The Economics of Carbon Removal: A Conversation with Deep Sky

Fred Lalonde:

The Earth circulates everything we emit industrially every six weeks in and out. So out of the trees, into the trees, out of the ocean, into the ocean. We have broken that natural cycle, the warming is accelerating. So not only is it not going to stop, no matter what we do, not only are we stuck with it for 300 years, it's going faster, and faster and faster.

So the fact is we underestimate this problem by order of magnitude and it will be economic before it's anything else.

Michael Torrance:

Welcome to Sustainability Leaders. I'm Michael Torrance, chief Sustainability Officer at BMO. On this show, we will talk with leading sustainability practitioners from the corporate investor, academic and NGO communities to explore how this rapidly evolving field of sustainability is impacting global investment business practices and our world.

Disclosure:

The views expressed here are those of the participants and not those of Bank of Montreal, its affiliates or subsidiaries.

Grégoire Baillargeon :

Hello I'm Gregoire Baillargeon, President, BMO Financial Group Quebec. This episode is an excerpt of an interview I conducted at the 2024 BMO Growth Summit with Fred Lalonde, the founder of Deep Sky, a leader in the Carbon Removal space. As you will hear in the episode, carbon removal innovation will be required to acheive our climate goals and avoid the worst effects of climate change. In full disclosure, BMO has made a financial investment in Deep Sky in support of its development of carbon removal innovation and infrastructure. Now let’s get on with the episode.

I can't think of a better person to interview here than Fred Lalonde who plays both in the tech software space and in climate tech. So as a co-founder and CEO of Hopper, of course, and as a co-founder and chairman of Deep Sky. We'll talk about his entrepreneurial journey. So it's a real pleasure to have you. We've had numerous conversation, you and I, on topics that we're passionate about. So we'll do a deep dive on Deep Sky Climate.

Fred Lalonde:

Yeah, thanks for having me.

Grégoire Baillargeon :

You're now an expert not only in software and tech, but also in climate tech. We're going to get on this, but there's obviously a third technology you're a specialist at, which is cloning because this guy was busy doing Hopper. Now there's Hopper and Deep Sky. So you've been cloning yourself.

Fred Lalonde:

I almost died.

Grégoire Baillargeon :

You must have told yourself-

Fred Lalonde:

Don't start two companies.

Grégoire Baillargeon :

So why, what's the journey? What happened?

Fred Lalonde:

So what happened is in around 2019, 2018, we started planting trees to offset the CO2 of everything we sell on Hopper, just guilt. And we don't charge our customers, we just do this. We spend millions of dollars planting trees. We have 25 million of these things in the ground. We have a commitment of 30 million. As far as I know, we're the only thing that sells travel on any scale that offsets the CO2 of what you book on us. Again, if you're not using us, but fundamentally, I planted a tree and it's going to be mature in 30 years and you're taking that trip to Cancun right now. So it kind of doesn't work. And I gave two interviews and these 19-year-old reporters just took me apart. They just ripped through me because of all the greenwashing. It was the most aggressive interview I'd ever given, and I came out of that going, "I don't understand CO2, I don't understand climate change. I don't know how anything works." I'd read all this stuff about the IPCC, but I literally had no understanding of how bad things are.

And through that process, and I had a lot of time to read during the pandemic, and I was just reading up on this. It's one of those few problems, when I was reading the data on this, I was like, "Well, this can't be right. This can't be right." And so I developed this thesis that no matter what we do, even if we turn the economy to off, we ride horses and hunt our own food, we're going straight to five degrees. The time to do the energy transition was 1946, which is a completely different problem.

Grégoire Baillargeon :

So you came to that realization. It's one thing to realize this number of people in this room are probably conscious of just how terrible the situation is on climate, and the challenge is tough. It's something else to decide I'm going to do something about it and it's not a little something. So when did you decide to jump and why that solution specifically and give us the elevator pitch on Deep Sky.

Fred Lalonde:

Yeah, maybe one second on why it's worse than you think, because you think you know how bad it is, but it's not. You don't. It's actually way worse. So there's a couple of things. First of all, very simply put the current concentrations of CO2, which is 424 parts per million, that's like the chlorine in your pool. The last time that the earth was that warm, it was plus five degrees. That's a geological fact. Second, when you put CO2 up in the atmosphere, there's a delay somewhere between 8 and 50 years. So the warming isn't immediate. The CO2 isn't actually a thing that's warming. It's all the radiative effects around that. So there's a delay. Let's say that it's 25 years or 10. Nobody's actually sure. The point is what you saw like last year, the forest fires, all that other stuff. It's not for the 420, it's for 380, 3 60.

