Episode 131: Jon Goldberg & Julio Friedmann, Carbon Direct

Management and ReportingFinancial Services

Nov 16

Today's guests are Jon Goldberg, Founder & CEO, and Julio Friedmann, Chief Scientist, at Carbon Direct.

Carbon Direct is a strategic advisor for companies with carbon removal commitments and an investor to scale carbon removal, reduction, and use. They focus on negative emissions investing. Jon has spent his career working in finance, investing, and climate focused commodities before founding Carbon Direct. While Julio, has focused his career on decarbonization and carbon removal from public policy at the US Department of Energy to research institutes. Jon and Julio, along with the team at Carbon Direct, saw a gap in science investing in the climate space. They are working to commodify carbon removal by investing their science based fund in companies building the negative emissions industry. Simultaneously, Carbon Direct is helping customers with negative emissions commitments reach their goals.

I learned a lot in the episode. Jon and Julio are the first pair to come onto the podcast and it led to a fascinating discussion. We dive into Carbon Direct, their place in the market, and how Carbon Direct is changing the game. We also discuss the areas Jon and Julio are most excited about as well as net zero commitments and the controversy of offsets.

Enjoy the show!

You can find me on Twitter @jjacobs22 (me), @mcjpod (podcast) or @mcjcollective (company). You can reach us via email at info@mcjcollective.com, where we encourage you to share your feedback on episodes and suggestions for future topics or guests.

In Today's episode, we cover:

Jon and Julio’s respective climate journeys
An overview of Carbon Direct and how it came to be
The controversy surrounding carbon offsets

Jason Jacobs: Hello everyone, this is Jason Jacobs and welcome to My Climate Journey. This show follows my journey to interview a wide range of guests to better understand and make sense of the formidable problem of climate change and try to figure out how people like you and I can help. Today's guests are Jonathan Goldberg and Julio Friedmann, the founder and CEO and the chief scientist of Carbon Direct. Carbon Direct is a first of a kind company that is scaling the negative emissions industries. They do that in two ways. One is almost like a financial advisor that works with companies and primarily today, the big companies to help them to allocate their negative emissions spend across projects, identifying high quality ones that will best address their unique needs. And the second piece is around investment, to point capital and negative emissions companies that tend to be further along and ready for scale.
We have a great discussion in this episode about the negative emissions' industry, why it matters, where it is in its evolution, some of the more interesting areas for exploration, some of the barriers that are holding it back, some changes that would best unlock its progress, as well as a fascinating discussion about the mindset of these large organizations. How to tell which ones are serious with their net zero commits, how they're thinking about negative emissions, as well as what the future holds and the role of innovation, the role of policy and the role of breakthrough technology. Julio, Jonathan, welcome to the show.
Jonathan Goldberg: Thanks for having us.
Julio Friedmann: Glad to be back.
Jason Jacobs: Usually don't let people double up like this Julio, so you must be special or you must have slipped in somehow. I'm not sure quite how this happened, but I'm so glad that you're back.
Julio Friedmann: I just couldn't miss an opportunity to be back on your show and glad you're tolerating my presence.
Jason Jacobs: It's just such an important topic, this negative emissions and I've touched on it recently. I had the Stripe team on and Toby from Shopify came on and we had, uh, Peter from Charm Industrial on the climate tech startup series. So we've been kind of poking at it from some different directions and there's some others that I missed as well, but the Carbon Direct angle seems to be a little different in terms of your path. So I thought it would be fun to have you guys on and to take 45 minutes or an hour and really dig into what you're doing. Jon, why don't you take this one? What is Carbon Direct?
Jonathan Goldberg: I'll give Julio a lot of credit for what Carbon Direct is. I can kind of give a quick personal rundown, but only because it directly relates to what Carbon Direct does, but my career's been spent in investing, in managing funds around commodities and energy commodities, agricultural commodities, renewable commodities, uh, you name it, we've sort of invested in over the last 20 years. I got very concerned and hooked on climate related issues in no small part because of the work that I've been doing at the Energy Policy Center at Columbia with Jason Bordoff, when he was a friend of yours as well. That's how I got to meet Julio at the Carbon Management Initiative about four years ago, and then taking a bit of a sort of commodity lens with the scientific element that Julio was bringing to the table really late to an imperative to build out Carbon Direct because I saw a lot of the connective tissue that does work in that exist and that functions reasonably well in other commodity markets.
So infrastructure, off take agreements, investments, but investments across the value chain, not just in venture, not just in private equity, not just in growth equity, as well as working with clients was not happening in carbon removal, was not happening in carbon management. And it's an industry that needs to be order of magnitude two times the size of my previous industry, which is huge and was, none of that was happening. So our firm does two things, we work with clients who are principally buying forms of carbon removal. The idea is to sit side-by-side with buyers, it's a complicated landscape and try to help them sort through their options. And then we invest capital and we invest into the industry of carbon management, removal and utilization. You know, the heart of all of what we're doing is really what Julio has brought together, which is a terrific team of scientists, which we try to support on the business side, but who they can walk you through the more scientific and interesting angle of, of the team structure.
Jason Jacobs: Well, that's a nice lead in, Julio, would you like to do that?
Julio Friedmann: Very much so, and I'm really excited and enthusiastic about the work at Carbon Direct because at the end of the day, the best possible outcome is to commoditize CO2 removal to make it a place which is an open, transparent fungible market where everyone can get into it. And boy, we are far, far away from that right now. We don't have the supply, we don't have the demand, we don't have the standards. We don't have the protocols, like all this stuff. And one of the great things about working with Jonathan and about the team we've assembled at Carbon Direct is we led with the science. We said, we need to understand forests for real. We need to understand CO2 mineralization for real, we can't issue a valid, verifiable, durable product if we don't have people who really understand the technology, the biology, the physics and chemistry, we just need that. And that has proven to be an important differentiator.
So we've got some of the world's best experts on direct air capture, people like Jennifer Wilcox, we've got world-class experts on blue carbon, people like Tiffany Traxler. World-class soil experts like Pete Smith at Aberdeen or Keith Paustian at Colorado. And these people all want the same thing, they want the tons out of the air and ocean, they want it to be durable and real. And so that alignment of expertise and vision and wish allows Carbon Direct to move quickly in separate sense from nonsense to help our customers.
