Venture capitalists offer their investors outsized financial returns in exchange for taking on considerable risk. But what if that risk includes backing products where the economics of the end market aren’t clear? Moreover, what if the companies being supported have the non-financial goal of tackling climate change?
As more money than ever pours into climate tech, Azeem Azhar speaks with Shayle Kann, a partner at Energy Impact Partners, about the challenges of investing in the net zero economy and why his framing of the problem as “deep decarbonization” may offer a way forward.
They also discuss:
- Five challenges and opportunities facing “deep decarbonization.”
- To what extent net zero electricity is the solution to climate change.
- What metrics VCs should consider when investing in climate tech.
Five Frontier Challenges to Deep Decarbonization (Climate Tech VC, 2022)
Decarbonization by the Numbers (Exponential View Podcast, 2021)
Why Energy Storage is the Future of the Grid (Exponential View Podcast, 2021)
FRED CASELLA: Hi, you’re listening to the Exponential View podcast and regular listeners will realize I am not Azeem Azhar. My name is Fred Casella, and I’m one of the producers here at Exponential View standing in for Azeem who is away. Now, many of you will know that our mission here at Exponential View is to shine a light, bring some clarity to the bewildering pace of change that is affecting every aspect of our lives by the onward march of technology. This really is a unique period in human affairs, and we believe that it’s only by staying informed that we can hope to ensure that this change benefits all of us. If you share that vision, and I hope you do, then please consider taking a few moments to leave a review or rating as it really is the best way to help others find us. Now, before his break, Azeem was able to record a great conversation for you with the erudite and fabulous Shayle Kann. Shayle is a renowned writer and speaker on the energy transition. He is regularly cited in the world’s leading publications, has testified before the US Congress, and hosts his own podcast, The Catalyst, on the issues we face in decarbonizing our planet. Shayle is also a partner at Energy Impact Partners, the leading venture capital fund advancing the net zero carbon economy. Shayle and Azeem get into the special role that VC firms have to play in supporting climate tech and what the key innovations are coming down the pipe. And of course, what the most important obstacles remain if we are to keep global warming down to that crucial 1.5 degree celsius figure. That’s enough for me. I hope you enjoy the show.
AZEEM AZHAR: Now, Shayle, we’ll start with a hearty congratulations. You and your wife recently had your first child. And I was wondering, as someone who’s worked in climate change arena for a while, which is so much about these difficult questions about our future, has your perspective shifted at all now that you have these expanded responsibilities as a dad?
SHAYLE KANN: It’s an interesting question. I was wondering how I was going to think about climate change upon having a child because I had heard all these stories of people who had kids and it totally changed their perspective. Oftentimes, I think unfortunately it made them more despondent about it because of the fears around like the world their child is going to inhabit as they grow older. And I guess I’ll say so far, I’m only a few weeks into it obviously, but I’ve not had that experience fortunately. But as you said, I’ve spent my whole career thinking about climate change and pathways to decarbonization and so on. And since I started doing that, we’ve had this kind of benchmark in our heads around the need to fully decarbonize to reach net zero greenhouse gas emissions globally across all sectors by mid-century if not earlier. And I’ve always thought about like 2050 as being… It just seems so far off into the future. And the one thing that having a child has changed a little bit for me is if I think about it in the context of his life, my son is going to turn 28 in the year 2050. That feels much more immediate to me, and actually if I think even one step beyond that, I think, well, if he’s going to turn 28 in the year 2050, and by that time we have to be at net zero, then all the things that are going to contribute significantly on a global scale need to be commercial and at scale and starting to approach the gigaton scale impact probably halfway between here and there. So, that’s like when he goes to his first awkward middle school dance or something. So, it’s just made this sort of timeframe around decarbonization a lot more immediate to me.
AZEEM AZHAR: That’s actually really helpful because we do think about 2050, it’s a sort of end point, it’s the milestone. But of course there are these way points that we have to get to in order to achieve that. And it seems to me, actually as somebody who’s more than casual observer but not professional observer of these issues, that we tend to talk about the end state but we’re not so good at articulating the things that need to happen on the way to get there.
SHAYLE KANN: And I also think that what you see happening a lot now is there’s been this movement to get basically every major emitter, be it a country or a company, to commit to a pathway to net zero. And so everybody says now, okay, we intend to achieve net zero or some version of that by 2050, or maybe it’s 2040 or something if they’re more ambitious. And then there’s kind of a next level that comes after that, which is, all right, now, chart your path from here to there in as much detail as you can. And that’s where a lot of the stuff falls apart today because it’s easy enough to say, “Sure, we’re going to hit net zero in 2050.” It’s really hard to say, “Here’s exactly how we’re going to get there and what we think the technologies are and the costs are going to be and what it means for our operations and so on.”
