Why Microsoft’s Carbon Removal Pullback Is Such a Big Deal

This week's episode of ShiftKey is brought to you by Lunar Energy, brilliantly designed Endless Clean Energy. He maps labs recently sat down with Sam Levers, Director of Product at Lunar. The scale of VPP programs in the USA is remarkable. Last year, in the DSGS program, the Bredel Group put out a report, there was over 500 megawatts dispatched and one dispatched last year, and one didn't start with the most complex market structure, but the core goal should be the same, which has recognized the true sort of physical and economic value of these residential assets, and by doing so, costs of managing the grid can reduce, customers can save money and make money, and more renewables can reliably be brought online. Listen to the end of this week's ShiftKey to learn more about Lunar Energy and its vision for the future of home energy and the power grid. Hello, it's Wednesday, April 15th, and there's big news in the small but extremely important world of carbon removal. Last week, Microsoft informed some partners and suppliers that it's pausing its carbon removal purchases. I first reported the news here at Heatmap on Friday, Bloomberg and Carbon Herald have confirmed the story as well, and it's a huge deal for the carbon removal industry, that is the set of companies trying to develop technologies that can reduce or eliminate heat-trapping carbon dioxide from the atmosphere. Sometimes you'll hear it get called CDR for carbon dioxide removal, and no matter what you call it, in recent years, Microsoft basically was the industry. Since 2020, it's bought more than 70 million tons of carbon removal, which is 40 times more than any other organization or coalition is purchased. The CDR scientist Julio Friedman told me that there are lots of companies out there whose whole business model was basically we're going to develop a CDR technology, and then we'll sell it to Microsoft. Well, now Microsoft won't be buying anymore, at least for the time being. I think it's important to intervene here and say CDR is not a nice-to-have technology. The IPCC says we'll need carbon removal to meet the Paris Agreement's goals, and by one estimate, the world will need to be removing seven to nine billion tons of carbon a year by 2050 in order to maintain its Paris targets. Now, Microsoft, for its part, says its program isn't totally over. Melanie Nakagawa, their Chief Sustainability Officer, told me in a statement, quote, "Our carbon removal program has not ended. We continue to both build on and support our existing portfolio of nature-based and technology-based solutions. At times, we may adjust the pace or volume of our carbon removal procurement as we continue to refine our approach towards sustainability goals. Any adjustments we make are part of our disciplined approach and not a change in ambition." But even if just the pace and volume are changing, it's still a big deal. We are going to need this technology, and we just lost its biggest buyer. So what comes next? Here to chat about it today is Jack Andrews in Kavanaugh. He's the Director of the Carbon Management Program at the Center on Global Energy Policy at Columbia University, and he's the President of Carbon Middle Management Incorporated. He was previously Policy Manager for Carbon Management at Breakthrough Energy. Jack and I talked about the history of CDR, what Microsoft's departure might mean, and what's coming next for the industry. I'm Robins and Meyer, the founding Executive Editor of Heatmap News, and it's all coming up on Shift key. Jack Kavanaugh, welcome to Shift key. Thanks for having me, Alan. Rob, good to see you. Good to see you. So let's start here. Why was Microsoft such an important player in the carbon removal system? Yeah, well, I think it's important to do a little under a thing of the history of carbon removal, how we got to where we're at today. There was a lot of seminal work done in the 1990s, the early 2000s about this crazy thing called Director Capture, where you could remove CO2 from the A&B and Air, and a lot of that was done by Clash Lockner and David Keith, who have both founded different Director of Capture Company as David Keith, Carbon Engineering, which was eventually sold to Occidental Petroleum, and then it was mostly R&D academic research, and then in 2019, Stripe, the payment processing company announced $1 million for purchasing of carbon dioxide removal. And then in 2020, Microsoft announced their net negative by 2030 sustainability goal. And in 2022, that was followed up by the Frontier Fund, which was Stripe, following on with a number of other partners, a $1 billion advance market commitment. And so up until that point, what we think of today is carbon removal and the carbon removal market really didn't exist. And so Microsoft was the first to get in and say we are going to put relatively large capital outlays towards purchasing carbon removal alongside what Frontier did with the advance market commitment, and essentially kicked off a massive hype cycle for CDR that went across some government policy and certainly private investment. That history is super helpful. And also I feel like it is worth kind of hammering that at least when I started being a climate reporter, which was like 2016, 2017, 2015, carbon removal was seen as this purely science fictional technology. Like basically something we might need to develop down the line, there had been work on it done. It was a little taboo to talk about it