Jason Jacobs: Great. And when Jon was first explaining to me the business many months back, the analogy that we spoke about at the time, or I can't even remember if we spoke about it, but as the one that came in my head was almost like a wealth manager where it's helping big companies who, uh, have negative emissions spend that they need to do, uh, sort through the different areas where they could put it and construct a portfolio that optimizes that spend for impact and any other objectives that they may have. How does that analogy work for what your doing?
Julio Friedmann: So Tom Lehrer had a punchline in his sketch where he said that he had a doctor friend who specialized in diseases of the rich. We're not that, it is instead I think a consequence of the way that this whole enterprise is unrolling and structured, that the only people who can really get serious about carbon management are really wealthy individuals and companies. It's a company like Microsoft or like Shell that has an urgent and imperative problem, but also has the resources to tackle it. So we're really delighted that companies are showing that level of ambition and they certainly have that need, but I would sort of put it the other way around, we want to evolve to the opposite position. We want it to evolve to a place where anybody can get into this and that there's a, a valid, easily accessible CO2 removal product for anybody.
Jonathan Goldberg: The analogy Jason is, um, I think, uh, a good one I may have stolen it a few times after we spoke.
Jason Jacobs: People say that with my analogies a lot, by the way, which I take as a huge compliment because I, that, I am an analogy guy, that's how I think.
Jonathan Goldberg: Hopefully I get another one out of this podcast that I can ... kind of this conversation. There's a lot of truth to that, right? I mean, some of it is in portfolio management, like financial wealth products have diversified approaches with different portfolios, or different strengths, or different weaknesses and there's different durations, right? You have the long-term financial assets that you hold for a long period of time. And then within the CDR space there's options that have higher levels of durability, like direct air capture and those that have shorter level of durability. And you need to have some sensible way, not in this case, purely a financial one, but also a sense of the climate science, about the value of storage. And that is also an important part of what we do.
I think it's a, a reasonable analogy and then Julio, his extension is a good one, right now this is difficult work to do. The products are new, they're hard to understand. They take a very tailored approach to doing it. Our goal as a firm is that if we do a good job, we will be great customers to the suppliers of carbon removal and make it easier for people to participate in the market over time. And that is actually similar to the management model that you've described.
Jason Jacobs: So maybe since it sounds like you have ambitions well beyond your kind of entry point, here may be good for sake of at least this initial part of this discussion to talk about where you're focused today. And then we can kind of come back around to maybe how this evolves and staging and things like that. But today, what type of company makes a good prospect for Carbon Direct?
Jonathan Goldberg: We're working with 10 companies right now, the companies themselves are quite large. The CO2 footprint is about 650 million tons per annum among our client base, which is roughly equivalent to Korea. So it's quite a lot. Different clients have different perspectives on what they want to do within the programs, whether it's outright purchases of carbon dioxide removal, which is great, or thinking through within their supply chain ways that we can use our expertise, it could be on biomass conversion to hydrogen or skin gas as a way to change supply chain management, CO2 to diesel for data center powering, things like that. So clients have different objectives.
The commodity clients, a lot of the clients are in the technology sector. The commodity clients also have infrastructure that they're looking to utilize that could be mining companies that are looking to use mine killings to accelerate CO2 capture, potentially as part of both their de-carbonization strategy and also potentially as a business line where they're capturing that carbon and storing it and there's regulatory capture involved with that. So it's quite a range of things that we do. There's a reason that the companies are, are, tend to be large in that the industry is very nascent right now, as you know, it is very easy to get excited about certain things that are going on in the market, but underestimate the scale that we really need to make any of this work.
Projects at scale in negative emissions in natural carbon solutions, as well as in particular in engineered solutions are expensive. They're big, they're capital intensive. They have uncertain revenue lines. Our view has been that if we are able to work with companies that have significant levels of carbon demand or are significantly sort of punching above their weight in terms of spend, relative to carbon emissions, and we have a few who really are doing that, we could make a difference getting the supply chain bigger. And that's why we've taken this particular track.
Jason Jacobs: And then for the companies that you work with, who it sounds like you do different things, but one piece is if they have spend, it's helping them purchase the right projects, what, is that the lion's share of what you do or is that just kind of one slice of a portfolio of services that you're delivering for these companies?
Jonathan Goldberg: I'd say it's one slice, a critically important slice of what we're doing, as you know, and as Julio has talked about on your previous podcasts and consistent with our team and with all the science, we are not getting out of this mess without wide-scale carbon removal in addition to carbon management. We've got some special expertise in CDR, but we need to work with clients where clients are. Um, a lot of companies have made very strong CDR commitments, that's great. We are doing those. Others have said they're simply not doing it, but they have significant room to run in meeting their, where there's 2030, 2035, 2050 de-carbonization goals. And if we can accelerate that process, there's some good in that.
Julio Friedmann: Let me add something there too, which is sort of a Margaret Mead anthropological thing. One of the things that I think we've been pleased with is how sophisticated most of the companies we work with are. Like they enter with a really deep level of understanding about the climate and the science and what's available, and it's part of the reason they've come to us, is because they've actually gone through sort of many, many tiers of thinking. And we're like, okay, well, if we want to get this done, we need some help. Who can we go to? And even with that level of sophistication, there's cognitive dissonance. Where they will say, like, we understand that to do the job really costs a whole lot more than $10 a ton, but we only want to spend $10 a ton.
So even though we know it costs a lot more than that, what can we do knowing that? And we do our best to explain, like we are always seeking low cost, valid, verifiable, durable removal, but there's only so much of that. And so the rest of this stuff will cost more, that's why we talk portfolio all the time and they're comfortable with that way of thinking. They're like, we understand that our portfolio reduces cost and reduces risk. Excellent. Back to that point about $10, can't we do it for 10? And these are the most sophisticated people are saying, that they know that it costs more, but they're still asking if they can get it for less. And I think that's sort of where the market's at right now. And I don't begrudge anybody in any of that. Like, I absolutely get it.
Many of our customers where let's say big tech companies, they say, look, we could pay more, but we don't want to just pay our way out of this, we want to evolve the market. We want to grow supplies, we want to develop standards. We want to learn as a community because otherwise we won't get to where we need to be either. So if we're going to pay more than a minimum or that we're contemplating today, we want to make sure we get these other things as well, that we get the learnings or the findings or the standards or the growth that will help us get there. And so everyone is kind of feeling their way through this landscape. And we feel that part of what we do as a company has helped them wherever that is.
