Brennan Spellacy: 0:03

Global investment in renewables is like something like three or 400 times that of any sort of carbon abatement. We know that works, but we haven't really figured out what are those carbon abatement strategies at scale. And that's going to be one fifth of the problem. And so eventually it's gonna have to be one fifth of the investment. So something for us to keep in mind and keep an eye out for

Tom Raftery: 0:22

Good morning, good afternoon, or good evening wherever you are in the world. This is the Climate 21 podcast, the number one podcast, showcasing best practices in climate emissions reductions, and I'm your host global vice president for SAP, Tom Raftery. Don't forget to subscribe to this podcast in your podcast app of choice, to be sure you don't miss any episodes. Hi everyone. Welcome to the climate 21 podcast. My name is Tom Raftery with SAP and with me on the show today, I have my special guest Brennan. Brennan, welcome to the podcast. Would you like to introduce yourself?

Brennan Spellacy: 0:57

Absolutely. Tom, thank you so much for having me. Hello everyone. My name is Brennan Spellacy. I'm the co-founder and CEO of a company called Patch.

Tom Raftery: 1:05

Oh, okay. And what is Patch?

Brennan Spellacy: 1:08

Patch is a software company. So we were founded about two and a half years ago, and we build technology that enables primarily organizations or companies to scale their climate programs. So how do we do that? We partner with a really wide variety of what are called carbon removal developers. These are organizations where they actually sequester and remove carbon dioxide sometimes from the ambient air sometimes from the broader carbon cycle with the intent to help organizations hit what are called a net zero commitment. So for those who are unfamiliar a net zero commitment is essentially this idea of how do you have net zero climate impact on the planet, which typically involves some amount of decarbonization and some amount of carbon removal. Decarbonization is all about preventing the pollution and carbon removal is all about undoing pollution that has already taken place. Patch focuses on making that carbon removal element incredibly easy by building software, both for the sellers of the carbon removal, as well as the buyers of the carbon removal.

Tom Raftery: 2:09

Okay. So you're like a marketplace in the middle. And people who have some technology to remove carbon can go to you and you'll sell it for them and people who want to remove carbon, go to you and they can purchase how to do that.

Brennan Spellacy: 2:25

That's exactly right. That's exactly.

Tom Raftery: 2:26

Okay. Okay. So it's the idea of offsets, now offsets have a kind of a very dubious, what's the word I'm looking for reputation, I guess, some do some don't there have been some that have been shown to be complete greenwash and some which are not so bad. So how do you go about in Patch verifying that the offsets that you guys are selling are not greenwash?

Brennan Spellacy: 2:56

Yeah, no, it's a great question. So that really lends itself to what we think about as trust and safety at Patch. So typically any marketplace, actually, whether that's Airbnb, Uber has this concept of trust and safety, which is we're essentially an enabler to bring buyers and sellers together. So we wouldn't actually even say that we're selling the carbon credits on behalf of the supplier, we're just making it easier for them to sell. And that nuance is important because if we're buying and then reselling, we might be viewed as more of like a retailer or a broker versus an actual marketplace where you don't actually take on inventory risk. You're just providing these systems that make it easier to get access. That being said, if people are playing in our arena, if you will, in our marketplace, there has to be a series of rules. In order to make sure you can continue to play in that arena. And that's where the trust and safety elements come into play. So what Patch does specifically is we really make sure any information that's put into the Patch platform. So that's a claim around the mechanism of the carbon credit. Is it a removal credit, or is it an avoidance credit? What's called additionality or permanence of the credit, which is actually the idea of without this money, would this positive environmental benefit have happened. And the permanence is all about once the benefit happens, how long does it last for, does it last for 10 years, a hundred years, a thousand years, if that information is put into Patch, we're guaranteeing that information where a supplier is actually signing up when they go through our KYC process or know your client process to say this information I'm giving to is true and if it ever becomes untrue, whether by accident or intentionally Patch has the ability to actually withhold payment and give the buyer recourse on how to reallocate their funding, their funds. So that's kind of how Patch regulates that participation within, the marketplace. There's this other idea of quality though, which is in quality typically refers to, okay, we might have a credit with a hundred year permanence and we might have another credit with a thousand year permanence. Which one should I buy? That Patch is not play an active role in. The individuals at Patch might have a perspective on which one you should buy, but Patch is a product in a business, we attempt to not influence what people buy, but rather make sure people are educated on what they're buying. And the primary reason for that is actually coming down to a potential conflict of interest at scale. And the idea is, imagine a world where a NASDAQ or some sort of equity or a securities exchange and credit rating agency was the same party. Right. That'd be a massive problem because we make money off of throughput, we are incentivized to say, everything's great, right at scale. And that is not necessarily true. There's shades of gray. There's kind of nuance in how carbon markets actually work. And as a result, we have to make sure structurally the people deciding what gets bought. It's not in the same organization as what's actually facilitating the buying, which is what Patch does. And so we partner to kind of bring it back to the punchline. Now we partner with a really wide variety both verification standards, as well as what are called these new emerging classifications of companies called credit rating agencies, where they're actually evaluating the underlying data and validation of the particular credit. We take that data and present it in the platform, but we're not generating that content ourselves.

