Microsoft and Occidental sign carbon credit deal to help offset AI energy surge

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Microsoft and Occidental Petroleum have signed a record carbon credit deal worth hundreds of millions of dollars, as the technology industry struggles to keep its climate promises amid a surge in power needs driven by artificial intelligence. 

Occidental, one of the biggest US oil producers, will sell 500,000 carbon credits for an undisclosed amount to Microsoft over six years, under an agreement announced on Tuesday.

The companies said it was the largest deal of its kind, and would allow Microsoft to offset its emissions by paying Occidental to have the carbon removed from the atmosphere and stored underground.

The deals come as Big Tech struggles to contain a drastic rise in energy emissions driven by AI expansion.

Microsoft said in May that its emissions had risen by almost a third since 2020, mainly from the construction of data centres. Google also last week admitted that its emissions had increased by almost half since 2019 as a result of the building of power-intensive infrastructure to support AI.

Microsoft has pledged to be “carbon negative” by 2030, while Google has committed to achieving net zero by 2030.

The use of carbon credits to help meet such goals has come under intense scrutiny in recent years because of concerns over verifying the claims about how much carbon is removed by new projects. Each credit is supposed to represent a tonne of the greenhouse gas that has been avoided or removed from the atmosphere.

In its deal with Microsoft, Occidental expects to sell its credits generated by a process of sucking carbon dioxide from the air, known as direct air capture, more cheaply than the roughly $1,000 market rate.

Critics say direct air capture, a nascent technology, remains too expensive and uses too much energy for the volume of carbon dioxide that it can capture in projects to date.

Occidental is America’s fourth-largest producer by volume of oil and gas. But it has rapidly expanded its carbon dioxide management business in recent years in a bet that trapping and storing the greenhouse gas will become increasingly necessary in the race to keep global temperatures in check. 

That growing business allows Occidental to sell credits linked to the captured carbon. It signed a similar deal with Amazon in September for 250,000 credits over 10 years. 

The tech sector was a “priority sector” for 1PointFive, Occidental’s carbon management subsidiary, said its chief executive Michael Avery.

There would be a “near-term” shortage of the clean power needed to run AI systems that would necessitate “a basket of solutions” including carbon credits, he said, adding: “We don’t see DAC as trying to solve any company’s entire portfolio of emissions.”

The announcement is a boon for Occidental as it seeks to win support for its pivot into DAC. The International Energy Agency has said the technology will play “an important and growing role” but has not been demonstrated at scale. At present, it removes a small fraction of the 37bn tonnes of annual energy-related carbon emissions.

Climate experts are clear that carbon credits should only be used to offset hard-to-eliminate emissions such as some of those that result from certain industrial processes including steelmaking.

Microsoft’s credits will come from Occidental’s first DAC project, Stratos, in West Texas, which is set to be the world’s biggest such facility when it goes online next year. The project is being developed in partnership with BlackRock, which invested $550mn in November

Recent estimates from S&P Global put the cost of DAC credits at about $800-$1,200 per tonne of carbon emitted, a high cost that meant there were at present few bulk contracts being signed. 1PointFive said it expected to operate at a cost of $400-$630 per tonne. 

Avery said the carbon linked to Microsoft’s credits would not be injected underground as a means to extract more oil — a process known as “enhanced oil recovery” (EOR) — though he conceded that carbon captured by Stratos could be used to do so in future. 

Occidental’s expertise in EOR, a controversial process, has enabled its shift into the carbon management business. Any use of carbon captured by Stratos to this end would be “customer driven”, said Avery. “It may make sense for certain customers to take fuel that has been fully decarbonised using captured carbon.”

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