Jonathan Goldberg - Capturing Carbon - [Founder’s Field Guide, EP. 25]

My guest today is Jonathan Goldberg, the founder, and CEO of Carbon Direct, a company focused on advising and investing in carbon removal at scale. Jonathan started his career in the commodities division of Goldman Sachs and then went on to start a commodity hedge fund, BBL Commodities. In our conversation, we cover the state of the carbon problem today, the importance of global carbon standards and carbon taxes, and the future of carbon capture and removal technologies. This was a masterclass on all things carbon-related. Please enjoy my conversation with Jonathan Goldberg. For the full show notes, transcript, and links to mentioned content, check out the episode page here. ----- This episode is brought to you by Klaviyo. Klaviyo is the ultimate marketing platform for e-commerce. With targeted segmentation, email automation, SMS marketing, and more, Klaviyo helps you create your ideal customer experience. See why Klaviyo is trusted by more than 50,000 brands, like Living Proof, Solo Stove, and Nomad to help them grow their business. For a free trial, check out klaviyo.com/founders. ----- This episode is brought to you by DigitalOcean. DigitalOcean provides founders and creators with the platform they need to get their website and apps off the ground, all with low-bandwidth pricing to save them money over other cloud providers. If you are looking for the best place to build web apps or API backends on robust infrastructure, DigitalOcean is the place for you. They provide a fully managed solution that handles your infrastructure, operating systems, databases, and other dependencies on their new App Platform product. App Platform makes it easy to build, deploy, and scale apps. Get started for free at do.co/founders. ----- Founder's Field Guide is a property of Colossus, Inc. For more episodes of Founder's Field Guide, visit joincolossus.com/episodes. Stay up to date on all our podcasts by signing up to Colossus Weekly, our quick dive every Sunday highlighting the top business and investing concepts from our podcasts and the best of what we read that week. Sign up here. Follow us on Twitter: @patrick_oshag | @JoinColossus Show Notes [00:03:25] - [First question] - Overview of his career [00:06:02] - The start of his commodities trading strategy and its evolution [00:09:08] - Key strategies for making money as a commodities trader [00:10:41] - Opportunity to trade commodities today [00:11:39] - Making the shift to carbon capture work [00:15:04] - Range of consequences for elevated carbon emissions and biggest buckets of carbon [00:18:52] - An outline of the Paris Climate Accord and other agreements on climate change [00:20:26] - Ways to remove carbon from the atmosphere [00:23:46] - The technology to remove carbon and incentives to invest in this technology [00:26:19] - Corporate participation in the carbon trade [00:28:35] - Balance of natural vs man-made solutions [00:31:53] - Making money without the altruistic goals [00:33:43] - Trends in the fossil fuel industry [00:36:41] - Convenient ways for consumers to switch to clean energy products [00:39:57] - The geopolitical will to shift towards cleaner energy [00:41:58] - Primary consequences of not making this shift [00:44:25] - The important role of regulation [00:46:01] - Thinking through the investing side of combating climate change [00:48:59] - Kindest thing anyone has done for him

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Patrick O'Shaughnessy?

  I know firsthand how complex the tech stack is for asset management firms. And seemingly every new tool and data source makes the problem even worse, adding more complexity, more headcount and more risk. RidgeLine offers a better way forward. One unified platform that automates away the complexity across portfolio accounting, reconciliation, reporting, trading, compliance and more, all at scale. RidgeLine is revolutionizing investment management, helping ambitious firms scale faster, operate smarter and stay ahead of the curve. See what RidgeLine can unlock for your firm. Schedule a demo at ridgeline.ai. This episode of Founder's Field Guide is sponsored by Klaviyo. Want to deliver marketing moments that last a lifetime? Klaviyo is the ultimate marketing platform for e-commerce. With targeted segmentation, email automation, SMS marketing and more, Klaviyo helps you

• 0:45Patrick O'Shaughnessy?

  create your ideal customer experience. See why more than 50,000 brands like Living Proof, Solo Stove and Nomad trust Klaviyo to grow their business. Keep your customers coming back. Get a free trial at klaviyo.com/founders. That's K-L-A-V-I-Y-O dot com slash founders. This episode is brought to you by Digital Ocean. Digital Ocean provides founders and creators with the platform they need to get their website and apps off the ground, all with low bandwidth pricing to save them money over other cloud providers. If you're looking for the best place to build web apps or API backends on robust infrastructure, Digital Ocean is the place for you. They provide a fully managed solution that handles your infrastructure, operating systems,

• 1:27Patrick O'Shaughnessy?

  databases and other dependencies on their new app platform product. App platform makes it easy to build, deploy and scale apps. Or if you prefer to manage your own infrastructure, Digital Ocean provides a suite of products that gives you full control. To learn more about Digital Ocean, get started for free at do.co/founders. That's do.co/founders. Hello and welcome everyone. I'm Patrick Roshanese and this is Founder's Field Guide. Founder's Field Guide is a series of conversations with founders, CEOs and operators building great businesses. I believe we are all builders in our own way and this series is dedicated to stories and lessons from builders of all types. Founder's Field Guide is part of the Colossus family of podcasts and you can access all

• 2:09Patrick O'Shaughnessy?

  of our podcasts, including edited transcripts, show notes and resources to keep learning at joincolossus.com.

• 2:19Speaker 01

  Patrick O'Shaughnessy is the CEO of O'Shaughnessy Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Shaughnessy Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Shaughnessy Asset Management may maintain positions in the securities discussed in this podcast.

• 2:44Patrick O'Shaughnessy?

  My guest today is Jonathan Goldberg, the founder and CEO of Carbon Direct, a company focused on advising and investing in carbon removal at scale. Jonathan started his career in the commodities division of Goldman Sachs and then went on to start a commodity hedge fund, BBL Commodities. In our conversation, we cover the state of the carbon problem today, the importance of global carbon standards and carbon taxes, and the future of carbon capture and removal technologies. This was a masterclass on all things carbon related. Please enjoy my conversation with Jonathan Goldberg.