Tom Raftery: 6:13

Okay. And what kinds of carbon removal technologies are we talking about? Is it planting trees? I assume that would be kind of the hundred year span that you're talking about. Is it direct air capture, which would probably be the thousand year capture that you're talking about? Is it something else? Is it a combination? What are we talking about?

Brennan Spellacy: 6:33

Yeah, it's a great question. So that's actually why people love Patch so much is how much breath we have. So again, going back to the idea of Patch as a product is highly unopinionated. The only opinion we hold really strongly is if you make a claim, it better be true and so as a result, you have things like direct air capture on the platform. You have things like enhanced weathering, geological storage, reforestation and AOR station, all of these things on the platform, but you also have a series of emission abatement technologies or avoided emissions technologies, too. Things like refrigerant destruction. So chlorofluorocarbons have over 300 times the global heating potential of carbon dioxide. Those are, were basically every like fridge in the fifties, sixties, and seventies. And now they're leaking. How do you, and there's no current at least in the United States in a lot of cases. Some of that emission or refrigerant destruction or refrigerator emission is not regulated. And so in some cases it actually makes sense to develop a project around capturing and destroying that refrigerant is actually being emitted very similar with methane. The, at least again, in the United States, the EPA has been ratcheting down. The amount of methane here at landfills, for example can emit. But if you're beneath that cap, there's actually a Delta of emissions associated with methane again, methane heats the earth about 25 times as much as carbon dioxide does. And so there's opportunities to capture and either flare or reuse that methane. And so it's not just carbon removal. It's also different forms of permanent abatement on the platform. But the idea is how do you kinda keep all of the options to someone, help them educate themselves and then make the best decision for their organization.

Tom Raftery: 8:03

Okay. I've heard people refer to offsets as kind of like a parking ticket. The analogy being that, if you have enough money, you can park illegally and just pay the parking ticket all the time. Whereas people who don't have that much money have to park legally, how would you respond to that kind of an analogy it's just a slightly more of a tax to pay as a permission to pollute.

