The Exchanges

Q it. So how does that tend to work? Are you all ever actually supporting the sort of direct investment in these projects? Are you helping them find investors? Do you find that they're almost always using venture capital and sort of financing on their own balance sheets if they're a little bit earlier? What are the sorts of things that you're seeing on the actual sort of project investment side?

A We typically work with three types of suppliers. You've got the established, typically energy companies that are looking to diversify their revenue streams, add a new revenue stream from some sort of low carbon business. You've got Companies that are traditional carbon market players that have done a lot in a carbon avoidance world and are trying to move into carbon removal. And then you've got startups, you know, pure play ideas, thinly capitalized. And so I think the financing model varies based on each of those. In the first case, there is some sort of corporate finance Agenda. They may end up thinking about project finance, but they're, they're going through your corporate balance sheets and Like they would any other new capital project. In the second category, they'll probably engage a little bit more in project finance, sort of, depending on the strength of their, of their balance sheet, and, uh, our offtakes are a critical component of that, so that you've got a high credit-worthy offtaker on the other side, and they can, though, go raise capital against that. And then the third case of the sort of startup model, you know, anything's on the table. There are some venture approaches, and, uh, Uh, and project-based approaches, but we vary our contracting in two big ways. So if the project's ready for scale, we will work through a long-term off-tick agreement that's modeled …

AI assessment note: “financing model varies based on each of those. In the first case, there is”

Q You've mentioned at various points both engineered, you know, carbon dioxide removal as well as nature-based solutions. Do you all kind of have a preference For one over the other? Or do you think about the sort of differentiated advantages and disadvantages and kind of you do all of the above opportunistically?

A Yeah, we have an all the above strategy to carbon removal, but it requires us having a balanced portfolio. So the, the target is we segment the CDR market based on durability. So for us, low durability carbon removal is you expect that carbon to be sequestered for a hundred years or less. There's medium durability, a hundred to a thousand years, and then high durability, which is millennia plus. And so for 2030, for us to meet our goals and for us to build a high quality carbon removal market, we've been targeting for about half of the portfolio to be low durability and half to be medium and high. There are different approaches to the carbon removal market. Our view is that the climate crisis is happening now and that there are Not only carbon benefits, but also ecological benefits that can happen from nature-based solutions, typically low durability, uh, in the typically low durability category that can buy us important time against, you know, as we work toward a net zero world. So we're looking at that fifty-fifty split, and then buying projects within, within those, and we think about portfolio diversification across that. So we don't want to be too deep in any one Technology, or too deep with any one supply or any one project. So in the low durability, there are certain pathways that we think are more likely for scale by 2030. Those are primarily afflorestation, reforestati…

AI assessment note: “we have an all the above strategy to carbon removal, but it requires us having a balanced portfolio.”

Q Afterwards. Sounds good. And conversely, are there a couple of things that are sort of baseline unless you have this, don't bother applying? It sounds like maybe site selection is one of those things. Are there other sort of bright line things you're looking for?

A I think you have to have a good sense of their unit economic model. So you have to know, what are my revenues going to look like? How many credits do I want to sell into the market? What are my other revenue streams? And what are my key cost items? And how can I Then be sure, and, and your buyers as well be sure, that there is additionality from the carbon credit purchase. So, thinking through an economic model to, uh, understand what your returns are going to be and have those inputs sort of firmed up a little bit. You know, if you don't have a picture of what your sourcing is going to look like, you don't have a picture of what your land cost is going to look like, it's probably pretty hard to submit to our, our application, right? The carbon equivalent is the carbon accounting math. So you've got to have a view of what are your You know, how many credits are you going to be able to produce? Which, working backwards, requires you to have a sense of, you know, how much carbon are you going to sequester? Are there any process emissions in the, in the course of generating that credit that you're going to need to deduct? And what's your plan to get those, those verified? So it sort of comes down to numbers, I'd say, is the starting point. You know, what's your financial model look like? What's your carbon accounting model look like? And having those sketched out is essential. You…

AI assessment note: “I think you have to have a good sense of their unit economic model.”

Q Tell us, Maury, what are your other favorite deals that you've done, and how are they structured?

A Yeah, BTG is a really exciting one. You know, this is the world's largest carbon removal deal out there. Uh, they're, uh, planning to purchase I think more than eight million tons. You know, they're planning to plant a hundred million trees, and they're converting degraded cattle pasture in the Brazilian Cerrado, which is the second largest biome in Brazil after the Amazon. So they're planting trees in, in this place that's been deforested and, uh, with, with a mix of native species and eucalyptus plantations, and, and while they're doing that, they're restoring native ecosystems. Um, and so the eucalyptus is used as, as sustainable timber production on land that does not have good alternate uses. The native tree planting is sort of restoring those ecosystems. You know, they're, We're in a pay-go relationship with them where we'll buy the credits as they sell them to us, and they're, they've raised, you know, well over half of their billion dollar fund, and on the timber side, they're working with best-in-class FSE standards. So that gives us a lot of credibility in where they're going and that the quality of the project is at the top.