• 3:17Patrick O'Shaughnessy?

  Our mission with these episodes is to provide access to the best ideas and people in business and investing. We will soon be significantly expanding the scope of this effort. To make it possible, at Colossus, we're expanding the team and hiring two critical early roles. The first position will be our lead mobile software developer. This person will lead the development of our mobile applications, which will change how people learn together. The second position will be our lead designer. Because the existing team lacks UX and UI design experience, this person will have a blank slate to creatively design new applications from the ground up. To learn more about both roles, visit joincolossus.com/careers. Now, on to the show.

• 3:57Patrick O'Shaughnessy?

  So, John, we've been trying to do this for a long time. I'm so jacked to do it with you finally. You've taught me most of what I know about the topics that we're going to cover today. I think an interesting place to begin would be with setting up why you're such an interesting person to be attacking this topic and this problem with your career and with this conversation today. Give us just a thumbnail sketch of the major stops of your career, and then I'll probably ask some follow-up questions on each, just so we can lay good groundwork to then talk all things carbon.

• 4:25Speaker 02

  Yeah, Patrick, thanks so much for having me here. My career actually started a bit off course, I think as many of your guests do. In school, I had fancies of becoming a writer. I worked at Reuters, and they randomly put me in the commodities group to cover Energy markets, I hadn't requested that. It just happened that three people quit the summer that I joined that job. This may tell you a little bit about the quality of work at the time, but I got to publish about 50 articles on energy markets that were distributed. I think I was 18 years old at the time and knew absolutely nothing about what I was writing about, but to get able to get some coverage and got pretty hooked on global commodity markets, why they were important, the geopolitics that goes into it, especially the energy markets. I thought I might continue on that path and writing about it. And then graduating college,

• 5:08Speaker 02

  checked rent levels in New York City and decided that something different might be a little bit more appropriate. I joined Goldman and because of this interest in commodities, got linked up with Jaren, which is the commodities group at Goldman. And really it was just a fascinating place to start my career. So the commodities group at Goldman did and does two main things. One, work with clients on their hedging needs. I worked with a lot of airlines, utilities, refiners. And then after doing that for about two years and getting a good understanding of how these markets worked, I gravitated to run what then Goldman was allowed to call a prop trading business within the firm. It may have subsequently changed names, but I essentially

• 5:49Speaker 02

  ran an internal fund within the commodities group for about six years and really enjoyed it. Great group of people, learned a lot about the market, was quite happy there. Around 2010, there was a lot of changes going on within the industry, within banking, within trading, and left to go to a company called Glencore, which is a private company at the time, to run the derivatives business in the US, doing essentially the same work that I'd been doing at Goldman. And also transition time that firm went public a few years later. I had always had some designs on starting my own firm and did that in 2013, using capital from myself, some of the partners that I'd worked with at Glencore, and then some institutional

• 6:30Speaker 02

  investors and ran that firm until about a year and a half or two years ago.

• 6:35Patrick O'Shaughnessy?

  Talk us through a little bit of BBL's part of the equation, that being the fund that you started in after leaving Glencore and really during that period, and maybe you could even bleed deeper back into both Glencore and your prop fund days at Goldman. Talk us through what that world was like when you came into it and how it's changed. So let's call you a selfish actor in this on behalf of your investors. You were trying to make money trading commodities. I would love a crash course here. What were the major commodities that you were trading, sort of in what ratios? How much was oil versus gas versus other? What were the major strategies? How has this whole world evolved? Because, well, I've had energy investors on the podcast before you know, the team that Deep Basin, who I've had a few times on, their primary focus is on equities. I've never actually

• 7:19Patrick O'Shaughnessy?

  had a commodities trader on before. So I'd love the opportunity with you here, even though we'll spend most of our conversation on what you're doing today, just to learn about this space. Walk us through what it was like when you started and how it evolved.

• 7:30Speaker 02

  It's changed so much during that time. And first, my emphasis, whether it's at BBL or even before that, while I traded a number of different markets, including some macro markets, my focus was always in, again, the actual underlying commodity itself, not in equities, not in fixed income of commodity companies. And within that, my specialty was really in energy products. So crude oil, obviously crude goes through a refinery and then produces refined products. There's no demand for crude inherently. There's demand for things like gasoline, diesel, and other products that come out of the refining process. That was really where I cut my teeth and continued to trade throughout the BBL time. The commodities often were correlated. So even if I didn't have a position on, I'd

• 8:15Speaker 02

  always keep a close eye on what was going on with some of the other commodity markets. And it's inflected a lot. It'll be interesting, actually, as we dive into the carbon discussion. When I started, there really wasn't any electronic trading. It's sort of hard to fathom now. In 2003, the majority of the trading were Bilateral transactions, they were a bit slower to occur. You had to assign different credit charges if you were doing a crack spread trade with a a Shell or a Valero and they had different credit metrics, very different from the exchange clearing mechanisms that essentially all of the trading is done on now. And also the dissemination of information was a lot slower.

• 8:55Speaker 02

  So it was all public information, but fairly well guarded in terms of how people were doing analysis on, say, Cushing, Oklahoma stocks or on inventory in New York Harbor. And today, you know, when inventory data is released on every Wednesday, that data is instantly analyzed within people's trading systems. And oftentimes, it seems moves a second after the data is released, it's been digested and traded. So it's just different. I think there was more, a little bit more interpersonal relationships with trading when I started because the information was harder to come by. We would spend a lot of time in Asia, getting to know the people who are trading those markets, and that became a bit more of the funnel. I think that's not really the case today.

• 9:40Patrick O'Shaughnessy?

  Can you talk about the evolution of what I'll call alpha? Kind of have to say alpha. I guess there is a beta, right? Like you could just be long oil for some reason over a long period of time. But what were the strategies? You've already mentioned relationships, the importance of maybe information, and that's become less important. As you were successful, especially across like the period of BBL and maybe Glencore in the most recent decade, what were the key strategies for making money as a commodities trader? And how do you think that's changed?

