A buyer’s perspective: Building demand signals for first-of-a-kind carbon removal projects

Tom Heintzman: Welcome to The Sustainability Agenda, a podcast series focusing on the evolving complexities of the sustainability landscape. I’m your host, Tom Heintzman. Please join me as we explore today’s most pressing issues with special guests that will give you some new perspectives and help you make sense of what really matters.

Mitchel Selby: We have almost 50 companies in our portfolio. So we collect data from those companies at the end of every year on things like cost and capacity, how they’ve been able to sell credits, financing they’ve been able to bring into date. And we aggregate all that data across all the companies to kind of see where the market’s at.

Tom Heintzman: Welcome to our multi-part series, Profiling the Carbon Markets. The purpose of this series is to examine some of the most significant issues facing our clients in both the voluntary and compliance markets. Carbon dioxide removal or CDR is still a nascent industry. First of a kind CDR technologies often require agreements with buyers known in the industry as offtake agreements to help stimulate interest from investors and lenders. On today’s episode, we’ll explore the CDR buyers perspective in supporting first of a kind or FOAK carbon removal projects, including what makes a good FOAK project, how buyers select projects, and other important considerations to help scale the market towards gigaton removals. Today, it’s my very special pleasure to welcome my guest, Mitch Selby from Shopify. Mitch is the lead for Shopify’s Sustainability Fund, which supports emerging technologies that can help to mitigate the worst effects of climate change. Most listeners will know Shopify as the leading commerce platform for both online and in-store sales. Listeners may be less aware, however, that Shopify, both on its own and in partnership with many other leading tech companies under the Frontier banner, is one of the world’s leading carbon reduction buyers. Mitch, welcome to the show.

Mitchel Selby: Thanks so much, Tom. Excited to be here.

Tom Heintzman: Yeah, this is going to be fun. First of all, before we get into discussing the Sustainability Fund, it would be inspiring for our listeners to learn more about your career at Shopify, especially as we look to encourage the next generation of sustainability leaders out there. So how did you get to Shopify and why Shopify?

Mitchel Selby: So I actually started my career in audit, financial statement auditing, and I enjoyed it, but I didn’t think it was the long game for me. And I decided to take a bit of a risk and go back to school and study sustainability. It’s something I was passionate about, but wasn’t really sure about job prospects, but took the leap of faith anyway. And while I was in school, there was an internship component and we had to kind of go out and find our own internships. It wasn’t provided through the school. And I was reading a bunch of sustainability reports from Canadian companies. And I realized Shopify doesn’t have a sustainability report. And I decided to do a cold reach out and volunteer to write it. And they took me up on it to write their first ever sustainability report. And they actually asked me back for a second term. So around the time I was writing their second sustainability report our Sustainability Fund got spun up by our CEO and our former head of sustainability, wanted someone to support her in kicking off the program. So she brought me on full time and that kind of kicked off my carbon removal journey at Shopify. I started as in a supporting role and now I’ve grown into kind of leading the program, leading the deals in the program. So that’s where we are today.

Tom Heintzman: And Mitch, to be fair to our audience, you’re not only leading the program within Shopify, but globally as well, as we’ll get to in a minute because Shopify is definitely one of the world’s leaders out there. So it’s been about five years now since Shopify launched its Sustainability Fund in late 2019. Why is a Canadian multinational e-commerce company taking such a bet on carbon removal at a massive scale?

Mitchel Selby: So, I mean, the science is clear. We need both reductions and removals. And I guess the removal piece is important because even if we drastically reduce emissions, we still have those hard to abate sectors like concrete and steel, which will still be emitting and we need removals to address those emissions. Plus the 150 years of carbon dioxide that’s been emitted over the industrial revolution, we still have to pull that back out of the atmosphere in order to reverse climate change. So it’s clear what we need to do. Back in 2019, our CEO recognized this and launched our Sustainability Fund with a specific focus on carbon removal. And he felt like Shopify had experience helping small companies succeed and reach large scale. And he felt like we could apply that expertise to this nascent field in carbon removal. As a purchaser, we would be a demand signal for the few technologies that we’re currently getting built in the space to scale up as well as for new technologies to enter the field, coming out of labs. And he felt like Shopify could play the role of that demand signal. And he was right. In five years, we’ve committed to over $70 million in contracts, supported almost 50 companies, and the market has definitely made significant strides since 2019.

Tom Heintzman: Shopify and you invest across many different types of carbon removal technologies. Can you describe the range of project verticals that your fund supports and give us an idea of the breadth of the CDR approaches that you’re backing and that you see out there?

