Microsoft & Heirloom
Observations on the latest big deal in carbon removal
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Heirloom Carbon just landed an anchor customer for its forthcoming Cypress plant in Louisiana. From the WSJ:
Microsoft said Thursday it agreed to buy credits from startup Heirloom Carbon for the removal of up to 315,000 metric tons of carbon dioxide over 10 years. That would amount to a purchase commitment of at least $200 million based on market prices…
I’m sharing some observations that probably won’t make the headlines. Some themes:
Carbon offsets may benefit from increasing competition in Big Tech
The relevance of data centers and the cloud to carbon removal
Big repeat purchases will signal quality but…
Microsoft was always going to do a deal with Heirloom because they invested in the startup
Claims in the press about Heirloom’s technology gloss over the big challenges in bringing down DAC costs
Hunting for Differentiation
Large tech companies are not monopolies and are increasingly fighting on each others’ turf. The competition between Cloud Service Providers (CSPs) which includes Microsoft, Amazon, and Google, is particularly ferocious. In an interesting twist, Microsoft, aged 48, is the newcomer to this space, while 28-year old Amazon created (and leads) the market.
For many years The Cloud was the fastest growing large market in enterprise technology. Now growth is slowing, with customers capping spend. This is also a unique market where the majority of large customers buy cloud instances from both Amazon and Microsoft, actively compare them, and make decisions quarter-to-quarter about where their next dollar should go.
All of this means that the hunt for differentiation is intense. Though it is unlikely to be a deciding factor, Microsoft is probably touting its carbon removal purchases in customer pitches, claiming to be more green than Amazon.
Amazon will need to purchase offsets just to ‘tick the box’ in pitches. Perhaps Google will move next. It will be hard for Amazon and Google to buy anything other than high-quality offsets. Unlike customers of, say, JP Morgan, most large buyers of cloud services will have a team that’s smart on carbon offsets. Having low-quality offsets is worse than having no offsets at all.
Amazon and Google probably don’t want to look like copycats by going with Heirloom. Climeworks and Oxy — the two other early DAC scalers — should be sniffing around the other CSPs today.
If Amazon signs a big deal, it could start a domino effect, with Google, Meta, and others following. Something to watch!
The Cloud loves energy
In recent years, much of Microsoft’s growth has come from its Azure Cloud products.
The cloud is just centralized data centers. If you’ve ever been in a room with data centers (I’ve been in a few) the first thing you’d notice is the heat and the humming of cooling fans as these fantastic machines work on overdrive. Data centers use so much energy — think of your 2010s-vintage laptop operating at full capacity, burning your lap, but a million times over, in floor-to-ceiling racks.
The hardware and software that reduce the power consumption of data centers is at least 25 years old, and the tech to limit wasted energy has fully optimized power consumption. That means energy per compute/storage/networking instance is basically flat, making it harder to reduce emissions in data centers.
Shifting from distributed data centers to clouds has moved these energy-intensive facilities to companies with HQs in climate-conscious places. Washington state, home to both Microsoft and Amazon, is one of a few US states with a carbon market, which is likely to effect CSPs in a big way in the coming years.
Even putting aside government regulations, Microsoft wants to be greener. It is committed to both serving their customers via cloud and eventually hitting net zero emissions. Unless grids the world over move entirely to renewable energy (unlikely), high quality offsets should be a part of Microsoft’s business model.
Big buyers will validate carbon removal
There are a bunch of organizations looking to ‘standardize’ and ‘validate’ carbon removal. The idea behind these startups is that they can provide a service to companies purchasing offsets to ensure that they are getting an environmental return on their money — that the CO2 is actually being put in the ground. Some of these organizations might succeed, and that would be good.
But here’s a contrarian take: some early large customers of offsets (like Microsoft) will be better at validating carbon removal than these startups. That’s because it will be very hard for Battelle / Heirloom to say no to Microsoft when their team wants to visit their DAC plant to make sure they are pumping lots of CO2 underground. It’s much easier for Batelle / Heirloom to ignore emails from small startups that are not paying them a dime.
Microsoft climate folks will not be soft on Heirloom. They will be very focused on tracking Heirloom’s progress against the promises they make because they publicly attached the Microsoft brand to this project.
According to cdr.fyi, Microsoft has purchased >5,000 tons of carbon offsets from five different vendors. It’s unlikely that a company as large as Microsoft will ever single-source carbon offsets. But if we see multiple larger orders to just a few vendors, it sends a strong signal to the market that this or that DAC technology or company is for real.
I’d argue that repeat purchases send a stronger signal than any work a standards/validation organization could ever do, though I’d be happy to be proven wrong about that.
All in the family
That said, we shouldn’t anoint Heirloom a DAC leader on the basis of this purchase, and not just because Heirloom hasn’t built a scaled facility yet.
Microsoft founder Bill Gates and Microsoft itself are both investors in Heirloom, so they were inevitably going to agree to a big deal deal. The recent DOE funding of the Cypress plant only accelerated the timing of it.
Claims about Heirloom’s tech
If you’ve been following DAC, you know that the main challenge is bringing costs down. All the major technologies are competing primarily on this metric.
There’s no good reason to believe that Heirloom’s tech is either leading or lagging, despite this claim, again from the WSJ article:
The goal is to bring down costs faster than competitors through the use of low-cost limestone
Limestone may be cheaper than materials used by air-based players like Climeworks or liquid-based Oxy / Carbon Engineering. But the up-front cost of materials matters much less than how fast materials degrade.
A more expensive material that maintains 90% capture efficiency for 10,000 cycles is much more desirable than a cheaper material that lasts 100 cycles. And not just for the obvious reason that you’ll pay less in the long haul. There’s opportunity cost to replacing materials — it requires more labor and can result in lost time for the plant. I haven’t seen evidence that limestone degrades more slowly than other materials.
The other claim about Heirloom’s tech is that limestone naturally captures CO2. But the part of the DAC process that requires a lot of energy is not capturing the CO2, but releasing it from the capturing agent before storage. Heirloom, just like it’s liquid- and air-based rivals, has not eliminated this energetically intense step. It requires a powerful kiln to separate CO2 from limestone.
That’s not to say there’s anything wrong with Heirloom’s technology. I just wouldn’t believe a claim about limestone’s superiority because it is natural or cheap. The race to $100 per ton of CO2 is in full swing, and Heirloom has not released data that shows that they are moving along the learning curve than Climeworks, Oxy, or anyone else.
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