AI assessment note: “BTG is a really exciting one... We're in a pay-go relationship with them”

Q So what do you think the future holds for these potentially 500 plus CDR companies out there? Do you think they'll, they'll all be around, you know, sort of eventually, or do you think that we're going to see a winnowing of companies that are operating in this space?

A I sincerely hope they'll all be around, but I think history shows that there will, there will certainly be a winnowing. What we're focused on is ensuring that high quality car removal has funding today and has offtake today. And so we see about 250 applications per year, and mostly from, it is probably from 200 plus suppliers, and we're seriously considering over a hundred projects right now in our pipeline. Not all of those will make it through. I, I would guess fewer than half do, uh, but a lot of the other half we, we will, the half that will reject or more than half that will reject will provide feedback on, okay, this is what it takes for you to improve. This is what we need to see for you to come back. So for many companies, that will be enough guidance for them to work on some things, work on a pilot, uh, advance an LCA, make some key hires, help them shore up their application. For, for others, they won't have enough time to do that. And then, you know, we'll see, I think with any emerging, emerging marketplace that the suppliers will sort of regravitate to what are the tech pathways that, that are going to, going to work out. So I don't have a crystal ball of, uh, of the types of car removal that we buy today, you know, which of those will actually be still there in 2040, but, I couldn't tell you right now that which ones are not going to make it. And so our approach i…

AI assessment note: “I think history shows that there will, there will certainly be a winnowing.”

Q the sort of revenue side of the equation for a business. It makes it easier for you to do more innovative things. There's kind of more headroom. There's more need, frankly, too, for doing some things that might be a little bit outside the box. Is that something that you're seeing right now, or are you generally still sticking to kind of the most proven CDR technologies you can find?

A Yeah, I think our CDR The procurement strategy breaks down in sort of two general buckets. They're the pathways that we think can deliver scale by twenty-thirty, and in that case, I think it's more the example that you give, that you need to focus on the proven tech because scale can only be achieved so quickly, and, you know, a hockey stick can only be so, so steep. Uh, we're also focused on innovation in the CDR market and focused on advancing the broader CDR market so that it could be a vibrant part of net-zero economy and a vibrant part that, that other companies And maybe governments in the future can buy from. And, uh, it can definitely play a role in, you know, what is the next generation of direct air capture look like? What is the next generation of, uh, marine CDR look like? Those are pathways that aren't going to be so big on our 20 30 timescale, but really important in 2035 by 20 40. So there's certainly opportunity to play there. I guess the other thing that comes to mind here is our carbon free energy procurement. That is tailored to where we're going to have, uh, energy or have data centers around the world. You know, they're thinking, and that team sits right next to us, and they're thinking increasingly creatively on how you structure contracts so that you can match your scope to emissions in the markets where, where those emissions are happening. And we're cer…

AI assessment note: “our CDR The procurement strategy breaks down in sort of two general buckets.”

Q And so when you say no to a project, what are the most common reasons that you're saying no?

A The most common way we say no to a project is because it's too early. You know, they haven't yet thought through all the elements that are in the application, so we don't yet know, they may not have a site selected. So you don't know what the impacted communities are going to be. They may not have Fully identify what a life cycle analysis looks like for the project. Where are the system boundaries? And so where are they going to get their, their carbon, uh, the, the sort of source material, the inputs, and how are they going to sort of turn it into a carbon credit? Um, you know, companies can be at various stages. They don't have to have an LCA before they apply. They don't have to have sourcing contracts, but, uh, some of those pieces need to be filled in. So we have a good sense of where, where they're going to be.

AI assessment note: “The most common way we say no to a project is because it's too early.”

Q know, how many tons of carbon dioxide removal and when But then there are these other elements, too, that you've already brought up around, well, how permanent is it, and how much certainty is there or isn't there around your ability to measure what this carbon dioxide removal looks like? So how do you think about all of those pieces, and how do you ultimately structure the contracts you sign?

