Episode 204: The Role of CDR with Stacy Kauk, Head of Sustainability at Shopify
Episode 204: The Role of CDR with Stacy Kauk, Head of Sustainability at Shopify
Today's guest (well actually Monday’s guest, but we are late to get this out 😳) is Stacy Kauk, Head of Sustainability at Shopify. Stacy walks me through her career path, how she first got interested in climate, what led her to Shopify, and Shopify’s climate journey, thus far. We also have a great discussion about CDR, its role in decarbonization, its progress to date, barriers holding it back, what it will take to get it to where it needs to go, and what Shopify is doing to help.
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Stacy Kauk: Shopify is a leading global commerce company and we've become the platform of choice for entrepreneurs all around the world. We have millions of merchants in over 175 countries worldwide. Some examples of key brands on our platform are Allbirds, Gymshark, Heinz, Tupperware, Netflix, FIGS. As a company, we have over 7,000 employees worldwide. And at Shopify, I'm the head of sustainability. And one of those key elements is overseeing Shopify's sustainability fund, which has committed 32 million to date since we launched in 2019. The fund is focused on long term carbon removal, but also emissions reductions. We're taking a two prong approach.
Jason: Okay. So the Shopify team started down the path asking questions, starting from first principles, uncovering that there was a gap. Then what?
Stacy Kauk: And then it was like, well, we probably should play a role in addressing that gap. And the decision was made that if we want to buy and support high quality carbon removal projects, we should make a minimum annual commitment to do so. So that there's a reliable demand signal out in the market. Recognizing $5 million is not gonna create a robust market, but being a first mover to create a market and hopefully bringing others along with us could kickstart the carbon removal market.
And so the decision was made to start Shopify's Sustainability Fund to allocate a minimum of $5 million every year towards supporting the solutions and technologies that will reverse climate change. That happened in September, 2019, the decision was made to pursue that. And at that point, the company was like, we need to hire somebody to build that. And that's where I come in.
Jason: So if I'm hearing right, the initial thought behind the Shopify Sustainability Fund was that cheap offsets might on paper look like you're counteracting the pollution that the company produces, but it isn't truly doing it because of issues with quality, permanence, additionality and things like that. And so to go with higher quality products is the desired path, but it is hard to find enough of them to do the job that are truly above the bar. So let's start a fund now to invest in the companies behind these projects, or essentially just committing to purchasing a minimum of $5 million per year of these projects in the same way that you would purchase an offset.
Stacy Kauk: Yes, it is not an equity investment. It is a purchase commitment. So we spend that in a very flexible way. What we like to do is prepay. And so we'll make a purchase and we recognize first we're paying a high premium because we're an early adopter. The capital's not amortized over a significant number of carbon removal units that you can buy. So we're paying a very high price, but we also like to pay that upfront so that it gets the capital into the hands of the climate companies so that they're able to do more with the cash. And then they are able to deliver the carbon removal once they're up and running.
And we also like to do longer term multi-year agreements. It's not a one off purchase, like when you go out and you're trying to balance your carbon accounting, and you have to buy X number of offsets by the end of Q1 in the following year to balance your carbon books. We're not doing that one off purchase in these cases, we're signing multi-year deals that give these companies a longer runway. Where they know that they have a buyer for a certain amount of quantity year over year.
And what that's doing is facilitating investment from other sources for those companies, because they're able to demonstrate, look, we've already got revenue on our books and we're still operating a pilot plant. And so that really helps accelerate their development and progress as a company.
Jason: And so given that you have been working in and around the environment for your whole career, I, I feel like carbon removal is a lighting rod topic in the environmental movement. Had you been thinking about carbon removal as a potential solution before the Shopify opportunity emerged? And what is it about carbon removal that made you excited that this was the place you wanted to anchor for the next phase of your career?