AZEEM AZHAR: I think it’s that interim set of steps that technology has got an important part to play. This is this wicked problem where we have to align policy and commercial investment and individual consumer preference and the conflicts between nations, and also what the technology can deliver. We first met each other a couple of years ago when I was doing some research into this theme that I had seen, which was a growing amount of venture capital investment called climate tech. And we had started to see these levels rise and rise and rise from very, very low levels maybe a decade ago to as much as perhaps one in seven venture capital dollars going into funding the technologies of climate change. How important is that novel technology access as a part of the solution relative to existing technologies that we just need to scale out, policy, government relationships and consumer behavior? I mean, how do we rank those things?
SHAYLE KANN: I think in some ways there’s this challenge that the community that really cares about climate change mitigation ends up putting itself in by trying to stack rank those things. And so there ends up being this sort of infighting periodically that pops up between folks who are saying, “No, we have all the technologies that we need. We just need to deploy the hell lot of them on one side.” And on the other side, people are saying, “Actually no, we need a bunch of breakthroughs and new technologies that either don’t exist today or at least not commercial yet in order to get there.” It’s like fairly obvious to I think anybody who takes a hard look at it that both of those things are true. We actually do have a bunch of technologies that are economic today and can be deployed at orders of magnitude faster than they are being deployed currently, solar and wind being the obvious examples here, at little to no cost to society with significant decarbonization impact. That is basically undeniably true in my mind. And at the same time, it is also true that those technologies alone are not going to get us nearly to net zero, let alone all the way there. So, we do simultaneously need to be figuring out how to scale up the things that are ready to scale up today as fast as we possibly can. And at the same time, if we want this new suite of technologies to be having the same impact that solar and wind can have over the next 10 years, but over the following ten or fifteen years, then we have no time to waste on getting those things out of the lab and into the market today as well. You talked about the growth in climate venture capital, which has only continued to grow since you started looking at it a couple years ago, which is kind of early on in this new wave. And now it’s even much bigger than it ever was. The nice thing about that is that both are happening. There’s funds that are really focused on deployment and software and downstream business model innovation. And then there’s other funds like what I focused on that are more on the sort of fundamental technologies that are going to be the building blocks of a long-term net zero future.
AZEEM AZHAR: And you have, with your partners, just announced a new fund that is tackling frontier technologies that will help us on this part of decarbonization. You’ve called it Deep Decarbonization, and you laid out five challenges. How do you think those challenges help us think through the steps to getting to that 2050 target?
SHAYLE KANN: Yeah, the way that I think about Deep Decarbonization is looking past the near future. So, as an example, the IPCC just put out a new report that’s a pretty seminal report. There’s a great chart in the Summary for Policymakers, which is usually the document that is most readable in IPCC reports. It has in it basically like a list of, I don’t know, thirty-some technologies and approaches to decarbonize and the relative magnitude of the impact that they can have on greenhouse gas emissions by 2030. There’s some clear winners, and it’s solar and wind and forestry and land management. We can do all that stuff and have a pretty big impact in a very short period of time at very low cost. What we’re looking at with Deep Decarbonization is the next level. So, let’s assume we successfully do all those things. What else do we need to decarbonize? How do we deal with things like industrial emissions? Currently, electricity represents 25% of end use energy in the world, roughly speaking. What do we do with the other 75%, because you can add all the solar and wind you want, but if you don’t either electrify or decarbonize those other sectors, you haven’t solved the problem. How do we deal with things like meat? How do we deal with emissions in concrete?
AZEEM AZHAR: Yeah. So, when we look at where emissions come from, about three quarters come from energy, a quarter of which is electricity. And then of the remaining 75%, about 15 to 20% is in agriculture and land use and forestry. And then industry is at sort of 5 to 6%, and then waste is sort of the remainder. And so we seem to be having a tremendous amount of success around electricity, but then there are these really hard and gnarly areas. But by weight, we sort of have paths for quite a lot of carbon emissions to be minimized because actually we are starting to solve things through electricity and we are starting to solve transport, but then there’s a whole set of things for which we don’t seem to have answers right now.