• 10:07Speaker 02

  For me, it was about having limited exposure to the absolute price of oil. So oil prices go up or down. Certainly there are cases where we've made and lost money by having views in either direction. I always found it more difficult because the price of oil could be correlated, for example, to the dollar getting stronger or weaker, where I didn't have a particular edge in understanding whether the dollar would go down. Others were presumably better at betting on that. Where our alpha came was generally in relative value trades. So basically, we would have views that, it's an overused example, but in the summer, gasoline prices tend to do very well relative to diesel.

• 10:51Speaker 02

  There are changes that happen in configurations of refineries that might favor one product. Versus the other. So we were always trading fundamental qualitative strategy. So it was in those areas that we always had certainly our biggest success were in those areas. And often frankly caught wrong footed if we were to just make a huge bet on a macro trend, which was a little bit more difficult to discern.

• 11:14Patrick O'Shaughnessy?

  Do you think that there is an opportunity today in these kinds of strategies? And does it look anything like maybe the opportunity size when you were at your most active?

• 11:22Speaker 02

  I do. I think that commodities, there's been a lot of comments. I think for all of my years trading, every year was the death of commodities as a trading thing. It's a sort of overused narrative, which I don't believe in. I think that there are going to be ample opportunities in commodities in both relative value and some broad trading strategies. I mean, I certainly think my expertise was generally not in the kind of broader dollars weakening inflation, but it is true that when you look at synchronized stimulus, easy monetary policy, things of that nature, there's a pretty interesting case for commodities over the next 12 and 24 months, especially with what's going on with long-term oil demand,

• 12:03Speaker 02

  changes in regulatory policy, changes in investment structure from the oil majors. I think from a trading environment, it will be quite good, actually.

• 12:12Patrick O'Shaughnessy?

  Let's talk now about a transition that you've made. And I'd like to begin that transition with maybe you describing what you're doing today. But maybe we could even back up to what insight did you have while still at BBL before you decided to move on from that business and that kind of chapter of your life to doing what you're doing now? What was the spark that ignited your interest to change?

• 12:33Speaker 02

  I had always been interested in climate-related issues, I would say, for two reasons. One, eyes and ears open. The science is apparent to anybody who chooses to look for it and pay attention to it. Also, as an energy investor, I thought that a lot of the discussions that were going around climate, many of them were helpful, but also missing huge perspective. I think that people generally underestimate just how big the energy market is. There's about $2 trillion per annum of investment in the energy industry. It's about double that if you extend it to other fossil industries. That's a huge amount of capital every year. It's very slow to turn over. And the other thing that always stuck in my head about the carbon issue that related

• 13:16Speaker 02

  to commodities is most financial assets, as you're familiar with, Patrick, are flow issues. How quickly are you growing sales? What's your long-term trajectory? And commodities are a bit of a mixture of both, and carbon is as well, where if you need a barrel of oil or a bushel of corn, you need that actual bushel. So the inventory, the stock matters. Carbon is similar and actually more exaggerated, where there was a lot of good work being done on energy transition for the flow of CO2 emissions, although not nearly enough because the flow, with a little bit of a dip because of COVID, continues to increase per annum. But the stock of CO2 already in the atmosphere was about 1.6 trillion tons. There's some

• 13:58Speaker 02

  variance in how that's measured, but about that number. And the flow is only 40 billion tons per annum. And for some reason, that stock question just wasn't addressed in the conversation, in spite of it being clear in the science that it needed. I had done a lot of just nonprofit work while I was running the fund, most especially at Columbia. There's an energy policy center that I've been on the board of since it started and helped fund something called the Carbon Management Initiative about four and a half years ago. And I just got hooked. This was an important thing to do. We needed to manage carbon in a big way to hit IPCC goals. I had started just doing this from a policy perspective. We would write papers, we still do, get them in the right hands of the right

• 14:40Speaker 02

  policymakers to help with things like carbon tax recommendations and other policy work. But when I started digging into the industry, there was just nothing there. There were no companies essentially doing this work. There was very fragmented demand for people buying carbon removal or carbon management services. And then when you looked at the science and what the science assumed that we would get to, we were assuming a negative emissions industry of roughly 10 gigatons per annum, really inflecting in 2030 and growing until 2050. We do nothing today. And just as a proxy, the entire energy industry only moves about five gigatons per annum of stuff. So we need to build essentially

• 15:24Speaker 02

  an anti-oil industry, if you will, or an industry that can remove the stock of CO2 that's 2X the size of all of the oil and gas industry. And we need to do that now.

• 15:36Patrick O'Shaughnessy?

  I love the framing of stock versus flow and it's a really good excuse to talk about like the major levers and drivers here. So 1.6 trillion versus 40 billion tells you that probably the bigger bang for the buck would be removal or reduction of the stock versus reduction of the flow. I don't think I've ever heard, anytime I've approached this issue, it's reduction of the flow. That seems to be the thing. Like here's the annual production sources. I want to talk about that too. And if we reduce them, you know, we start to solve the problem. But talk us through just why the stock is so important. What do we need to get that down to? You referred to the science a few times. I think it would be helpful to hear your perspective on that science. What are the potential range of consequences? Understanding this is a complex system, I'm sure some of it's not predictable,

• 16:21Patrick O'Shaughnessy?

  but what are the types of consequences we're talking about? And then let's dig into the sources for stock and flow and how we might do something about it.