Stacy Kauk: I'd always been a skeptic when it came to offsets and carbon account outing. And I felt that it was very much an exercise like a Catholic absolution, you know, like you, you sin and you go and you're forgiven and everything's fine, but like you still did the bad thing I felt at the time that it really wasn't going to be what would get us there as a planet to reverse and climate change. Especially from low quality projects where it's a sham, they're being sold twice. The forest actually isn't there and you're getting a picture from, you know, another location. And it just seems a little opaque at the time and digging into these kinds of projects and seeing what an offset was actually made of the question in my mind was, well, why would I or Shopify pay another company to not pollute as much as we just did. Paying another company, not to pollute when the technology is there, they should just use it. Like, from a moral obligation, you know how to not do it. You don't need me to pay you to not do it. Just don't do it.
That was the frustrating component around avoided emissions offsets. And for me, carbon removal is so much more of a pure application. You're paying someone to provide you with a service to go out and vacuum up your emissions and lock them away for a long period of time. And that's a service, it's a cleaning service essentially, right? You're cleaning the atmosphere on behalf of someone who's emitting something that's unavoidable. I think that's much cleaner way to think about it because carbon removal from the atmosphere's perspective is net negative. Whereas in avoided emissions, your emissions are still up there. You just paid somebody else not to do the same thing.
Jason: What are some of the critiques that are most prominent of carbon removal and how much did you think about those when determining that this was where you wanted to anchor in the next phase of your career?
Stacy Kauk: The most frustrating argument against carbon removal is the one of a moral hazard where if you're spending money on carbon removal, that's money that should be going to emissions reductions. And this viewpoint that they're mutually exclusive. If you're doing one, you're obviously not doing the other, like I think it's a false equation. And I find it very frustrating because we have to do both and we need to do both as fast as possible.
Anyone who pays attention to the economics at all knows that it is more cost effective to avoid emitting a ton today than it is to go out capture and store that ton of emissions in the future. So obviously the money needs to be spent on emissions reductions, and it's way more efficient, but emissions reductions alone are not gonna get us to where we need to be. The science is super clear on that where we actually need carbon removal technologies on top of deep emissions reductions in order to reverse climate change and avoid the most intense and impacts that are now being forecasted by the IPCC and others.
We can't just focus on one or the other. It can't just be avoiding emissions now because we need to scale carbon removal concurrently at the same time, so that we're doing both. And I think that's the most frustrating argument because we need to be doing everything all at once as fast as possible. From my perspective, that means that we need a diverse ecosystem.
We need a diverse set of approaches. We need people who are solely focused on emissions reductions, and that's what their jam is. We need people and companies are only focused on carbon removal and that's what they wanna put their money on, because what we need to do is encourage everyone in all aspects. And I don't like the divisiveness of that narrative. And it's very frustrating because anybody who's doing anything should be encouraged, supported, and welcomed to the ecosystem.
Jason: We did touch on one of the big concerns that I've heard, which is around. I mean, essentially the argument is that it's fossil fuel company propaganda, and that carbon removal is permission for business as usual. And if we could truly do both then great, but from a human psychology standpoint, by giving one out, it takes their foot off the gas or off the EV pedal or whatever, to actually clean up their own house as it relates to their generated emissions. Do you worry about that? 'Cause yes, we need both, but do you worry about that psychological element?
Stacy Kauk: This is going to be an unpopular opinion. So I think of it a lot. Like wastewater a long time ago, we didn't know what to do with it. And we just threw it out in the street and there were all sorts of adverse health effects and our cities were unpleasant. We didn't like it. We didn't stop generating wastewater. We figured out how to deal with it and how to clean it and how to be responsible.
The solution is still being implemented around the world. There's still issues around this, but we know what we need to do. It's a question of economics when it comes to carbon removal and it being purported as an excuse to continue polluting because technology's gonna save us. Part of me, challenges that and says, well, wouldn't it be wonderful if it did? Wouldn't it be wonderful if we took all of the financial resources and the big brains, and we were able to solve it in a very similar way as we solved our wastewater problem?
And right now we're at the point in history which will be history where we are trying to reduce it. We're also potentially going to uncover solutions that could like, this is gonna cause a lot of clap back. But what if we did develop some solutions that were scalable and were profitable and were able to enable us to emit and know that we were able to take care of it.