SHAYLE KANN: I also think that we have a tendency now to sort of think that just because we’ve solved some really important things, namely how to generate renewable electricity cheaply and at scale, that we’ve solved electricity or that we’ve solved light duty transportation because we can electrify it. I don’t think either of those things are foregone conclusions yet. So, we still have some work to do in electricity, specifically we can deploy a lot of solar and wind, but we’re going to start to hit some limitations there around the intermittency over long periods of time. We’re going to hit limitations around transmission capacity and land use. So, we’re not done with electricity. We just have the clearest path in the near term. But we still need things like baseload clean energy, be nuclear or geothermal. We need long duration batteries to help us manage the intermittency of renewables. But assuming we solve all that and we get our cheap, clean, reliable, ubiquitous electricity, then that is in my mind the great unlock for a bunch of other sectors, not everything. It doesn’t solve all of climate change. But you can use that cheap, clean, reliable, ubiquitous electricity to power parts of transportation, to power parts of industry, to power parts of agriculture, and so to me that’s the sort of single biggest wedge we’ve got. If you want to, for example, use electricity to decarbonize steel making, steel is 8% of global greenhouse gas emissions, single largest source of industrial emissions in the world. You can use electricity to produce steel rather than using coal, but steel is a gigantic industry, trillions of dollars a year. It’s going to take a monumental effort, even if the technology works exactly as we hope it will, to get it to the scale where it can have a gigaton impact on CO2. So, there’s still just a long road for all these new technologies.
AZEEM AZHAR: That’s a healthy dose of realism. Sometimes on the Twitter RT, there is a sense that if you drive the price of renewable energy down low enough, you can build excess capacity and you can magic through that to handle all of these industrial processes. I guess your point as well, that might be sort of theoretically the case, but these are huge industries that have many, many other dependencies, and it will take time to implement those even if this abundant electricity is available.
SHAYLE KANN: I’m just saying the task ahead of us is sort of daunting no matter how you’re looking at it, even if you just care about deploying lots and lots of renewables. If you’re one of the sort of renewable energy zealots who says we could solve everything with wind, water and solar, even if that’s true, we have to solve a bunch of problems just to get enough wind, water and solar developed on the grid and to get the grid strong enough and built out enough in all these places. At the same time, every single component of this is an enormous opportunity. I mean, this is why there’s so much excitement around climate tech and the venture capital community is that the total addressable market for basically everything within climate tech is huge because unfortunately emissions come from basically every large sector of the economy. That’s your TAM for climate tech. It’s not hard to get really big numbers there. So, what is a big challenge is also a big opportunity.
AZEEM AZHAR: When we talk about climate tech, we’re really talking about the fundamental investments in technologies that will impact pretty much every piece of economic activity certainly that the world currently engage in.
SHAYLE KANN: Yeah. I think you can overdraw this analogy, but I’ll draw it nonetheless, which is there’s that famous quote from Marc Andreessen, software is eating the world, that kind of underpinned the entire thesis for Andreessen Horowitz’s Venture Capital strategy. And the idea there was, software will kind of go one by one through every major sector of the economy and transform it over time. And that I think has generally proven to be true. I think you can say something similar about climate in the sense that emissions come from nearly every major sector of the economy. And if we’re truly going to decarbonize, then basically every one of those industries needs to transform in some way or another in order to decarbonize. So, climate I think will end up eating the world in a slightly different way from how software did, but it’s a similar idea.
AZEEM AZHAR: Yeah. Another investor who I’m sure you know, Andrew Beebe at Obvious Ventures, he said to me a couple of years ago, he goes, “Well, I think of climate tech a little bit like dotcom. There was a point in ’98, ’99, where every company had to be a dotcom. And then by 2003, every company was a dotcom but they didn’t say they were.” And he said, “It’s going to be like that with climate tech.” At the moment, you say it’s a different sector, it’s a different sort of form of behavior. But in some period of time, hopefully shorter than longer, everything will be kind of inherently at its heart a sort of a climate tech company. If it’s not involved in actually sort of sucking carbon out of the atmosphere in a very hard tech way, it’ll be climate tech in the sense that it’s managing and mitigating the footprint of its processes, its inputs and its outputs.
SHAYLE KANN: Climate tech, I think, is a sector of convenience. It’s not really a sector. We call it a sector, but it’s not. It’s a theme. We’re saying that something needs to change in a million different places, and that single thing that needs to change can be measured in tons of CO2 equivalent. But the actual pathways to reduce or remove those tons of CO2 equivalent are myriad and they vary a ton by sector. So climate tech is just a consistent theme across many different sectors. It’s not a single technology or suite of technologies.
AZEEM AZHAR: Can we go back to the new fund that you’ve announced, the frontier fund. You have your Deep Decarbonization and you have your five themes. Will you just run through them for us again?
