Felix: Hello and welcome to this Carbon podcast from Argus Media. I'm Felix Todd, Deputy Editor for the Argus Global Carbon Report, and today I'm joined by Harshad Kolpyakwar, Head of Product Management and Energy Solutions at FIS Global. Hi, Harshad, how are you today?
Harshad: Hi, Felix. Thank you very much. I'm doing well. How are you?
Felix: Great to hear it. All good here. We'll be speaking about the recent development of carbon markets, what lies ahead, and how energy trading and risk management systems, ETRM systems, can help. There are certainly a lot to discuss in carbon markets these days, but for this conversation, I think it would be best to first provide a little context. We would probably be here all day if we were to go right through the history of carbon markets in its entirety, but perhaps Harshad, you could kick things off by giving a brief overview of how carbon markets have evolved over the past few years and talk about some of the issues that have cropped up. We know, for example, from our conversations with the market that there are a lot of concerns about a lack of transparency, very large discrepancies in pricing, and the absence of a single central authority. It'd be great to get your thoughts on these areas.
Harshad: Absolutely, Felix. And then it's important to look at the big picture. Carbon markets have evolved rapidly, there is no doubt on that, but not without their growing pains. And this is where I see a major shift. We are seeing that a market which is growing, but it's also growing in complexity. Fragmentation, we all have been struggling with that. The industry has been struggling with that. Different jurisdiction, different rules, wildly different pricing. And the voluntary market, most of the time operate in silos, which basically, you know, as you correctly said, lack of transparency. Prices can range, like, from $1 to $100 a ton depending on the kind of project you start, depending on the certifications you're looking at. And that's the spread, which I feel like introduced this real risk, right? Especially when carbon is part of your broader energy portfolio.
And it sure is, look at Europe, it's part of your portfolio. They have become a period of elastic alongside your power and gas and renewables. It reduces the volatility. Traditional EPRM systems probably won't build to handle that asset class. If you are not managing all of your exposures in one single system of repo, which is your ETRM, your exposure is not centralized and you'll be just buried in your spreadsheets. I think this is where I see a lot more demand from the industry for a platform which can handle these multiple commodities. So that's kind of where I feel where the market is heading and the lack of transparency and the price variations and the jurisdiction causes, you know, challenges for foreign industry.
Felix: Very interesting. It seems that, like you say, a lot of these issues seem to apply to the voluntary carbon market in particular which are, I suppose by nature less regulated, so issues around the lack of standardization are prominent, and we understand that a lot of buyers are concerned about reputational risk of buying from projects that may have come under media scrutiny. Essentially, it seems that there is a lot of onus on buyers to conduct their own extensive due diligence, which might be hampering demand in a market that is already complicated enough. Would you agree with that? What are your thoughts on this?
Harshad: 100%. So the VCM is where we see the most innovation and the most uncertainty. The lack of standardization is a big issue. Different registries, different methodologies. My knowledge, there is no universal benchmark for inequality. So reputational risk, and the owners, if you put it on the buyer, you know, it makes it challenging, it impacts your reputation. You may have financial, you know, exposure [inaudible 00:04:37] control. So this is where technology I feel can help. And we started looking at the registries. I think integration with different registries, automating the validation is key. And I think this is where we have been focusing on is to sort of bring in some trans-standardization, automation, and integrity to the entire workflow and the lifecycle of your certificates or your voluntary markets is key.
Felix: Absolutely. We know there are various quality initiatives and things being brought in to try and improve the integrity of the market, but I suppose it doesn't really address the core issue of just how complicated it is for a buyer, a prospective buyer looking to engage. We seem to be very much on the same page with regards to the issues facing carbon markets today. But I suppose that kind of brings us to FIS global solution. Can you explain this concept and talk about how it might be able to address some of the problems that we've outlined so far?
Harshad: Yes, absolutely. I think fundamentally speaking, FIS' energy trading, risk, and logistics platform, which is formally known as Aligne, it was built and designed to handle multiple commodity portfolio, right? And that means power, gas, renewables, and environmental commodities will reside in one system. We have customers, you know, using those multiple asset classes within the platform. And I think importantly, from the risk perspective, that is [inaudible 00:06:12]. If you're holding EUAs, you know, VRs, RECs, biofield certificates, you need to track your exposure in real time across all of them. We offer this market-to-market valuation, inventory management, you know, compliance, workflows, reporting, all sort of encompassed into one integrated platform.
With the connectivity that I earlier mentioned with the registries, what we are working on, we are establishing partnerships with or MOUs with some of the registry providers so that your even certificate data sets, they flow seamlessly into the system. And inventory management of carbon is not like an inventory management for your bottles, right, have their own complexities and their attributes that need to be modelled. And the flexibility is what we bring to the market. So that's the sort of multi-commodity approach where all of your portfolio within one platform, your risk is managed from one platform, you are not blindsided to the exposure on the carbon market with the massive spreads of different jurisdiction that affect your portfolio is that standardization journey that we started and will continue to build on.
And then the other aspect is the market, as we saw, you know, is going to grow. I mean regardless, transparency is going to improve, you know? I think we'll have to leave that to the regulators. We can facilitate, but it's for the regulators to sort of make it more robust. But as it becomes more robust and, you know, induces the transparency, the complexity is still going to remain. Every organization, every region, every country will have their own rules and regulations where you can offset your carbon. So from the technology standpoint, it's important that our tech stack that we bring to the market supports that complexity and centralization and the scalability which will come.
I think the market, I think will be like hundreds of billions of dollars very soon, if not already, right? And this ultimately will mean your number of trades will increase in your platform. And putting that onto a more scalable platform, you know, we all talk about cloud-native infrastructure, elasticity, and scalability, but I think this is what is going to be so critical for the industry. So that's where I see a lot more focus and we have been focusing as FIS on these areas.
Felix: Very interesting. So it's not just about addressing the existing issues, it's also about scaling the market. I wonder if you could talk a little bit more on the latter point about how this system can service the growth of a market that is by all accounts set to grow exponentially over the next decade?
Harshad: Sure. I think one is the agility and rapid updates, you have to go to the cloud. Markets now only pay, like, 50 billion maybe in the next six, seven years, right, or even before that. The financial instrument that gets traded on either, you know, the OTC markets on exchanges will be adding more liquidity into the space. Traditionally when your number of trades grow, when your exposure goes global, you need a system that is flexible, that is built scale. And we feel that we offer that. So the cloud deployment integration with various registries now that are already trying to bring that standardization and transparency for automation, optimizing your portfolio across the multiple commodities for your strategic decision-making, these are the things that, you know, will continue to be in more demand. And everything boils down to financial risk management in the end, right? So being able to manage that portfolio effectively, managing the carbon inventories, streamlining your purchasing operations, making sure your compliance reporting is accurate is where we think the growth in that carbon market is also going to demand.
Felix: Great. Fantastic. Well, that's all we've got time for today. Unfortunately, as with anything carbon, we could probably talk about this for hours, but we'll have to leave it there. Any data and analysis provided by myself today is created using the Argus Carbon Service. You can request a free trial or more information by visiting www.argusmedia.com/argus-carbon. Finally, a big thank you to you Harshad from FIS Global for providing your insight.