Jonathan Goldberg: I mean, we're pretty lucky with the cohort that we're working with as Julio mentioned, because nobody wants to pay higher prices when they can pay lower prices. But we do have clients that are willing to pay "High prices." And again, it's sort of all relative, right? So it's a high price, but only relative to prices that have been artificially low and haven't accomplished much for a long period of time using the phrase ology of a high price. But everyone that we've dealt with has said, we'll pay that if there is a line of sight where either we individually or we collectively can drive that cost is something that we think can have a broader market impact, because if we're the only people that can afford this particular solution, it's not going to do much, it's got to get to something that can be adopted at scale.
Jason Jacobs: And what's motivating them to come to that conclusion that they're willing to pay higher prices in the short term? Is it strictly bleeding heart or is there something else going on?
Jonathan Goldberg: It's a first. I mean, I think that some of it is, you know, there's a lot of our early clients come from, uh, technology and innovation space where they get it, they get the learnings by doing, they get that technology scales down over time. And your podcast has spoke I think pretty eloquently about some of these things. I think they understand that need for early innovation and have a technology orientation towards the way that they view the world because of some of the great companies that they've created in the tech sector. So I think that, that's part of it. I also think that in some part, because like the scientific literature that many of the people on our team have done is I do think this high cost thing is somewhat of an artifice.
It's not a real conversation because you do need to measure something that lasts for a long period of time, whether it's direct air capture or something similar to the charm process where you're storing the bio oil for a long period of time, it's just not fair to say, well, that costs $300 and forestry costs something substantially less than that when the durability is very different. And I think the folks that are on the cutting edge of data get that.
Julio Friedmann: A good example of a way to sort of anchor your thinking around this is carbon mineralization. And I keep coming back to carbon mineralization as a thing, because you don't have to ask yourself, is it durable? You're like making a rock, it's going to be around for a while. Right? Well, today the cost of doing that is pretty high, like 150 or 200 bucks a ton, but there's no ambiguity. It's easy to monitor and manage and it's certainly durable. We also have no projects around the world doing that today, zero that are just pure mineralization projects. So of course the first project are going to cost more. So it's reasonable to say, well, how should we spend money to scale up that enterprise? Do we need five or six of these places around the world doing the job? Do we need to create companies that will create the supply chains? Do we need to invest in more science first? We know that's a big prize. There's gigatons in carbon mineralization, but how do we get into that space?
And so for most of the people we're talking to, it's not the actual dollars, they want a line of sight to the cost reduction, they want a line of sight to the scale up. And so whatever the topic is, whether it's mangroves or carbon mineralization or bio oil injection, like it's always the same topic, what's the line of sight to getting stuff done?
Jason Jacobs: I guess, switching over for a moment to the supply side, how do you think about that landscape in terms of how many buckets of things, areas are there that you evaluate, is that, are those fixed buckets or is it constantly changing? What are those buckets? What are some of the areas you're most excited about? I mean, that's too much for one question, but I guess take that anywhere that you will.
Jonathan Goldberg: One of the things that we've been pleased about is that the more we work on this space, the better some options look. I think we were sad to discover that the really good forestry stuff, the stuff that was additional and actionable and like verifiable was a whole lot smaller than we had wanted. But as we're looking, we're finding more and more of that stuff. A compliment to that is there's something like blue carbon, we're talking about mangroves or deep ocean and movement of carbon and stuff like that. When we started this, we were like, yeah, that's not ready for prime time. We're about a year later and there's actually stuff that looks interesting.
There's companies that we're working with, there's projects and offerings that we think are valid. There's still questions about the term and the monitoring, and we want to understand those things. But a year ago we would've said, eh, I wouldn't look at that. And now we're looking at it. Same thing with something like peatland restoration, where we sort of said, well, is that just avoided? How big a prize is that? I think we're convinced now that there's a pony in that, that there has a real opportunity, not only to avoid continued emissions, but to reduce and then ultimately remove carbon and that the action plan and the costs look reasonable in a way that we didn't originally think. So this voyage of discovery has been a good one. We're finding more options as we go.
Jason Jacobs: DO you find that as you go from client to client, and I know, I'll try to stay away from asking specifics about any one client that you can't talk about, but just in general, is the recipe the same? Are the solution stack ranked the same, is the fruit ripe, the ripest the same from a solution standpoint, as you go from client to client, or is it all over the map based on what their specific unique needs are?
Julio Friedmann: I wouldn't describe it as all over the map, because the principles that we're applying to things are a scenario described, valid verifiable forms of carbon removal. There isn't that many options out there that actually do that, which limits sort of how far along the map one can go. I do think that there's some legitimate differences of opinion in terms of certain clients don't want to involve engineered solutions. They don't think that they're going to scale, they don't think that the cost structure is going to go down over time. And they're more comfortable in the broadly speaking nature-based solutions or ecosystem management. I'm not sure that we fully agree with that view, we've got a team devoted to study direct air capture. We spend a lot of time with these folks explaining how the cost curve can change over time and the durability of it, but at the end of the day, it's their capital.
It's their corporate program that they're looking to implement. So we implement the best nature-based solutions that we can find. So high quality forest projects, high quality soil projects, and the like. Other firms are quite open and public that they are technology firms. They want to be supportive of the engineering curve. They believe that engineering is the way that's going to solve, as climate gets warmer and warmer, it's going to be increasingly difficult for some of the natural carbon solutions to maintain their carbon benefits, and they want to be more on the engineering curve. So there is a difference of opinion, but it's not wildly divergent because the principle of taking a ton of carbon and storing it for some durable term, right? We don't say permanent because nothing is permanent, and that would rule out essentially all of the nature-based solutions, which we think would be a big mistake, but durable. The only projects we would ever recommend to anybody, we would map, recommend and work with things if we didn't feel hit that filter and that is not an infinitely wide universe.