SHAYLE KANN: The problem with climate change in part in wrapping your head around is this is really complex. There’s lots of interdependencies. It crosses all these different sectors. It’s really confusing. So I have tried to spend a lot of time thinking about what are the core challenges that we need to solve to get to net zero or approach net zero. And I sort of boiled it down to five core challenges. The first thing that we need to do is what we already discussed, which is solve electricity basically. And that means we need electricity on a global scale to be low cost, abundant, reliable, ubiquitous, and zero carbon most importantly. That’s no small task but I think may be, of these five challenges, the one that we have the clearest pathway toward. The second thing we need to do is we need to figure out how to solve the biggest industrial emitters. The emissions from large industry generally are energy related emissions, but they are generally not electricity. So, these are things like steel and cement and chemicals, which emit a ton of greenhouse gases.
AZEEM AZHAR: It’s about a third of all GHG emissions, I think, or just slightly under a third. So it’s huge.
SHAYLE KANN: Little bit under a third. So, it’s really, really big. Those are very difficult to solve. Electricity may be a solution for some of them directly or indirectly via stuff like green hydrogen, but either way that is task number two. Go after the big industrial emitters: steel, cement, chemicals, aluminum, you can go down the list. The third thing we need to do is solve transportation. There’s multiple components to that. I think light duty transportation is probably the most solvable via electrification, it’s pretty clear. So, that’s the one that is more of a deployment and sort of business model and pace of acceleration of adoption challenge, but that doesn’t solve all of transportation. There is still heavy duty transportation which is shipping and aviation and trucking and most freight. Those are harder to solve and where there’s still multiple pathways that everybody is pursuing. All of it needs to get to net zero if we’re going to solve the whole problem. So we’ve got electricity, big industrial emissions, transportation. The fourth thing we need to do is we need to build, I guess, what I’ve been calling a carbon management industry basically from zero. That’s going to involve capturing CO2 both from point sources, from emitters, but probably even more than that ultimately, removing carbon from the atmosphere because there’s basically no realistic way that we are going to get to net zero fast enough by just doing these other things. That’s an industry that basically does not exist today but needs to be in the tens to hundreds of billions, perhaps even a trillion dollar market, by mid-century. So, that’s a massive undertaking. And then the final thing, at least the way that I’ve described it, is we need to decarbonize Maslow’s basic needs. I’m sure you’re familiar with Maslow’s hierarchy of human needs. If you look at that pyramid, two of the things on the very base of the pyramid that represent the most basic human needs are major sources of emissions, which is food and agriculture, and buildings, shelter in the case of Maslow. So we need to solve for emissions in buildings and emissions in our food. And that’s the final thing that we need to do. If we can solve all of those five things, then you can add that all up and we’re probably 90 to 95% of the way to deep decarbonization.
AZEEM AZHAR: The framework well articulates how we can break down this enormous problem into five almost as enormous problems, but within all of that, of course, we’re going to have to deliver these technologies in the form of companies and there are some fantastic ones in the Energy Impact Partners portfolio. One of the ones I found really fascinating was this battery storage company called Form Energy, which I think was quite surprising in terms of its technologies and its chemistry when I read about it. I would love to hear what you found interesting about the founders and that company and why you chose to back them.
SHAYLE KANN: Well, Form was the first investment that we made out of this frontier fund a year and a half ago. I’ve known the CEO, Mateo Jaramillo, for over a decade. He, prior to founding Form with a few co-founders, he was at Tesla and he was a big part of building Tesla’s stationary energy storage business. So what is now the Powerwall and the Powerpack before they were called that. I got to know him then. He’s just an incredible founder, really great person. His co-founders are amazing. It’s the team you would design in a lab to solve this problem.
SHAYLE KANN: But apart from that, what they’re going after is a real problem that is emerging and will only get stronger that there are very few other solutions for, and that problem is as you add more and more wind and solar to the grid, you start to face issues with their intermittency unsurprisingly. But that intermittency comes in different time scales. So, let’s just talk about a grid that is heavy in solar. I’m in California. So, this is a market where we’re adding more and more solar all the time and it’s great. I think of there being two ultimate big timescale problems, the first is diurnal, so on a daily basis, and this one is the obvious one. If we’re a grid that is heavily reliant on solar, how do we deal with the fact that we’re going to generate a ton of power during the day and very little at night? That is a problem that I think generally can be solved via a combination of kind of baseload clean resources and probably more importantly batteries that we’re familiar with, lithium ion batteries, because they’re well suited to providing energy storage that lasts say four to maybe twelve hours at a time. But you also face a problem on longer time scales. If you have multiple days at a time, for example, where there is no sun, you have a cloudy set of days. We generate probably three times as much solar in the summer here in California as we do in the winter. So, if you’re a grid that’s really heavily reliant on solar, how do you deal with these longer term challenges? That’s a problem that lithium ion batteries are not well suited to because the costs scale pretty linearly as you add more duration to the storage. So if you wanted to deliver multiple days of energy storage, it’d be really, really expensive. So the only way to solve that with a battery is you need a battery that can last hundreds of hours at a time for which the capital cost is basically a tenth of the capital cost of lithium ion, and that’s what Form is doing.