Brennan Spellacy: 8:28

Yeah, totally. So I, I think there's a couple elements there. There's the idea of equity, the idea of, well, that basically is a license for the rich to pollute and less fortunate to not. So it's kind of, there's that dynamic in that metaphor. And it's also the idea of does this actually drive structural change or not. Right. And then that's kind of the second piece, right? If you're, you're always gonna park in the bus lane or whatever, and you can afford it, it doesn't really matter. Right. You don't care how long your fancy Teslas parked there. You can park it there every single time. Um, and so I think there was kinda two elements that I think in the first element, related to the equity piece, typically in most cases, the kind of where that metaphor actually breaks down a little bit is if you are a wealthy nation, you're typically the one that pollutes more. So like, if you look at like emissions per capita and GDP per capita, they're pretty interrelated with one another. You know, we're gonna see actually what happens when the US like really robustly decarbonizes, and then maybe some more like developing nations. Are they gonna actually skip to renewables or are they gonna go through the kinda the fossil fuel trajectory that the US has. And in that case, it's actually unclear, but historically the people who have polluted the most are also the wealthiest nations and it's not so much. And in that case, they actually have the ability to overcompensate in a lot of cases. So that's kind of the narrative that we typically have internally, which is historically, there's been this inequality. The global north for the most part has created the lion's share of the pollution. And so we personally believe, or we typically believe that they're kind of on the hook to do a lot of the damage that's undone, especially when you consider the positive, other positive kinda societal benefits of increasing energy consumption, right? Things like education, go up and for mortality to go down when you consume a lot more energy and produce a lot more GDP. I don't see any reason why the global south can't benefit from that same trajectory. That the north has. So because of that, the north, in my opinion has to do double duty in that case. And that is kind of bringing me to the second point, which is, it really depends on the cost and the rules that are set for how you can pay those parking tickets. Because in that world, I at least, again, in the states, if you have a certain number of parking tickets, you, then you lose your license, right. It's actually not, you can pay infinite parking tickets forever. Like my father actually has a very funny story where he parked illegally all the time in Montreal where he studied and they repossessed his car and he had, I think, six or $7,000 in outstanding tickets, but the car was worth like two grand. And so he just said, you should just keep the car. I'm not coming back from my, you know, 1977 Honda civic with like 300,000 miles on it. And so eventually the thing gets taken away in that metaphor. And that's kinda where we view the role of policy to come in or really robust climate plans. So again, going back to the initial comment we made earlier, carbon removal should not be making up more than 20, 30% of your net zero strategy. So there really ought to be a cap and expectations around the quality of that carbon removal. And so historically offsets have been very, very affordable. And the reason they've been affordable is cuz they've typically subsidized something like renewable energy development in the global south, be like the clean development mechanism for example, what we're seeing the average price per ton bought on Patch is $70. And so it's speak like the kind of organizations we're working with, which are typically technology companies, financial institutions, they have a very, very high willingness to pay for effective climate action. And as a result, we would really expect that to set the best in class standard, where as you're ratcheting up the price, you're both actually truly having durable climate impact, but also the price for tons things enough where it's a good incentive to say, Hey, maybe we shouldn't do that business travel because it's not just the cost of ticket. It's gonna be another $200 on top of it to use direct air capture, to take it outta the air or whatever the specific example is. And so, you know, I think on the surface that metaphor, I think definitely resonates. You know, I hear a lot of get out of jail free card type metaphors as well, but I think if you really focus on, okay, what are the exact rules. That we should be playing by you then realize that get outta jail free card. If we actually define it appropriately, isn't very free at all. It's actually quite expensive, which is the right incentive structure for typically a company.

Tom Raftery: 12:39

Sure. Sure. And, and when you say it averages 70, what's the kind of range and what influences that range?

Brennan Spellacy: 12:46

So at the very bottom for something like a reforestation project and maybe like a frontier nation or developing nation might be in a scale of 15 to $20 per ton for something that's like actually truly additional and will actually not be something like a monoculture, for example, where it's all the same tree, but rather a diversity of forestry. And then at the top end of the scale, we have things like direct air capture at a thousand $1,200 per ton. And there's a few kind of things that guide that price typically the maturity of the technology. So photosynthesis. Agriculture. It's a very mature industry we understand how that works. Direct air capture is very thermodynamically complex, and we're still very, very early on in what's called the cost curve, which is essentially as you scale up production, the unit cost of something goes down. We have not scaled up production of that yet, but we have done that with forestry. So we've traversed the cost curve in a lot of cases, forestry, but we have not direct air capture and there are other, kind of interest supply and demand dynamics as well. Whereas some of these frontier technologies, that have the thousand 10,000 plus year permanence associated with them are actually highly in demand. And so some of those suppliers actually have significant pricing power. And so in some cases you might be buying a more premium product. And so if something's more highly sought after the supply is limited, that typically creates upward price pressure.

Tom Raftery: 14:01

Okay. Fair enough if I have some fantastic carbon removal technology that I'm after developing, and I want you to help me monetize that. What are next steps for me?

