Companies continue their attempts to mitigate their environmental impact. But are some merely buying their way out of the problem using carbon offsets? Global Head of Sustainability Research Stephen Byrd and Head of ESG Fixed-Income Research Carolyn Campbell discuss. ----- Transcript -----Stephen Byrd: Welcome to Thoughts on the Market. I'm Stephen Byrd, Morgan Stanley's Global Head of Sustainability Research. Carolyn Campbell: And I'm Carolyn Campbell, Head of Morgan Stanley's ESG Fixed-Income Research. Stephen Byrd: On this special episode of the podcast, we'll discuss the voluntary carbon offset market and the role carbon offsets play in achieving companies' decarbonization goals. It's Thursday, February 23rd at 10 a.m. in New York. Stephen Byrd: As extreme weather becomes the new normal, and sustainability rises in importance on investors' agendas, many companies are working towards mitigating their environmental impact. But even so, there's persistent public concern that some companies claiming to be carbon neutral may in fact be "greenwashing" by purchasing so-called carbon offsets. So, Carolyn, let's start with the basics. What exactly are carbon offsets and why should investors care? Carolyn Campbell: So a carbon offset represents one ton of carbon dioxide equivalent removed, reduced or avoided in the atmosphere. Companies are buying offsets to neutralize their own emissions. They essentially subtract the amount of carbon offsets purchased from their total emissions, from their operations and supply chain. These offsets are useful because it allows a company to take action against their emissions now, while implementing longer term decarbonization strategies. However, there's concern that these companies are just buying their way out of the problem and are using these offsets that do not actually do anything with respect to actually limiting global warming. So, Stephen, some of these offsets focus on reducing carbon dioxide emissions, while others aim to directly remove these emissions from the atmosphere. Between these so-called avoidance and removal offsets, how do you see the market evolving for each over the next 5 to 10 years, let's say? Stephen Byrd: Yeah, Carolyn, I think the balance is set to shift in favor of removal over the coming decade. So we developed an assessment of the potential mix shift from carbon avoidance to carbon removal projects, which shows the long term importance of removal projects as well as the near-term to medium term need for avoidance projects. We're bullish that over the long term removal projects, and think of these projects as projects that demonstrably and permanently take carbon dioxide out of the atmosphere, as generating enough carbon offset credits to reach company's net zero targets, again in the long term. However, over the near to medium term, call it the next 5 to 10 years, we expect the volume of removal projects to fall short. As a result, we think carbon avoidance projects, and these would be projects that avoid new atmospheric emissions of carbon dioxide. These will play an important role as offset purchasers shift their mix of carbon offsets towards removal over the course of this decade. Carolyn, one of the big debates in the market around voluntary carbon offsets involves nature based projects versus technology based projects. Could you give us some examples of each and just talk through, is one type significantly better than the other? And which one do you think will likely gain the most traction? Carolyn Campbell: Sure. So on the one side, we've got these nature based projects which include things like reforestation, afforestation and avoided deforestation projects. In essence planting trees and protecting forests that are already there. There's also other projects related to grasslands and coastal conservation. On the other side, we've got these tech based projects which are actually quite wide ranging. This includes things like deploying new renewable technology