Worst case, it was when I was born. So even if we stop the economy, it's called pipeline warming and it's coming up in the literature. It's going up, and up and up. It's a point number two. Point number three, the CO2 that's up there stays for 300 years. So once the pipeline warming is done and we're at plus five, we have three centuries of plus five. By the way, if that was to happen, every place where human beings exist become uninhabitable. But don't worry about the flooding, because we're going to run out of food way before you ever see that. Then the third part is human emissions are 5% of what's up there. The Earth circulates everything we emit industrially every six weeks in and out. So out of the trees, into the trees, out of the ocean, into the ocean. We have broken that natural cycle, the warming is accelerating. So not only is it not going to stop, no matter what we do, not only are we stuck with it for 300 years, it's going faster, and faster and faster.

So this is why people are like, "Oh wait, we actually hit 1.5." We were supposed to have 20 years. So the fact is, we underestimate this problem by order of magnitude and it will be economic before it's anything else. The ecological aspects of this are terrible, but every single asset class is going to go negative. No matter what you do, you do the energy transition, we do everything. We're going to have to do one of three things. Either we're going to push up aluminum oxide constantly from the poles to increase the cloud cover, which will make the earth wider and prevent the warming, which will cost trillions of dollars and we'll dump billions of tons of aluminum oxide into the ocean. Good luck.

We're going to build a solar sail in urban, around Earth, that will block the sunlight with materials that we don't understand how to make yet or we're going to pull out the CO2. It's not an ideological statement, scientific fact. You got to do one of those three things. So what has happened, and this is how we met, it's how we met a lot of people. When you realize the magnitude of this problem, anybody who has access to capital, influence, technology, anybody who's smart, wants to figure out how they can help, and Deep Sky has become one of a number of things around the world where everybody's going to together and figuring out what can we do. And we knew nothing about CO2, we were idiots when we started this and we've just been learning as fast as we can

Grégoire Baillargeon :

For those who have maybe not done the deepest of dives in the IPCC reports and all this. There's nothing that tread said that's not the science. The science is that. That's just the way we navigate through that science, which is a little weird from an economic standpoint, but concentration levels, yes, we're at 280 for always [inaudible 00:07:38] billion and about 3 30 when we were born and 4 20 now, and we are heading to 500 parts per million. And there's no doubt, and it's in the IPCC reports as well, if we're going to keep anything within the temperature targets, we need to remove carbon from the atmosphere. It's in the reports. So it doesn't mean we shouldn't do the transition, we shouldn't reduce, we need to remove carbon. So that space is nascent. There's a number of technologies to remove carbon from the atmosphere. Of course, planting trees is not quite as effective or as fast as what we need or as permanent.

Fred Lalonde:

We'd be better to bury all the trees right now. That's a whole other conversation to plant more.

Grégoire Baillargeon :

Well, how do you take the carbon and put it permanently in the ground? So there's a number of technologies. That's why I joined the border of Carbon Removal Canada. You and I think Canada and Quebec need to be leaders worldwide on this. If you look at the IPCC reports, it actually expects that we would reduce CO2 emissions probably to a level that looks like 10. We probably still have 10 gigatons of emissions a year.

Fred Lalonde:

Yeah.

Grégoire Baillargeon :

Once we've reduced everything we can. 10 gigatons McKinsey says that's in the carbon removal world, probably in revenue opportunity annually of 1.2 trillion. That's not quite but close to the size of the oil industry. Now we need that in 20 years to remove annually what we emit annually. We're not even talking about concentration. So huge opportunity, nascent space. How does Deep Sky go about it? Are you building a new technology? Because that not what you're doing. You're doing something very different.

Fred Lalonde:

Yeah, so there's a few things you have to separate. You do a really good job explaining this. Capturing emissions at the source is also essential because we can't take all the fossil fuel laws online. There's a bunch of reasons for that. So when you have a chimney, 15% of what comes out, give or take is CO2. It's actually fairly cheap in electricity and CapEx to capture it, and so this is called CCUS. That needs to happen as quickly as possible. But the first rule of holes is when you're in one stop digging. So we have to stop emitting this stuff. Then let's say you did that. We magically did the energy transition and capped all the dirty chimneys that are out there, which is going to take more than our lifespans, but let's say we did it. You're stuck with the historic CO2. Once you've separated those two concepts, it gets easy.