because the sense was that talking about it would discourage the work of emissions reductions. And there was a sense that it would be really hard and I mean, it is really hard, but there was a sense that it was like something to talk about in decades to come, but not something we were going to be talking about scaling in the next 10 years. And I do feel like the big milestone there, you know this. I'm just injecting it into the history was the 1.5c report from the Intergovernmental Panel on Climate Change, which kind of said, hey, if the world wants to hit 1.5c or even 2c, first of all, it would be really bad for us to hit 1.5c. It would be lots of near term consequences. And of course, it's pretty clear those are going to happen now, but there was a lot of energy around avoiding that. But also if we want to not be at 1.5c by the end of the century, then the only way to do that is to know that we're going to overshoot in the middle of the century and then draw down carbon at the end of the century. And that will require carbon removal. And so therefore we need to start working on this technology now. And at least for me, that was the point as a reporter where it went from like, is this real? Should I be thinking about this? Like, does this matter? It seems like it would be a useful thing to have, but maybe there's a reason nobody's talking about it to like, oh, this is just like a tool that we are going to need to deal with climate change and we need to start working on the tool now. Yeah, absolutely. And you know, not to, there's a much longer history than I laid out. I mean, to your point on the APCC report, my colleague at Columbia, Noah Daich founded Carbon 180 around the time of that report coming out, which is the first CDR-specific NGO. And there were all sorts of folks that were talking about thinking about building a lot of the frameworks and the federal programs that we have today and building the bedrock of scientific understanding and R&D that have become companies today. And so a lot more happen, but you're to the right that that report really kicked like broad carbon removal from, you know, the sort of fringes of climate discussions into a more focal point that we are going to need this at a relatively large scale to reach any climate goals 1.5 or above. Yeah, so without that context preloaded then, what was the importance of Microsoft to the carbon removal market because it seemed to play a pretty essential role? Yeah, so as you reported, I laid out in a piece that I published as well. Microsoft was somewhere around 80% of all voluntary carbon removal purchases in the market. And so just to be clear, voluntary means voluntary. This was done not because of any sort of compliance regulatory mechanism or, you know, some sort of incentive to be able to purchase. This was part of their sustainability plan. And being 80% of the market is a really interesting position to be in. And Microsoft, not just on the purchases that they made, the billions of dollars, they have allocated towards carbon removal, they haven't just done that, which in and of itself is an incredible thing to be able to get through all the inner machinations of a four-private business to be able to do this with discretionary spending. But they also then had the ability to sort of shape criteria, standardized contracts, all of these sorts of enabling pieces of financial and project infrastructure to be able to de-risk some aspects of the carbon removal market, the voluntary market. And so, yeah, they were quintessential in being able to buy, build, and then also bring in other buyers into the market to some extent. Now, they tried very hard, I'm sure they wished that more folks would have joined them. But yeah, if you're 80% of the market, you are the market, essentially. It's funny. I've been reporting out the consequences of this pullback from Microsoft or this pause or whatever we're going to call it. And I think a number of folks in the industry have said, well, Microsoft did actually was amazing. I mean, they set this ambitious goal and they have met it. And they bought, I think, depending on how you count, 20 to 25 times more carbon removal than anyone else. It's that that hasn't been followed by other companies. The frontier companies are in second place, right? But it's after that, no one has shown up to the same extent as Microsoft has. And that's really significant. So I guess that naturally leads to the next question, which is how bad is it that Microsoft has gone, what does it mean for the carbon removal economy? And let's bracket that, like, stuff should happen next. I mean, let's bracket that, but let's just kind of track fallout for now. How bad is it that Microsoft has now gone, given that they were 80% of the market? Yeah, so starting out, it's obviously not good, right? There's no way to sugar code losing potentially 80% of the market is good for an industry. However, you look at broad sweeping trends across the voluntary carbon market across public policy, which I know that we'll get to. And we were already in the downturn of the large-scale venture capital and some project financial investment that went into CDR. And so what you have is hundreds of companies that are doing some form of carbon dioxide removal. Very few of those have a credible ability to claim that they are going to remove the amount of tons that Microsoft was buying. Microsoft was buying relatively large tonnage amounts, right? The hundreds of thousands to potentially millions of tons