CDR.fyi Insight - Microsoft

For the broader CDR market to scale to 6 - 10 Gt annually by 2050 (McKinsey & State of CDR Report, 2023), more purchasers are required as soon as possible to help promising technologies test their methods and scale.

Microsoft alone accounted for 70% of all-time contracted volume through the end of Q3 2024. Its decisive action in the CDR market stands out, even among its peer group.

In this CDR.fyi Insight, we will look at the nature of Microsoft’s durable CDR engagement, look into what is driving Microsoft's conviction to durable CDR, and explore what other companies can learn from its approach.

Breadth and Depth

With 91% of 2024 Q2 durable purchase volume and 70% of all-time contracted durable CDR, Microsoft's dominant position in the CDR market is unprecedented and pivotal for the sector's development. While there are other significant purchasers of durable CDR, including Frontier Buyers, Airbus, Equinor, Amazon and the NextGen Purchasing Facility, to name a few, Microsoft’s contracted volume is 16x the next on the list and 3x all other purchasers combined. It has become the market maker for this nascent industry.

Microsoft's CDR purchasing strategy balances large-scale commitments with portfolio diversification. At the core of this strategy is a focus on long-term, high-volume contracts, often spanning 10 years or more like its recent and significant BECCS deals with Stockholm Exergi (3.33M tonnes) and Ørsted (2.67M tonnes initially + 1M tonnes expansion).

Microsoft has shown that it is willing to go both broad and deep with its durable CDR purchases:

• Breadth: they have purchased from 22 unique suppliers, behind only Frontier Buyers (of which Shopify is one) with 38, Shopify with 35, and Milkywire / WRLD Foundation / Klarna with 27;
• Depth: they have made the top 4 purchases by volume and 5 of the top 6, and are the purchaser of the largest deals in the three highest-volume methods to date: BECCS, Direct Air Carbon Capture and Storage (DACCS) and Biochar Carbon Removal (BCR).

They use breadth to make “test” purchases in smaller volumes and depth to double down and “anchor scale” when they find proven, reliable sources of supply.

Methods

Further to the theme of diversity and scale, Microsoft has invested in seven different CDR methods. Beyond BECCS, these include DACCS, BCR, Ex-Situ Mineralization, Bio-oil Sequestration, Enhanced Weathering, and Marine Biomass Sinking. Many purchases are for smaller volumes, interspersed with some very large ones.

This method diversification, or portfolio approach, serves multiple purposes: it mitigates technology risk by ensuring non-reliance on a single approach, supports the broader development of the CDR sector, and, critically, acts as a probing mechanism to determine which methods and suppliers can form the basis for significant future purchase agreements.

With the volume of its purchases, Microsoft primarily focuses on proven approaches. Once Microsoft has found a proven method and supplier, they double down. However, Microsoft does maintain a diverse portfolio that includes some emerging technologies at smaller scales which helps them identify those scalable technologies.

As many durable CDR technologies and suppliers are in the early stages, let’s use a venture financing metaphor: if Microsoft were a venture capitalist, they would be less likely to appear as in the friends and family, angel, pre-seed, seed or even A rounds. They are the go-to funder for rounds B and onwards when the startup has found product market fit, has traction, and is looking for funding to scale. They are not a CDR charity donor; they have ambitious climate objectives, and they are in the business of durable CDR to put agreements in place to meet those goals.

Note: While the focus of this Insight is on durable carbon removal, Microsoft has also acted decisively in nature-based carbon removal. They have purchased upwards of 20 million tonnes of nature-based carbon removal credits since 2021 and are one of the founding members, together with Google, Meta and Salesforce, of the Symbiosis Coalition, an advance market commitment to buy credits from nature-based carbon removal projects by 2030. An open question for the durable CDR market is how Microsoft’s choice of carbon removal purchases will evolve as policy changes are enacted and engineered solutions mature.

Geography

From what we see, Microsoft prioritizes projects based on quality and scalability rather than geography. While they have purchased durable CDR from companies in Europe, the United States, Canada, Mexico, Bolivia, Kenya and Australia, three countries (Sweden, Denmark, and the US) account for over 96% of purchase volume. Across its three most prominent methods, BECCS has been largely from Scandinavia, DACCS from the United States, and biochar from the Americas, with an honorable mention for Kenya.

Overall, Microsoft’s geographical approach, especially for its large-scale and long-term purchase commitments, favors stable jurisdictions with supportive climate policies and reliable legal infrastructures.

Leading from the Front

Beyond its market-making purchase volumes, Microsoft is shaping the CDR industry in other ways.

Procurement: Microsoft has learned from and iterated on their approach to CDR procurement. They have moved from a scheduled intake model to more agile, continuous market engagement; coupled with their willingness to diversify across methods, they are able to respond quickly to new opportunities. Furthermore, their position as the leading purchaser keeps their pipeline full of high-quality projects.

Criteria: In collaboration with Carbon Direct, the “2024 Criteria for High-Quality Carbon Dioxide Removal” report guides suppliers on how to meet Microsoft's expectations. Given Microsoft’s market dominance, these criteria could shape industry behavior and potentially inform future regulations, reinforcing Microsoft’s market-making position.