AZEEM AZHAR: So, in a sense, the challenge is finding a much, much more cost effective battery chemistry.
SHAYLE KANN: So, Form has an approach that is an iron-air battery. The benefit of an iron-air battery is that the cost entitlement is extremely low, especially relative to lithium ion. So if they can scale up the technology as we hope that they will, then they can deliver energy storage at a 10th the cost of lithium ion, which is exactly what you need if you’re going to try to deliver 100 hours of energy storage instead of 12.
AZEEM AZHAR: When you say iron-air, the thing that struck me about this is that iron is a metal that we know really, really well. We’ve been working with it for thousands of years. Do those types of things, both the sort of previous investments together with our sort of understanding of its metallurgy and its chemistry help with the cost challenge that we’re trying to address with this sort of approach?
SHAYLE KANN: You’re hitting on why it makes sense because iron as an active material is abundant, well produced. It’s not hard to get your hands on, it is well understood, and it’s just very cheap. And so that as the active anode material is sort of perfect if you’re trying to build a very, very, very cheap battery.
AZEEM AZHAR: So, give us a flavor for what a Form battery will look like and how much is it going to end up adding to the cost of my electricity?
SHAYLE KANN: Well, hopefully it’s going to reduce the cost of your electricity ultimately, not add to the cost, because what it’s going to do is in various versions for various applications, it is going to balance out the really, really cheap, renewable energy that we can now add at high volumes, but make that renewable energy available all the time instead of available some of the time. So from a cost perspective, it should be beneficial. What it’s going to look like is this is going to be industrial scale. So this is not intended to power your house. This is intended to go on the grid at large scale. It’s going to look like a big industrial battery. The problem with batteries in general is they don’t look all that interesting. They’re not as sexy to take a photo of as like a solar array or a wind farm or something like that, but it’s going to look like a big industrial park and it’s going to get plugged directly into the grid or get tied to a clean energy project. It’s going to basically operate sort of cycling up and down a few times a year probably, but it’s going to be charging and discharging to basically flatten the profile of renewable energy projects or just sort of solving problems on the grid like if you have transmission bottlenecks or something like that.
AZEEM AZHAR: The thing that I find so fascinating within renewable grid but also the battery storage and the other types of storage that are required is how much more of a portfolio of technologies will be available for the operators of these grids. And actually how the sort of narrative of communication across the grid starts to change from being a linear directed approach into something that is much more web like, a lot more internet like. One of my friends runs a company which strings together the lithium ion batteries in electric vehicles into a big virtual battery so that actually as a consumer, I can also become a producer not simply through say solar feeding but by lending some of the spare charge in my car’s battery to my next door neighbor or to the grid itself on a day when it’s cloudy or when it’s not so windy. And that to me is a really fascinating opportunity to rethink the nature of the grid from this very industrial one way process to something that is a little bit more distributed, a bit more dynamic and a bit more two way.
SHAYLE KANN: The blurring of the lines between demand and supply in electricity is probably the biggest transition that that market is undergoing. It comes both from the fact that batteries are both. They’re both demand and they are supply on the grid. And as you said, we’re now seeing end customers who can be both through their electric vehicles or maybe the batteries that they’ve got at their house, or they can be a sort of form of demand that is actually more flexible and can operate in accordance with the needs of the grid by just things like smart thermostats and shifting their load around. So it’s getting more complex to operate electricity networks, but it’s getting more complex because the resources that we are adding are new and have capabilities that we haven’t seen before. So if we can fully leverage them to their maximum, then I think it’s going to be a real paradigm shift in the world of electricity.
AZEEM AZHAR: So, Shayle, if you look at someone like Form Energy, can they be content with just sort of building the technology and saying here are the specifications, here’s what it does, and hope the market takes it up, or do they actually need to shape the market expectations about this new capability that’s going to behave very differently to other things that the buyers within the grid have had to think about and that might actually shape the way the grid operates in quite fundamentally different ways? I mean, it seems to me they have to do the latter. But if they have to do the latter, then we’re asking quite a lot of a young management team. Not only do they have to bring this really difficult technology to market that’s got to be 10X better than its competitors, but they also have to sort of figure out all this business model regulatory value changes that they’re going to have to put their products into.