Jonathan Goldberg: And it is also the case that many of the customers who come to us, even if they want to invest differently or pursue a specific path, one over the other, they're often asking the same set of questions. So they want to understand something like regenerative agriculture. They're like, we're hearing a lot about regenerative agriculture, which we think about it. And our answers are kind of the same for all those people. It's, we're enthusiastic about regenerative agriculture, we're not sure that you get any tons. So if you want to invest in a regenerative agriculture company, like there could be a lot of benefit to that in terms of increased farm yields and ecosystem health and water quality and all that other stuff, we want from our perspective to think hard and clearly about whether you're getting CO2 transfer from the atmosphere to the biosphere, to the geosphere. And if you're not getting that, then you should be working with somebody else because we care about the tons. And that thought process proves helpful and salutary.
Jason Jacobs: Are all net zero commitments equal?
Julio Friedmann: I would say more than you'd guess, how's that for a waffley answer? First of all, if you're not making a net zero commitment, then you're not really thinking hard about what the future looks like. I understand why there's lots of companies that have not made net zero commitments, I'm not faulting anybody, but we all know that to stabilize climate, you have to get to net zero. And so the people who are leading in that space are, are leading. Like they're forward. We have not seen a lot of sort of green washing. We haven't seen a lot of people who are like, hey, net zero, piece of cake. And then we're just going to buy some offsets and walk away.
Like the people who've made net zero commitments are pretty serious about it. I would add to that though, there's two other dimensions. One of them is time, are you net zero by 2050 or are you net zero by 2030? That makes a difference because you have to change a lot of different things, but it's a lot easier for a company that has say 10 million tons of emissions to reduce. It's a lot easier for them to say than the one that has 500 million tons, right? So if a 500 million ton company is making a net zero commitment for 2050, like that's still material. But the second thing I would point to is what are the increments between the net zero date and the present? So if you're a company like Dow, let's say, which is not a customer of ours today, they made a commitment for 2050, but they have a set of interim measures between them that keep them on that track. So the current CEO is still being graded on actions toward net zero on an annual basis. That's a different net zero commitment than a company that doesn't do this.
Jason Jacobs: I can't remember, but one of you mentioned that your customers are surprisingly educated in this area. I'm curious, where does that education live in these organizations? And then where are you guys primarily interfacing over the course of these engagements? What level and what departments in the organization?
Jonathan Goldberg: It depends. I mean, something, you know, Julio just mentioned these targets mean different things for a company that emits five million times versus 500 million times, right? So if you're a technology company, likely have made great progress within your sustainability office, so there's a chief sustainability officer and have made for the most part what they've done with renewable power purchasing has been pretty phenomenal over the last couple of years. And frankly, we add no value in those purchase decisions because they've optimized them incredibly well. But understanding residual CO2 and how to get rid of them is something that the team needs some significant help with, which is where we come in.
For other clients, principally those that are engaged in some way in the production of a commodity, it's a CEO level decision. And I think that's where these net zero things do really diverge because, you know, if your a commodity producer, an energy company, is it scope one, scope two and scope three, how are you counting those things? How are you counting your customer emissions? How much do you want to decarbonize through operational efficiencies? How involved do you want to be in purchasing and buying carbon removal credits. Some of those companies are even building essentially project developers in the offset space to potentially sell those to their customers. So it's a much more sort of systematic question in terms of how their business operates, where I think for firms that it's not their direct thing, it's a very important cultural thing. It's very meaningful to the company, but it's just a slightly different iteration.
Jason Jacobs: When you engage with a client, are you expecting that when they come to you, they already understand their own footprint and what the delta is, or would they come to you to help assist them through the process of better understanding that?
Jonathan Goldberg: We can assist with that, it's fairly commoditized in terms of most people we work with know their measurements of scope one, scope two, scope three emissions. They know their data, purchasing their power, purchasing consumption for travel and things of that nature. Our real value add is not in that, the value add is what do you do when you calculate the things? Right? So it's not so much, okay, we have an emission footprint of X, Y and Z, what we do and where I think that this market and I think all this discussion on net zero and corporate responsibility can really change and change structurally is with carbon removal it becomes actionable to do something with that data. So it's great to calculate what your carbon footprint is and it's X, Y and Z, what you do about that is the important thing. And putting some real, real thought and making it really actionable in a way that it has meaning and actual carbon benefits, that's what we do.
Julio Friedmann: I would add to that, that many of these companies already have a plan for carbon reduction. They have a plan for carbon avoidance and they have a plan for carbon reduction, and those are kind of ballistic. And that's being driven by a C-suite decision. It's being driven by the CEO or the chief environmental officer, the senior VP for sustainability or something like that. And they're already down this, they are coming to us because they know that they won't close the delta to zero so they need removal because if you admit anything anywhere ever, then you're not net zero. So they understand that and they're trying to figure it out. In most of these cases, they recognize that they have a couple of years to really put together a game plan. So even if they want to spend money year one, like right now, they understand that they're not going to get everything they want the way they want it today.
But they also know that if they need to close that gap, seriously, they don't have 10 years to do it, they have a couple of years to figure out at best what they need to do. And they might need to get six million tons of abatement or 10 million tons of removal, like within a year or two. And that's a huge tall order. And so they need to really scope it hard. We've been pleased by the fact that because it's being driven by the C-suite, everybody in the organization's taking it seriously.
Jason Jacobs: And what is your stance as an organization on offsets?
Julio Friedmann: So the word offset is fraught, and part of the reason it's fraught is because there's a history of bad outcomes associated with offsets. The flip side of that is our core business is CO2 removal, which is what a lot of offsets are supposed to be about. So the question is a little bit like, do you still beat your wife? Like, it's not the way that we think about the work. If there are good offsets out there that are valid and verifiable and durable, we're interested. But for us, it's not about whether or not it's really called an offset or whether or not people would consider it an offset, it's where are the tons?
And I would say that there have been a bunch of bogus offsets. There've been a bunch of stuff that has been sold and traded that is not valid, that is some counterfactual, that is not additional, that is built on a platform that's leakage and we assiduously avoid that stuff. We want to avoid that. Like, we want to avoid all that terrible stuff, but in fact, there's usually good actors out there somewhere, and they would consider themselves to be an offset provider. And as far as we're concerned, if it's good, whether you call it an offset or not, we don't care 'cause we just want the quality.