per purchase. And so not that many companies had the ability to scale. We're at the appropriate time in their technology to scale that big. And so it's actually a relatively entire CDR industry, a fairly small subset of companies that could even have considered Microsoft as a potential buyer. Now that leaves right the 20% of the market that tends to buy and slightly sell smaller amounts and said you have all of those folks, including the potential large-scale providers now fighting over 20% of the market. And fundamentally what it will mean is just an acceleration of something that was going to happen anyway, which is consolidation and bankruptcies or dissolutions. This was always going to happen at this moment because we don't have supportive policy. And everyone in CDR knew. It was in every conference, every conversation knew that this moment was going to happen. There was going to be a memo where Microsoft wasn't going to buy at the clip that they are anymore. And so you really could have had the story written for two years. And it was just like hit send when it occurred. And we're just at that point right now. Something that's come up in my reporting that I think is now kind of an interesting facet of the next step here is that because Microsoft was buying so much more than anyone else, there was no one else who was able to set prices with them. They were kind of setting the price and they were doing all the price exploration themselves as one firm, just obviously suboptimal. Let's put it that way. And very tricky as I think as a place to be in as a buyer. And I guess now there'll be a lot more competition for buyers. And so maybe the price of carbon removal will fall. I don't know. But one of the problems with no other buyer showing up is that Microsoft basically had to do all the price discovery itself. What are the next steps for carbon removal? It sounds like there is going to be a wave of bankruptcies. To some degree, maybe that's a little inevitable. It's a growing technology. But on the other hand, we'd like to retain the ability to continue to make advances in carbon removal technology. So like what should happen next across the market? You're absolutely right. There are going to be consolidations. There are going to be bankruptcies. The consolidations are going to increase the runway for the companies that will consolidate to try to hold on as long as they can. There is an organization called Control Us that Jason Hokeman started up that is looking to retain some of the IP for some of these bankruptcies. My colleague Emily Phanna Corvo had a story about it, which will stick in the show notes. Yeah, yeah. And I think it's an interesting model because there is an incredibly diverse set of technologies within every CDR pathway. There's a hundred different companies or something like that. They all do something slightly different. And you can imagine a world in which there is incentivizing policy for carbon removal. That IP could be valuable to folks to be able to learn faster, to build quicker. I also just want to take a brief note just a moment to say, I'm like, what happens next is it is sort of incredible to me that there was a moment in time that there were folks at Microsoft that got in with the C-speed with the people that were allocating capital within the company and were able to carve out this program. That is amazing. This is voluntary discretionary spending at billions of dollars. And although the tech companies have free cash flow to be able to spend on this, having that same conversation today almost feels impossible. Like going into, and Microsoft did have these conversations with a lot of other private companies about trying to spur folks into the market. And that's sort of incredible. And so one pathway forward, I think that it's been clear that sort of shut off is I don't have a lot of confidence that they're going to be new private buyers at a meaningful amount. I just don't think when you look at the broad fiscal reality of the world at the moment that it just makes sense for any amount of discretionary spending to be spent on carbon removal, let alone many other climate technologies. And the key kind of elephant in the room here, right, is that a lot of the private spending on climate technologies be it carbon removal or renewable construction and development or electric vehicle manufacturing, frankly, was coming from these big tech companies. I mean, Amazon is an investor in Rivian, right? And is it major source of offtake for Rivian? It buys a lot of Rivian delivery vans, Apple and Google and Microsoft have these very aggressive renewable acquisition targets. And part of what's happened over the past three years is that all the companies that we're doing basically directing some amount of free cash flow to climate investment have become basically cash strapped light industrial companies that have to build as much physical infrastructure as they can and as much power generation infrastructure as they can. And every dollar matters much more than it did say two or three years ago. I think the exception would be Apple here. But for a while, we were able to kind of finance a lot of the climate ecosystem off the back of what was basically an employee perk because it was a very aggressive market for tech employees and they liked working at companies that had these big climate programs. And that is like fully over the bull market for tech labor employment is over the ability of these companies to finance climate tech