignty of Ukraine and the knock-on effects of that, I think should have disabused everyone of that.

ML: I would love to spend more time we were just going to get into the politics, and I would love your views on that. And then I could ask all sorts of leading questions about what you are going to do next, but I'm going to draw a close there because I promise to get you out in time for your next meeting. Mark, thank you so much for spending time with me here today on Cleaning Up.

MC: That was my pleasure, Michael and I hope to see you again in Scotland, Canada, wherever, somewhere.

ML: Perhaps in Sharm el-Sheikh at COP 27.

MC: Hopefully. High Ambition.

ML: High ambition. Very good. Thank you have a good day. Bye-bye.

MC: Bye-bye.

ML: So that was Mark Carney, former Governor of the Bank of England, and founder of both TCFD, the Task Force on Climate-Related Financial Disclosure and GFANZ, the Glasgow Financial Alliance for Net Zero. My guest next week will be John Pettigrew. He's the CEO of National Grid. So please join me at this time next week for a conversation with John Pettigrew. Cleaning Up is brought to you by the Liebreich Foundation and the Gilardini Foundation.