Jonathan Goldberg: I don't know that it makes sense to be pro or con offsets. If there's something that is called an offset that provides for a measurable, valid, verifiable form of carbon removal, that doesn't do any harm to ecological systems, we're for it and we recommend that it's purchased. History, experience and the literature suggests that the failure rate within the offset market is high. And by high, I mean near the 90%, high, that's consistent with the evaluations that we're doing and that's the historical nature of the game, but we don't think it's that helpful to just be critical about the history of these things without offering anything. So what we try to do is including with, with folks that are offering offsets is work with people. If there are projects that we think look good, but maybe they have too high of a baseline.
Maybe they're underestimating the amount of leakage that's associated with the project. Maybe their buffer pool is, you know, in a difficult location because of fire risk in other areas. We want to be proactive in going through and recommending changes to those things, that change could just be more of a discount. So instead of buying a hundred credits, we buy 50 credits because we think that's more of the risk of reversal. That's what we're trying to do, because there are people who are trying to do the right thing within this industry. We view our job as trying to help that along. I mean, our goal is to be a big customer. We want to be buyers of stuff, right? We want to be buyers of valid, verifiable forms of carbon removal. And we think we do that much better by working within the system and just being overly critical of what's happened.
Julio Friedmann: A point to the spear on that, I think are the certifiers and the qualifiers, because people issue paper certificates on offsets and CO2 removals. And sometimes they have a process in which they say, well, we're building the renewable plant we said we were going to build, so we're doing the thing we're going to do and that's okay. We look at that and say, building a renewable plant doesn't remove CO2, like so we wouldn't consider that to be valid for our business. The certifiers and qualifiers are in the process of improving their standards. They realize that some of what they've done in the past may not be what companies are looking for now. And so they're in the process of coming up with a better methodology, with a better protocol, with a better set of standards. We applaud that effort. It still may be at the end of that, but what they offer as a certificate is still not good enough for us, in which case we wouldn't take it. But like Jonathan said, working within the system raises the floor. It raises the quality of the whole ecosystem and that's sorely needed.
Jason Jacobs: So I'm going to say something as a statement, but really it's a question to test my understanding of it. So basically there's potential negative emissions projects, and some of those could be packaged as offsets and some of them not. And then there's offsets and some of those might be negative emissions projects, and there might be other kinds of offsets as well. I think what I'm hearing from you guys is that you focus on negative emissions and whether something is an offset or not is not a factor. The factor is whether it meets your quality bar and your criteria, and you're not allergic where those two things align, but you also don't need that certificate in order to feel confident with your process. Did I get that right?
Jonathan Goldberg: That's a good description.
Jason Jacobs: Okay. Well then a follow up question is, do you then ultimately compete with the offset certification bodies? And are you building essentially ... I mean, if I had to describe what I think I'm hearing, and again, this is I'm, I'm testing my understanding, but it is rebranding offset, fixing what's broken with it in a proprietary way.
Jonathan Goldberg: There's a lot of the sort of weird terminology. That, you know, if you compete in your impact fund, you compete in the offset. There's a hundred million tons of offsets that sort of traded if you will, in 2019, many of those were let's just say not great. Some probably were okay. And the average price was about three bucks. That's $300 million. Just to be very clear like that is nothing. I mean, we're talking about something that we want to do, not want to, we have an imperative to do 10 gigatons, 10 billion times, two times the amount of fossil fuels that move back and forth every year. We invest $3 trillion a year in the energy system. I mean, my old job was investing in commodity systems and energy and other things. We are so far below the scale of where we need to go that sort of "Competing in the existing offset game," if you will, is not, that is not an interesting thing for us to do.
We are very happy to work with registries. We do work with the registries. We don't sell anything, so we work on behalf of buyers who are looking to purchase. They pay us and they pay us to give them good advice on those purchases. That's how we view the ecosystem. If we can get more of this stuff out, that's what we want to do.
Julio Friedmann: It might be helpful, Jason, to explain two things that we're not. And again, we found early on that we would make a statement and people would misunderstand the statement that we made because the terminology is not fixed. The language we use to talk about this stuff is also in early days. And so there's a lot of confusion and we sometimes have to work through it. So let's say a couple of things we're not. One, we're not actually certifiers ourselves. We're not going to issue paper certificates on a transaction. We will help people find a good project or a good certifier or something else, but we are not going to issue paper certificates. That's not what we do.
Jason Jacobs: Do you require those certificates in order to feel confident moving forward with a project? Or do you view your work as a substitute?
Julio Friedmann: We think they're independent things. We don't require a certificate. What's interesting is some of our customers have said, we don't need a certificate, but we want a certificate. Others have said, we will only make an investment with a certificate. Others have said, we couldn't care less. So it's across the board. So again, we're just meeting people where they are, but this is the other thing we're not, we are not traders. We are not aggregating credits and reselling them with an arbitrage, like that is completely dis-interesting. That is not the work. The work is not trying to scrape a few extra dollars out of what sloshing around the market today. To Jonathan's point, we need to get a factor of 10,000 bigger, so how do we do that? That is a much more interesting and much more challenging.
Jason Jacobs: How do you guys get paid? What's the business model?
Jonathan Goldberg: We get paid by clients who are looking to implement successful carbon strategies.
Jason Jacobs: And is that, uh, I mean, I know how a traditional like to go back to that wealth manager analogy. I mean, it's like a percentage of assets under management and there's no other fees that, that change hands, unless, I mean, I guess it gets more complicated than that and if they have their own products or whatever, but with you guys, I mean, is it more like a strict kind of hourly or retainer based consultant or is it some percentage of spend?
Jonathan Goldberg: We dislike hourly things. I think our, we have a group of people that have committed their careers to getting this right and getting the carbon science right. So for doing a project and it's, um, there's 20 hours of work and it requires 21. This is not a group that's interested in stopping. So no, we don't do that. We work out arrangements with clients that fit for their objectives. Some of them are more intense, some of them are less intense, but we make it work for folks.
Jason Jacobs: Yeah. And I definitely wasn't asking for specific numbers, I'm just trying to understand where the lie.
Julio Friedmann: What I would say is that this is a tee off to Jonathan, there's a completely other thing we do, which is we have a fund and that fund makes investments and generates a return. And that is part of what Carbon Direct does.
Jason Jacobs: That is good segue. It's also a way to change the subject, but it is a segue. So in terms of that fund, can you talk a bit about the fund size, the source of capital and the thesis there?
