Microsoft buys hundreds of millions of dollars worth of carbon credits from Occidental Petroleum, a company heavily invested by Buffett, setting a record in transaction size

Microsoft and Occidental Petroleum have signed a record-breaking carbon emissions agreement worth hundreds of millions of dollars. The latest agreement highlights the significant challenges that the technology industry faces in fulfilling its climate commitments amid the surge in demand for electricity driven by the AI boom.

According to the agreement announced on Tuesday, Occidental Petroleum, one of the largest oil producers in the United States and a major holding of Warren Buffett, will sell 500,000 carbon credits to Microsoft over six years, with the specific amount undisclosed. Both companies stated that this is the largest transaction of its kind.

Occidental Petroleum generates carbon credits through direct air capture (DAC), which involves absorbing carbon dioxide from the air. In the deal with Microsoft, Occidental Petroleum sells the carbon credits it generates at a price significantly lower than the market price of around $1,000. Microsoft offsets its emissions by paying Occidental Petroleum for these credits.

In recent years, the practice of using carbon credits to help achieve emission reductions has come under strict scrutiny due to concerns about the verification of emission reductions from new projects. Each carbon credit should represent the avoidance or removal of one ton of greenhouse gases from the atmosphere.

Microsoft's carbon credits will come from Occidental Petroleum's first DAC project, Stratos, located in West Texas, which will become the world's largest facility of its kind when it goes online next year. The project, developed in partnership with BlackRock, received a $550 million investment from BlackRock in November last year.

Currently, major tech companies are working to curb the sharp rise in energy emissions driven by the expansion of artificial intelligence:

In September last year, Occidental Petroleum signed a similar agreement with Amazon to sell 250,000 carbon credits over 10 years.

Microsoft stated in May that its emissions had increased by nearly one-third since 2020, primarily due to the construction of data centers. Google admitted last week that its emissions had increased by nearly half since 2019 due to the construction of energy-intensive infrastructure to support AI.

Microsoft has committed to achieving "carbon negative" emissions by 2030, while Google has committed to achieving net zero emissions by 2030.

Occidental Petroleum is the fourth largest oil and gas producer in the United States. However, in recent years, the company has rapidly expanded its carbon management business, believing that capturing and storing greenhouse gases will become increasingly necessary in the context of controlling global temperatures. This evolving business allows Occidental Petroleum to sell carbon credits related to carbon capture.

Critics point out that direct air capture is an emerging technology that is still too expensive, and in current projects, the energy used in the process is too high relative to the amount of carbon dioxide it can capture.

The latest large carbon emissions deal is a positive development for Occidental Petroleum in gaining support for its shift towards DAC.

Michael Avery, CEO of Occidental Petroleum's carbon management subsidiary 1PointFive, stated:

The technology industry is a "priority industry" for Occidental Petroleum. The clean energy needed to power artificial intelligence systems will face a short-term shortage, requiring a comprehensive solution including carbon credits. We believe that DAC cannot solve all emission issues for any company.

The carbon related to Microsoft's carbon credits will not be injected underground to facilitate more oil extraction - a process known as Enhanced Oil Recovery (EOR). However, the captured carbon can be used for further oil extraction.

Western oil companies' expertise in the controversial process of EOR has enabled them to enter the carbon management business. Any captured carbon used for this purpose will be customer-oriented. For some customers, using decarbonized fuels through captured carbon may be meaningful.

The International Energy Agency (IEA) states that Direct Air Capture (DAC) technology will play an important and growing role, but it has not been widely validated. Currently, the amount of carbon emissions removed annually is only a small fraction.

Recent estimates from S&P Global show that the cost of DAC carbon credits is around $800-1200 per ton of carbon emitted, and this high cost means there are few bulk contracts signed currently. 1PointFive estimates its operating costs to be $400-630 per ton.

Climate experts clearly state that carbon credits should only be used to offset emissions that are difficult to eliminate, such as those produced by certain industrial processes like steel refining.

The logic behind the stock god Occidental Petroleum's "buy buy buy" strategy is becoming increasingly clear.

Previously, Buffett's Berkshire Hathaway bought shares of Occidental Petroleum for nine consecutive trading days from June 5th to June 17th, accumulating a total of 7.3 million shares at around $60 per share. Berkshire Hathaway's total holdings in Occidental Petroleum exceed 255 million shares, accounting for 28.8% of the shares. Occidental Petroleum is Berkshire Hathaway's sixth largest stock holding, and Berkshire Hathaway has become the largest institutional investor in Occidental Petroleum