• 16:28Speaker 02

  I think the first thing we would emphasize is, we want to be very clear, the flow is essential. A lot of our work is also focused on that. We need to hit net zero on an ongoing basis, period. That has to happen. I think our point is a little bit that there's a lot of work being done in that flow analysis and in the investments that are being made and that needs to continue and accelerate. But both things really do need to happen. And I think the other thing that we generally emphasize when we talk about carbon management broadly, so the abatement or slowing of the flow and also the removal of CO2, is that frankly, most of the models assume that flow is going to zero or something in order of magnitude to be zero. I am very skeptical of that. We're extremely encouraged by some segments of the economy, but when you look at,

• 17:12Speaker 02

  for example, we do a lot of work in the cement industry. Cement and heavy industry are huge emitters, 8% and then roughly 22% if you extend it to a broader swath of heavy industry. That's more than all the cars, trucks and planes put together in the world by a lot. And there's very little innovation happening in that industry. There's a couple really promising companies that we're working with that are doing things like low carbon heat, for example, or decarbonizing cement and steel process, either through capturing CO2 at the point of emissions or through curing it in the actual production process. But we're very far away from getting those huge numbers down towards zero and that's a little bit where we're focusing on right now.

• 17:55Patrick O'Shaughnessy?

  Can you round out that sourcing pie for us? So if heavy industry is 22% of the emissions on an annual basis, what's the rest? Just be helpful to level set people like here's where the stock is continuing to increase because of an annual flow. Like here are the sources of those emissions.

• 18:10Speaker 02

  So if you look at it at transport broadly speaking, and you could get a little bit more specific in terms of consumer vehicles, aviation trucks, et cetera. The big buckets are transport, heavy industry. Agricultural land use changes is a huge part of this, and it's one of the things that we're very concerned with because as the world changes, actually the stock of CO2 from certain natural sinks can change and get released into the atmosphere and that can become more problematic. And then obviously the power sector being the last big, big bucket. And I would guess in those, we do see a lot of slivers of like very promising things. EVs are on a great path, although it is interesting if you look at the sectoral emissions from the consumer automotive sector, in spite of great news from the Tesla's of the world,

• 18:55Speaker 02

  they're not on track to hit their Paris accords, which is pretty fascinating, even when you take it sort of an asymptoped curve of where electric vehicles are changing because the existing stock of cars is so high and they're relatively long-lived assets. We are unlikely to hit the Paris Accord even in that sector, let alone some of the harder to decarbonize areas. Power's been pretty fantastic and with the drops in solar PVs and a lot of that could enable changes in some of the other sectors and is quite encouraging, but it's still too slow.

• 19:25Patrick O'Shaughnessy?

  Can you describe the Paris Accord for us? Is that the most important of the global standards or sets of goals? If not, what are the other important ones? So maybe we just start there. Like what is it exactly? Almost like an inventory of the things that we're working towards.

• 19:40Speaker 02

  There's a number of different, I guess, important things. Paris, I think, is very important. It is non-binding, obviously be better if it were a binding accord, but just getting large nations coordinated in a way to commit to a quote unquote carbon budget over time is a huge deal. It was a big accomplishment and we should have stayed in actively and encouraged others in the Paris Accord and hopefully in a new administration that will change. I actually think some of the things that are driving the market more today are more nationalized and even local policies. So there's a lot of things out there on the compulsory side, like the EU ETS, which is a carbon price by any other name in Europe. Has a huge annual turnover, about a trillion dollars.

• 20:25Speaker 02

  It impacts industry. It impacts most, if not all, segments of the economy. And we're going to see the UK linked to that post Brexit, which is a great thing. In the US, we don't have anything quite so intricate, but we do have a number of state legislations like the LCFS in California. So it's happening, but it's happening in a very bespoke. There's 170 different types of carbon taxes throughout the world. It would be much better if these things were synthesized on a federal and global level, but there are important things happening on the bottom side.

• 20:58Patrick O'Shaughnessy?

  Can we start to talk about carbon removal? I don't think this is something that a lot of people are aware of or understand the technology behind. If we've got 1.6 trillion in the atmosphere, what are the ways that we can get it out? How much do we want to get out? What are the cutting edge technologies on this front? Who are the major players here? Just start to lay the picture here for us on the idea of carbon removal and its potential to be a huge and important thing in the world.

• 21:25Speaker 02

  I think first maybe start with the imperative that we will need carbon removal, even if we go on a more accelerated pace of slowing that flow down. And we're certainly working towards that. Because we've accumulated so much CO2, there's a lot of essentially global warming that's been baked in because the stock is having an impact on the climate. The amount that we emit going forward will change the dynamics of that, but we already have so much that we're going to have to remove CO2 from the atmosphere. And there's sort of two main categories of carbon removal. One is in the, what's called the natural carbon removal. The second is in engineered or hybrid forms. Broadly speaking, natural carbon removal is things like trees, planting trees, protecting trees, so-called improved forest management, which is essentially changing your timber

• 22:10Speaker 02

  farming practices relative to a baseline to increase the carbon stock. And choosing soils, soils have net released about 130 billion tons per annum, which is a huge amount of CO2 since the industrial age because we've changed how we farm and use lands. That's another big area that can be improved over time. There's also some developing things within the marine sector. Kelp, for example, the biomass stores CO2 and when stored properly in the ocean can be a sink of CO2. And we do a lot of work in natural carbon removal. In fact, it's by far the majority of what's happening. Today, because the engineered side is very early, on the engineered form of carbon removal, again, all of these are defined by being essentially old technologies.

• 22:55Speaker 02

  Direct air capture, for instance, is a 70-year-plus technology. We've known how to capture CO2 for a long time, but the deployment of it has been very recent and very, very low. And the main forms of carbon removal from an engineered perspective are direct air capture, which essentially takes CO2 from the ambient air, separates that CO2 from the ambient air through a variety of different processes, depending on the technology provider. And then it either stores the CO2 in the ground, which, just to be clear, is an incredibly safe process. The CO2 liquefies, it stores in geological storage, just like oil and gas has been stored in the ground for perpetuity, so too can the CO2 when it's liquefied. And we have tons of CO2 storage globally.