Knowledge-sharing: Microsoft contributes to the entire CDR field through detailed reports, whitepapers and industry events by sharing their knowledge and lessons learned. Like other CDR early adopters such as Frontier and Shopify, they share annually their observations and learnings from their engagement in the industry.

Co-Benefits & Clean Energy: Microsoft's CDR strategy extends beyond direct purchases: they prioritize projects that have a positive environmental impact, including biodiversity and ecosystem health, as well as community benefits. Additionally, their significant investments in BECCS and DAC technologies indirectly drive demand for clean energy, contributing to a decarbonized grid.

Related services: While their purchases directly accelerate the development of the methods and suppliers they support, they also drive supporting services for the CDR ecosystem, such as registries and monitoring, reporting and verification (MRV) services.

Policy: Microsoft actively influences the regulatory landscape through substantive comments on initiatives like the EU’s Carbon Removals and Carbon Farming Regulation and the SEC’s rules on climate-related disclosures.

Drivers of Durable CDR Engagement

Having looked at how they engage in durable CDR, we come to the key question: why is Microsoft engaging as assertively as they have?

It starts with their climate commitments: becoming carbon-negative annually by 2030 and neutralizing all historical emissions by 2050. These targets are amongst the most ambitious of any company. Meeting them requires a comprehensive and robust CDR strategy beyond conventional emission reduction efforts. This is particularly crucial given the company's increasing emissions profile, especially in Scope 3, which has seen a 30.9% rise since 2020. Artificial intelligence, a significant business opportunity for Microsoft, requires significant processing power and increasing demand for data centers with their consequent emissions.

Source: Microsoft 2024 Environmental Sustainability Report

Breaking down its climate targets, Microsoft’s 2030 goal is to cut its FY23 carbon footprint of 15 million tonnes by 60% to 6 million tonnes of CO2e by FY 2030, and offset those residual emissions with carbon removal.

Looking further out to 2050, Microsoft aims to neutralize all historical emissions. Being at net zero on an annual basis will not get them to their goal; the only way to get there is to be carbon negative for some period of time until historical net zero is achieved, at which point annual net zero can be restored.

The scarcity of reliable, proven CDR appears to be another significant driver of Microsoft's strategy. With the company's purchases representing three-quarters of the contracted volume to date, it's not hard to envision a situation where Microsoft might exhaust high-confidence supply volume and find themselves obliged to consider lower-maturity projects to achieve their ambitious objectives. This market dynamic has pushed Microsoft into a position where it will likely be required to actively develop and support the CDR market to meet its needs, especially as additional purchasers enter the market and compete with Microsoft for limited supply.

Peer Group Comparison

In the financial markets, Microsoft’s name is often associated with those of other large, highly-capitalized tech firms such as Alphabet, Amazon, Meta and Apple. How do these companies’ actions in durable CDR compare to Microsoft’s?

Based on information gathered from various sources displayed in the table on following page, two key differences stand out from this comparison:

• Targets: Microsoft is the only one with a carbon-negative goal.
• CDR Mix: All five companies have engaged in nature-based carbon removal. Google, Amazon, and Meta have purchased durable CDR. However, Microsoft’s focus on durable methods has seen its cumulative contracted volumes at over 30 times those of the second highest company in this group, Amazon.

Sources: https://zerotracker.net/; https://www.ownyourbeliefs.org/; company sustainability reports.

Key Lessons

What can companies committed to climate action learn from Microsoft’s approach to durable CDR?

Set Bold Targets: Microsoft has made a strong public commitment to ambitious targets: annual carbon negativity by 2030 and all historical emissions neutralized by 2050. The only way to neutralize historical emissions is by going carbon-negative for some period, which requires the purchase of carbon removal.

Create a Comprehensive Net Zero Plan: Achieving these targets requires decisive action across their entire emissions profile: avoiding new emissions where feasible, reducing the ones they have, especially in light of increased energy demands, and removing what remains.

Decide on the CDR Mix: In terms of carbon removal, they are massive buyers across both nature-based and engineered solutions. They distinguish themselves from their peer group by how much of their removal portfolio comes from long-term removal.

Seek Win-Win: Their decisive action in durable CDR comes from enlightened self-interest: enlightened in that their willingness to engage in long-term offtake agreements and innovative contracting arrangements has been crucial for the durable CDR market’s development; and self-interested in that they are securing long-duration supply for themselves now and putting themselves at the top of every durable CDR suppliers list.

Assure Co-Benefits: Beyond the business of securing carbon credits, they consider factors such as environmental impact and social equity while openly sharing their experiences, benchmarks, and even their stumbling blocks.

Microsoft's proactive and assertive approach to climate action has been crucial in underpinning the growth of the durable CDR market and serves as an excellent example for other large corporations to emulate. The decisiveness of their actions is a wake-up call for prospective CDR purchasers to accelerate their efforts now or risk not securing supply when needed.