Key Takeaways from Microsoft's FY23 Carbon Briefing Paper
Microsoft issued its 2023 FY briefing paper this month. The document provides strong guidance on voluntary market trends, as Microsoft aims to have a portfolio of over 5MM metric tons of carbon removal per year by 2030, one of the largest carbon offset portfolios in the world which spans both proven low-durability, nature-based solutions and medium- to high-durability solutions . To that end, new additions to Microsoft’s nature-based solutions segment of its portfolio this year include five forestry projects (>1.8 million mtCO2), one soil carbon project (200,000 mtCO2) and a mangrove blue carbon project (100,000 mtCO2), three biochar projects (>81,000 mtCO2), and one kelp-sinking project (12,000 mtCO2).
Broader Market Observations
While low-durability options face challenges (particularly with regard to durability), high-durability solutions require scaling. Achieving the goal of limiting warming to around 2ºC by the end of this century will likely demand scaling carbon dioxide removal (CDR) to at least 6 billion metric tonnes per year by 2050, and incorporating both low-durability and high-durability solutions will be necessary.
To execute this plan, Microsoft is increasingly focused on long-term offtake agreements. A long-term offtake agreement is a legal contract in which a buyer agrees to purchase a set amount of carbon credits at set price points several years into the future. Such agreements are crucial for ensuring a steady revenue stream for sellers and a reliable supply for buyers. Power purchase agreement-style offtakes from the renewable energy industry serve as an appropriate starting model for carbon removal.
It’s important to acknowledge that CDR is not a single industry; instead, it spans multiple sectors, each with its own nuanced market, financing, and deal structures. That said, repeatable and scalable processes across CDR industries are something that is being increasingly sought after.
One of the major tensions in developing carbon removal capacity is the need for rapid ramp-up, as suggested by the IPCC-endorsed science, versus the requirement to address environmental justice concerns and community impacts thoroughly. The development of CDR projects must consider reparative, procedural, and distributive justice throughout their lifetimes to avoid harming communities and ensure equitable outcomes.
Within the expanding array of carbon removal techniques, nature-based techniques focused on the circular economy stand out. Namely, agroforestry, biochar, and industrial ecology firms using CO2 and waste materials to create end-use products while removing carbon dioxide. The PanXchange plant biomass methodology fits within the scope of these types of nature-based projects.
Lessons from Supply-Side Deals
- Ensuring additionality in carbon markets is crucial to the marketability of carbon credits. Robust additionality tests must be included in new policy supports to reward truly additional efforts. For example, Microsoft is diving further into how “carbon revenues impact bottom line internal rates of return (IRRs) on different projects as a proxy for the risk of non-additionality”. They have found that a number of projects were almost entirely funded by government policies and irrespective of carbon credit revenues, rendering them non-additional.
- Reliance on models has increased due to the expense or impracticality of direct measurements. Advancements in modeling and MRV (Measurement, Reporting, and Verification) science are essential to scale such systems effectively. Uncertainty buffers and accounting for uncertainties in forecasting are being incorporated into contracting and claims processes.
- Environmental Justice: Agroforestry holds great promise for environmental and social benefits. Programs like Rabobank’s Acorn program, which promotes agroforestry in developing countries while giving back carbon revenues to local stakeholders, demonstrate its potential. Policy should encourage environmental justice and co-benefits under certification schemes.
Nature Based Carbon Removal Issues
While nature-based solutions provide the most scalable pathway for carbon removal at scale, there are still questions as to whether global nursery and agricultural lands are able to meet global demands for carbon removal. Again, deploying an all-of-the-above approach for carbon projects appears necessary. Secondly, monoculture planting and over-optimization for carbon diminishes biodiversity and raises questions about additionality. Projects should incorporate safeguards and demonstrate co-beneficial purposes like natural regeneration and equity alongside carbon outcomes. As well, a greater understanding of the biochar market is crucial, as biochar is a mainstay in the medium-durability portfolio, bridging the gap between lower-durability nature-based solutions and DAC.
High-Durability Biomass with Carbon Removal and Storage (BiCRS)
As Microsoft assesses potential Biomass with Carbon Removal and Storage (BiCRS) projects with large-scale carbon dioxide removal capacity, they acknowledge that existing biomass sourcing guidelines provide a useful foundation but do not entirely address critical questions related to deploying BiCRS at a megaton+ scale. To be conservative, Microsoft suggests:
- Avoiding harvesting from protected areas and areas without strict adherence to existing regulations.
- Avoiding the use of biomass with higher-value applications, such as long-lived wood products.
- In the case of forest biomass, sourcing only from sustainably harvested areas with stable or increasing forest carbon stocks.
Furthermore, alongside implementing the aforementioned principles, Microsoft recognizes the necessity for transparent systems that comprehensively track and trace how biomass is sourced at a more granular level.
Demand Side Commentary
A successful marketplace recognizes and addresses the challenge in attracting more buyers to the market and successfully implementing more carbon removal projects.
To mobilize buyers relying on carbon removal for their 2030 plans, immediate action is necessary. For viable projects, it is essential to match them with a critical mass of demand, particularly for various carbon dioxide removal approaches that require significant upfront CAPEX investments.
The establishment of common standards and terms for carbon removal deals will be critical in increasing market capacity and reducing transaction costs, requiring collaboration between buyers and independent experts.
Several fundamental utilities essential for a mature market, such as performance data, financing options, and liability structuring, are still underdeveloped, hindering carbon credit markets. Microsoft anticipates that increased clarity and the emergence of new tools in the following areas will help allocate risk more effectively and accelerate project deployment.
A lack of performance data (such as project data, credit ratings, and more) and market transparency is keeping a substantial amount of capital on the sidelines. Programs that separate financial interest from operational control, such as Indigo’s ‘rewards for regenerative practices” model are not appealing on their own merits. Nature-based carbon market players, particularly agricultural players in PanXchange’s network have stated that oftentimes, binding land-use contract terms outweigh the gains from an incremental increase in revenue from carbon offsets. Microsoft prefers a 100% pay-as-you-go arrangement, keeping capital raising responsibilities with the sellers. As well, carbon credit purchasing insurance products and many carbon offset project methodologies are still in their infancy, requiring further refinement over time.
Corporate and National Accounting
As the global community strives to combat climate change and meet the objectives of the Paris Agreement, a significant constraint is the lack of clarity in existing guidelines regarding how private sector contributions should be accounted for in relation to national contributions. Making private and public accounting systems more compatible in dealing with carbon accounting is a crucial step in the right direction.