It’s not every day you get to have a fireside chat with a globally recognized expert on climate policy, carbon markets, and the economics of climate change, and we’re delighted to be able to share this conversation with Nathaniel Keohane, the President for the Center for Climate and Energy Solutions (C2ES).

Nat is also a valued member of our strategic council and has more than 20 years of energy and environmental policy experience in academia, government, and the non- profit sector. During his time at the Environmental Defense Fund, he led the consultation project which led to the formation of Climate Catalyst.

Here are our five key takeaways from our conversation:

We invite you to dive deeper into this interesting conversation below.

Q: What do you see as the state of play in Asia on climate progress?

Asia is so vast. You have China, which is simultaneously the world leader of renewable energy – certainly wind and solar – and increasingly electric vehicles (EVs) and so on – and also building more coal plants in the last 10 years than anybody else and continuing to increase its emissions. It is unprecedented to have industrialised as a nation and lifted hundreds of millions of people out of poverty, and accelerated the transition to clean energy. The West didn’t do that. The West industrialised over centuries. That has to be recognised, but at the same time for the sake of the climate we have to not just see an acceleration of clean energy, but we have to see emissions start to go down. China shows this tension more than anywhere. It is all well and good having lots of solar and wind installed, and lots of EVs but if you are not cutting emissions – that’s what counts. We need to see China peak and decline.

In India the challenge is so different. It is about making sure India can thrive as a country, and grow and provide jobs to its young workforce and continue to develop and do that on a different path. The world does not need India to reach a peak in carbon emissions in the near-term. Rather, India’s challenge is how to grow its economy without the massive increase in carbon emissions that has come with economic growth elsewhere. India has the opportunity to blaze a fundamentally different path for the future, taking advantage of its enormous renewable energy resources, of its technology and its engineering prowess. I think the fascinating thing about India is that it can be a model for so much of the rest of the world. China seems like an outlier, partly due to its size, its structure, its politics. India, as a vibrant, messy democracy of 1.4 billion people, can provide a new model for low-carbon growth.

Q: How would you assess the current state of climate policies in the EU?

The EU has long been a leader on climate action. The EU Emissions Trading Scheme (ETS) is a cornerstone of this, and I think it’s an underreported story. Of course, I’m coming at this as an economist and someone who thinks a lot about market-based mechanisms. I’m old enough to remember the justified criticism about the ETS in its pilot phase (from 2005-2007), and it certainly suffered growing pains. We all know there are no silver bullet policies – and the EU itself has a range of policies in addition to the ETS. But I think one of the things that has been so extraordinary about the ETS is that it has become the bedrock of the EU’s leadership on climate change, which to me provides a really good case study of how to build robust institutions and strengthen policy over time.

At the same time, we can’t talk about the EU right now without mentioning the on-going challenge around energy security and climate. I think the bloc has come through remarkably well from the knock-on effects of Russia’s invasion on Ukraine and what this has meant for natural gas supplies and so on. There are some negative areas you can point to, but the EU has managed to make sure it continues to lead on climate when under pressure. As an observer from the other side of the Atlantic, I see the EU as being in the vanguard – and as with anyone on the leading edge – it comes under political challenges. I think these are absolutely addressable. People who are passionate about addressing climate change need to be really smart about how to make sure climate action is connected to and improving people’s everyday lives, and make sure they are leaning into affordability and economic growth. There are smart policy designs to do that. But I think as a movement, the climate community is sometimes guilty of forgetting that most people care about a lot of things other than climate change.

I don’t see this as an irrevocable tension. We know that it’s not a matter of choosing between climate policy and economic growth. In the long run – and short to medium run – the only way we have a thriving economy is a low-carbon economy. There is no path to high-carbon prosperity. So we have to push forwards on this path. There are lots of ways to do it that really drive technological innovation and economic growth. But I think because of its positioning as a leader, the EU is really coming up against the front edge of those.

Q: Looking ahead, how do you see the balance of regulatory and market-based approach to climate policy evolving? Particularly in these two regions?

Europe has found the balance, and continues to move ahead with addressing the political economy issues we spoke about earlier. In Asia, everything is happening at speed. If we think about the use of market-based approaches, the most interesting and vibrant places are in Asia.