Brennan Spellacy: 14:16

It's a great question. So we have an entire business development and trust and safety team on the supply side of our business. So they're people actually taking the climate action themselves and using our software. And so there's a few paths that you have to take, and there's a pretty robust sequence of steps. You have to go through to even be allowed to sell on the platform. And there's really two paths right now. There's the idea of being on the marketplace itself in order to be on the marketplace, you have to pass all those trust and safety rules. So you have to, you know, things, basic things like K YC or know your client, you have to show where are your carbon credits actually housed or registered. Right. Are you using a traditional certifier, like Avera where they're actually the ones minting the credit or are you using some sort self certification or pathway where maybe there's no existing protocol yet. Cause that's actually a very interesting dynamic we're in right now where companies like Charm Industrial, for example, they're actually taking the approach of partnering with a third party by running their own registry system and their own fulfillment system. And so depending on the technology type in the party, there's some situations where it's a lot more clear, if they're in the kind of old mechanism of running through the traditional registry systems, but in the world where the registry system has not caught up yet, how do you have things like an LCA evaluated by a third party and proof of fulfillment and kind of indication of kinda like where cash is flowing as well as like really basic things, like is your development on, in a nation that's on like a US Canada or any sort of buyer sanction list? That's actually been kind of a problem in some cases with some more developing, ancient projects is like, there's actually like humanitarian problems with the project itself. And so as a result, you cannot be on Patch. That's kinda for the marketplace path. And there are some cases where people maybe are not mature enough , be on the Patch marketplace. And so as a result, instead, we allow them to sell using Patch's software, but not to the marketplace where they're actually selling directly to an organization. But Patch is not act as the intermediary. We just act as a software provider in the accounting system to enable that in that case, we're far more lenient on who can be on there, but we're far more strict on the kind of expectations from a legal perspective, because if you buy through Patches marketplace, there's all these legal and financial guard rails we provide you. And if you're buying, if you're selling through the Patch platform, it's really just a matter of we're giving you software to collect payment and manage inventory, but we're not taking an active role with the buyer itself. You're owning that relationship with the buyer. And so it's up to you to set expectations, but what we've seen there work really, really well is companies that might be pilot stage. Maybe they've just gotten like an ARPA-E grant from the US government and they're developing some sort of novel technology. And they're looking to corporates that maybe prepurchase inventory to help them subsidize the development of their technology. Patch isn't at a position where we'd be comfortable enough to put. Way behind that to be on the marketplace. But if specific buyers are willing and understanding of what's happening and they really view it more of a market moving or R and D exercise, rather than something that they're gonna count towards the net zero commitment, that's a really, actually fantastic way for corporates to accelerate carbon removal development with non-dilutive capital for the supplier. So those are kind of the two different ways you can operate on Patch. So it really depends on where you are in your maturity with your particular technology Tom.

Tom Raftery: 17:34

Okay. Okay. And on the flip side, if I am, for example, a chief sustainability officer of some organization, and we're going through a decarbonization exercise and reducing the amount of CO2 we're emitting, but we're nowhere near where we need to go. So we want to try and come up from underneath as well. So we need to get offsets. How do I interact with Patch in that scenario?

Brennan Spellacy: 18:00

So in that case, It's really just a matter of making an account and then using these products. So the quote of whole point of, marketplace , is to what I call drive activation energy to zero. So how do you make it as easy as possible? So if you wanna do today, you could build a carbon program in Patch, as robust as Microsoft's right. We're Microsoft is published there, so you can make Microsoft's carbon program and Patch today in an afternoon and versus having a team of, you know, 10, 15 brilliant people six month timeline to do all the BD and diligence and contracting. You can do what Microsoft has done in an afternoon on Patch. And that's why it's so powerful. And why we talk about this idea of, although it's a little bit overused, this idea of democratization, right? The only way we're gonna hit this kind gigaton scale impact is really driving the effort required for anyone to participate, whether you're a small business, whether you are kind of a medium sized, a large enterprise, how do you make it so, so easy to do the right thing that you're prepared to do it. You don't have to put a huge amount of human power behind it.

Tom Raftery: 19:35

Okay. And I mean, speaking of gigatons, roughly how many tons of CO2 are you guys abating at the moment?

Brennan Spellacy: 19:46

That's a good question. I actually only know the dollar spend off the top of my head where it's on a scale of tens that we're gonna do tens of millions of volume this year.

Tom Raftery: 19:53

Okay. And the aim is to get to?

Brennan Spellacy: 19:56

The aim is to get to, I mean, at a giga ton at, at $50 a ton, that'd be 50 billion worth of volume. So that's the goal.

Tom Raftery: 20:04

just only one gigaton. That's very modest.

