Charm Industrial: Putting oil back underground
Startup Spotlight #16
Note: This newsletter is brought to you by Jeff’s Boston Marathon Fund. I hate running, so why would I run? In 2019, I lost a dear cousin, Annie Evans, to Leukemia. So this year, I am running the Boston Marathon to raise money for Dana Farber. The training is a big reason my writing time has been cut down temporarily! I don’t do ads, so I figured I would she with her story.
Context: The rise of carbon in our atmosphere
The impact of fossil fuels and carbon
Since the industrial revolution, humans have been relying heavily on coal and other fossil fuels to power machinery. The innovation of the industrial revolution has had outsized positive impacts on humanity, but over the past few decades, we have started to recognize downsides that we need to address, mainly climate change.
+80% of energy production comes from oil, coal, and gas. For electricity specifically, we have made material progress in scaling renewables (e.g., solar), but it is important to understand the scale.
Even if you use things like electric cars, the majority of electricity comes from dirty fossil fuels (a whole other deep-dive in itself).
So why does all of this matter? All of these fossil fuels come from the earth (e.g., coal from a mine, oil from drilling). They are attractive because they are cheap to acquire, and they already fuel much of our infrastructure. They are, however, primarily carbon. When we burn them, they release high levels of carbon (in the form of CO2) into the atmosphere.
High levels of CO2 lead to the Greenhouse Effect. When sunlight hits the earth, it is either A) absorbed as heat or B) deflected. The deflected heat would typically exit back out to space, but CO2 deflects some of it back to earth, increasing overall temperature.
In summary, we are removing carbon from the earth, burning it, and releasing it into the atmosphere, which heats the earth. And this transfer of carbon is happening much faster than CO2 can be recaptured (and returned to the earth).
Increasing emissions and carbon levels
As a result, we see i) the annual emissions are increasing and ii) the density of CO2 in the air is increasing. Most of the focus (like electric vehicles) revolves around lowering the rate of i). While progress continues to be made, you can see that directionally emissions continue to go up.
This is a classic Tragedy of the Commons situation. Climate change has a universal impact, but the incentive at the country level is to pursue cheap energy. Even though the US has made strong progress, China has entirely negated that (and then some)! While the cost of solar, etc., continues to trend downward, shifting infrastructure can be expensive. Much of this will continue to take time and work. Doing it too fast (and shifting to expensive energy inputs) can slow the economy and risk becoming anti-competitive.
So while we continue to reduce emissions over time, we need to impact ii) by actively removing carbon from the atmosphere.
Commitments to remove carbon
Many corporations have already come to this conclusion. Over 400 corporations signed The Climate Pledge, which commits to carbon net zero by 2040! These companies include Amazon, Microsoft, Uber, & Visa. Many of these companies are working actively to reduce the emissions they create with methods like converting office space to renewable energy, electrifying vehicle fleets, etc., but they realize that purchasing carbon is critical.
As a result, these companies committed almost $1B to the Frontier Fund, an advance market commitment backed by Stripe Climate, Microsoft, Mckinsey, and more. In 2021 alone, Microsoft purchased 1.3M tonnes of carbon offsets!
The problem: The effectiveness of carbon offsets
What does a carbon offset mean? Companies may not be able to get to zero emissions (or maybe not even close). The companies still have a specific # of emissions they produce (companies like Watershed track this). As a result, they purchase carbon-negative activities (things that remove carbon from the air) to get to zero.
Here is an example:
Smog Inc produces 1,000 pounds of CO2 per year
They make a bunch of changes (e.g., switch to solar panels) and it cuts their emissions by 520 lbs of CO2
A single tree absorbs ~48 lbs of CO2 per year
Smog Inc pays to plant 10 trees per year
1,000 lbs - 520 lbs of cuts - 480 lbs in planted trees (offsets) = Net-zero
That's completely made up, but that's the equation all of these companies are solving. For these large corporations, it is orders of magnitude larger. We are talking millions and millions of trees.