• 23:39Speaker 02

  There's about 20 trillion tons of available geological storage of CO2 throughout the world. We will never store 20 trillion tons of CO2 if we do, the earth is in some serious challenge. So there's plenty of storage available to it. Other forms of engineered types of carbon removal are things like bioenergy coupled with CCS. So biomass stores CO2, so things like tinder trees will store, but when the biological process, when the living organisms die, the CO2 decomposes and released back into the atmosphere. There's technology that can convert that biomass into something useful, capture CO2 in the process and have a negative process.

• 24:19Patrick O'Shaughnessy?

  Can we talk through the first of the engineering solutions? Because this is so interesting. How does it work? Is it just like giant fans? What is the technology? And it begs the question, what are the incentives if the technology's been around a long time and this is an important problem, but it hasn't been deployed? How might that change? Is it a change in incentives? Is it, this is where we might need to get into corporations, spending some money as part of their individualized efforts to reduce their own emissions or reverse them through air capture? Talk us just through like, not so much the separation technologies, but the gathering and capturing technologies.

• 24:50Speaker 02

  Your description is good. They do look like a giant series of very, very big fans, very accurate with different types of essentially absorbent materials that when run presumably on geothermal, or if you're using fossil energy, because these are energy intensive processes, you have to pick up for that CO2 and capture it during the process, which the companies do. The CO2 is separated by those fans. There's a couple of different processes which do it, but broadly speaking, it separates the CO2 and then compresses it so that it can be either stored in the ground or used in a variety of commercial processes. One of the interesting things about the tech is it's essentially all open sourced. There's been a lot of debate about direct air capture, price points, et cetera. So about 10 years ago, David Keith, who is one of the pioneers in this field, along with a few others, open sourced what

• 25:35Speaker 02

  the technology looked like, how it worked, published it, and people have been innovating off of that since. The reason it hasn't scaled is you're right. In a world where it's free to emit a ton of CO2 and you don't get charged for it, or you don't have a willingness to take care of it, there's zero reason to do direct air capture. None. It will always be easier, always, the thermodynamics are quite clear, to either capture CO2 from point source, so from a concentrated stream, or to source CO2 from the ground. It's always going to be cheaper to do those things and will be in the future. So it's only the presence, I would say, of incentives. They could be voluntary demand from companies like Microsoft

• 26:17Speaker 02

  that have these commitments to be carbon neutral, or in Microsoft's case, carbon negative. It could be a carbon tax. It could be an incentive to use what people like to call as a full cycle economy product. So taking carbon from the atmosphere, converting that CO2, which absolutely can be done, and a number of people in my team focus on this, into useful products, be it petroleum fuel, or things like polymers for plastic production, and this can be done. But you need to create either a government or market incentive to accelerate those markets.

• 26:52Patrick O'Shaughnessy?

  Talk us through the range of corporate participation around the world. You probably know the US best, but what does that mean for Microsoft? What is a big company that's made a commitment? How do they make that commitment? What does it mean? What do they do to fulfill it? If you think about the corporation as a unit and a key player here, what's happening in that world?

• 27:10Speaker 02

  Yeah, I mean, I guess 2020 was a lot of things, but it was probably also the year of pledges. It seemed every day there was a net zero, something or another alliance announcement. And listen, many of them are difficult to discern that there will be any meaning towards those things. But there has been a cohort of very large enterprises that are taking this seriously. There's not a uniform approach to how people deal with their net zero. As a firm, Carbon Direct is working with 13 clients. They're global, they're big. The CO2 footprint of our client base is about 650 million tons per annum, which is roughly the size of Germany. It's quite a lot of CO2 and there are different perspectives about what to do with that.

• 27:53Speaker 02

  Microsoft has been a fantastic partner and they've taken a very clear stance. Bill Gates has been a big advocate of direct air capture for a long time. They've taken a very clear stance that they want to be not just carbon neutral, but carbon negative since the company was formed in 1975. So what that requires is both reducing their ongoing emissions through buying renewable power, other types of sustainability, and also putting together a portfolio of carbon removal stuff. And that is both growing trees. It's working with soils to increase the CO2 intensity of the soil programs. And it's also looking at and purchasing from innovative engineered forms of carbon removal, like direct air capture. Other companies have different perspectives.

• 28:37Speaker 02

  They're more focused on the flow, on the abatement. They're focused on incorporating things like low carbon steel into their supply chain. We help companies with that, so there's a range of different approaches. And I would say it's going in the right direction. But I think, and this comes from somebody who works very extensively in the voluntary market. If people are betting that these voluntary pledges are going to fix this, that is a bad bet. They're not big enough, they're not up to the scale. There needs to be a lot more that happens.

• 29:08Patrick O'Shaughnessy?

  If you think forward, let's assume we solve this and it's 2050 and we've... Reduced to net zero or negative on an annual emission basis and we're actively pulling carbon out of the atmosphere. What's your best guess as to the major sources of making that possible, thinking about natural versus engineered? Is it feasible that, I've seen some really prominent leaders, Toby Lutke comes to mind, I think he's got trees in his Twitter profile, he's planted like some insane number of trees. What do you think the right balance is between these types of solutions at the broadest category level of natural versus engineered? And what should we be focused on? Like people that are interested in this, where do you think the bang for the buck comes from if we're successful?