A Yeah, so the backbone of our offtake agreements is built on a power purchase agreement. So I think you called out a lot of the right elements that are common to folks who've seen lots of power purchase agreements. But there's a huge difference between Electricity and carbon removal. Electricity generated, and then it goes away in a flash, right? So you're, the service is provided, and it's, it ends over. In the carbon removal sense, durability, how long that carbon remains sequestered from the atmosphere, is the whole challenge. Because if you have the credit, and then that, that tree gets cut down or burnt, or the geologic, the carbon that was put in some sort of geologic storage formation at mile underground, that well gets uncapped and gets released to the atmosphere, that is, Sort of undermines exactly what you've just purchased. So we're highly engaged in different thoughts of durability protections and reversal management is sort of how we look at it in a contracting sense. I mean, every credit that we buy has to be issued and, uh, and verified by a third-party carbon registry. So those are some methodology out there that will assert that, okay, for this type of carbon removal, these are the types of, of Calculations we need to do. This is how we approach a life cycle analysis to see, okay, what is happening with carbon in the use of some, are there, is there any carbon t…

AI assessment note: “the backbone of our offtake agreements is built on a power purchase agreement”

Q the supply side and what it looks like when you're actually engaging with a partner. So you mentioned that you have a website and that people can kind of fill out a form and say, here's my project. So is that typically how the engagement starts, or do you also go out and kind of directly try to recruit projects? Tell us more about kind of how the engagement goes.

A All the above. Beggars can't be choosers. So, uh, the, our open RFP process on a website, so if you just Type in and search for Microsoft Carbon Removal Program. You'll get there. Scroll down. It says, click here to apply. That provides us an opportunity to evaluate projects on equal terms. In the early days of the program, we established our principles for high quality carbon removal. So things like additionality, you know, making sure that our corporate purchase is essential to the project existing, measurability, monitoring, reporting, and verification so you feel good about the quantification methods of the credits, um, Community fairness, so that we're doing right by the communities that are affected by these projects. You know, that's part of, like, good permitting and good project development. And so, we've got all those, those questions geared to those, those criteria, and the application gives us a chance to evaluate every project on its merits, because it's really important to us that we are fair across the board and give every chance, every project an equal chance to succeed. Um, Well, we're out there talking to folks constantly, and I think by the nature of the number of announcements there are, Microsoft buying various forms of car removal, lots of suppliers are, no, ok, Microsoft's a way to, to come approach us, is a buyer out there, and we'll evaluate their proje…

AI assessment note: “All the above. Beggars can't be choosers. So, uh, the, our open RFP process”

Q sure you're getting what you want to get is really interesting and probably very critical. So what does that look like? Is it really just sort of the company attesting that, like, we're, this is truly a waste stream that we're using, or is it something where you verify suppliers and go visit sites and things like that? Like, what is that ultimately, what form does that take, these protections?

A Yeah, so taking a step back, every contract that we sign typically has a twelve-month Process. Could be more, could be a little bit less, where we've done our own due diligence, pulled in scientific experts, and then ultimately, based on that, that expertise and the site visit, have a sense of, what are the things we care about over and above what the current registry methodologies do? And so then we will structure our contracts based on that project context and based on understanding, okay, this is, we have these specific concerns in this area of the world or in this What the project is doing, what we're seeing on the ground. And so we'll write that in as requirements on our contract. They can take a few different forms. It can be part of the progress reporting that the supplier provides. There's always an audit, right? We can come in if things sort of seem wrong and we can, we can go back in once a year or so and make sure they're following the terms of the contract. In an ideal world, We build this into the registry ecosystem so that the third party verifier is checking the box, but at this stage of the carbon market, as methodologies are quickly developing, we're looking to bolster those standards through attestations, through progress reporting. Sometimes we'll ask for evidence. Sometimes we'll ask for officer certificates that an officer of the company has pledged that th…

AI assessment note: “we're looking to bolster those standards through attestations, through progress reporting.”

Q actually function, but first I wanted to know how offtake agreements have evolved since that very first contract with Orsted. So this is really cool that you all were on the front lines of essentially changing and sort of creating a new, a new style of offtake agreements that's much more meaningful within the CDR market space. And so you've really seen that take off since then. Is that right?

A Absolutely. I mean, I think there's a playbook that we can follow. And at the same time, there are elements of the playbook that are quite different based on the type of carbon removal that you're working in. So a bioenergy and carbon capture and storage offtake agreement has a lot of common elements with What a long-term offer agreement looks like for reforestation credits. Um, but they're also looking at different investment periods. So a reforestation project may have a much longer, naturally would want a longer term because if you look at tree growth cycles, you'd have carbon credit generation over a long period of time. Whereas an infrastructure style BEX project kind of needs a fixed, you know, And you have, there's a thick shape to it. You know, they need reliable offtake over that period of time. Trees grow at different rates, uh, depending whether your first is pretty slowly, and then it goes fast, and then slowly again. And that shapes how you think about contracting and, um, in core commercial terms and financing and, uh, durability as well. You know, how long is that carbon going to remain sequestered?

AI assessment note: “there are elements of the playbook that are quite different based on the type”