The idea gets easy, then you got to pull it out. Now you're at 400 parts per million, which means if you move a million molecules of air, instead of getting 150,000 of CO2, you get 400. So now your energy requirement, your CapEx has gone like stratospheric. So you get to these crazy calculations like you're going to need 3000 plants around the world that each cost half a billion dollars and people go, "Well, Fred, that makes no sense." Then I point out that there's 2,800 coal-fired power plants burning right now, so we know how to do this. The scale of this is mind-boggling, but we've actually done it in the oil and gas, in the mining as a species. The technology problem, which is separate, is what do you run in this? So when we started two years ago, we actually went everywhere where somebody was building carbon capture.

I climbed a fence in Squamish. I was sure I was going to get arrested to look at a thing, take a legal picture. They wouldn't want us in there, and they sort of chased us out. We went to basements, garages, a place that was next to a place that was changing windshields and all these kids were in garages making stuff. One had all the tags from Alibaba, literally bought all the parts on Alibaba and they were trying to make this thing work, and we found six or seven companies and we went there and we said, "I'll buy your thing." And they were like, "What do you mean?" I was like, "Make another one and ship it to me and we'll buy it." And the guys were like, "You're raising VC money. You need a customer. How much does it cost?" $2 million. We gave them a deposit and we said, "Ship it to us."

This year, the last 12 months, we have evaluated over a hundred different new air and ocean capture companies. That's how fast this industry is growing. Now, none of them work. This is the part where we're in trouble. They're all made by hand. So on Earth, we have factories to make cell phones, batteries, cars, laptops. We do not have a single factory that's operating to build a carbon capture unit. We're going to need millions of them. The second thing is we know nothing about how this tech should work. These things that we've bought, we've bought about 12 different units and we're all going to run them to figure out what works. They all run different scientific processes. Nobody knows the energy curve. I don't even know if they're going to start. But here's the thing that everybody forgets when they go, "Well, Fred, you're wasting time and money because the technology doesn't work today."

Take this, this thing that's in your pocket that you use mostly to chat and scroll pictures of cats or whatever you're doing on TikTok, this in the 1960s would've cost $6 billion and it would be the size of [inaudible 00:12:14]. Why do we all have this for $1,000 in our pockets? Well, because of Moore law. When you apply human knowledge to something, you get this nonlinear progression of technology. Now, here's the thing. I'm going to let you in a secret. Moore's law doesn't just apply to silicon and chips. We could do this with anything we want except that we haven't cared enough about removing CO2 from the atmosphere. So Deep Sky was founded to do basically two things, figure out how to get the power and the geology, because you have to suck it out of the atmosphere with energy. We don't have that energy we need from the energy transition. So how do you do that? And B, where do you put it?

You can't put 800 billion tons of CO2 in vodka or carbon nano tubes. Anybody who's telling you there's an industrial application to this doesn't understand the problem. You got to bury it. Canada's exceptionally good for this, but then the thing in the middle cannot cost $2 million. If I made your car by hand, it would cost $2 million. We need to know what we're building and we need to manufacture it, and this process of human ingenuity should take 50 years. We built the oil and gas industry and about that.

Grégoire Baillargeon :

So therefore, what you're doing, you're not creating a new technology, but you're benchmarking all of them.

Fred Lalonde:

Yes.

Grégoire Baillargeon :

Who else in the world does that?

Fred Lalonde:

We don't know of anybody. What we're seeing is oil and gas companies have been placing bets, small equity checks for them in some of these companies and buying them. So I personally believe we need a separate tech industry that is scaling up, and so that's what we're trying to do. We have a lot of government funding, a lot of private funding. We're building a consortium of banks because this stuff has to be traded. We need an arm's length because DAC is for removing the emissions that are already there, and every ton that we release becomes a historic emission.

Grégoire Baillargeon :

Interesting. You go back on that concept of taking out what's already there, the concentration. So when I mentioned the 1.2 trillion, that's the removal of the emissions we have annually that we'll never be able to take out of the system, but there's 700 gigaton to probably 1.4 gigaton-

Fred Lalonde:

Thousand gigatons.

Grégoire Baillargeon :

... thousand gigatons. So that's about a hundred times what I mentioned. So 1.2 trillion is almost the oil industry a hundred times that is what we need to remove from the atmosphere. So it's the biggest industry in the [inaudible 00:14:29]-

Fred Lalonde:

Ever, ever.

Grégoire Baillargeon :

And we need it ASAP. When we say Canada, Quebec could be leaders in this, so you're an important component in that, the partnerships you've been bringing in, all these technologies we've been bringing in are from all over the planet, so knowledge is being built. We know how to [inaudible 00:14:46] molecules, certainly out west. You talked about geological formation, but tell us a little bit more about both energy component and the geological formation. What percentage of that industry could Canada be?

