Carbon Removal, 3 Years and $32 Million Later

Over the past three years, Shopify has committed $32 million and dedicated countless hours supporting carbon removal solutions. This is an update on what we’ve learned, as of early 2022.

Over the past three years, Shopify has committed $32 million and dedicated countless hours supporting carbon removal solutions—including those that currently only exist in labs. Now it's time to share an update on what we’ve learned.

This is the state of the carbon removal market in early 2022, through the lens of a voluntary corporate buyer.

Our approach is to pay a premium for high-quality carbon removal to demonstrate demand, allowing carbon removal companies to prove their impact and scale. As they scale, their costs will decrease and they’ll be able to charge less for credits, allowing more price-sensitive buyers to participate.

In just three years since we launched our Sustainability Fund, there are signs we’re onto something. We’ve demonstrated demand for carbon removal where there previously was none. Other corporate buyers have now entered the market. Carbon removal companies have accelerated their development using the prepayments in our agreements, as well as the external capital these contracts have unlocked. We've made a significant impact: multiple companies we've supported through our Fund have raised tens of millions of dollars, grown their carbon removal capacity by as much as 80x, and increased their customer bases by up to 40x.

But significant challenges lie ahead. Some companies and verticals face hurdles. Costs for engineered solutions have yet to decrease, and credit prices remain high as a result. And while other corporate buyers have begun making purchases, the amounts getting contracted are miniscule. Without a stronger demand signal, carbon removal companies will struggle to secure financing for the large-scale facilities they need to become economical, and so the world doesn’t continue to melt.

Costs hold steady, while credit prices rise

While companies have progressed from lab to bench scale, and some from bench to pilot scale, carbon removal completed remains extremely small. As a result, cost reductions have been limited. We’ll need to wait until companies stand up their first large-scale facilities, at which point we’ll see the cost of the solution benefit from economies of scale.

Since costs haven’t come down for almost all companies, carbon removal credit prices haven’t either. In fact, the opposite is happening for engineered carbon removal solutions. Because voluntary buyers are showing a willingness to pay higher prices, companies have been able to sell their credits at-cost, a critical development that will help companies move down their cost curves faster.

Take Heirloom, which has developed a technology that speeds up the rate at which naturally occurring minerals capture CO₂. They've been able to price the credits from their first deployment at-cost at $2,054/tonne, where the previous threshold was closer to $1,000/tonne.

Research and development in Heirloom's lab

"Over the long term, climate change won't be solved at $1,000's per tonne. But the willingness of the voluntary market to pay higher prices today to spur lower prices and higher volumes in the future is the fastest way for us to make progress towards gigatonne scale. Pricing at or near our actual costs allows companies like Heirloom to re-invest in R&D and deployment, and achieve scale on a much faster timeline."

Max Scholten, Heirloom Head of Commercialization

A few applicants to our recent call for submissions even exceeded Heirloom’s price; it’s clear the ceiling hasn’t been set.

While it's okay to pay high prices in the near-term, engineered carbon removal companies can’t charge high prices forever. When negotiating long-term agreements with carbon removal companies, it’s imperative that buyers see a decrease in price with each new facility constructed, a signal that companies can and will achieve cost reductions. If companies don’t have the motivation or ability to get to under $200/tonne at scale, you probably should be looking elsewhere.

For companies pursuing nature-based carbon removal solutions like reforestation and soil carbon storage, prices are starting to creep up due to the growing demand for less expensive carbon removal credits, which is actually helping make the cost of engineered solutions appear slightly more reasonable. We’ve seen the price of soil carbon removal credits increase as much as 200% since our first purchases.

Don’t be enamored by the flurry of recent purchases

Here’s where things get really interesting. Since Shopify’s first purchases, demand for high-quality carbon removal has increased from other corporate buyers and individuals. This is not reflective of the price of carbon removal decreasing; instead, it’s due to the popularization of our approach. Others are realizing the importance of demonstrating demand to kickstart the market.

But don’t be distracted by all of the recent purchases grabbing headlines. While it's been great to see an increase in support, purchase quantities remain extremely small. The largest agreements currently getting signed are for a few thousand tonnes at best, and no company in our Fund pursuing an engineered solution has more than 10 of these. We need 1,000s of purchases of >10,000 tonnes annually if we want any chance at reaching gigatonne scale by 2030, and we are nowhere close.