Mitchel Selby: We are primarily focused on durable carbon removals. So technologies that are pulling carbon dioxide back into the atmosphere and storing it for a period of a hundred plus years or longer. Listeners are probably most familiar with direct air capture. That’s kind of a term that’s thrown around quite a bit. And those are technologies that are pulling air in, scrubbing it of carbon dioxide, and then sending that carbon dioxide for permanent storage, typically underground. We have backed over 10 companies doing direct air capture, but with direct air capture, it’s quite expensive, takes a lot of energy. So we’re also looking at solutions that leverage nature to do a lot of the work. Things like enhanced rock weathering, which applies ground up rock to farm fields where the rock weathers when it’s exposed to air and water and draws down atmospheric CO2. We’re supporting technologies that are putting rock in the ocean where it pulls carbon dioxide out of the upper layers of the ocean and allows the ocean to absorb more CO2. We’re supporting technologies that leverage the work of plants. So a company like Vaulted Deep is something listeners might have heard about. What they’re doing is they’re taking biosolids. So it’s a byproduct of the wastewater treatment process. And those biosolids are typically spread on land or burned or landfilled, re-releasing CO2 to the atmosphere. Instead, Vaulted’s intercepting them in that process and injecting them deep underground using their slurry technology. So leveraging the work of plants. So we’re supporting technologies across a broad spectrum of carbon removal pathways and we’re hoping some of them can reach large scales.

Tom Heintzman: So Mitch, let’s dig in a little deeper here. Lots of different types of projects that Shopify is supporting. It takes market leaders to really lean-in making new types of investments and advanced purchases. What does Shopify look for in making an initial purchase? What makes a good CDR company or project? And what risks are you taking into account when you evaluate each new company or project?

Mitchel Selby: So we have a pretty extensive list of criteria we assess companies against. I’ll name a couple of things in that list. So how efficient is the process at removing carbon? How much land does it take up? How verifiable is it? Is it safe? But then probably most importantly, does it have the potential to reach large scales? Will it be cheap at scale? So I guess when you ask what makes a good company, it’s things that do well against those criteria. So, does it remove a lot of carbon dioxide, but not emit a lot to run the process? Does it not take up much land? Technologies that are safe have the potential to reach 100 million tons of carbon removal at scale, be below $100 per ton of removal at scale. And then risks. Just like any deal we’re looking at technical risk, execution risk. So with technical risk, we’re involving third party experts to look at the technology. Does it seem like it could work with execution risk? We’re looking at data on what the company’s been able to do to date. So have they been able to run their process at a lab scale, at a pilot scale? What are the results from that? Who’s in charge of the companies? Do they have the right kind of expertise, technical expertise, as well as commercial expertise? And then, probably interesting to you, we’re looking at financial risk as well. So how much has the company been able to bring in capital to date? What kind of experience do they have raising capital? How much do they need to run their projects? Yeah, things like that.

Tom Heintzman: That’s a pretty extensive list. Let’s go into some examples here. So recently Shopify announced an AirMiners deal in which you’re funding a number of new technologies. Tell us more about those transactions. To what extent will the buyers pre-purchase the credits? How do you deal with the potential lack of a protocol? For the listeners, most technologies ultimately develop a protocol in order to be able to verify that they’re actually capturing and sequestering carbon. But some of these early technologies don’t yet have a protocol. And what are the considerations for setting a price when you’re dealing with such an immature technology? So maybe you can just give us some examples and go into some of the complexities of dealing with some of these very nascent technologies.

Mitchel Selby: So maybe I’ll start with the AirMiners deal since you specifically asked about that. This came out of a exercise we run at the end of every year. We have, I mentioned almost 50 companies in our portfolio. So we collect data from those companies at the end of every year on things like cost and capacity, how they’ve been able to sell credits, financing they’ve been able to bring into date. And we aggregate all that data across all the companies to kind of see where the market’s at. What is the data telling us? And we saw from 2022 to 2023 was that purchases had kind of leveled out, financing was decreasing a bit. And specifically for really early stage companies, the new buyers that had entered the space were trending towards purchasing from companies closer to commercialization, but these early stage companies were kind of being passed over. And were facing having to kind of close up operations. So we set out this year trying to close the funding and purchasing gap for these early stage companies. So with AirMiners, they’d selected 20 companies and they were going to allocate some funding they were able to raise across these 20 companies, they were doing actually revenue share. So it was a bit of a different model, which we liked. We came along and decided, you know what, let’s tack on an a hundred thousand dollar purchase with each of these 20 companies and give them, that extra push, that they need to kind of, have a couple more years to test out their tech. And we figure with a few more years, that could be the difference between closing up operations or having a tech breakthrough that could lead to them being a big part of the solution set in the future. So we were pretty excited to do this deal and get purchases into the hands of 20 new companies. And then you asked about what we do when there’s no protocol and that is definitely commonplace for when you’re supporting early stage companies and these 20 companies, most of them are at the place where they’re just drafting their own in-house protocol. They’re not even thinking about working with a third party yet to have a protocol spun up. So what we typically do is we get comfortable with the idea that we will accept credits measured against their in-house protocol, as long as we’re involving third-party experts to review the data we’ve received. Or what we sometimes do is if we don’t have the capacity to kind of do our own credit review, we’ll ensure that the credits come at a point in time, three years down the road, four years down the road, that a protocol will have been spun up by then a third-party protocol, that the company will be working with the registry by then so that we can get money into their hands now. But the credits we’re going to be receiving in three, four years will also meet the needs that we have in order to be able to use that credit against our footprint, for example. And then I think you had also asked about cost.

