Net-Zero Commitments Should Come With Cash
It’s getting scary out there. As a result of our reliance on fossil fuels, we’ve set the Gulf of Mexico on fire, and we’ve just seen freakishly high temperatures in the Arctic(!) and the Pacific Northwest. This recent round of extreme weather killed a significant number of people and a shockingly large number of animals. New York’s always had its hot days, but the recent ConEd alerts suggest that our grid isn’t up to the challenge of keeping us cool.
Climate change isn’t just a problem for future generations; it’s a problem for us.
Until now, the focus of climate action has rightly been on decarbonization of the economy. But I’m seeing more discussions of topics that were previously kind of taboo: managed retreat from exposed coastlines, geoengineering to reduce the amount of sunlight that Earth absorbs, and scaling up technology that can suck carbon dioxide out of the atmosphere.
Today I want to focus on the last of these, direct air capture. Because it’s an area where organizations with money can make a meaningful difference — if they’re willing to back up the commitments they’re already making, with the cash they already have.
Are Net-Zero Commitments More Than Just Hot Air?
More and more companies are announcing commitments to get to net-zero. These companies are saying that, by a certain date, the amount of CO2 they’re removing from the atmosphere will be the same as the CO2 they’re emitting into the atmosphere. The dates of these commitments tend to be well into the future — 2030, 2040, and beyond. Though better than nothing, these commitments are problematic for a couple of reasons:
The commitments are non-binding. What happens if a future management team decides to go back on the commitments made all the way back in 2021? Probably nothing. Maybe some bad PR. Who will even remember?
We need action now. If companies wait a decade or two to reduce emissions and/or invest in removing CO2 from the atmosphere, the worst effects of climate change may well be locked in.
Some are pressuring companies to go further, demanding that they specify plans of action and interim targets. Personally, I’d like to see each company making a net-zero commitment put its money where its mouth is. Committed to getting to net-zero by 2030? Great. Now, commit to purchasing CO2 that is successfully removed from the atmosphere between now and 2030.
If enough companies would do this, they would jump-start the direct air capture industry, which could play a crucial role in fighting climate change.
Why Commitments to Purchase Captured CO2 Would Help
Direct air capture — using technology to literally remove CO2 from the atmosphere — feels like the stuff of science fiction. And, at the moment, it kind of is. Nature does a pretty good job of it (see: trees). But human-made technology can’t yet remove CO2 from the atmosphere at scale, and at a reasonable cost.
Stripe, the payments company, recognized that the direct air capture industry is facing a classic chicken-and-egg problem encountered when commercializing new technologies. New technologies tend to be expensive in the early days. Sure, if you had lots of customers, you could bring down costs, as you benefit from scale and learning effects. But you can’t get lots of customers in the early days, precisely because the tech is too expensive.
Stripe is trying to pull the direct air capture industry forward by pre-purchasing CO2 from direct air capture start-ups. Just as importantly, they’re shining a light on the start-ups in this space and hoping that others will now step forward and commit to purchasing CO2 from these start-ups.
Why would purchase orders be so helpful to these start-ups? Because purchase orders, even if conditional on successful delivery of captured CO2, would prove there’s a market for their products — which would help with fundraising.
During Stripe’s Climate Demo Day, it was striking how small the direct air capture start-ups were. This is potentially world-changing tech. Why aren’t venture capitalists pouring money into these companies?
Well, look at this space through a VC’s eyes. Unproven tech, uncertain demand. That’s a rough combination. But what if we could at least remove the uncertainty around demand? That may well unlock the investment dollars needed to jump-start the direct air capture industry.
Cash to Go with Net-Zero Commitments
Imagine if every company making a net-zero commitment also signed a contract committing to purchase CO2 removed from the atmosphere via direct air capture. That would be a lot of purchase agreements worth a lot of money. This promise of revenue would in turn drive investment, and the direct air capture industry would be off and running. It’s an exciting prospect, but there are some obvious questions:
How would a company decide how much CO2 to purchase?
Frankly, just about any methodology a company might use would result in a pretty big number.