But there are many problems and critiques with the way offsets currently work. I want to talk through four main problems:
Transparency
Additionality
Permanence
Scalability
Transparency
The first (and most alarming) issue with carbon offsets is opacity. Well-intentioned companies try to fund projects that reduce carbon, but it is quite challenging to know if it does that. Carbon Credits are administered primarily by one of four main carbon registries: Gold Standard, American Carbon, Verra, and Climate Action Reserve.
There is, however, limited oversight over these four organizations, and John Oliver famously created his registry just to prove how easy it is (context here).
The lack of regulation and transparency makes it hard to truly understand where your money is going. A Wall Street Journal investigation found that very little of the funding for rainforest protection made it to locals. This is one of many instances where it appears most of the funding goes to middlemen (e.g., marketing, sales, ops) rather than capturing the carbon.
The opacity has become so apparent that when the Wall Street Journal surveyed companies about offsets, here's what they found:
Around half of the respondents say they aren’t buying credits because of a complex web of standards, varying definitions of carbon credit quality or a lack of market transparency. Around 40% cite the risk of reputational damage, including legal action.
Additionality
Let's say 90-100% of your funds go to reducing carbon. The next question is on additionality. Was the project funded new, or would it have happened anyways?
Imagine you go to Target, and you quietly sit by the cash register. Then a customer comes in, fills their basket, goes to checkout, and you say, "Here's a coupon for 50% off!" Did the coupon drive new sales? No. The customer unknowingly went through the entire process and then was ready to pay. Instead, you just gave credit to something that was going to happen anyways.
Here's another example. A little kid has a baseball. I take the baseball. Then I return it and brag to my friends about how generous I am for giving a kid a ball... even though I just returned the ball.
Oddly, these are both issues of additionality that people mention with offsets. The Target example often manifests as renewable projects. A study found that 52% of carbon offset funding went to projects that likely were happening anyways. For the baseball example, there are scenarios where people protect a forest that was already protected. JP Morgan gave $1M of funding to protect a wildlife area that was... already a sanctuary!
Permanence
Let's say you find a transparent solution that is truly incremental... great! But how long will it last? Microsoft is one of the larger purchases of carbon offsets, and they look at these projects through the lens of "durability."
Low-durability stores carbon for up to 100 years (ex., trees). Medium durability stores carbon for 100-1,000 years. High-durability stores carbon +1,000.
A common criticism of carbon offsets is around the permanency of carbon removal. When we look at the breakdown of carbon credits, most are allocated to Forestry & Land Use.
We protect forests and plant trees. This is great, but most of it qualifies as a "low-durability" solution. Even then, when the trees die (or burn), they release all of the carbon they restored. Sadly, the surge in wildfires has caused this. Hundreds of thousands of acres of carbon offsets were burned in the Oregon 2021 wildfires. All of that effort was undone.
Scalability
A final problem with many carbon offsets, particularly tree planting, is the ability to scale. The carbon offset voluntary market grew to $2B in 2021. There is intense demand, and this barely scratches the surface of the efforts needed to get us to climate net-zero.
The United Airlines CEO, Scott Kirby, said it best:
Traditional carbon offsets are mostly about planting trees and, while there’s nothing wrong with planting trees, it’s simply not enough — we have to do more. Even If we planted every square inch of earth that could grow trees, by some calculations it would account for less than a year of mankind’s emissions. There isn’t enough land to plant enough trees to make a lasting difference.
The voluntary markets alone require a 70-130x increase by 2050. This does not include government-mandated credits, and it does not focus on extremely permanent applications. If we want high permanence solutions (e.g., carbon capture), it will need to scale at much faster rates!
The TL;DR
In summary, fossil fuels have fueled our growing economy since the Industrial Revolution. They are very cheap and good at producing energy. Unfortunately, they release carbon into our atmosphere, which reflects heat on the earth. This is increasing. Our annual emissions are increasing, and as a result, the carbon density in our atmosphere is increasing at rapid rates.
