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Impact in your Inbox | #2
The case for carbon dioxide removal (CDR)
Over the last month especially, we at Carbon Equity have been looking into the carbon removal market because Lowercarbon Capital has launched a fund that focuses solely on this sector.
We asked ourselves: do we need it and will it become a big enough market for an investment to make a decent return? I describe our findings on the market below.
Why is CDR necessary?
Limiting warming to 1.5°C is pretty much no longer feasible even if we shifted everything today, which is why our trajectory shifted to 2°C by 2050*.
And the science is clear:
In all recognized modeled pathways that limit global warming to 2°C or 1.5°C, we need to reduce the concentrations of CO2 already in the air by directly sucking it out and capturing it somewhere for a long time to come.*
Yes, emissions reduction is still the main way to adhere to a 2°C pathway and net-zero by 2050 — but this alone is not enough:
Net-zero is not zero emissions
In most decarbonization pathways, some GHG emissions will remain post-2050 — estimates vary (between 5% and 20%)
These emissions will come from hard-to-abate sectors (long-haul aviation and cattle), and we must capture the CO2 equivalent to be net-zero
We currently overuse our carbon budget — CDR allows us to compensate for this emissions ‘overshoot’ so we can be net-negative after 2050
Note: we need to stop emitting whatever we can AND capture as much as we can out of the air (there’s a great bathtub metaphor for this here).
How do we define CDR?
Carbon dioxide removal refers to removing carbon out of the sky and ensuring it cannot be released back into the atmosphere for at least 100 years — by putting it in the ground, turning it into physical materials, etc.
This is different from carbon capture and storage which refers to catching emissions right at its release (i.e. Remora: whose device captures at least 80% of a semi-truck's carbon emissions directly from the tailpipe).
What is the potential of the CDR market?
While all decarbonization investments currently fall short of what is required, carbon removal solutions are disproportionately underinvested — at around one-thirtieth of the level needed, identified by the IPCC.*
The carbon dioxide removal market is relatively tiny today, with estimates varying from $10-50 million.**
At the same time, the future market potential is pretty massive. The IPCC states that we need 5-16 gigatons of carbon dioxide removal by 2050 — or about 10-30% of total GHG emissions today.
At a 10 gigaton total market paired with prices of $100 per ton, the market would reach 1 trillion USD by 2050. (That’s more than the Dutch GDP of ~$900 billion per year).
Even at a 1 gigaton total market, it would still be a $100 billion market.
To reach the one trillion mark, the current market must scale 20,000x in less than 30 years — aka it requires exponential growth and capital.
How can this happen when carbon removal itself is expensive and doesn’t have direct economic benefits?
It’s the new kid on the block in the voluntary carbon offset market.
Its demand has seen recent signs of acceleration thanks to commitments from big companies like Microsoft, plus a $925 million commitment to purchasing carbon removal credits from four large tech giants. (see below: 📚Interesting Reads).
Spread that $925 million out over 5 years and that’s still ~200M per year — or 4-20x the total market today!*
While this shows traction is growing, we still identified three “need-to-believes” to feel confident that the CDR market can reach its full market potential.
What are the three "need-to-believes" in the CDR market?
1) Cost per ton needs to at least go below $200
The price of a ton of carbon removal must go below $200, which is currently at $600-1000 per ton. Why do we think this?
If the cost per ton of carbon removal becomes less than $200, it's then cheaper to purchase carbon removal than change from current technologies representing 20% of the total carbon economy.*Now that’s a pretty big market.
The Coalition of Negative Emissions, supported by McKinsey, estimates carbon removal costs will drop to $40-125 per ton by 2050. CDR companies, like Verdox, also say costs of its product can go as low as $50 per ton at scale.
2) Governments need to attach carbon removal to net-zero commitments
Organizations voluntarily paying for CDR will only take the market so far — the full-scale potential of the market relies on governments pushing CDR policies.
This requires not only certification schemes and some subsidies but regulations must push fully to net-zero, i.e. making it mandatory for companies to purchase carbon removal credits matching their emissions.
At the moment, good first steps are being taken to improve the regulatory framework for CDR, and government funding is becoming available.
In the EU, they just finished feedback on a proposal for certification of carbon removals, which represents a necessary and significant step toward integrating carbon removals into EU climate policies.*
In the U.S., its infrastructure package will provide ~$6.5 billion for carbon management projects, specifically direct air capture (DAC) and carbon capture, utilization, and sequestration (CCUS) projects between 2022-2026.*
3) We need the technology to do carbon removal at scale
Carbon removal and storage technologies must be scientifically, technically and commercially feasible at scale, ideally within the next decade.