• 29:48Speaker 02

  Shopify is a fantastic example of somebody doing it well and is a client of ours and Toby's done an amazing job with where he's pushed the firm on this. I would say they and we advocate very strongly for a portfolio approach. That's not a way of dodging the question, it's not a way of putting values on different things. It's simply when you look at doing over 10 gigatons of stuff, you can't get there with any of these individual projects. You just can't, at least in the timeframe. We are big advocates of using land, trees, and natural resources well, so that they are ecologically sound, they do no harm, and they have carbon benefits. But what people have estimated that tree planting can do,

• 30:32Speaker 02

  for example, this trillion tree idea that's floating around are crazy. They are not grounded in science at all. We don't have enough land, we don't have a good enough measurement of whether many of these projects are actually storing CO2 relative to a baseline. Many times they do not. They rely on crazy counterfactual analyses which are incorrect. So we can do it within that sector, but I think you're limited to sort of the single gigaton expansion when you're looking at soil carbon, tree planting, other types of biological approaches. And the other thing that I will emphasize is that those biological approaches are great and should be encouraged. They need to be done essentially in perpetuity, because if

• 31:13Speaker 02

  you grow a tree and even if you manage it correctly, that will die. And when the tree dies, the CO2 is released back into the atmosphere. So whether it lasts for 50 years or 20 years, you need to address that. And when you look at some of the short-term cycles that some of these projects do, you're solving for nothing, because essentially the carbon's just going to be released back into the atmosphere. You need more durable storage associated with And then when I look at direct air capture, one of the positives is that it is technically infinitely scalable. You can put it essentially anywhere you have access to both storage availability and also cheap and viable renewable power. And you don't want to steal that renewable power from something else. So if you put a direct air capture plant and it sucks up all the renewable power and a coal plant continues to operate, that's

• 31:58Speaker 02

  like not a carbon benefit and you shouldn't be doing that. But essentially it's infinitely scalable. The problem is it's expensive today. The price is declining, I think, quite quickly, but it's expensive and they take a long time. I mean, these plants take a million ton a year carbon engineering plant would take four years, three and a half years to build. We're not dealing with an infinite time horizon. So I think that direct air capture can and get and needs to get to the gigaton scale, not in an acceptable timeframe. So we need all of these things.

• 32:26Patrick O'Shaughnessy?

  I'm going to ask something I'll call the villain test. Let's just assume there's the demand side grows somehow, whether by regulatory requirement, national laws, or whatever, carbon prices, whatever, or bottom up. You know, Microsoft isn't being forced to do this, but they're doing it anyway. That does seem to be a legitimate wave, like a bottom up demand, growth in demand to solve this problem. The villain test question is, let's say you didn't give a damn about the earth or the atmosphere. You just wanted to make as much money as possible as somebody that was fulfillment for that demand to reduce carbon in the atmosphere. If you were that villain, what would you be doing right now? What kind of business would you be building?

• 33:06Speaker 02

  I think even in the villain test, you would be fulfilling something that needs to happen because of how limited the industry is now. There's a lot that needs to be built. I mean, I think if you're purely financially focused, I think infrastructure around CO2 storage, so pipeline assets, storage, infrastructure, taking CO2 that's being captured from point source to direct air capture. There are a couple of great companies doing it now, but not enough. I think that there's a big commercial opportunity. There, I think that there will be a few parts of the circular economy that work well, where I can see some areas where you can do CO2 conversion, for example, into carbon monoxide, which is a huge market. It's a hundred billion dollar a year market for polymers and other things. I think that there's a pathway forward where you can actually make that sort of green

• 33:51Speaker 02

  carbon monoxide at a cheaper price than the traditional stuff. I'm very skeptical that you'll be able to take CO2 from the atmosphere and turn it into like a petroleum type fuel at anything that's cost competitive. So I doubt that would be a good place to be a villain anytime soon, but I can see some of these areas having just a pure commercial result. And I think that that's going to expand over time.

• 34:14Patrick O'Shaughnessy?

  Talk us through the existing two industries of we'll call it fossil fuels and I'll call it clean energy. I don't know what else to call it, wind, solar, et cetera. No emission energy creators. What are the major trends that you're seeing in these two spaces? Maybe we could start with fossil fuels. It's kind of interesting that what seems to be at sort of the tail end of this thing, we had something like a Ramco plans to be a publicly traded company. What's going on in the world of fossil fuels that you think is interesting? What's changed the most? The energy sector is like now a minuscule part of the stock market, which is just fascinating. I remember when I started my career, it was like 12, 13, 14%. Now it's like one or 2%. What do you see there in the world of fossil fuels first? And then we'll go to sustainable or clean energy.

• 34:56Speaker 02

  On the fossil side, I segregate what's actually happening in the world that will contribute or not to climate impact. And then the financial assets. I mean, I think while the market has done a pretty good job of divesting for you, because if you just own the S and P 500, you've miraculously divested from a significant amount of your energy portfolio because the companies haven't done very well. And I think that there's other areas where the financial markets have done things like increasing capital costs to the oil and gas industry. So if you look at essentially the embedded carbon tax in the market, it's about $80 to $100 a ton. And that's basically backed out from looking at what IRR do you need to finance on a cost of capital basis? A clean energy versus a fossil, it's significantly different.

• 35:40Speaker 02

  That being said, we still use pre-COVID and likely in 2021, 100 million barrels a day of the stuff. So even if the stocks are trading at lower P E's and multiples and whatever the case may be, the world uses 100 million barrels a day of petroleum-based things. And that will be higher in 2021 than it was in 2019. The rate of growth is definitely slowing, particularly will be in aviation fuel for next year because flying, I think, could be structurally impaired. Transport demand for cars, E Vs are having a marginal decline in gasoline, but the level is staying pretty high. But petrochemical demand is really good. There's going to be a lot of infrastructure spending.

• 36:20Speaker 02

  So I think it's important for people to note from a climate perspective that divestment on its own does not do anything. You've changed asset ownership from one person to another. Maybe indirectly, there's some capital cost change, but I don't want to digress too much on divestment. But you know, I have a friend, he has fancy cars and he got very concerned on climate. He never drove the cars. It's a very expensive collection. He never drove them, but he wants to be a climate forward person. So he sold all the cars to somebody else. Well, the problem is the person he sold them to is going to drive them on. So if you're, if you're an energy company and you're selling all of your cars to someone who's actually going to use them, the net CO2 emissions are not going down because of this. So I think we're in that part of the market phase right now.

• 37:04Speaker 02

  And I think that's also why people will be disappointed that in the next couple of years, the level of CO2 emissions that we're having are nowhere near consistent with the Paris Accord.