is over the willingness of them to finance climate tech as opposed to to dump another marginal dollar into data center development or AI model development is over like it's all over. And that's a major moment not only for I mean to some degree carbon removal is like the most illustrative version of it because it was the closest to like the gargoyle on the cathedral for Microsoft that beautiful thing they could fund as a result of their incredible societal surplus. But like it's over for a lot of different things. Yeah. And like you said, this is just one story amongst many other stories that could be written in a similar vein and to a original question about where to go forward from now, you could have another surplus of which you just described come up and you climate commitments kick back up again and we would just do this whole thing over again. We would run it back and we would be having this conversation you know five years from now or whenever that is and the way to hedge against that from happening and just and to some extent stop it from happening is to have federal governments across the globe pass durable policy that either compels the regulation or incentivizes the deployment of carbon dioxide removal and that because carbon dioxide removal outside of the co-benefits of some pathways which are fantastic just removing carbon from the atmosphere for pure carbon sake is the tragedy of the commons in a single climate technology entity like this is something that will need federal support in the long run to some extent in a way that other climate technologies don't that's true of most of carbon the carbon management world but it is uniquely true of CDR but it's a form of waste management trash and recycling also require ongoing government support now that this point attends to come from the state and local level but like governments still pay to handle waste that's part of what we expect governments to do it's just that this waste happens to be in the atmosphere and requires a particularly high form of technology to dispel yeah it's a it's a very costly trash pickup service and it also is contention upon people caring about the trash there is a relatively large consistency around the world that is unconvinced that the trash is an issue and that is the big challenge yeah agnostic on the trash you know historically congress has been quite supportive of carbon removal technology but the current administration has not been at supportive what has been funded in terms of federal policy that could potentially begin to pick up the pieces here and then what should be funded with a more constructive congress a more constructive administration what kind of policy should we eventually hope to see that could fight off some of this carbon removal wave of consolidation and bankruptcies well there there was some appropriations money that was put into place for carbon removal rnd and that is valuable and it's good to be able to work on the research and development to help scale these technologies but in terms of actual federal funds that have been spent the DACUBS program at the end of the Biden administration issued two 50 million dollar grants to the large DACUBS that is the full extent to which is the monies that have been spent on the 3.5 billion dollar DACUBS program the rest of that money is sitting at DOE going through some internal review or whatever is happening at the moment with the DACUBS program like the movie Brazil presumably yes exactly the purchase price is in a similar position paused in Definitely unclear if or when that money will be spent and The only existing policy that incentivizes carbon removal to any extent only incentivizes director capture and becks Which is the 45 Q tax credit you get a hundred eighty dollars a ton if you remove a ton of carbon from the atmosphere Yeah, with director capture one yeah and and with becks you would get eighty five dollars a ton and that you know to count that a C.R there Or some LCA is in in terms of what biomass feedstocks are using into the the process But remind listeners what becks is oh Bioenergy with CCS, so you burn some sort of biomass feedstock and capture that CO2 at a point source So you can imagine heat and power being used to create pulp and paper and then you capture the CO2 and that receives eighty five dollars a ton because it's a point source capture But even then eighty five dollars a ton is not enough to reach Final investment decision on the becks facility and a hundred eighty dollars a ton isn't enough to reach Profitability for a debt company and so you still have to make up the delta to Profitability and that is in the voluntary market which as we discussed that is greatly retracted and the appetite for relatively expensive debt credits It's pretty low right now considering the fiscal situation of it all and so If I'm looking at right now from the US federal government, there's basically very little to know current outlays for Carbon removal going forward. There was a specific carbon removal tax credit that was introduced That had increased dollar amounts for various forms of CDR basically functionally all forms of CDR There has been discussions of in carbon border adjustment mechanism that you're put in Senator Cassidy as well Senator White House each have a sort of trade policy as a sort of response to the carbon border adjustment mechanism And that could include compliance pathways for carbon removal. I think it is important that Because the cost of carbon removal