Dismantling the carbon capture myth
Breaking down the unit economics of direct air capture technology
“NBC News just called it the great freeze — coldest weather in years. Is our country still spending money on the GLOBAL WARMING HOAX?”
— Donald J. Trump
Not everyone has been a firm believer in taking action to combat climate change. However, considering global CO₂ emissions have more than quadrupled since 1950, spending money on the Global Warming Hoax is actually pretty important. There are various sectors in need of funding wherein their positive climate effects would be paramount.
One of those sectors is carbon dioxide removal. As carbon dioxide accounts for approximately 76% of total greenhouse gas emissions, there needs to be an immediate reduction in its output. This is a challenge however, as CO₂ molecules account for less than 4% of the atmosphere.
How has society tried tackling this issue?
One may suggest to lower emissions and gravitate towards renewable energy sources. However, it is simply not enough if net zero is to be reached by 2030. This is why removing carbon dioxide from the atmosphere is an essential course of action.
Enter: Carbon Capturing
Carbon capturing is a process that captures carbon dioxide from the atmosphere and stores it in safe locations. More specifically, Direct Air Capture (DAC) is a relatively new form of carbon capturing that uses far less space and water than traditional carbon capturing technology, increasing scaling potential. We believe the bottlenecks currently are capturing capacity, energy intensity, and costs of the operation. However, there is progress on all fronts. If private and government funding continues to increase, we believe unit economics can support the expansion of capacity and ultimately drive down CO₂ emissions.
So…why carbon capturing?
Since the beginning of the 21st century carbon dioxide levels have continued to rise, reaching 417 ppm in 2020. This is the highest level of CO₂ in the atmosphere in human history. Combating climate change through capturing carbon dioxide from the atmosphere is a concept that has existed since the 1970’s. As society is finally waking up to the harsh realities of climate change, the demand for carbon capturing technologies have become more deployable, but it has not been enough.
As of today, there are 18 DAC plants operating in Canada, Europe, and the United States. All the plants are small-scale and there are only a few commercial agreements. In 2021, 40 million tons of CO₂were captured by existing carbon capturing systems. In order to be on track for net zero by 2030, this number would need to increase to 1.7 billion: an increase in capturing capacity of 40x. We are not even remotely close to this.
We may not be close, but demand is surging
Market demand arises from the need to combat climate change along with growing optimism among investors. The growth rate of the market between 2022–2032 is projected to increase 14% from a base year value of $4.2 billion to $9 billion. Larger corporations are entering the market as well. For example, Microsoft, Stripe, and United Airlines have all begun to invest into carbon capturing technology. Canada-based Carbon Engineering Ltd and Switzerland-based Climeworks AG have each raised more than $100m.
Venture capital investments in carbon capturing startups have increased from less than $25 million in 2015 up to $250 million in 2021. The trend of private investments being allocated towards carbon capturing technologies is evidently on the rise.
Government’s are contributing to demand through increased funding
In addition to increased demand, The United States and European Union have recently begun to invest billions and provide initiatives enhancing the development of DAC.
US & EU Development
While corporates and governments have recently increased investments into CC technology, there are still significant bottlenecks into scaling production
Let’s take a look at the bottlenecks of DAC
Limited Capacity & Energy intensive
In addition to a significant needed increase of capturing capacity, DAC requires an immense amount of energy. According to various sources, filtering one ton of carbon dioxide through DAC can range anywhere from 1,000–1,400 KwH. Capturing CO₂ from the air is more energy intensive than capturing it from a point source. DAC technology is extremely energy intensive and even has carbon emissions itself. Experts in the industry are worried that a downfall of DAC is that the energy required can potentially outweigh the benefits of capturing CO₂ at a large scale.
There are estimates that if DAC is to indeed increase in capturing capacity, then it will be consuming 10% of global electricity in 2075. The emissions coming from such projects would be drastic for the environment. If carbon capturing cannot scale down the energy requirements, then the operation will make very little sense.
