The latest data is in from the world’s weather scientists: global temperatures are likely to reach the key 1.5 degrees Celsius increase over the next five years, and the hottest year on record is likely to hit. The message: We’re past stopping climate change. Now it’s about lessening the damage in the race against the existential threat humanity faces. But that’s not news to CEOs of companies focused on climate technology. “We are mitigating, not solving,” said Mast Reforestation CEO Grant Canary during an appearance at the first 2023 CNBC Disruptor 50 virtual event since the new annual list was revealed last week. “The bombs are going to go off.”
Canary has seen firsthand how much climate change is destroying the fabric of the planet at its literal roots. His firm, which owns the largest seed bank west of the Mississippi and is the biggest planter of trees in the state of California, exists because forests are no longer doing what nature taught them to do: regrow. In a natural wildfire cycle, forests replenish themselves, but recent wildfire seasons are burning so wide and so hot that they “are taking out the seeds deep down,” he said. From 1982-1992, the national wildfire ten-year average was 2.5 million acres each year. The more recent 10-year average: 7.7 million acres, “the size of New Jersey,” Canary said.
Jan Wurzbacher, co-CEO of Climeworks, which uses direct air capture technology to remove CO2 from the atmosphere, sees the challenge in numbers, too. By mid-century, industry needs to be in the position to remove 8 billion to 15 billion tons of C02 every year from the atmosphere. Of the current 40 billion tons of emissions annually, much will be avoided – industrial companies, for example, like cement and steel makers, will need solutions to cut emissions at the source. “But we will never be able to reduce to that to zero, or at least not in the next 30 years,” Wurzbacher said at the Disruptor 50 virtual event.
The two climate CEOs together make an important point: there is no single solution to tackle climate change as humanity throws everything it has at the problem. There’s a temptation, Canary said, for people to pit business models like his and Climeworks against each other, nature versus machine – trees and biomass as a carbon sink against the industrial plants of direct air capture. But both have one big thing going for them: investment dollars are increasingly flowing into the sector, and the demand for carbon credits already outstrips supply.
That said, each faces unique scaling challenges that will be critical in the years ahead. In forestry, for example, regrowth was historically financed by landowners based on the certainty of nature’s regrowth cycle. That’s no longer an option. Last week, Mast Reforestation signed its first deal to essentially securitized the financial interest in its future forest growth as a way to fund the replanting of trees.
In the case of Climeworks, scaling the direct air capture model will require even more money.
Wurzbacher said companies like Microsoft, already a client, are attracted to its industrial plants that remove carbon directly from the air because the plants can use flow meters to precisely measure the exact carbon in tons per customer. That takes away the risk of “greenwashing” that has become more prevalent. But the downside: it’s still a very expensive process.
As Climeworks attempts to scale up from removing thousands of tons of carbon to millions of tons by the end of the decade, it will require billions of dollars to build plants, a billion or more per plant to begin with. The industries that Climeworks is mostly dealing with today are relatively low emission and high profit margin, including financial services and technology. As the economy moves ahead with more detailed climate accounting – the Securities and Exchange Commission’s climate disclosure rules are expected out as early as the fall – what Wurzbacher sees his company addressing over the next decade are the “unavoidable emissions,” or industries with residual emissions from sources, such as travel and buildings.
These corporate buyers are getting in early on a need that will only grow in the future. “Customers buying these credits at the current price point are scaling up with us and walking down the cost curve together,” Wurzbacher said.
One of Mast Reforestation’s biggest buyers is Shopify, and that has allowed the e-commerce giant to set itself apart from other payment processors in a sector where emissions are a big deal: shipping. For the many small companies that Shopify works with, it’s a difficult process to sort through the carbon credits market. Canary noted that there are 170 different types of carbon credits or carbon projects from 100-plus countries. (Mast Reforestation’s forestry segment of the carbon offsets market is the largest by volume, and its niche of reforestation current has the highest value credits.) Shopify can do the carbon market work for its network of merchants and charge a subscription fee to analyze the emissions and source the credits. That opportunity represents a “couple of hundred million tons,” Canary said, but it’s going to get a lot bigger when maritime shipping is factored into the equation – “billions of tons, and the supply is not there compared to the demand,” he said.
Even amid heightened criticism of carbon credits, there’s a precedent for use of the market and a sign that public companies early in can gain the approval of analysts focused on profits. Canary pointed to Ryanair, which has shown how the buying of credits, and the use of credits as a hedge against price fluctuations in the carbon market, can preserve profit margins and get a thumbs up from the analysts who cover the company’s shares. Today, a little less than half of companies are using the carbon market, Canary estimated, but as the SEC rule comes into play, compliance programs need to be aware that the market has moved quickly from what was dismissed as “marketing” to a “GAAP-like structure” with big implications for corporations. “You can get sued by shareholders if you don’t do it right, and that’s a very different level of accountability,” he said.
Ultimately, the climate tech CEOs say, a message that the market and investors should understand is the idea of portfolio construction using carbon. A nature-based approach like Mast Reforestation may be less expensive and offer more volume today than a billion-dollar Climeworks plant, but it’s investing horizon is that of a forest – as long as a century of ongoing auditing and monitoring. Climeworks is operating on the high-cost side of the market, but its instantaneous removal is at the opposite end of the time spectrum from forest regrowth. That’s why Canary sees an equivalent to the way bond investors in both the corporate and individual investor market structure portfolios today to diversify across fixed-income maturities.
“We can combine both, and that’s what happening with companies like Microsoft and as we build it out into something like an index fund or mutual fund, build out a portfolio that is time-weighted, average cost-weighted,” Canary said. “There’s space for a lot more climate tech to bring credits into the market to help effect that basket, that index of credits we are offering.”