• 37:14Patrick O'Shaughnessy?

  Let's talk about E V. I'll call it from the consumer perspective. So I'm increasingly of this view that convenience is sort of everything and price is part of convenience for sure. I would put myself in the camp of, if you just told me there was an easy way for me to switch my personal consumption of energy, let's just call it in all ways, transport home and otherwise, in a relatively neutral cost setting or even pay more, I would certainly do it. And my guess is a lot of people would. So talk us through the market dynamics, the consumer dynamics, whatever you think is important on changes in clean energy. My understanding is the cost of solar and some of these other things has come way, way down. How much room is there to run in those sorts of things? Walk us through this whole part.

• 37:55Speaker 02

  I think the first thing I would emphasize is that while there are certainly some parts of the market who will pay a green premium and do things like that. One should assume that the willingness to pay for this stuff is zero. We have a client, he's a very large producer of consumer goods. They've tested all of this, whether it's in detergent or in other types of consumer products. It's zero. It's not a little bit, it's absolutely zero. You need to deliver to consumers, again writ large, something that is cost competitive or cheaper than the existing product or has substantial differentiated benefits in the use and when we invest capital. I always remember what these people have spent billions and billions of dollars to figure out I have, so we don't need to learn that lesson again. In areas like power, where it's just legitimately cheaper to use wind and solar, depending

• 38:40Speaker 02

  on where you are, depending on the intermittency issues, it's going to win out. People say to win out through market forces, I think that's the wrong term because we need to remember that all of these markets, whether it's oil and gas, renewable solar, they're all subsidized. They all have some type of embedded tax subsidy, positive or negative. It could be a gasoline tax that penalizes you for driving, it could be an incentive structure. But just for the price to the consumer, whether it's financed by the treasury or just a lower cost, needs to be at or below the competition. And for power, it looks really good. I think for EVs, you know, we're five years away from lifecycle EV ownership being cheaper than fossil cars. But again, the car stock lasts a long time and people will be driving my friends' cars

• 39:24Speaker 02

  traded around for a period. I think those are the two broad trends. I do want to emphasize one trend that I would like to pick up that unfortunately hasn't. A lot of the work that we do at Columbia is again policy focused. This is in policy and frankly in the market to really look critically at what we call the levelized cost of carbon abatement. So what that means is whether it's a treasury making a decision or a company, what are you paying in dollars per ton to remove a ton of CO2 or to avoid a ton of CO2? And for some reason, we just don't do policy this way. We say basically, I want to sell a million electric vehicles at a cost. You don't look at it at what am I paying per ton of what I'm avoiding?

• 40:07Speaker 02

  And I hope that we get to a point where we look at this much more critically because some of the things that have accelerated, including EVs, which is good, have come at significant cost per ton. So electric vehicle subsidies can be $500 a ton. They're declining and that was to encourage the market, it's a good thing. But we need to, with a finite budget and a finite amount of time, really look closely at how those subsidies are applied.

• 40:30Patrick O'Shaughnessy?

  Can you talk us through the geopolitical will landscape of the world, both snapshot and movie? So if you had to put governments in like a couple of major categories, what are the major categories of sort of government stance towards all of this stuff as a snapshot today? And how do you think that movie plays out? Like, what are the rates of change that you observe?

• 40:52Speaker 02

  I'd say Europe and Canada are probably in a league of their own today, both in terms of compulsory markets. So Ottawa just announced a carbon tax that's going to be $175 a ton. It's an escalating carbon tax. That's incredible. I mean, that's going to be above the price of direct air capture when it hits that level. I think that's quite important. The EU carbon price now is 33 euros a ton, give or take, which is really approaching where it should be. I think the price of carbon should be the price that it costs to remove and store CO2, to give an accurate market reflection, but it's climbing from 35, which is great. China, who knows? Just legitimately don't know. The net zero announcement, I think, is a good thing, particularly when the US wasn't willing to make it. I think China, if they can make money on things like solar innovation,

• 41:37Speaker 02

  electric vehicles, they are going to do it. So if the rest of the world does lead a little bit in terms of pricing things, I think you'll see a significant amount of innovation. On the carbon removal, we're hugely skeptical of what we've seen. They've got announced a number of reforestation goals, and they have a long history of this and a long history of it working poorly and not delivering the carbon benefits that have been stated. Japan's made a net zero goal as well. And then, of course, the US. I'm pretty optimistic, actually, about 2021 in that I think the makeup of this election between the more centrists, for lack of a better term, part of the Democratic Party, and what I'm seeing is slow and not enough, but some movements from the Republicans that are supportive of innovation around climate,

• 42:22Speaker 02

  other types of things that are a carbon tax by other names, and I think a significant uptake in R and D from the US government on climate innovation.

• 42:31Patrick O'Shaughnessy?

  I forgot to ask earlier about just consequences. I mentioned it, we didn't go into it. When you think about whatever the peak awareness of whenever an inconvenient truth came out from Al Gore, my living memory, that was sort of like this wake up moment for a lot of people, probably because it was an approachable presentation of what was going on. What do you think today? What have we learned since then? Good, bad, ugly, different than what was said back then? What in your mind are the primary consequences that people should be aware of? Should we be unsuccessful in both flow and stock removal over the next 100 years or whatever the timeframe you think is appropriate?

• 43:10Speaker 02

  Yeah, unfortunately, we didn't learn much from inconvenient truth because half of all emissions since the industrial age has happened since that documentary was released, which is stunning. I think it's an important document, but in terms of what's happened, I guess it could have been worse without it.

• 43:27Patrick O'Shaughnessy?

  Right. You don't know the counterfactual, right?