Fred Lalonde:

So that's a good point. So imagine we have the tech. Just take my cell phone, pretend they can capture a million tons of CO2, just as a thought experiment. The two ends of this are actually equally as hard. So the first thing is you're going to need renewable energy because burning natural gas to take out CO2 actually creates three times the CO2 emissions. So you can't just do that. It doesn't make any sense. Canada, BC, Manitoba and Quebec have a massive, massive hydro grids and we do have a surplus. Will we have a surplus forever? No, absolutely not. Do we need to be careful in what we're doing? Yes, absolutely. But electricity is real time. So we actually have shortages in the winter.

Canada has one of the highest temperature swings anywhere like Russia, which creates a huge opportunity because our grids need to be able to handle the winter. Therefore, there will always be power in the summer that we're doing nothing with. So that's the first statement. Second, peaks, you have to have a grid that can't handle peaks, so day and night actually you have another 40% swing. If all we did is we ran DAC off of our existing hydro.

Grégoire Baillargeon :

DAC being direct air capture.

Fred Lalonde:

Yeah, direct air capture over existing hydro doing anything at night when we don't need it. Imagine that the grid goes up, the fans spin down, and then you just do that. First of all, you'd balance the grid. It has huge effects. Second, you would actually take out a hundred million tons a year, which actually would start to matter. You would actually start to prove that this is doable and that would accelerate the technology curve. That's one. Two in the part of Canada, that's the oil sands, there's a geological formation that's enormous. It actually goes through all of Alberta goes to Manitoba, and then the US that thing's called the Devonian structure has been evaluated as being able to hold 2000 billion tons of CO2 safely. And the first time we put CO2 underground was 1972. We've known how to do this for decades.

Again, we just didn't care enough to scale up this industry. So the only other place where you could build the renewable hydro energy before we have enough nuclear to power all this, that's another conversation is Russia. It's just geological. It's just like you look at a map and what's interesting about Canada is not only is our hydro already built where Russia's mostly gas, we're running our hydro lines north to south, so they cover the whole territory. So you could actually build these infrastructures. And then thirdly, Eastern Park Quebec has the highest wind density in North America, so we could actually build a massive, massive wind fund, which we're starting to do and co-locate it with direct air capture.

So when you look at those two things, mathematically, I have an actual geeky spreadsheet on this, Canada could reverse climate change. The math is there and that's not how it's going to play out. Obviously the whole world's going to have to kick in, but technically, and this has been our story since the first Europeans came here, we have the natural resources to change the world. We're actually the richest country in the world. We just act like we're poor sometimes.

Grégoire Baillargeon :

So who pays for this? So all these enterprises in the room here, revenue's a real thing. So you need revenues. Who pays for this?

Fred Lalonde:

So right now, what the business model in market is selling voluntary credits. So we announced a lab that's going to do about 3000 tons. We're experimenting with things, but they're going to capture CO2. We have access to a well, we're going to do the full loop. We've sold all of our credits until 2050 in a week. So you have big buyers like the tech companies and others that are coming in and they're trying to buy these credits. They're paying an enormous amount. A market price doesn't make any sense. But again, as the technology goes down, the price will follow if we actually make the investments the same way, the cell phone no longer costs $6 billion, but there are people that are starting to buy. What's going to happen next, in my humble opinion, if you look at the 2030 commits for net-zero that every public company is taking, the miss is going to be enormous.

It's going to be hundreds of gigatons. If not, it's going to be enormous. And of course there's commits to 2050, but those are the hardest ones because everybody did the easiest stuff in the front nine, the back nine is going to be much harder to play, and as you said, 20% of that just can't deal with. So we think the voluntary markets of companies are going to go and say, "Look, we're going to plant some trees, like Hopper does, but I need a mix of DAC and we need to be part of this." So we think that the voluntary markets are going to be billions of dollars and we're starting to see it now. Industrial companies that were saying we're never going to do DAC a year ago are calling us back and going, "Hey guys, wait. It turns out that blue aluminum is harder than we thought," or "actually some of our investors are actually starting to pull their money," and so you are going to see gradual pressure built up and the people, the companies that actually show that they're doing early investments in this, they're trading multiples will be higher.