Brennan Spellacy: 20:07

Yes, exactly. Well, I mean, it's, it's 10% of the necessary requirements, so I think that's where we're gonna set the goal for now. And then don't see, had a giga ton. We'll go for two.

Tom Raftery: 20:16

fair enough. Fair enough., and. Where to from here. I mean, I know we've said gigaton is kind of where you want to get to ultimately then you're at about, how many, what did you say in terms of millions? Again,

Brennan Spellacy: 20:29

Tens of millions, tens of millions. So depending on big variable that moves that volume number is that average price per ton. Right. That, so that's kind of the thing where if our price return continues to expand. Then that actual tonnage number will go down, but if it kind of compresses, then that tonnage number will go up.

Tom Raftery: 20:45

Okay. And the ones, the likes of the direct air capture that are at the moment at around a thousand $1,200 a ton. As we start to learn how to do them. And as the cost curve comes down and as they come down, let's say they come down to a hundred dollars, a ton that will start to impact potentially on your income, or you'll start to sell more of them or not. How do you see that? And how do you see that impacting as well? People's parking ticket idea that, suddenly it's a lot cheaper for them because when it was $1,200, you know, they have to think twice. Now it's only a hundred. Uh, maybe it's not so bad.

Brennan Spellacy: 21:29

Yeah, totally. I think there's a couple things here. What's actually unclear is if in this specific example, direct air capture is even gonna be able to get to a hundred dollars a ton. Like just the amount of like abundant, clean energy you need in order to enable something like that. I would kind of actually peg it closer to like four to three to $400 by 2030. I think that if we can get there for DAC specifically, because the associated storage as well of the carbon dioxide, I think that'd be absolutely phenomenal. So, well, I mean, we'll see what happens. Like I could very much be wrong or it needs either direction, but a lot of the kind of work we've done with these action developers themselves, that's kind of what they're setting their sights on you will.

Tom Raftery: 22:09

yeah.

Brennan Spellacy: 22:09

Now as far as the dynamics of our income, I think you're totally right. I think the thing that we kind of, the model we move to sometimes is we don't purely monetize based off of volume. We're actually moving to this world where if, you understand your usage of the Patch Platform, and the Patch Network we'll offer you the ability to pay for a lower take rate. So basically less usage based revenue in exchange for subscription. And so there's a model where actually we're charging, simply just subscription fees to enterprises for all you can eat access to the marketplace. Right now that's kind of the world where we're actually heading towards. And so in that case, we'd kind of be a little bit decoupled from volume a little bit. It would still be some coupling because the amount of subscription revenue can generate is tightly coupled to the amount of volume using from the platform. But the way that we think about it is there essentially the size of the problem is so big right now, where if we're actually getting to the point where the price per ton coming down is material affecting our revenue. That's very much like a champagne problem because that basically means we're doing tens of billions of GMB through the platform. Essentially, that's kind of, we are actually, if we're actively traversing the cost curve through Patch, it means that. We've had some sort of major unlock, which typically means there are other value added services we can layer on top of it, either for suppliers or for buyers. And so for us specifically, we're a little bit less concerned about that. Although at the hypothetically or theoretically, that could happen, if you have that much material volume, there's always other ways you can create value for buyers, sellers, other ecosystem players, where you continue to grow and, and make patch in this case, a sustainable business. So I'm a little bit less concerned about that, right know.

Tom Raftery: 23:53

Okay. And what kind of value add services were you thinking about?

Brennan Spellacy: 23:57

Yeah, whether it's helping folks like a really concrete one is we help suppliers today collect payments in six different currencies that they're not based in right now. There's an opportunity to expand deeper into the payments world. There's an opportunity to actually help buyers finance their purchases, or maybe purchase over multiple years. You know, at scale Patch, it's gonna look more and more like a sustainable almost bank or FinTech at scale, where once you have a really material amount of volume, and this is kind of what happened when I was at Shopify, where focus on the basic things first, how do you manage inventory enable people, to order things, enable shipping all these other kind of like really basic foundational elements. But when you're in a position where you essentially can see us apply and demand curve and a huge amount of volume going through there, there's always other things you can layer on top of afterwards and some of these value added services, I might not even be aware of because these problems might not even crop up until a supplier is doing a hundred million of top line a year. And so in some cases it's actually tough to predict, but I've seen it happen so many times in other analogous companies that I'm incredibly optimistic about. What's coming around in the future.