We’re forecasting a massive demand deficit, which could cause the carbon removal market to fail.

Once companies have proved their concepts and are operating successfully at pilot scale, they intend to increase capacity significantly. As of right now, we’re forecasting a massive demand deficit, starting in the year 2025, which we expect will stall the trajectory of these companies and could cause the market to fail.

Capital will dry up without larger offtakes

As a whole, carbon removal companies have not struggled raising capital to date.

Upfront payments in early pre-purchase agreements from the voluntary market have lessened the need for external capital. Where external capital has been required, companies have been able to bring these pre-purchase agreements to the table to demonstrate demand and secure the financing they need. Companies in our Fund have been able to raise 10s of millions of dollars and have cash runways that cover their plans for the next two years.

Shopify's Sustainability Fund purchases as of March 2022

While it’s been relatively easy for companies to collect sufficient capital to take them through lab, bench scale, and pilot phases, it won't be this simple to raise capital for their first large scale facility.

Raising capital isn’t a problem at the moment for carbon removal companies, but it’s poised to become one.

Without a substantial portion of the carbon removal anticipated to be produced from these facilities locked up in pre-purchase agreements, there will be no capital. Capital providers need to minimize risk, and facilities with only a few small pre-purchase agreements exceed that risk threshold.

Running Tide grows kelp and sinks it to the bottom of the ocean where the CO₂ is stored for the long term. While early pre-purchase agreements helped secure capital for R&D, it was clear larger purchase agreements would add the backing necessary to move beyond the R&D phase. Shopify signed a five-year letter of intent to purchase 32,500 tonnes in late 2021, which Running Tide has leveraged in conversations with its stakeholders.

Experimenting with kelp onsite at Running Tide

"Shopify sees the market better than anyone else and are flexible and adaptive to help companies like ours scale. When we started talking to them about a larger purchase agreement, they were a true partner to us and we structured an agreement that made sense for both parties. We've been able to open ourselves up to new conversations that'll expedite our growth significantly."

Claire Fauquier, Running Tide Head of Business Operations and Strategy

There’s a rapidly growing pipeline of carbon removal companies

Now for some good news. The planet needs new companies pursuing innovative solutions to enter the market, and that’s exactly what we’re seeing.

Nearly a dozen leading applicants to our recent call for submissions were established in the past three years, evidence that new companies with novel solutions are entering the market at a faster rate since Shopify and other corporate buyers got involved, likely due to the clarity we’re providing around buyer expectations.

Our procurement process also shows us that most of the innovation is taking place in mineralization, a process which uses rocks to capture CO₂, and direct air capture (DAC).

Noya’s technology will reduce the capital cost of DAC by capturing CO₂ from air moved by existing cooling towers, devices which sit on top of almost every commercial and industrial building. Originally planning to service the existing commercial CO₂ market, Noya, which launched in mid-2020, was able to pivot their business plan to carbon removal when it became clear there would be demand for their credits from the voluntary market.

“When we started building Noya in 2020, we thought a necessary first step would be selling CO₂ to commercial buyers—bars, restaurants, brewers, medical facilities, etc.—to sustain the business for months or years. Because of the clear demand signal sent by Shopify, other buyers have started showing up, and we have been able to pivot our focus to carbon removal much faster than we ever thought we would.”

Josh Santos, Noya Co-Founder and CEO

Many of the companies we’re supporting will fail, so we need others waiting in the wings. Encouraging companies pursuing novel solutions to enter the market, and supporting them as a first or early customer, is critical because it allows them to prove or disprove their concepts. With more companies pursuing different solutions at the same time, there is a higher likelihood that some pan out, and that carbon removal as a whole contributes to reversing climate change.

We must accelerate our efforts

It’s been incredible to see the voluntary market rally around carbon removal. Paying a premium as an early customer is allowing companies to prove their impact and scale, and motivating new companies with novel ideas to enter the market.

But if you’re going to take one thing from this, it’s that we need to sign larger pre-purchase agreements and letters of intent to help carbon removal companies secure the capital they need to construct their first large scale facilities.

We’ve kickstarted the market. Now it’s time to accelerate it.

Learn more about Shopify’s Sustainability Fund and our climate commitments and subscribe to our email list for more frequent updates.