They just will. It'll be gradual. It'll take about a decade to materialize. Then when you get into the real issues, insurance will collapse, agriculture will collapse. There's only one outcome for somebody funding something that's going to cost a hundred trillion dollars and it's direct government purchase. People go, "That's crazy. It'll never happen." The defense industry, that's how it works. Parliamentarians debate, they put trillions of dollars and it goes to companies like Raytheon and General Dynamics that are, by the way, some of these are privately owned by families that you've never heard of, and then those things get deployed where there are conflicts. As this species, we know how to mobilize trillions of dollars of taxpayer money to do certain things when we believe our survival depends on it. So the first stage is economic acceptability. The second stage when it comes to survival, you're going to see all of the rules go out the door in my opinion, and it's going to become state backed. That's the only way you hit any of these numbers.

Grégoire Baillargeon :

Fundamentally, there's a belief that we share and that's why we bought the firm radical and we're there to trade their carbon from people who remove it to people who need the credits. So we certainly see an enormous opportunity there and like all markets, there's all sorts of integrity issues initially, but we're getting through that and we think these markets are going to explode. So when we met the first time talking about Deep Sky, it was essentially a spreadsheet in the PowerPoint presentation.

Fred Lalonde:

It was a very nice PowerPoint, but that's correct.

Grégoire Baillargeon :

It was very convincing.

Fred Lalonde:

That's correct.

Grégoire Baillargeon :

Since you've raised $75 million, you hired A CEO, you hired a whole team. Where are you guys at? What is Deep Sky today?

Fred Lalonde:

Yeah, so the first thing we did is we bought what's called a subsurface team. So we hired and built that. So we brought people, geophysicists, geologists that understand how the underground works, and so obviously these people are out west. We have a great pool of talent Canada, it's unbelievable. And so these people have been working, collecting all of the geological data that exists out west, and also we're going to do a seismic study in Bécancour to really get some modeling of what's under our feet there, because that is our biggest industrial park in Quebec where we wanted to do the battery factory. So if you could actually capture the emissions and put them underground there, you'd have the best place in the world to do any of this. So we've done a ton of work on that ton of work on power, like how to use power, how do you make it variable?

We've built a software team that is building, so we literally have this in a garage right now where we're running CO2 in a closed loop, and Siemens just gave us a box of sensors and we're actually digitizing the movement of CO2 so that we can create a credit digitally. Then you can go and trade it without any human beings filling in paperwork or anything like that. This is partially the issue with this scale. If I have a million units running up north, that guy in a hard hat that's going to walk around and just take measurements and some guy's going to fill out some paperwork. We need to build the total digital infrastructure. These things can be traded like orange juice or coffee or crude oil or natural gas. So we've built all of that and we are starting to receive our first units in October.

So we're looking at our first site, which is probably going to be out west. In Quebec we have Sept-Îles for ocean, and we're actually looking at Bécancour as a hybrid area. If we can drill the wells there, we can capture industrial and do DAC. So with a little bit of luck, we'll have break in ground by Halloween and we'll have the first units. It might run for five minutes and break, or it might actually do what it's supposed to do. And then throughout the year, we're going to scale up a dozen different technologies to get this going. As I've mentioned, this I would not have guessed, we've pre-sold all of those tons. And we've kept reserves for banks, especially Canadian banks, so that you guys have supply to start trading because we can trade anything, all the commodities in the world. We have no commodity for CO2 as you well know. So all that financial engineering has to happen this year too.

Grégoire Baillargeon :

I'll finish on this. If you walk out of here, doom and gloom, probably of all my readings on these topics, one great book that came out this year called Not the End of the World: How We Can Be the First Generation by Anna Richie of the World in Data. The World in Data is absolute great research and uber rigorous data site. So she dives and makes a difference between the headlines, which can be alarmists, the doom and gloom, the reality of things, the solutions, and the fact that humans have fixed enormous issues in the past. We can absolutely do this, but we need these things. We need to change. We need all of it.

Fred Lalonde:

I'm actually an optimist. I actually think we can do better than where we're going now. Just I want to point that out. The reason I talk this way is that people need to actually get the realization that recycling and all this other stuff isn't enough. In this room there's already something you can do. It's not true of every room everywhere, but in this room, if you walk out here, so I'm going to make a difference the same way we did, the same way [inaudible 00:24:24] does. There's something you can do about this. It's still under our control. What happens next.

Grégoire Baillargeon :

Cool, Fred, thanks.

Fred Lalonde:

Thank you.

Michael Torrance:

Thanks for listening to Sustainability Leaders. This podcast is presented by BMO. You can find our show on Apple Podcasts, Spotify, or your favorite podcast player. Press the follow button. If you want to get notified when new episodes are published. We value your input, so please leave a rating review and any feedback that you might have or visit us at bmo.com/sustainabilityleaders. Our show and resources are produced with support from BMO's Marketing team and Puddle Creative. Until next time, thanks for listening and have a great week.

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