It's like science fiction and past 2050, but that potential is there where these solutions could scale and could allow us to begin using fossil fuels again, down the road, which is a crazy concept. But right now we can't afford to be doing that. We have to be reducing our emissions because the technologies are not there. And so for right now, I would agree that we need to be focused on emissions reductions, but we also have to be scaling carbon removal.
So we need investment in both because for carbon removal to get to the scale, we need, allow us to have that permission to still pollute. We have to get to that time horizon first and it's way down the road. So we'll probably wreck our planet before then, if we don't focus on emissions reductions while building these longer term solutions.
Jason: And when you budget internally for that fund, how is that viewed in terms of its job from a business standpoint? I mean, is it viewed like a philanthropic contribution for the collective good? Is it a marketing expense? How, how do you think about that?
Stacy Kauk: I guess it would depend on who you ask because there's a lot of angles you can take with the fund. And when I talk about, or I get asked about the return on investment and how we're measuring success and what's the play, it really is the success of the companies that are in our fund. That means that Shopify's being successful. And so internally how we treat this is right now, a lot of the things that we're buying haven't yet been done. Some companies have not yet proven that in fact, this is gonna work at the rate that they expect at the capacity they think.
Scaling and cost curves are still being truth and proven out. So right now it's more of a trying to kickstart and we're very open to risk. However longer term, this is going to transition at as the carbon removal services begin for those companies that are successful as they start to deliver tonnage to Shopify, this certainly will be something that will become material.
And we really hope it will become material to our company because of the impact of our initial kicks starting, the market. We're getting these carbon it's in which we will then continue to retire against either our corporate footprint or shipping services or use them for merchant promotions. Like a great example is black Friday cyber Monday, which is, you know, the largest shopping weekend around the world. And it happens just before the holidays. And we have this beautiful globe that shows all the orders where they're flying around the world. And it's really a wonderful rendering of what global commerce can look like.
And what we do for Black Friday or Cyber Monday is we use the carbon removal credits that we get through our Sustainability Fund purchases to make every shipment for every order placed on that four day weekend carbon neutral, or even actually remove the emissions from that activity. So there's a direct connection to the business in terms of how we're using any of the carbon removal tonnage that is delivered.
Jason: If I'm one of your peer companies, you know, a competitor or someone in an adjacent part of the commerce stack, and I say, look, that's great that you're doing that, but I run a publicly traded company. I'm accountable to shareholders from a financial standpoint every quarter, and I get that it helps the greater good, but I'm just trying to, you know, save my butt and deliver financial returns for my shareholders. Why would I do this? What would you say?
Stacy Kauk: That's a great question 'cause we've had to answer that we're a publicly traded company as well, delivering quarterly results and are accountable to the board and our shareholders and how we think about it as a commerce company, as the entrepreneurship company, that Shopify is when we think about climate change and the long term climate change has to be dealt with because it's a threat to entrepreneurship and there's a couple layers to this. So I'll try to unpack what I mean by that.
When we think about climate change, and we think about the adverse effects that are starting to be more commonplace around the world, we've got rising sea levels. We have drought, we have wildfires, we have water shortages. We have increasing food prices. All of those things disproportionately affect marginalized as populations around the world. All of those things that are putting stress on those populations, those are the same populations that would benefit the most from entrepreneurship.
Those are the populations that need to become entrepreneurs that need to build their businesses that need Shopify. And when we think about being the entrepreneurship company and having global commerce be something that's sustainable in the long run, we wanna make sure that entrepreneurs and entrepreneurship can thrive and people aren't just focused on surviving.
And so when you look at like 100 year time horizon, we need to take down climate change so that entrepreneurship can persist for everyone globally. So with that perspective, we need to deal with climate change and we need to spend money to decarbonize as a corporation so that we can protect our core business from the threat of climate change.
Jason: And Shopify aside, if you just look at the state of carbon removal and you look at what it will take for it to make a meaningful dent in addressing the problem of climate change, where is carbon removal in the aggregate in getting there? What are the most promising areas within it? And what are the biggest barriers holding it back?