Luckily, people are noticing, and many corporations and governments are committing to combating this with reduced emissions, cleaner energy sources, and carbon offsets to actively remove carbon from the atmosphere. Unfortunately, the current carbon offset industry is entirely insufficient. The industry is opaque. The solutions are not entirely incremental. Existing solutions only provide temporary fixes. And the solutions are not very scalable. While investment increases rapidly, the impact will not be realized until we have better carbon offset solutions. Enter Charm Industrial.
The Solution: Barbecue sauce and char
The founding story
In 2018, Peter Reinhardt was leading a data management company he co-founded: Segment. The company was fresh off a Series C and growing rapidly, and it was two years away from being acquired by Twilio for $3.2B. For years, Peter had been very concerned about our Climate Crisis, and to do his part, he had purchased carbon offsets for Segment... only to find out they were mostly wasted.
So in his free time, Peter worked with Kevin Meissner, Shaun Kinetic, and Kelly Kinetic to combine industrial decarbonization and carbon removal. In 2018, Shaun Kinetic had two key breakthroughs that crackled things wide open, so with the approval of his board, Peter co-founded Charm Industrial, allocating a few hours per week to get it started. At the beginning of 2022, Peter officially stepped away from Segment to run Charm Industrial full-time.
Already, Charm Industrial has become one of the fastest carbon-sequestration solutions in the world, and while they have raised money, they refuse to publicly announce it because the focus is on showing output. Fundraising is part of the game, but it is not the end goal. Removing carbon is. Deliver results. And they are. Here's how:
The world of biomass
Pyrolysis
Injecting oil deep underground
The future of steel
Put up numbers
1. The world of biomass
The Charm Industrial solution begins with biomass. Biomass is "matter from recently living organisms that are used for bioenergy production". This includes things like wood, organic waste, energy crops, and more. Examples are things like hay, corn stover, sawdust, wood pellets, and more.
One massive source of biomass is agricultural residue. There are +1B of tonnes of harvestable residue biomass a year in North America alone. For example, when you harvest corn, there are stalks, leaves, broken pieces, etc that remain. This is called "corn stover."
And we produce a lot of corn. It is estimated we plant +80M acres per year, which is higher than wheat. Roughly 120 million tons of corn stove biomass is created annually.
Corn stover is carbon-rich. As the corn grows, it extracts carbon from the air (via photosynthesis) and from the soil (reducing soil carbon levels). For Charm Industrial, biomass offers a massive, scalable market to address carbon removal... but how?
2. Pyrolysis
Today, corn stover can be used for a variety of things. Mostly, it is placed back on the field for two primary reasons: a) erosion control and b) soil organic carbon (SOC) replenishment. When it is placed back in the fields, the corn stover breaks down, releasing carbon into the soil (and into the air).
The carbon yield to soil is quite low, so you end up with a lot of unneeded emissions. SOC levels, however, are important. One way to improve it appears to be biochar. Biochar is solid carbon and ash, and many analyses show biochar can have higher yields for SOC levels. This improves SOC levels and reduces overall emissions. Great!
Producing biochar can be done with a process called pyrolysis, which is the process of heating organic material in an oxygen-deprived environment. When you pyrolyze corn stover, it produces biochar, but it also produces:
Bio-oil - A thick liquid that in an aqueous solution is quite literally... barbecue sauce!
Syngas - A combination of Carbon Monoxide (CO), Methane (CH4), and Hydrogen (H2)
Producing this has challenges. Pyrolysis plants exist today, but most biomass is not very dense, so it is quite inefficient to transport. Transportation produces carbon. Charm Industrial solves this with mobile pyrolysis. Don't transport the biomass. Transport the pyrolyzer! (Author's note: This also makes it a fascinating industry; biomass markets are hyperlocal)
Charm Industrial brings the pyrolyzer directly to the site. Once pyrolyzed, the three elements (biochar, bio-oil, and syngas) are much easier to transport. For biochar, it is quite easy. The biochar immediately returns to the field, and it is used to restore SOC levels to the soil at much higher yields and with much lower carbon emissions.