Want to buy an amount of CO2 equal to your historical emissions? Great. Want to buy an amount of CO2 equal to your expected emissions between now and your net-zero date? Great. Want to buy an amount of CO2 equal to your expected emissions after your net-zero date? Great. Want to buy an amount that just sounds like a lot? Great.
Any of these methodologies — applied across a large enough number of companies — will establish a sizable market for direct air capture start-ups to sell into.
Which start-up would a company actually buy CO2 from?
There are a lot of direct air capture start-ups trying a lot of different approaches. That’s a good thing. Of course, we don’t yet know which ones will eventually work at scale and which ones won’t. This creates a problem from the perspective of a customer looking to offset its emissions. What if you sign a contract with a company whose technology doesn’t ultimately work?
Perhaps companies interested in buying CO2 could contract with a third party (“CarbonCo”) that would in turn commit to buying captured CO2 from whichever start-up delivers it first. First-come, first-served — on both sides of the market. If you’re the first company to commit to buying, you get the first batch of captured CO2 and the offset credit that goes along with it. If you’re the first company to deliver captured CO2, you get the first payment.
Perhaps most importantly, what price would be paid for the captured CO2?
It’s hard, but vitally important, to get pricing right. There are a couple of things we know for sure. First, the price will need to be known by both parties, in advance. No buyer is going to sign up for a variable price that could skyrocket, and no supplier would sign up for a variable price that could plummet.
Second, the price will need to be above the expected near-term cost (let’s call it $200/ton) in order for the direct air capture start-ups to thrive. And this is where we run into problems. The near-term cost of direct air capture is, of course, higher than what the steady-state cost will be (let’s call it $75/ton). Why would a company put itself first in line to purchase captured CO2 at a premium, rather than waiting for costs to come down?
Certainly, some companies will choose to do so for the good of the planet. Stripe is example #1. But we need to expand the pool of companies making these commitments.
I want every company making a net-zero commitment, every company that knows it’s going to one day need to pay for the removal of emissions, to lock in their purchases now.
In order for this to happen, we should set a price that is at or below the steady-state price for the removal of emissions. Let’s stick with $75/ton. This means CarbonCo will need to sell CO2 for $75/ton after buying it for $200/ton. Uh oh.
The Gaea Premium
When Stripe chooses to pre-pay $200/ton, is it simply over-paying for direct air capture? I don’t think so. I think, in effect, Stripe is paying the expected market price, plus a do-gooding premium whose purpose is to catalyze a vitally important industry.
As noted above, it’s probably a small number of companies that will commit to paying both the expected market price and the do-gooding premium. But what if we split the cost up, into its two components?
What if do-gooders would commit to putting up $125/ton for each ton that a company commits to purchasing at the expected long-term price of $75? By bringing down the effective price, the do-gooders would dramatically expand the pool of companies that would be interested in committing to purchase CO2, even if just as a hedge against the risk that demand for offsets will exceed supply, leading to higher — not lower — prices.
Who might have the wherewithal to pay the do-gooder premium? (Let’s call it the “Gaea Premium” — sounds better.) If we had the political will, our government could step forward and subsidize direct air capture. But so too could foundations. Or perhaps crypto treasuries. Or companies that feel particularly guilty about the role they’ve played in warming the planet.
Getting Equity in the Most Important Industry in History
Also, we could sweeten the deal. What if the purchaser of the Gaea Premium benefited from the growth of the direct air capture industry? What if CarbonCo receives equity in the direct air capture start-ups that it buys from — and gives equity to the purchasers of the Gaea Premium?
For years, philanthropists have recognized that they can maximize their impact by offering to match the donations of others. In this case, organizations committed to fighting climate change could maximize their impact by offering to pick up part of the tab.
Do-gooders that will pay the Gaea Premium in exchange for equity in perhaps the most important industry in history.
Companies that will build on their commitment to net-zero with a commitment to purchase CO2 at a reasonable price.
Companies around the world, you’ve shown us you’re committed to net-zero. Now show us the money.