Stacy Kauk: Oh, this is what keeps me up at night and keeps me reading and digging and trying to solve that because there's so much in that question. What I can share in terms of where is carbon removal at? I've seen massive progress in just two years when I started working on this in early 2020, it was massively challenging to spend $5 million. Now it's not hard, it's much easier. And because I've got a view into the 22 companies that are now in our Sustainability Fund, I can see how they're evolving and what's changing and what their success looks like.
So even with our $5 million in annual spend, and obviously we need that to be a thousand times more to get to where we need to go, what that has done is the companies and our fund have raised tens of millions of dollars. They've grown their carbon removal capacity by as much as 80 times, that's 80x, which is a massive change in two years.
And they've increased their customer base 40 times. So things are working. There is momentum, and I think there is going to be a significant increase in momentum. And I think it's going to accelerate and I'm very hopeful about carbon removal, getting to the point where it's a meaningful contributor to reversing climate change. What I'm excited about is more along the lines of what has not been done yet.
What do we still not understand? What do we still need significant research into? And that makes me think of any kind of ocean based solution right now that is just an untapped wealth of space to put carbon and being a massive carbon sink that the ocean is any solution that uses the ocean. Doesn't have a competing land use. Like we're not trading off places for us to live places, to plant trees and to renature deforested areas.
We're not trading off agricultural space. The ocean has a huge potential and it's hardly yet understood. We've just scratched the surface in terms of how to harness the ocean as the world's largest carbon sink. And so I'm super excited about that area of exploration, because it just has such a huge untapped potential.
It has a different set of risks associated with it, but it sits largely outside. A lot of the criticisms around some carbon removal solutions and nature based solutions specifically where, you know, we can't reforest the world because we have to live and we have to eat so trees aren't gonna solve all of this for us, but if we can use our entire planet and all of the geology, all of the land and all of the oceans, I think we're gonna get there.
Jason: I think the voluntary market is important. It's not the only thing we've got, but it seems like it's the bulk of what we've got right now. I, my question is how far can the voluntary market take us? And what is the theory of change here? Look, it's better that you're doing what you're doing than not doing it, but you worry that you'll do it with these little dollars and not to suggest. I mean, it's way better than no dollars, right? But if you need trillions and you're doing $5 million, then how do those dots connect? What needs to happen? And how much do you think about and resource to ensuring that this entry point or beachhead, if you will, is actually kindling for a larger fire.
Stacy Kauk: That question is perfect because you've almost brought us full circle in our conversation because that's exactly why I chose to join Shopify. And I chose to leave government. That's where I was working before Shopify. I was at the Environment and Climate Change, Canada, working on the regulatory side of things I chose to come to Shopify because I felt at the time and I still firmly believe this, that the voluntary market and corporations are going to be able to move faster than the regulated space.
Governments have very important role in creating a level playing field across industries, through standards and regulation. They really need to make the rules of the game fair, but incentives lie in the market, when I think about business. So joining Shopify was really about having impact and when corporations and business go out and prove that something is possible and spend the money and go look that $5 million that Shopify spends a year has achieved x, y, and z.
And we've got all these other companies piling on and more purchases are happening. Work is taking place around defining what a high quality carbon removal credit should be. We're talking about permanence, additionality, atmospheric source CO2. All of those things are starting to be talked about because companies like Shopify are demanding that quality and we're paying for it with our dollars. And when that starts to happen, you will get that follow on.
That'll eventually create the playing field for a carbon removal and governments will start to shore that up. But if you wanna be on the leading edge, I think you need to align yourself with where the incentives lie to get things moving, not to formalize and permanently entrench. What's built. If you wanna do the building, you have to be here and you have to start and you have to get others to contribute and join.
And that's really what we're going to need is a monumental amount of capital being dedicated to purchasing high quality carbon removal, to be that undeniable market demand signal that can be relied upon by the supply side of the equation, that private financing and equity groups and venture capital can rely on to know that these are the companies I need to invest in because there is this market for their product and it's strong and it's going to be there.
And the demand is only gonna grow. And, and so that's really what it's about that using the voluntary market to build something that's robust. And I mean, it's not easy. There's a lot of criticisms. There's a lot of smoke and mirrors, but I think in the long term, we'll be able to create something that will eventually be formalized.
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