China, for example, has an emissions trading system, but without a proper cap on emissions. How do you transition that to something that applies to more sectors and really drives emissions down? This means taking it from a flexible mechanism to manage growth and reduce emissions growth in the margins to something that really caps emissions and drives them down. That will be really important, but China already has so much of the policy and market infrastructure in place to do this. India is fascinating in terms of some of the state level work on cap-and-trade and emissions trading programmes, in Gujarat and elsewhere. It is positioned in an interesting way to think about markets. They also have the energy efficiency trading piece. They have some prototypes they can play with. And you have strong market-based approaches already in Korea, Japan at the municipal level which they are thinking about expanding.

I think one of the interesting things ahead will be the potential interaction between the compliance carbon markets and the voluntary markets. In the West, we think of those things as very different. The EU has the ETS, the US doesn’t – we have some things at state level – so companies are relying on the voluntary carbon market. Those are distinct things, I’m not trying to say they blur together; but there are interesting ways for them to work together. Singapore, for example, has a carbon tax and is exploring what kind of programme would allow companies to reach into the voluntary carbon market for high-integrity credits and then use those to meet a compliance mechanism. They are looking to learn from the work of the voluntary carbon markets and organisations like the Integrity Council for the Voluntary Carbon Market (ICVCM) to set its standards for integrity.

Now that bridge between the voluntary markets and the compliance markets is very interesting. Korea is thinking about this, Japan is thinking about this. Hong Kong and Singapore are both positioned to be trading hubs. So, Asia is the place to watch, and I think the active innovation and growth in the market space is happening particularly in East Asia, in Hong Kong, Singapore, and this is being fed by the growing markets and interest in Indonesia and elsewhere.

Q: How do you envision public-private partnerships play a role in accelerating climate finance mechanisms?

It is critical. Every high-level analysis of climate finance comes to the same conclusions: we need more climate finance, public finance has to play a role, but it is not nearly large enough; so we have to think about how we tap into private capital. But we can’t just exhort asset owners and managers to do more. They are going to go where the money is and follow profits and returns. So getting private finance into low-carbon solutions means leveraging policy, public capital and philanthropic capital. We have this massive pool of private capital – trillions and trillions of dollars – that could be incredibly effective but is going to go where the returns are. How are you being strategic about understanding where the obstacles are? How do we make the returns – as much as we can – reflect the value of reducing emissions and to society? And remove barriers that don’t need to be there? This means using public policies to address things like exchange rate concerns, political risk, technology risk, performance risk. Some of these risks are real and some are perceived. Part of the public role is simply public finance. But part of it is how to improve policies that clear the hurdles that are “own goals” – policy related obstacles. And part is about how you layer different forms of capital. To use public capital in ways that only public capital can be used and then use that to leverage private capital. Public-private partnerships can be part of that.

Public-private partnerships are essential to climate finance. The ones I’ve worked on have touched on markets. Carbon markets are certainly not the only way to mobilise finance, but they are valuable. There is built-in measurement, built in metrics around the reduction in emissions and the value of those reductions. And the revenue from carbon markets in some ways looks a lot like grant funding. It doesn’t come with an equity claim or a debt claim. It is very flexible finance if you can figure out how to get it to flow.

I’ve been involved in the LEAF (Lowering Emissions by Accelerating Forest finance) coalition which is very much a public-private partnership. The governments of the US, UK and Norway have combined with a number of private companies to mobilise capital for protecting tropical forests, using carbon markets. It’s starting to get traction as we get transactions underway, as tropical forest countries start to come in and start reducing their emissions and generating credits. I’m also part of the Energy Transition Accelerator (ETA), which is at an earlier stage, trying to do something similar. It’s a public-private partnership to mobilise finance for the just clean energy transition. I think LEAF is on the cusp of major success and the ETA will hopefully follow that path.

Q: How can we effectively address the perceived risks associated with climate-related investments and encourage greater adoption of impact investing strategies?

There are definitely perceived risks that aren’t real but there are also real risks. Wrong perceptions can be addressed through sharing information around technologies and investment conditions and so on. But there are lots of real risks: exchange rate risks, technology risk, government risk, delivery risk. We need to think about ways we can use public capital, use impact and philanthropic capital and public policy to address those risks. I think sometimes there’s a desire to overlook some of the real risks. For example, it is riskier to invest in low-carbon solutions in emerging economies than in the US: full stop. And we have to recognise and address that.