Expensive
As we are just starting to progress in technological development — there is still large uncertainty moving forward. For direct air capture the current range of costs are in between $200-$600 per ton of CO₂ captured — depending on their technology, scale of their deployment, and the energy matrix of the respective country. For reference — reforestation costs are $50 per ton of CO₂.
At the current costs, DAC is not a scalable nor profitable operation. The high costs in relation to the low selling price of CO₂ does not help the cause either (selling price will be thoroughly discussed below). The extremely high costs need to decrease incrementally in order for DAC to become a viable solution.
Investments will increase when there are sustainable unit economics
Unit Economics of Direct Air Capture depend on Three Key Factors
Gross Profit = S — (K x E)
Key Factors
1)S = Selling price per ton of CO₂
2)K = KwH required per ton of CO₂
3)E = Price of energy per KwH (will assume it remains constant)
Points one and two significantly impact the attractiveness of DAC
The pricing of CO₂ is regarded as one of the most important elements in the future. The price of CO₂ in the United States and Europe can range anywhere from as little as $15 upwards to $117. It is estimated that the price of CO₂ needs to be above at least $200/ton in order for DAC systems to be scalable (assuming production costs are kept at current levels). The increase in pricing would need to be achieved either through a CO₂ emissions taxing method or government subsidies.
How far off are we from a stable CO₂ price?
As the United States is one of the leading players in the future DAC, it is important to take a deeper dive into the development of pricing. A great deal of countries use the pricing of the United States as an indication for their own.
Obama administration
- The very first social cost of carbon was implemented. The pricing was set at approximately $41/ton. This meant that if one ton of carbon dioxide emissions was avoided, one would save $41 in damages. This was regarded as a strong step in the right direction.
Trump administration
- The price was lowered from $41 to approximately $7
USA — Costs based on Trump Administration and USA energy matrix
Profit = Revenue — Costs
Profit = (Selling Price per ton of CO₂ x Volume) — (KwH x Price of Energy)
Profit = ($7 x (Ton/CO₂)) — (1200 KwH x $0.18)
Profit = $7-$216
Profit = -209
Needed an increase in selling price of about 3000% to become profitable
Biden Administration
- Re-raised the price of Carbon from $7 to $51
- 45Q tax credit implemented ($85/ton if a certain volume is met)
- Selling price in the example is based on the 45Q tax credit ($85/ton)
USA — Costs based Biden Administration and USA energy matrix
Profit = Revenue — Costs
Profit = (Selling Price per ton of CO₂ x Volume) — (KwH x Price of Energy)
Profit = ($85 x (Ton/CO₂)) — (1200 KwH x $0.18)
Profit = $85-$216
Profit = -$131
Need an increase in selling price of about 155% to become profitable
While certain EU countries have their own pricing method, countries such as Germany are expected to adopt the market price by 2027. If there is no pricing stability — the market price may not significantly increase in the future.
Not only is selling price too low, costs of production are too high
Future capture cost estimates for DAC are truly uncertain, which is a reflection of the early stage technology development, and are estimated at between $125 and $335 per tonne of CO2 for a large-scale plant built today. The potential for costs to fall to these levels will be strongly dependent on increased public and private support for innovation and deployment.
Production Based on Biden administration in the United States
Gross Profit = S — (K x E)
Gross Profit = $85 — (KwH x $0.18)
Gross Profit = -$131
A 400% increase in efficiency would incentivise more investment into the space
Where do we go from here?
While the need for DAC technology is evident, there are still significant bottlenecks towards scaling potential. As of today, the limited capacity, volatile pricing, and high production costs are all currently blocking the road to success. Moving forward however, there is a strong reason to believe the unit economics will become sustainable. In order to reach net zero achievement, the use of DAC is essential. In combination to this, if funding from a private and federal level continues to increase, the development of the technology will begin to increase rapidly. While we may not be there today, keep an eye out for the market to expand within the coming years.