Jonathan Goldberg: Sure. So we've got a, a hundred million dollar fund, source of capital is from the general partnership and other investors.
Jason Jacobs: Are those individual investors or institutional investors?
Jonathan Goldberg: Mostly institutional investors. The thesis is we invest in carbon management, carbon removal, carbon utilization, into products. Things that we can have a tangible measurement on that could be a net negative, but it could also be a conversion. It could also be an abatement, but there's some numerative amount of carbon that we are doing something with in a commercial way. So we invest in things like point source capture companies, conceivably in direct air capture companies, although we haven't made one yet. And we invest pretty heavily in CO2 utilization and CO2 conversion.
So basically what we're looking for are companies that we don't do venture, we like companies where people like Colin, Julio, Jennifer, Stephanie, can get into the weeds of a scaled operation 'cause these things are vastly different between this sort of lab phase pilot project to getting to scale. We like things that have already raised some capital that we can get our teeth into and they're on the precipice of commercializing. They have a client, they have multiple clients and they have revenue ability through both merchant markets and potentially through regulatory capture.
Jason Jacobs: So typically, how many investments are you making a year, and what are the guardrails in terms of check size and stage?
Jonathan Goldberg: Portfolio B between eight and 10 companies, roughly $10 million each, maybe a little bit more. This is an industry we think ultimately is going to need trillions of dollars of capital in the project finance, product development world. What we're trying to do at Carbon Direct is in some ways, provide that connective thread between demand side. We work with, we don't invest in venture, but we work with a lot of the early stage companies to get them customers. We wanna get them clients. We want them to be selling their emissions or their carbon to someone, and we can be helpful in that regard.
Right now we're putting money in the growth equity phase because that's where we think we can make returns. It's been de-risked a little bit, but the returns are still healthy because late stage, "Clean energy investments" right now are very low. Rates of return and things where we really need the money, which is we think where we're investing, there's still somewhat of a shortage. And I think a higher return on capital to come, that may iterate and change over time. So as we continue to grow the business, you know, there may be projects that need to be built, more off take agreements, long-term commodity things that need to be done. But right now we've got a pretty focused fund.
Jason Jacobs: And when you took in LPs, was it with the expectation of market-based returns?
Jonathan Goldberg: The concept of market-based returns is always unclear to me because I don't know what the baseline is from that. We underwrite to commercial returns. So we will underwrite to a 5X gross return on our capital. We've got a 10 year horizon. We like things, not like things, we mandate things and underwrite under those scenarios in the current market. By the current market, I mean, existing legislation, like 45Q that we know that the company can qualify for and has a value proposition underneath or existing version markets, which do exist for CO2 conversion and CO2 use. We like things that while they're already underwritten for those, have potential upside scenarios from more pricing of CO2 that could be from regulations or voluntary purchases. And in all of our investments, whether it's through the technical expertise of folks like Jennifer and Julio and the rest of the team, or through our advisory work, we've found that we've added strategic value to those companies through that business and connectivity.
Jason Jacobs: What do you think of the word additionality and how does it apply or not apply to your efforts with the fund?
Julio Friedmann: Let's start by saying that we care about additionality quite a lot in thinking about advising our customers and building a portfolio. So one of the things that we are not fans of generally is avoided deforestation because we think that's basically a protection racket. It's like, it's not, and it doesn't really add more tons of removal. But in that context, a lot of the things that we're focused on is stuff like areas that have been devastated by fire that will not easily grow back on their own, where the additionality is clear or something like a marginal or degraded land where additionality is clear. Something like bioenergy with CCS, like that's clearly additional. It's like you're paying a lot of extra money to get the removal piece that you wouldn't get any other way. So we think about additionality in terms of how we build the portfolio quite a lot.
In terms of the investment, I'd say that we're still putting our brains together here, but we're not thinking so much about additionality, as we're thinking about sort of what's necessary to build the total enterprise. What are the things that we know are going to be important? So when we look at something like a CO2 utilization company, we're looking at that, not because we get necessarily a huge amount of tons of removal from it, but we look at the CO2 utilization companies like that will be part of the ecosystem, it's necessary.
Jason Jacobs: I'm going to steal that one, like Jon talked about stealing an analogy from me, but that answer I'm actually going to steal for my investing, because I think that does actually reflect what we're trying to do with MCJ collective as well. But I didn't mean to cut you off Julio, I was just excited.
Jonathan Goldberg: It was good answer. I mean, listen, I think additionality is a hundred percent part of the advisory business in that, for example, if there's a reforestation project that might be doing some good things, but it's already paid for by a government agency and then ask for money from a client that is non-additional, it already exists, you're doing it again. I don't think additionality is really the right word for the investment space. I mean, there are additional network, we are building stuff, right? There are new facilities that are coming along. Connectivity I think is important, right?
So we like to think through the ecosystem of all right, if we're doing a point source capture company or a direct air capture company, what else is needed? Well, maybe it's a material company that can speed up the absorption process. Maybe it's pipeline, maybe it's trucking infrastructure, or maybe it's an end market for that CO2 that's being captured that we're not thinking about right now, cement an obvious one, but it could be aggregate or something else. So we like to think about the portfolio as different ties in the sort of carbon universe, if you will. I'm not sure that falls directly under the additionality definition.
Julio Friedmann: One last example of something that I think suits that sensibility is we look at biomass conversion. Biomass conversion is not automatically removal, but something like fast pyrolysis is going to be really important in a net zero world. And so we're trying to say, well, is there a good, fast pyrolysis company out there that we would want to invest in?
Jason Jacobs: Now, given that you have a fund and you also have this advisory relationship with the big potential buyers, how do you manage conflict and maintaining your objectivity?
Jonathan Goldberg: Yeah. We're not invested in any companies that have been, or are being considered by our clients. It's sort of a different thing. It's a different part of the landscape. If that were to change, we would obviously make folks aware of that. It's not currently the case. I think the one thing I would emphasize on that point is I think the folks that are actually approaching this sensibly get that all parts of this market need to scale. So Microsoft very publicly is purchasing carbon dioxide removal and is investing capital into the ecosystem. Amazon has an investment fund and also has carbon related goals. The oil and gas companies are investing heavily in some of this areas, and also are purchasing. Shell spent hundreds of millions of dollars on offset acquisitions, so getting project developers in addition to their own goals.