There are different theories around impact investing. Are we talking about an investment that seeks a market return plus impact? This is good, but by its nature doesn’t provide an additional source of finance. Or are we talking about capital which is looking for impact as part of the return? This is much scarcer and more valuable. People throw around the term impact investment for both of these. But the latter – capital that is willing to take a lower rate of return in terms of investment, that is willing to be at a different place on the risk-return trade off – is incredibly valuable. I think there is room for philanthropic foundations to do more and what we call in the US programme-related investments (PRIs). This then raises questions about how to measure and be rigorous about impact, and that’s where carbon markets and other forms of metrics, measuring biodiversity, measuring economic development can help.

Q: What are the key challenges and opportunities associated with innovative financial instruments or mechanisms, such as carbon markets, green bonds etc?

I think there are lots of opportunities, we’ve talked about carbon markets specifically, and three related challenges that come to mind. The core one is building confidence in integrity. This is front and centre for carbon markets which run into a lot of questions around integrity and quality. Some of those questions are well-founded. Some are exaggerated. I think there is an ideological campaign against carbon markets, which is too bad. I don’t think any of us working on climate have the luxury of attacking what other people are doing because we disagree ideologically. But we need to make sure that carbon credits are real, that they have high-integrity. And if we can do that, then let’s use them as much as we can. They are not a silver bullet but why would we turn down the option of having 10, 20, 30, 50 billion dollars of finance flow through markets? There is a lot of work being done on that core integrity concern, by the ICVCM and the VCMI (Voluntary Carbon Markets Integrity initiative). That integrity question comes up in other areas like green bonds. You want to make sure you’re delivering on what you say you are. It is critical, as no one is going to invest in them if they think they will be attacked for greenwashing.

The second challenge, which is related, is measurement. Rigorous, transparent measurement is going to be key. Demonstrating the carbon markets are really getting emission reductions, demonstrating that green bonds are really yielding the broader green returns and so on.

And then third is systematisation. If you look at the really big capital markets, they share characteristics of fungibility, liquidity, and debt. There are instruments that are widely understood, that can be scaled up, whether that is exchange-traded instruments or just instruments people are comfortable with and can use to deliver finance at scale. A lot of this is standardisation, having a systemic approach, and it’s been largely absent in the carbon market. It is almost a cultural problem. We want to be innovative, to do something new, do the next big thing. But each first of its kind thing is going to be limited. So how do we move from that to being scaled, more systematised and standardised? In the carbon market, this is not about thinking about every project as a unique and wonderful story, but about how we deliver climate finance at scale. How do we do that through mechanisms that work at sectoral and jurisdictional levels? How we do that is through markets that are liquid, deep and fungible. That’s the only way we’re going to get to billions or tens of billions of dollars and the scale that matters.

Q: What is the role of climate philanthropy in driving climate innovation and scaling solutions?

One of the things we did when coming up with the idea of Climate Catalyst was a huge number of interviews with people from across the climate space; philanthropies, NGOs of different sizes. What Gemma Mortensen, Amanda Leland and I consistently heard from NGOs was the need for philanthropy to do two things.

Firstly, to fund genuine strategic collaboration. This means self-identified groups saying “here is what we want to work on, we’re moving forward strategically and together.” There are lots of models of what I think of as fake collaboration, as when an organization says “I have this pot of money but my funder says I have to collaborate, so why don’t you come and help me carry out this strategy I’ve developed.” That is not real collaboration. Genuine collaboration is about getting the right people in the room, co-developing a strategy and executing it together. So funding that genuine collaboration is an important role for philanthropy and Climate Catalyst is an incredible model for that.

The second thing we heard, particularly in the context of driving climate innovation and scale around solutions, is that philanthropy should think more about investing in high-impact organisations, leaders, and policy entrepreneurs. The best philanthropies invest in organisations, leaders and teams; simply fund the people doing the work and then let them do the work. There is an increasing tendency to want to come up with a fully fledged strategy as a philanthropy or re-granter and then plug organisations into that. This isn’t the recipe for success, or growing the field. If you look at how venture capital, private capital and markets work, they invest in people, ideas, organisations, and invest to scale them along the way. Philanthropy should of course have an idea where they want to focus, I don’t mean they should be scattershot. A funder should have an overall strategy of where it thinks it wants to focus, the problem it is looking to solve and where it can contribute. Philanthropic funders can be amazing partners by bringing their own expertise and perspective, and point out people to work with, or things to think about.