SHAYLE KANN: They recognized very early on that if you’re going to introduce an entirely new kind of resource into this market, you can’t just trust the market to immediately recognize exactly how it should be used, where it should be placed, what it should displace and so on. So, what Form did from the very early days is they built out this ultimately really sophisticated analytical suite that they call Formware which is a suite of modeling tools to help model out grid scenarios that are really complicated and that the traditional grid modeling tools are actually not well suited to modeling that include a bunch of things around what happens when you add new more intermittent resources onto the grid and what is the suite of technologies that you should deploy to supplement those, among which include the question of, well, what if you had a battery that had these specifications? Where would it fit on the grid? Where does it make sense economically? Where does it not? What should it displace and what shouldn’t? So, they started very early on saying we can’t just let the market come to us, we have a resource that we think is going to have enormous value. We need to show where that value is going to be. And along the way, we need to actually prove to our future customers that this kind of thing is going to have a lot of value to them and that they can recognize where that they should use it. But to your point, it’s a really high bar for a team that knows how to navigate. The difficulties of selling into the electricity market, in the first place, notoriously difficult, dealing with the regulatory construct, and particularly doing so with an entirely new class of resource. So, in the case of Form, I feel incredibly confident that they can do it, but it is, and they would tell you the same thing, really difficult.
AZEEM AZHAR: It’s an example of one of the many companies trying to do these sorts of things where it’s not just about the product. I think you’ve seventy-five, eighty companies in your portfolio, many of which will face the same sort of scale of challenges, which brings me to one of your other thesis, this idea that we need to build a carbon management industry from scratch. Now, I guess carbon management includes everything from being able to count, analyze, optimize emissions, figuring out where we’re going to store it once it’s been taken out of the atmosphere. And it’s definitely not hyperbole to say that we’ve got quite far to go with developing a full carbon management industry. What are the things that make you feel optimistic about us being able to deliver that in the next 20 or 30 years?
SHAYLE KANN: I think we do have an incredibly long way to go. I mean, just to put a number on it for you, so carbon removal, total volume of transacted purchases for carbon removal credits, which is basically how these things get monetized, in 2021 was under $50 million, pretty safely under $50 million. It’s been bigger this year. But that was the total volume last year. The size of the market in 2050 if we are going to hit a 1.5 degree celsius, future needs to be in the sort of gigatons scale, which is billions of tons. And if you figure it’s $100 a ton roughly speaking, that’s hundreds of billions of dollars. Could be as much as a trillion dollars. Now, what makes me optimistic? I mean, I would say I don’t think we’re anywhere near this being a foregone conclusion that we’re going to get there. We’re working backward from what do we need in order to achieve a reasonable future with regard to climate change. What makes me think that we are going to at least head down the right road is I think generally speaking, increasing recognition of that need all across the board. So, that’s the sort of that recognition among the scientific community, amongst some in the tech community who are kind of forming the early purchasers for this stuff. It’s gaining a lot of attention and a lot of investment. The question is, is there going to be a clear glide path from $50 million to a trillion in the absence of international mandates and regulation and standards that require it, or are we going to need some kind of concerted global policy effort to drive carbon removal up to that kind of scale?
AZEEM AZHAR: Here we go. Here’s kind of the relentlessly optimistic case. There is this increasing collective belief that carbon removal is going to be really critical part of the solution. One of the consequences is that more and more investors from an asset allocation perspective are starting to see carbon and carbon credits as a tradable and investible asset class. So, they feel they need to hold these things in their portfolios just from the perspective of being good asset allocators and spreading their risk. That starts to kind of create a demand for these credits. And of course, these credits are then going to be supplied by some kind of industry. It’s incredibly fledgling right now, but they will start to see that there are already buyers that are out there. So that’s the first thing, and for me that kind of constructs a flow of money into the market. The second aspect to all of this also comes from the finance world, which is that risk is starting to already be priced. Climate risk is being priced into the cost of capital for different types of projects. One of my previous podcast guests, Michele Della Vigna, he runs a Carbonomics research program at Goldman Sachs, made the point that it’s already 5 to 7% per annum more expensive to fund a coal plant than it is to fund a solar plant because capital understands risks and it is reflected essentially in how expensive it is to build something that is dirty. And then the third area I think about is, have we got any precedent for scaling industries as quickly as we might need to scale the carbon management industry? And I think a little bit about the computing industry where back when I was born in 1972, there were a few thousand computers in the world. And by the time my son was born in 2005, there were billions of computers in the world and the capability of each of those computers was far, far greater. So, we have this kind of modern machine, which is a modern economy that can, when there is enough belief in something, has a track record in being able to achieve a scale of the gigas. That is the sort of billions of computers that were in the world. Without being a climate expert, the kind of relentlessly optimistic case for why we could deliver the carbon management industry that you’ve identified that we needed. So what’s wrong with that picture?