But what about the bio-oil and syngas?
3. Injecting oil deep underground
Let's start with the bio-oil. It is super carbon-rich, and some bio-oils have meaningful value. But this requires a lot of refining. From a strict carbon removal standpoint, Charm Industrial found one clear solution: inject it back deep underground.
But that's crazy! And dangerous! And hazardous! Wrong. Wrong. Wrong.
It is estimated that 2 billion gallons of fluids are injected into the ground in the United States EVERY DAY. Hazardous materials. Wastewater. All sorts of stuff. All of it occurs through a variety of different classes of injection wells regulated by the EPA.
At a high level, the fluids must be injected very deep underground. The fluids are injected below the water supply (at varied depths) into sandstone/limestone. We have done this a lot, and it is highly regulated, so it is a pretty efficient and safe process.
By comparison, bio-oil is pretty clean compared to the other stuff we inject into the ground, so while it seems like an immediate critique of Charm's process, it is pretty baseless. Injecting the bio-oil has clear environmental benefits. It takes carbon from biomass. Condenses it into a very dense liquid. Injects it into the ground where it sinks and solidifies in place, removing it from the atmosphere entirely. Throughout thousands of years, it likely becomes coal and stays there... that's pretty permanent! The carbon otherwise would have been released into the air, so it is also 100% additional.
4. The future of steel
The steel/iron-making industry drives up to 9% of global emissions. Direct-reduced iron can reduce the carbon emissions of steel production drastically (est. ~75%!). Iron is exposed with heat to Carbon Monoxide, Hydrogen, or another reducing gas during this process.
This reaction prepares Iron for further steel refinement. Luckily, syngas contains high levels of Carbon Monoxide & Hydrogen, and while there are many other applications of syngas, steel production is quite insensitive to impurities. It is a great fit for outputs from Charm Industrial deposits.
In the short term, it is unlikely Charm Industrial will get far enough down the cost curve to sell syngas profitably. Long-term, however, as they scale, they can use the syngas as a replacement for natural gas in steel production. This is a direct replacement and additional.
5. Put up numbers
Charm Industrial has created and refined this process for scalable, permanent, and additional carbon removal, and they are confident in it. So confident that they will show you with utmost transparency. Not with funding or massive valuations. They have purposefully obfuscated that. But instead, they share exact carbon removals.
Go to charmindustrial.com/registry, and you will see a total count of the carbon removed. Below that, they take it a step further.
There are line-by-line ledgers for each carbon removal. If you click on the serial numbers:
Each serial number has a clear waterfall chart of carbon removals. So for every purchase of offsets, the individual can see what percentage of money went to pure removals, and where there were inefficiencies.
Conclusion
In the end, the mission of Charm Industrial is quite simple: put oil back underground. If we can reverse the flow of oil, we are making substantial progress in reversing the trend of carbon levels in the atmosphere. Doing this requires a variety of transparent, additional, permanent, and scalable (TAPS?) solutions, one of which is Charm Industrial.
And most importantly, this is not a theory. They are doing this. They are executing. Putting barbecue sauce back into the ground. Who would have thought?!?
Appendix
One pager
Market drivers
Carbon commitments - Companies and organizations continue to make pledges for carbon net-zero etc. Each one will require significant offsets, rapidly expanding the market
Policy - Directionally, I believe the policy will continue to favor carbon footprint reduction (e.g., Paris Climate Agreement). That will give this industry tailwinds
Renewables - Technically the expansion of cheap renewable energy is reducing carbon footprint. This will slow market growth for voluntary offsets. That being said, so many other fossil-fuel-intensive areas are expanding that the industry as a whole will continue to expand rapidly
Investment score
Super super interesting. Love your blogs, no fluff.