So I actually think anybody who takes a hard look at what needs to be done, if we're looking at the big picture of not near term business objectives, but the longterm climate objectives, none of this is happening if we don't scale demand, orders of magnitude higher, none of this is happening if you don't scale the capital that goes into the industry orders of magnitude higher. And we think we have a team to do both.
Jason Jacobs: That was surprising to me that you said there's not alignment between the companies you're investing in and the companies you're recommending. If you're investing in the companies that are further along and more mature, and you're dealing with the giant companies that have the huge spend that they need to deploy, where does that miss the mark? Why isn't there more alignment there?
Jonathan Goldberg: Take a point source carbon capture company, for example, that is, I think in a hugely important technology. There's 70% of the economy that we really don't have a good answer on, that we think we can get point source capture down to about 35 bucks a time, which on a levelized cost of carbon abatement basis, which is Julio's favorite acronym to use and is a good way to view both policy and investments, it's like 70% of the economy, but that's not negative. That's not something that would go into a negative emissions portfolio for a client, it's avoiding fluke gas emissions, I think is a highly commercial thing to do.
Jason Jacobs: So do you avoid negative emissions purchases with the fund or investments in companies that have negative emission solutions?
Jonathan Goldberg: We would invest in them if we found an opportunity that we thought was appropriate. And if we did that, we wouldn't let folks know that we're working with [inaudible 00:45:40].
Julio Friedmann: A corollary to this is that, and this is actually a gap in the ecosystem, we are not investing in projects. So there actually is a real need to develop and scale projects that do the CO2 removal, whether it is a tree farm or whether it is a mineralization site or whether it is bio oil injection, like there needs to be investible projects out there that is not something our fund does, we just don't do that. And frankly, there needs to be more risk capital going into that space because there's not enough projects to purchase. So there needs to be the companies, there needs to be the projects, there needs to be the demand and there needs to be the protocols. And like all of this stuff has to come together as we go and it's whether or not we wish it was different, that's the work. So we got to do what we got to do.
Jason Jacobs: And Julio, if you look at the negative emissions landscape and you are dealing with a client, let's say that has no constraints and says, we trust in you and we just want to do the highest impact stuff. We have no bias towards engineering versus natural or engineered versus natural versus anything else, where do you think the fruit is the ripest? And then what are some kind of longer-term more promising things that are earlier along that you're also excite about?
Julio Friedmann: So as unsatisfying as that answer may be, we really always think about it as an all of the above. It's sort of like saying, should you go work in government or industry or academia? Well, I've worked in all three of those things and there's great jobs in each of those sectors and there's terrible jobs in each of those sectors. So you can't ask really the answer to that question. Well, what you want to say is you want to get a good job. So I see really good things to do in direct air capture in terms of scaling up companies, in terms of reducing their costs, in terms of investments to get projects on the ground. But I see the same thing in biomass carbon removal. And I see the same thing in peatland restoration, and we know that we need that to get to 10 gigatons anyways, we need each of those things.
So I would almost reverse your question back to you. I never think of this as an either or, it's always, I want something from every phylum. Like I want, I want, we need big wins across the entire ecosystem. So if somebody came to us and say, hey, money's not an issue, here's $120 billion check, how would you invest it? We wouldn't put it all into one thing. We'd put it into a handful of things across the ecosystem that we all think has the highest validity and has the highest chance of success.
Jonathan Goldberg: There's micro and macro reasons, right? To not go all in to the ripest fruit, so to speak. So on a micro basis, like there's not enough of any of these things to do that in. So if a client came to us with a significant carbon footprint and said, "Hey, in 2021 I want to be, uh, carbon neutral and I want to use direct air capture." Well, you can't, there's not enough. There's not enough capacity in the market to fulfill those. You know, we're involved with all of the DAC companies are doing great work. They're scaling, more projects are going online. We're helping off take agreements get going. We're excited about those things, but anybody with any volume is not able to purchase it purely through engineered forms. So it's not achievable in the current market, there's just not enough of it.
And then on a macro sense, and a lot of the folks in our team have done this from with an academic lens. If we are to get to that scale, the 10 gigaton scale that we've been talking about, you get into land constraints, right? You get into energy constraints, you get into, you know, where you can grow stuff, where you can plan stuff, temperature changes, which is impacting where traditional reforestations have grown. So there is a hard reason to make sure that our team has a diversity of approaches towards CDR.
Jason Jacobs: Maybe I'm thinking about this the wrong way, but I know there's debates in more, let's say on the energy side, for example, or emissions reduction, right? There's like deploying what we've got and then there's more breakthrough innovation. I mean, can you cut the negative emissions landscape similarly where there's some more established solutions that are more proven that we need to get to significant scale. And then there's other stuff that maybe has the potential to be more disruptive, but still has science risk for example, or is that too simplistic a view?
Julio Friedmann: I kind of think that's too simplistic a view. There's hair on everything, right? So a lot of people say, well, we can just do regenerative agriculture. We can just do soil carbon. We know what the practices and the protocols are, there the big challenge is actually the science question. What's the flux, what's the tons, how long does it last? How do you monitor it? We haven't answered that. Should we do soil? Yes. Should we solve the science? Yes.
For direct air capture, it's kind of the opposite end of the spectrum, that's entirely cost. Should we invent new materials and make them cheaper? Yes. And so forth. But right now, if it costs $600 a ton, the market's very, very limited. So there it's just, how do you grind down the cost? Well, that's deployment and innovation. That's the work, we got to do that, but if I'm the government of England, I should be thinking about both of those things because we can't de-risk the present and we can't de-risk the future. The only thing we know is we don't have enough of anything.
And so if you know that you have to scale every aspect of the work, let me take a step back. I think in our last podcast, I used this phrase, the climate Counter-Strike. Imagine if in world war two, everybody said, well, we've contained the Nazis, that's good enough for everybody. It's like, no, we have to push back. We have to have a counter strike in which we reduce the emissions we've already emitted. And we know that all of our solutions today are a quarter of what we expect we're going to need. We need to spend money on soldiers and quartermasters, and we also need to spend money on innovations and weapons lab. And we need to spend money on supply chains and educations and raising war bonds. That's the work, the climate Counter-Strike requires an offensive on every level and on every front. And what we're just trying to say is, well, we can be in part of the pick and shovel company for that. And we can make sure that money is well spent in that endeavor.