is so high and Because the political winds of the United States have been shifting very rapidly back and forth in terms of how Political parties view climate and execute on climate policies or not execute on climate policies That you have as many bites of the apple as you can CDR is embedded into as many policies as you can get it into whether It's trade policies whether it's tax credits whether it's direct procurement or even you know farming smart programs for soil Carbon sequestration and there there's all sorts of different Policy and regulatory opportunities. It's just a matter of which ones the politics and the finances will allow What's happening around the world are other countries beginning to put money toward carbon removal that are not the US? Yeah, Canada has a 10 million dollar procurement program, which is the first procurement program of its kind That ever been put into place. They're soliciting proposals for that now I mean 10 million and then it leaves in a lot, but it's something and you build on policies like this and so it's a good first start 10 million Canadian Yeah, that is true 10 million Canadian and then in Europe Europe is integrating carbon removals into their emissions trading system And that the final rules on that will happen in the next couple of years Which leaves a gap in terms of when that market will be accessible Japan has compliance pathways in their domestic ETS for carbon removal But in terms of pure policy market incentives that actually will get Carman docs and removal projects built in the real world Incredibly limited in the next three to five years or whenever Europe integrates them If not all else illegal nothing else goes forward Europe will become the largest carbon removal market in the world until that happens There is nothing in the near term that is moving forward Is there anything happening in China because often the story of these climate tech investments is that the West Starts them up gets bored allows all this IP to die on the vine. I think this is part of the idea of control less and then basically all the IP goes to China and China Decides this is a frontier technology that it wants to invest in and Loan the whole five years later is the best at it in the world Like is that happening right now with carbon removal or is this not a field that China has indicated much interest in so far? It's tough to find data information on carbon removal in China although Tencent yep, they announced some prizes structurally similar to sort of the musk ex-price that $100 million for carbon removal and there have been some reports of Director capture R&D projects that have been built but It might be this is structurally different from China than any of the other things that they've done relative to the climate technologies that they've developed because again You produce an EV you produce a solar panel you produce a battery. There's a consumer that gains something valuable to them whether it's power from Solar panel or a battery right power your car to help with the back of power on your house or an EV that is great and To us cool features and as a you know a computer, but That's not the same for carbon removal and so like even To tell you China or like you look Other places like the Gulf the climorks partner with Saudi Arabia and obviously the Gulf countries are highly invested in a number of different technologies and have At least on balance sheet the money to be able to put towards this, but again What is the value proposition for them to invest heavily in this industry when nowhere else around the world is? I mean, I think it also if you think about Chinese Energy policy flows from a triangle of concern about conventional or pollution, you know like PM 2.5 Energy security and wanting to stay at the frontier of technological development It's really only that last point that would drive them to invest in carbon removal At what point will the Chinese energy policy triangle become a diamond and we'll see China make concerted investments focused not only on kind of playing up the climate benefits of its existing supply side investments But affirmatively making supply side investments to advance international climate agenda At that point maybe we'll see an investment carbon removal, but until then it doesn't really fit into the existing Chinese paradigm There are a number of CDR pathways that have really interesting co-benefits associated with them that have a Clearer way to scale than something like director capture unless using for enhanced oil recovery, which is possible Even then still expensive But you look at things like enhanced rock weathering and the potential to increase yields for crops as well as decrease the need for fertilizer You can imagine their ocean health benefits associated with some forms of ocean CDR And so in that way, I think that there is An opportunity and you are currently seeing this amongst the CDR pathways that they are finding ways Like all climate tech is at the moment to highlight everything but the climate value associated with their technology and This was a bit of a doomy and gloomy pod, but I think that that is a very near-term Pathway that a market has a value associated with these things and it's not a voluntary one on carbon Well, we're gonna have to leave it there But You and I know that at some point you're gonna come back on shift key to talk about another Favorite topic of ours, which is how to dress for 1.5c And we'll have to talk about many other developments