But the way to get innovation at scale is to have confidence and trust in entrepreneurs and supporting them to grow their organisations. The Skyline Foundation made Climate Catalyst possible, by supporting first the concept and then the organisation at an early stage. That has unlocked the growth and impact it is now achieving, and other funders are now joining which is fantastic.

Q: What do you see as the long-term role and integrity of established or voluntary carbon markets for decarbonisation pathways in the context of the role of avoidance and reduction of high emitting activities in the first instance?

We have a mantra at the ICVCM: build integrity and scale will follow. We all want scale. When thinking about climate finance, we need to be thinking about scale. We need to think about the gigatonne scale and about tens of billions of dollars. The point of the mantra is that the only way to get there in the voluntary carbon market – as both a practical and moral matter – is to do it with integrity. I see integrity as foundational to scale. First we build the guardrails, assessment and guidance, and all the tools we need to ensure the supply of credits has high integrity and can be used by companies with high integrity. And that will give the confidence we need to scale up.

When it comes to the voluntary market, we always have to think about timeframes involved. If you want something to happen in 2050, then you start thinking how that applies today. What do I mean by that? Voluntary markets are a critical mechanism we have available today to scale up climate finance. But I don’t want to be relying on them in 2050. That doesn’t mean we’re explicitly designing them as an on-ramp. We’re designing them because there is a need now for climate finance and an unmet need for companies to meet their climate strategies. We can bring those together and solve both problems at once in a powerful way to help cut emissions and drive sustainable growth in the global south. It is 2024, almost 2025, and we need money to flow in the next five to ten years. But over time we also need to put in place much more ambitious policies.

Q: What are your perspectives on the nature-climate nexus as a dual approach for impactful longer-term investments for people, the planet and profit?

Nature based solutions are integral to addressing climate change. There are massive, large-scale opportunities in things like halting tropical deforestation. We won’t meet our climate goals if we don’t do that. There are also significant opportunities in agriculture and management of soils, but they are harder to measure. We have blue carbon in mangroves and coastal forests – there is lots of potential there. I see this like a Venn diagram. There is an overlap between nature and climate solutions and that overlap is important. Those same ecosystems are sustaining livelihoods and societies.

Like many in the climate movement, my origin story is about caring for natural places. Now, I spend my day thinking about climate. As I said there is a Venn diagram with an overlap, but it is worth keeping those distinct. We need to understand when we are doing that for the sake of the climate, and the sake of biodiversity. Those are both important. But different tools and mechanisms are going to be useful for different things. We are further along in building the economic case for investment in low-carbon solutions, and I see people wanting to jump to biodiversity markets and nature markets. I would love to see that but it is hard. And as a climate hawk my focus is on continuing to build that out for climate and if we can find the overlap in the Venn diagram I think that is an amazing place to be.

I know there is a fair amount of skepticism in some quarters about using carbon markets to drive investment into nature-based solutions. I think one way to start addressing that skepticism is to focus on an area where we should be able to build broad agreement: the role of companies and their responsibility for addressing emissions in their value chains broadly. To start with we should look at areas where you can address climate at scale and address business models. I would start with the sectors and companies that have nature in their supply chain, that have a deep interest and responsibility to address and promote natural climate solutions. For example, if you are a company that is selling meat or soybeans, the biggest risk of the emissions in your supply chain is tropical deforestation. Those are great sectors to think about addressing the nature-climate nexus. Let’s start there.

We need to make forests worth more alive than dead. We need to make it worth more to take carbon out of the sky and put it in the soil than to do the reverse. We need to reward innovators who figure out new ways to reduce emissions. And we can do that, we just need to align the incentives.

We’re grateful to Nat for taking the time to speak with us and explore these diverse and critical topics. You’ll find alot more information about the work he leads as well as a number of insightful resources over at Center for Climate and Energy Solutions (C2ES).

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