SHAYLE KANN: It’s a plausible future. It’s certainly the future that I hope occurs. I think if you kind of squint at it a little bit, you run across what are likely to be some roadblocks along the way among the roadblocks you can think about. So, sort of the idea of traders holding these credits just for the purpose of trading. I think what’s actually happening here, folks get confused about how these credits actually get traded. The reality, at least today, is you’ve got tradable carbon credits that are in compliance markets. So, you are in Europe, Europe has a regulated carbon market, the EU ETS, those are tradable carbon credits. They’re traded. It’s a $700 billion annual volume or something like that, and so there are markets for stuff like that. That’s not really what’s happening with carbon removal world. What’s happening in the carbon removal world is voluntary currently. The way that it’s working is just bilateral purchases. So there’s not really a lot of trading of credits. What’s happening is a buyer who needs to be a net zero is purchasing a strip of credits from a project. Could it become tradable and with sort of commodity pricing? Potentially, though I think we’re ways from that because the market is still very messy. There’s still very low supply of these credits. They’re not actually commodities. They differ on some key characteristics like permanence, for example.
AZEEM AZHAR: Permanence, right. Yeah.
SHAYLE KANN: Yeah. So I think there’s a long way to go for there to be this like tradable liquid market for this stuff.
AZEEM AZHAR: The beauty of that is that we have experience of taking non-tradable, markets that don’t look like commodities, they look like they’re going to be hard to trade, and turning them into markets. I mean, that’s what the financial services industry does. It’s what they did with things like credit default swaps. It’s what we’re starting to do on the retail side with ETFs where we start to bundle all sorts of other assets and stick them into these things called ETFs. I mean, if the financial services industry, the banking industry is good at one particular thing, it’s that idea of being able to enable markets and create the conditions for which a market can therefore emerge.
SHAYLE KANN: I think the bigger challenges you probably face along the way are going to be those of physical constraints. Where are we going to get this billion tons of carbon removal from? Well, it’s going to probably come from a variety of different sources. But if it’s direct air capture, for example, which is maybe the most scalable thing that we’ve got, it’s a machine that captures CO2 from the air. So, you can put that machine anywhere. But the challenge is, it’s pretty energy intensive. So, if you want to do that at the gigaton scale, particularly if you’re going to power using electricity, which most of these systems are electrochemical, if you add up the actual amount of renewables that you will need to build to power the direct air capture, and then you layer that on top of the amount of renewables we already need to build to decarbonize the grid, and then you layer that on top of the amount of renewables we need to expand electricity share of energy demand via electrification of transportation and industry and things like that, it just adds up to kind of a monumental amount of land use and transmission and all these other constraints that we face. So, there’s these kind of like interrelated challenges in scaling up at least portions of carbon removal. Again, though, I think we’re in the early days of the suite of technologies that we’re going to use for this carbon management industry. There’s just this Cambrian explosion of new approaches right now, some of which are nature based, some of which are synthetic, some of which are kind of a hybrid, some of which use the ocean, some of which use soil, some of which use land or trees, some of which build engineered machines. So you add all of that up and I think there’s at least enough of a… We’ve got a basket of promising opportunities that we can scale up. So I don’t think you’re wrong to be optimistic, but I just think it’s going to be a long road.
AZEEM AZHAR: Right. So, when we look at markets that are on the verge of expanding dramatically in size with an uncertain path to that expansion where we’re going to rely on technologies that are more and increasingly less proven that need to be brought to market by remarkable management teams, there’s a particular type of capital that supports that journey, and that is venture capital. You are a venture capitalist with Energy Impact Partners. I am curious about whether you as a firm looking at this opportunity like a traditional venture capitalist only care about the financial measures, the IRR, the internal rate of return or the MOIC, the multiple on invested capital or the cash-on-cash return. Are you solely driven by the financial metrics or do you have some kind of double or triple bottom line reporting where you think about your carbon or sustainability impact as well?
SHAYLE KANN: The way that I think about it, at least for our fund, we are a financial fund and we have financial investors that are in it for the return. They believe this is going to be a good investment as I do as well. But there’s a heavy filter at the front end for things that can have a significant impact on climate change. I think of that as being a financial filter as much as anything else. If you can have a scaled impact on climate change, there’s going to be, I think, a higher level of demand for whatever your product is going to be than if you didn’t have a big impact. One of our portfolio companies, Boston Metal, which is the one decarbonizing steel making, the CEO, Tadeu, has said, “There’s a global conspiracy for us to succeed.” I think of that as being true for a lot of this sort of deep decarbonization technology stuff where everybody wants this to work, everybody who has a mind toward the future. So I think of that as being a financial filter. But it is a filter at the front end. If this isn’t going to have a big impact on decarbonization, it’s not a fit for us. But with that said, the metrics that we care about ultimately are traditional venture capital metrics. We expect to have above market returns and we’re not sacrificing on that in exchange for anything.