Jason Jacobs: Well, Julio, last time we talked I think it was not too far after 45Q came into being. And I remember that you were pretty excited about that as a potential accelerant from the policy side. I don't know if it's been nine months or 12 months or 15 months, I lose all track of time, especially in this pandemic. Maybe it's been longer, but how you feeling about 45Q today?
Julio Friedmann: So I'm actually feeling pretty good about 45Q. There's a couple of reasons I feel good. One of them, the IRS guidance finally came out. Like that's been a labor of love, but now companies actually know how to think about it and how to invest. Second, the IRS has discovered in 45Q a bunch of companies that were doing a bad job, that basically, we're trying to get the credits without doing the work. That was about 10% of the total credits, they found them and ferreted it out. The system's working actually. So that's pretty good. And third, in our current political landscape, which, you know, we don't quite know the outcome of the election yet, but it looks like it's going to be a Biden presidency and a divided Congress, 45Q augmentation is something that looks actionable.
And I think that the tax equity exchange people are starting to understand it better. It's entered the vernacular in a way that I could not have anticipated three years ago. I think that people are getting it and my hope is that in the coming year or two, not only will it be extended, but it will be enhanced. And the specific enhancements will include more money for stuff like direct air capture or will include provisions for stuff like carbon mineralization. We'll see what comes.
Jason Jacobs: And my last question is just, I guess, stepping outside of the work that you're doing or any one particular technology or your clients just kind of looking at the overall landscape, if you had a magic wand and you could change one thing that would, uh, most speed this up and help us get this negative emission stuff underway at a bigger scale faster, what would you do? What would it be? Maybe I'll ask that to each of you guys separately.
Jonathan Goldberg: I'll answer it in two ways. One, I think what we're doing with the voluntary market is important because it's given a kickstart to some of these industries. I think that's important to get them off the ground, prove that something's there. We do really care though about the big picture in terms of getting to that large scale, not just things that are commercially interesting to us, and maybe some companies can make money off of, but that bigger picture. And for me, that's really price security and regulations.
So it's not just like a high price for carbon or a cap and trade or an, we love the low carbon fuel standard, it's phenomenal. It is stability in that price because where you see real investment going is in non-sexy and sometimes zero returning assets that have price stability. And there's a lot of capital that wants for green energy, central banking sovereigns that want to go into that market place, but we have to de-risk the enterprise. And you can only do that with secured revenue lines. That is the gating factor.
Julio Friedmann: I would have a complimentary sort of sensibility around that. I agree with everything Jon said, I think about the world in a slightly different prism. And so the actions that I would ask for with my magic wand would support what he said, but it would be specifically different stuff. So one example of something with a magic wand, if I could get governments to just start buying this stuff, if they would just said, hey, we're going to procure 200,000 tons of CO2 removal in 2021, and we're going to double it every year for the next 10 years, that would create a secure supply, demand that would allow companies to be able to get investment and scale, because there would be a contract out there from the government. This is how we've always done clean tech innovation. It's always started with government procurement. So why not this? Like that would be helpful.
Alternatively, if you wanted to do it with a regulatory measure, just say, hey, we're going to go steep and down and fast, like we're going to have a whole bunch of CO2 reduction or removal, by the way, valid verifiable CO2 removal is a compliance option to your regulation. Then that would send the same market signal that would give price stability in the market. And it would scale the enterprise in a useful way. In both cases, you want enough price security so that the low carbon fuel standard is a great example of that. Right now it's trading at about 200 bucks a ton, it's been that way for 18 months. That's awesome. Anybody who wants to invest for a capital intensive project is looking at a 20 year horizon. They got to know what the price looks like for the last 10 years and they just can't possibly know that. So a little price security there would be helpful, and those kinds of measures would help.
Jason Jacobs: We've covered so much ground guys, is there anything I didn't ask you that I should have or any parting words for our listeners?
Julio Friedmann: I want you to ask Jonathan the question that you usually ask at the end of the podcast, and you asked me, which is if you had a hundred billion dollars, how would you spend it?
Jonathan Goldberg: I would go back towards the technology agnostic revenue stream, not investment stream to be made available to things that either remove or definitively abate carbon at a certain price threshold. And maybe you set that price threshold at different levels. But what I think the market needs, short of policy, right? Policy is what's going to sort of get this over the hump. And by the way, a hundred billion dollars is a lot of money. But again, just going back to scale, three trillion in, per annum in energy investments, five trillion is needed at new energy investments every year to get close to Paris Accord. So like a hundred billion dollars is not going to do that, but with a hundred billion dollars, I think you could get secured revenue line for some direct air capture.
I think you could get mineralization companies up and running. I think you can also do work in CO2 conversion into products where you could compress what Bill Gates calls the green premium, where things that have a lower carbon footprint in steel, cement, et cetera, that you know are going to be really expensive in first of the kind plan, second of kind of plans, third of kind of plans, whatever, you can buy them or you can pay that delta. So you can say, hey, the market's only willing to pay the commodity price for cement, I will pay the difference between the CO2 negative price or the CO2 neutral price and the regular price for up to $50 billion worth of cement. And you'll change that over time so that you'll have a decreasing rate where you're going to have to hit a certain threshold to apply. I think that would be hugely influential.
Jason Jacobs: Nice. Well, this was an amazing episode guys. I have to say we covered so much ground. I as is typical, I learned a lot, but I leave with probably more questions than I came with, but that's just because we pulled out a bunch of threads that will get us to more threads, which is kind of how this stuff works, but I can't thank you enough for coming on and being so generous with your time and wishing you both and Carbon Direct best of luck in the important work that you're doing.
Jonathan Goldberg: No thank you. We love the pod and everything, so it has been great to chat.
Julio Friedmann: Always a treat. Thank you again.
Jason Jacobs: Hey everyone, Jason here. Thanks again for joining me on my climate journey. If you'd like to learn more about the journey, you can visit us at myclimatejourney.co. No, that is .co not .com, someday we'll get to .com, but right now we got CO. You can also find me on Twitter @JJacobs22, where I would encourage you to share your feedback on the episode or suggestions for future guests you'd like to hear. And before I let you go, if you enjoyed the show, please share an episode with a friend or consider leaving a review on iTunes. The lawyers made me say that, thank you.