Tom Heintzman: Just how do you set a price with what these early technologies because you want to be fair to both parties and obviously these early projects are expensive and they’re carrying overhead so how do you go about setting a price?

Mitchel Selby: With our like deals with more commercial companies, we are negotiating more on price, but with these earlier stage companies, we are pretty flexible. Typically what we do is we will get them to name the price and then also provide a cost breakdown for what’s going into that price. We’re typically, if they want to add a bit of a margin, sure. But typically we’re going to pay exactly what it costs to produce these credits. There’s time for negotiation. That time is once they’re further along in their trajectory, but it’s not when they’re super early, they can’t be operating at a loss so early on in their trajectory. What we care most about is cost at scale. So as long as we’re picking a company that can get below $100 per ton in the next five to 10 years, that’s what we look at more.

Tom Heintzman: And Mitch, you mentioned $100 a ton, and you have a few times, and you do hear it in the industry. Why $100? And can you give the listeners some sense of why that’s a material amount or an important goal to reach?

Mitchel Selby: Yeah. So a hundred dollars per ton. And it could be 150. It could be 50. It could be 200. It’s just in a range that it’s a number that is palatable to a wider group of buyers. With tech companies, we can pay a thousand bucks a ton, 2000 bucks a ton right now. But a lot of other buyers are more price sensitive and that’s why they do tend towards cheaper offsets, nature-based credits. And if we can get durable carbon removal prices around $100 per ton, it does become palatable for those buyers. So it significantly expands the buyer base if we get to that number. And we need to have a number that is palatable to all buyers because we need significant amounts of money in purchase flowing into this industry in order to scale it.

Tom Heintzman: Mitch, we reference millions of tons, whether it’s a million tons of capture or whether it’s 10 million tons of removals. Can you give the listeners a sense of quantum, like how much a million tons or 10 million tons is?

Mitchel Selby: It’s hard because CO2 is, it’s invisible, right? But it’s significant. Like we’ve removed maybe a few hundred thousand tons to date, regardless of all the great work that’s happening in carbon removal. And we need to reach 10 gigatons, 10 billion tons. The amount of the industry needs to grow is massive in order to reach that number. In terms of like how much this is going to cost, Carbon Engineering was acquired by OnePointFive and they’re building a billion dollar direct air capture facility in Texas. And the nameplate capacity will be 500,000 tons and it’ll hopefully reach that once it’s operational. We need to reach 10 billion tons. So if it costs a billion dollars plus to build a facility that will remove 500,000 tons annually, think about what it’s going to cost to reach 10 gigatons. That’s why we need solutions that are more cost effective, like the solutions that leverage nature, like enhanced rock weathering, like ocean-based removal, like biomass-based carbon removal and storage.

Tom Heintzman: So Mitch, we’ve gone pretty deep into FOAK projects, protocols, setting prices. I want to pull you way back up for the last question and ask you to look out five years. Considering Shopify’s big bet on carbon removals, what innovations are you the most excited to see happen over the next five years? What do you see coming at us and what excites you the most?

Mitchel Selby: Yeah. So I’d say it’s less about like new innovations and more about, I’m just excited to see this stuff get deployed in the real world. Pilot facilities get built, first of the kind facilities get built. Over the last five years, there’s been significant strides in tech development, but in terms of deployment, there’s been a lot of delays. Projects are significantly behind schedule and I would love to see projects catch up on their timelines. Get ahead of schedule. We need to be 10 million tons of CO2 getting removed every year by the end of the decade. We’re currently at a number that’s a lot less than that. So we need to have some big wins in terms of deployment over the next three, four, five, six years.

Tom Heintzman: Thank you, Mitch, for taking the time to join the show today. And thank you to our listeners for tuning in.

Mitchel Selby: No problem. Thanks so much for having me.

Tom Heintzman: Please join us next time as we tackle some of sustainability’s biggest questions, providing you different perspectives to help you move forward. I’m your host, Tom Heintzman, and this is The Sustainability Agenda.

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