AZEEM AZHAR: So, you don’t consider the carbon abatement potential of an investment when you go off and make it? You don’t build a model to look at where the portfolio is going and what its aggregate contribution to this journey will be?
SHAYLE KANN: Oh no, we do. We do. We just don’t view that as being a sacrifice on the returns side. So, we look at greenhouse gas emissions abatement potential of every investment that we make. We then also measure, and we have fairly actually sophisticated ESG team that does a bunch of really detailed measurement of actual emissions impact of everything in our portfolio once we do invest. So, we do all of that. We just view that as being a part of our core financial investment thesis as opposed to saying, well, we’re going to make a trade off on pure financial returns perspective by adding this additional layer.
AZEEM AZHAR: Right. And so I’m with you on that as well. So, I think there is no trade off now. There may have been a trade off fifteen years ago, but certainly in the last few years, it’s clear that these are the biggest and most exciting markets, as well as the best markets from a sort of human flourishing perspective to go after. So just before we recorded this conversation, there was the IPCC report that came out, that sort of new update. There’s already interesting set of tweets from one of the lead authors, Sarah Burch. I’m going to just pick out some of the optimistic ones that she brought out. She said, “For the first time, we’re seeing evidence of real sustained decreases in greenhouse gas emissions from some countries, that a low carbon economy can create more jobs that last, that there’s really promising signals on renewables. But on the other hand, a negative side, GHG emissions have been the highest in human history and we’re not on track to limit warming to less than 1.5 degrees.” One of her key items was that the flow of finance needs to go up by 300 to 600% to spur the scale of action that’s needed. So, in the context of that sort of mix that we have demonstrated progress but still a big mountain to climb and the requirement for there to be much, much more finance to fund all of this, how do you think we go about untapping the very large pools of capital that are yet to flow into decarbonization?
SHAYLE KANN: To be honest with you, 300 to 600% does not sound that intimidating to me. Like I think that’s going to happen because I think the way that you unlock larger flows of capital is by showing returns from the earlier flows of capital. If this stuff works, and this is what we’ve seen with solar and wind, the capital that is now deploying that stuff at scale is traditional infrastructure capital. That wasn’t true 10 years ago, and they’re doing it because it’s now proven and it works and it makes money. And I think we just have to do that in sector after sector after sector. And I’m pretty confident that we’ll get three to six times as much capital into this sector over the next decade or so. That seems entirely doable to me. So if that’s all it takes from a financing perspective, first of all, I’d be sort of surprised, but also I think that’s not too intimidating.
AZEEM AZHAR: Shayle, I’d like to go forward to 2050. Let’s imagine that we do make really, really great progress. Your son will be 28 years old in 2050. When you think out to that and you look at this new economy that has been decarbonized, what do you think that means for the kind of choices that he will have, the kind of work he will do and the nature of the world in which he will live?
SHAYLE KANN: Ooh, that’s such a good question. I mean, I think the road between here and there, he’s going to live through some really… Like every time the IPCC comes out with a new report, we basically say the same thing. There’s this really exciting progress, but we are not moving fast enough. And I think that’s going to keep happening. It’s going to keep becoming more and more urgent. So, his childhood is going to be marked by, I think, some really challenging times probably driven by increasing recognition that climate change is like a global calamity. But if we are painting the optimistic picture of the future, we’re going to see these dramatic transformations of major sectors of the economy toward new technologies that are cleaner but also ultimately should be cheaper and as you said, could create more jobs. Like there’s a very sort of utopian version of how this could play out in the long term if we move fast enough today. I’m not enough of a futurist to be able to tell you how it’s going to affect the choices he can make in his life and things like that. I think about the more practical things like he will not have to make decisions about where to live based on how bad the wildfire risk is going to be there in the next few years. Hurricanes and floods are not going to be a factor that determine where economic opportunities are for my son. Like those are the types of things that I think an optimistic version of the future does not include, where a baseline version of the future definitely includes.
AZEEM AZHAR: Well, that is something for us to work towards. Shayle Kann, thank you so much for taking the time today.
SHAYLE KANN: Thank you for having me. This was fun.
FRED CASELLA: Well, I really hope you enjoyed that. And if you did, we have more in our archive. I would particularly recommend Azeem’s conversation with Michele Della Vigna, Goldman Sachs’ top carbon economy analyst and the creator of their Carbonomics research program. It’s a deep dive into the economics we need to bring us to a net zero world. This podcast was produced by Shontelle Smith, Marija Gavrilov, Sophie King, and me, Fred Casella. Exponential View is a production of E to the Pi I Ltd.