Tom Raftery: 25:03

Okay. And if I am that chief sustainability officer that I mentioned earlier, and I am buying through Patch, what kind of reports, can I get out of it? Can I pump it into, is there an API system where I can pump it into my sustainability reports or my backend? Or is there a UI where I can see a dashboard or a combination of both? Or how does that work?

Brennan Spellacy: 25:25

So there's both right now. So both reporting functionality in the dashboard itself where you can see what basic visualizations we have in the patch platform, where you can also just export all of your data and do whatever you like with it, load it into Tableau dashboard maybe visualize it and Excel, or Google sheets. And we also have a series of API so you can plug directly into, and that's actually what, a lot of the way some chief sustainability officers actually interact with Patch is not directly through Patch, but through what's called a carbon accounting platform, which there are essentially these software systems that help you understand what the carbon emissions of your business are.

Tom Raftery: 25:58

Interesting. Interesting. Cool, cool. We are coming towards the end of the podcast now, Brennan, is there any question I haven't asked you that you wish I had, or any aspect of this, we've not touched on that you think it's important to highlight?

Brennan Spellacy: 26:12

Yeah, you know, I think there's kind of two elements here, which is the key with fighting climate change. In general is really all about pie expansion. And we saw this recently pass with the inflation reduction act here in the US. The things that have been going on in Europe have been phenomenal as well. And there's just an element of really making sure we don't fall into this pattern of essentially like zero sum mindset that has historically been the case when trying to operate sustainably in the last two decades. And that's actually a very difficult reprogramming to go through. Historically, this was an initiative, or a project, or a goal that was not considered critical. Even, you know, though Al gore did his thing two decades ago. It wasn't really taken seriously into the last couple of the years. And as a result, the people who've been fighting, the good fight that entire time have always been focused on, well, how do we make this trade off? Like on this one particular dollar at the margin and the exercise we're always going through is instead of worrying, how are we gonna allocate this 10 billion dollars? How do we make it a hundred billion dollars? Because at the end of the day, we need to try a thousand things, cuz a hundred are going to work and 10 are gonna scale. And that's, I think something that's really, really important for us to understand and we are not going to understand the secondary and tertiary effects of either climate change or solutions that affect climate change, unless we try them. And I think if we're focusing just on the chalkboard or the whiteboard, if you will, on trying to predict what is the exact right capital allocation of day one, it's gonna make it so that it has to be right, because we're losing time every day that goes by. And so I think the one thing I wanna leave everyone with on this chat is really how do we focus on just getting more investment in aggregate and placing more bets. And then once we actually have clarity on what truly works and what doesn't, then we can actually double and triple down. We've done that with, you know, renewables in globally so far where like global investment in renewables is like something like three or 400 times that of any sort of carbon abatement. We know that works, but we haven't really figured out what are those carbon abatement strategies at scale. And that's going to be one fifth of the problem. And so eventually it's gonna have to be one fifth of the investment. So something for us to keep in mind and keep an eye out for.

Tom Raftery: 28:19

Nice. Nice. Cool. Brennan. If people want to know more about yourself or about Patch or any of the things we discussed in the podcast today, where would you have me direct them?

Brennan Spellacy: 28:29

So if you wanna learn more about Patch, you can go to P A T C H.I O. That's our website to learn a little bit more about Patch, and then, I'm on Twitter and my DMs are open I respond, fairly often. I think I'm the only Brennan Spellacy. I'm technically BSpellacy with an underscore at the end because someone is squatting on just BSpellacy, so most responsive on Twitter. I'm pretty bad on any other social.

Tom Raftery: 28:52

Okay. Super Brennan that's been great. Thanks a million for coming on the podcast today.

Brennan Spellacy: 28:56

Awesome. Thank you so much, Tom. Really appreciate the time.

Tom Raftery: 29:00

Okay, we've come to the end of the show. Thanks everyone for listening. If you'd like to know more about Climate 21, feel free to drop me an email to Tom dot Raftery @ sap.com or connect with me on LinkedIn or Twitter. If you liked the show, please don't forget to subscribe to it in your podcast application of choice to get new episodes as soon as they're published. Also, please don't forget to rate and review the podcast. It really does help new people to find the show. Thanks catch you all next time.