The good news: we have a few mature solutions, a few early-stage technologies and many crazy ideas... the tech is there. Plus, various natural solutions (trees and kelp) can help us speed up to scale. We can see the portfolio of technologies below:
As you can see, there are many ways to tackle the challenge of CDR.
There are three types of technologies to do carbon removal at scale: natural climate solutions (NCS), biomass with carbon removal storage and engineered solutions (DACCS).
NCS is the most mature technology, biomass with carbon removal storage second and DACCS are the up-in-coming innovations.
NCS are the carbon removal credits on the market, including a diverse set of restoration and land management activities (trees and kelp) that remove CO2 from the atmosphere and store it in soils and other elements of the biosphere. However, the duration of storage for these solutions is contested (is it 100 years?), which is where new solutions like Vesta Earth, Running Tide and Ecoera come in.
Biomass as input for CO2 storage consists of two main technologies: biochar and BECCS. Biochar is made by burning organic waste without oxygen, creating energy in the process. The end-product, biochar (i.e. charcoal), can contain CO2 for hundreds of years and can be added to soil to improve fertility. BECCS use biomass as an energy source in the production of power or fuels and store the resulting CO2 streams in geological storage. Innovative companies in these spaces include Aquagreen, Charm Industrial and Carbofex.
Engineered solutions are the technologies directly capturing CO2 from ambient air and storing the resulting CO2 stream in geological storage. The main reason the potential for these is not higher is that DACCS require large amounts of green electricity. Example companies are Carbon Engineering, Climeworks and Global Thermostat.
Once fully deployed, each can provide at least 1 gigaton of GHG removal while considering strict economic and environmental sustainability filters.*The potential of these solutions though is way higher*: 👀👇
Note: These are the high potential of the technologies' carbon removal potential from 2020-2050.
The specific amounts of removal per solution are certainly debatable, but these numbers clearly represent the high impact potential.
Recap: We need CDR and the market could become massive
We don’t know the exact total market size or the exact share of each technology to get us there — but we have plenty of tech options and know that we need them.
Will it stay a bit ‘niche’ or become a massive market?? That depends on the “need-to-believes”.
We’ve seen companies, regulations and investors start to recognize the critical role CDR technologies can play — and we need to see this continue, at scale!
In short: This McKinsey report is a call to action for carbon removal technologies that discusses many of the same areas we discussed today but in much more detail. The key messages on page 9 of the report are spot on!
In short: Stripe, Alphabet, Meta, Shopify and McKinsey have partnered up to spur the market for carbon removal. The initiative plans to give its money to companies that are developing the removal technology over the next nine years.
In short: The new ETC report reiterates that carbon removal cannot replace rapid and deep decarbonization, but if scaled alongside GHG reduction tech, it gives the world a better chance of limiting its warming.
In short: In this podcast episode, Shayle Kann a partner at Energy Impact Partners explores CDR with Ryan Orbuch, a partner at Lowercarbon Capital, who leads the firm’s carbon-removal work.
💡 3 awesome CDR innovations
Carbyon: a Dutch carbon removal innovator using a fast swing process by rotating a drum that contains a material, modified to efficiently capture CO2 out of air. It received a 1M grant from Elon Musk’s XPRIZE Foundation.
Verdox: an American carbon removal company that uses a battery-like process to capture CO2 with 70% less energy usage than direct air capture that uses fans and rocks — meaning it is 70% cheaper to do at scale.
Running Tide: an American company that sucks up carbon by growing biomass (kelp farms) and sinking them into the deep ocean for long-term storage.
🔬 Show me the data
Let's simplify this dataset into the key takeaways:
Covid-19 had far-reaching impacts on energy demand in 2020, reducing global CO2 emissions by 5.1%
Global CO2 emissions rebounded to their highest level ever in 2021 — offsetting the previous year’s pandemic-induced decline
Adverse weather and energy market conditions led to the historic use of coal
Good news: renewable power generation registered its largest-ever annual growth
“The world must now ensure that the global rebound in emissions in 2021 was a one-off – and that sustainable investments combined with the accelerated deployment of clean energy technologies will reduce CO2 emissions in 2022, keeping alive the possibility of reducing global CO2 emissions to net-zero by 2050,” said the IEA.
Q&A recording for interested impact investors
Climate investing, private equity and our Decarbonization Fund I offering can feel complex. We did a session for you, our future investor ⚡️, to simplify the investment opportunity. Watch the recording or schedule a call with our investment team!
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