• 43:28Speaker 02

  Yeah. So by the way, it quite likely would have been worse. So that's a good thing, but we haven't learned a ton. I think that when you look at the climate protests that have happened and a lot of the rhetoric from especially young people, I think it's great and galvanizing action. It's not true that there's some type of binary event that if we made it another 1 billion tons of CO2, it's all over. Like it doesn't work like that. There will be escalating impacts on things like ocean acidification and how we feed people globally. Obviously California with the forest fires that we've seen in the last few years that will accelerate and move to other areas. And unfortunately, like most of the challenges, this is going to screw poor people and poor nations, a lot more than wealthy nations. We'll be able to adjust where luxury condos in Miami are

• 44:13Speaker 02

  built and we will find a way to continue to grow. But areas with poor infrastructure and flooding and all sorts of things can really set a lot of progress back. And it will not happen in one thing overnight. I mean, frankly, you saw a lot of people had expected that you would see some type of climate disaster. We'd all get together and kumbaya would fix it. It's not going to be like that. It's going to be more voracity of hurricanes. It's going to be more incidences like in California, which on their own, there's some improvements in attribution science, which can show specific events and that they're caused by climate change, although that science is imperfect. It will remain imperfect and it will just be this trend of more severe challenges.

• 44:58Patrick O'Shaughnessy?

  What have we missed in terms of major players or technologies or really anything that we haven't covered yet that you're focused on and you know, think we need to cover the audience would be interested in?

• 45:09Speaker 02

  Regulation matters for all of the $2 trillion in energy spending and all of the $5 trillion in sort of commodity spending broadly. There's been some reticence to get into the market, although we're doing it. I think there's some other really smart investors who are getting into the space now because, well, we can't figure this out because there could be a change in regulation and things of that nature. That's true for all $5 trillion. So I think the key is to understand where things are underwriteable today. And then, yeah, have a little bit of a view on where the tailwinds are going within it, but not to simply avoid the sector. I think that'd be one message. The other thing that's really important to emphasize, and I know this goes a little bit against the background in trading and running a fund. I love trading on markets and you can make money doing it and that's great.

• 45:52Speaker 02

  I think there's an idea that's a little bit coming to the fore that we disagree with that simply scaling, quote unquote, "the market" will be a good thing. It won't. And I'm talking specifically about the voluntary carbon market. So what people are willing to pay to wash away their sins or whether it's in a regulatory market, you're literally paying for the right to emit a ton of CO2. We need to ground truth the quality elements of all of the things that are solutions in the voluntary carbon markets through rigorous science that we understand that we're actually getting a ton of carbon benefit from those. The history of these are really, and it's very important as we go forward, that there needs to be a science-first approach to all of these things. The market needs to come second, third, and last to what matters.

• 46:34Patrick O'Shaughnessy?

  We haven't talked really about the active investing side of what you do. If you split your business today, it's sort of advisory and investing. Advisory, I think you've talked about some clients like Shopify and Microsoft have a general sense for like helping big corporations think through their options, what they should do, structured strategies, et cetera. On the investing side, walk us through that. Again, investing tends to be, perhaps at least some financial interest, of course. People that put money into technologies or companies or whatever it is that are going to be helping with this problem. How do you think through that? What are the major categories of investment? What has you most excited that we haven't talked about? What are the sorts of things that you're backing and at what scale?

• 47:12Speaker 02

  I think in both our advisory business and the investing that we do is science comes first in both of those things. We've got 25 scientists on my team. They've got a variety of expertise from natural carbon removal to engineer. And everything we do, whether recommending something to a client or putting capital into it, we have to do rigorous analysis on. It is unfortunate part of this ESG landscape that there are a lot of claims that can be made by companies looking for money that the technology is unproven and/or it does not actually provide the carbon benefit. So we do real rigorous analysis on both the advisory side and the investment side that works. The science behind it is solid and sound. And then when we look to deploy money and this doesn't make changes through over time,

• 47:55Speaker 02

  we're firmly in this growth equity part of the investing cycle. And by that, I mean, we don't do venture. There are some good venture investors out there in the space, but I need my team to be able to look at something in a real world scenario. It's been cited, we can test it, get real data. And that company has a customer or customers so that we're not the only one saying, yes, this works, it's a great idea. There's some type of commercial validation, even if the revenue numbers are low, there's something there. For our strategy, which may not be for all, you know, we invest in the capital light part of the business. There are essentially a dozen or so very important, you can think of as like the intel inside for the carbon industry, companies that are technology focused that integrate

• 48:40Speaker 02

  with larger projects to reduce, eliminate, or use the CO2. It could be a point source capture company where a client like Lafarge would pay for the point source to remove the CO2 for the regulatory or use case reasons. That may change over time. And part of the reason we have the advisory business is as demand increases for the market, there will be more project financing type capital that's going to be needed into the industry because you'll have a little bit of a more de-risk revenue stream. But for now, we're finding the sweet spot in these technology growth equity rounds.

• 49:12Patrick O'Shaughnessy?

  Well, I knew this would be just an awesome masterclass on all things carbon reduction and removal. When I met you, most of the stuff I had no clue about. So I'm sure people will be really interested to hear just, first of all, the scope of it is just staggering. I mean, the number of different trillion dollar numbers that you can throw out there that we need to change is staggering. So I so appreciate the time today. I think you know my traditional closing question for everybody, which is to ask for the kindest thing that anyone's ever done for you.

• 49:38Speaker 02

  I have to say, I ran this by my, my wife, who you know, and we met, she was in the UK and I was here in New York. And let's just say, we live in New York now. So I, I both agree with and am obliged to point that out.

• 49:50Patrick O'Shaughnessy?

  I love it. I love it. Simple, true. Simple and true.

• 49:55Patrick O'Shaughnessy?

  Well, John, thanks so much for the time today. Really appreciate everything you've taught me here and for you teaching everyone else as well. If you enjoyed this episode, check out joincolossus.com. There you'll find every episode of this podcast, complete with transcripts, show notes, and resources to keep learning. You can also sign up for our newsletter, Colossus Weekly, where we condense episodes to the big ideas, quotations, and more, as well as share the best content we find on the internet every week.