as well But Jack Havana, thank you so much for joining us on shift key. It was great to have you Thanks show me on Rob And that will do it for us on shift key today We'll be back soon with another episode of shift key Until then if you love this show if you hated it If you had lots of thoughts you can find me on x blue sky or link in at @robitsomire Stick around after the credit. We have a great message from our sponsor for this week Lunar energy that I'm very excited about Until then shift key is a production of heat map news Our editors are Jolene Goodman and Nikhil Orchella Multimedia editing and audio engineering is by Jacob Lambert and by Nick Woodbury Our music is by Adam Kromelow. Thanks so much for listening. We'll see you real soon Hi, my name is Mike Munsell and I'm the vice president of partnerships with heat map For the last two episodes I chatted with Lunar Energy's Sam Weavers about solar batteries and utility rate design Today we dive into virtual power plants and international markets My name is Sam Weavers and I'm director of product at Lunar Energy I know we've been talking a lot about VPPs It seems like every company or even a research firm has a different definition Of a virtual power plant How does Lunar define a VPP? I've certainly come across this myself You can get right into the weeds of defining what a VPP is But I mean to me it's really just Connecting distributed assets together with software And controlling them in smart ways so that those assets deliver value to the grid And homes get paid for that sort of service and return A VPP turns thousands of disparate homes into something that can look like a power plant to the grid Except it's a power plant that can be segmented And provide very locational and temporal services to the grid Or it can be grouped together at sort of the top level to provide bulk level power when measured at sort of that transmission or sort of ISO level That's probably my definition of the VPP Do other countries other markets have VPPs or VPP like structures Yeah for sure I mean this is something that's been emerging in Europe and you know in Australia in particular for a good you know 10 years or so It's also with flagging that when I talk about VPPs I'm in the main talking about VPPs for residential assets You know VPPs have been providing demand response services with you know Arc furnaces and large industrial loads for some time And you know we are now in a world where it's not just big factories and manufacturing processes that can provide flexible demand to the grid but also thousands and thousands of homes. Lots of the Nordic countries have residential assets providing grid frequency services and the UK residential assets can be traded by independent aggregators in markets that are used to balance the grid after the wholesale market closes and Australia has a really active and competitive market for residential VPP services. And I know most shift key listeners are based in the US but what can the US learn from power markets of other countries? One point is the same problem has been addressed in lots of different ways in different markets whether that's more on the rate design side or more on the VPP sort of program design side. One common trend that we talked about earlier is certainly this idea that as there is a shift away from feed and tariffs in other markets for solar which is a kind of net metering so really generous solar compensation that ushered in a big deployment of batteries. There are over a million residential batteries installed in Japan and they were installed to maximize the value of customers solar and also to provide outage protection. It's a big reason why Luna provides and has provided software services in Japan with our grid platform for many years now connecting to residential assets to optimize them daily against time-of-use rates. I think the other key learnings probably go to exposure of price signals to customers like octopus agile in the UK or those time-of-use rates in Japan and the automated load shaping effects that these sort of rate shapes can have. The other one probably to flag is you know 10 years ago in the UK there used to be that you couldn't really play residential assets in these sort of wholesale level markets. The markets were very much designed around big minimum clip sizes and sort of performance standards that were very tailored to existing you know gas turbines and the like. But over time you know national grid over there in the UK and others has done a bunch of work to adjust those market rules to allow VPPs of residential assets to start to participate in new services and they are participating in those services. They're providing value to the grid into customers and you know millions of pounds a year getting paid out on a purely market basis. It's not a subsidy-based thing. It's just markets being designed to allow the value of these assets to be recognized. But I would also say that you know the scale of VPP programs in the USA is you know remarkable. Last year in the DSGS program I think the Brattle Group put out a report that was over 500 megawatts dispatched and one dispatched last year and you know one needn't start with the most complex market structure but the core goal should be the same right which is recognize the true sort of physical and economic value of these residential assets and by doing so costs of managing the grid can reduce customers can save money and make money and more newables can reliably be brought online.