A Case for Rapidly Scaling Carbon Capture, Utilization, and Storage
Climate-Tech Investing In The Time of COVID-19 — Article 4
In this article, I am going to discuss why we badly need to start ramping carbon capture, utilization, and storage (CCUS) technology now, why it maps more to the cost-decline archetype of large-scale renewables than to hydrocarbon assets, the best way(s) to scale carbon sequestration technology, and the attendant investment opportunities. This article will get a little deeper in the weeds than previous articles (linked below) which covered a broad overview of my climate investing thesis. I think we can now roll up our sleeves and get our hands a little dirty. For basic background on CCUS technology types, see the Appendix below.
Article 1 — Whither Climate Investors’ Opportunity Set?
Article 2 — There Is No Climate Change Deus Ex Machina
Article 3 — Earth’s Climate Budget — A Primer
Why do we need CCUS technologies? They are the Lysol for carbon emissions (when used correctly).
When asked to make a prediction about current carbon emission trends, most climate scientists will throw up their hands and say that, in all likelihood, barring a complete 90-degree turn, the current efforts to reduce carbon emissions are not going to occur nearly fast enough to stay below 2 degrees Celsius (2C) of warming. To make your own judgment, you do not need to look much further than the fact that global carbon emissions grew in 2019 vs 2018 and are 4% higher than in 2015. Up and to the right is: The. Wrong. Direction.
While the world is actively ramping zero-carbon energy, we also must urgently work on scaling carbon capture, utilization, and storage (CCUS) technology. If you recall from Article 3 — Earth’s Climate Budget — A Primer, carbon dioxide functions as a global thermostat for Earth. Add more CO2 into the atmosphere and the surface temperature of Earth warms up. Take some away, and the Earth cools down. To stay below 2C of warming, the United National Environment Programme (UNEP) estimates that we will need to be in a position to remove carbon dioxide from the atmosphere in amounts measured in the billions of tons annually. One UNEP scenario (pictured below) models that we need to remove 5 gigatons of carbon dioxide annually by 2050 and 20 gigatons by the end of the century. (To get a sense of how vast 5–20 gigatons of carbon dioxide is, see Appendix below).
How do we rapidly scale CCUS technology?
Spend any time walking the halls of the nation’s great research universities and labs and you will find enthusiastic, bordering on jealous, support for a particular carbon capture technology. At this stage, it’s too early to know which set of technologies might be the cheapest form at scale so we need to continue incentivizing an arms race. In other words, the best policy is to not pick a technology, but rather, a result. As Columbia Professor and leading carbon policy expert Dr. Friedmann, et al writes in an excellent paper published last month, called Policy Design to Finance CCUS Projects in the US Power Sector, we need to start implementing aggressive CCUS policies now.
“Policymakers must begin in earnest to augment existing zero-carbon power generation policies to accelerate decarbonization through CCUS deployment. The urgency of climate change provides a basis to enact additional policies to speed the energy transition. Because CCUS is an important tool to speed decarbonization, US policymakers should seek to support greater ambition through legislation.”
Congress did recently amend the US tax code to include a technology-agnostic carbon dioxide removal tax credit. Called the 45Q tax credit, Section 45Q of the US tax code provides a performance-based tax credit for carbon capture projects that ramps up over ten-years beginning in 2018. For carbon emissions used in enhanced oil recovery (EOR) or other beneficial uses (such as fuel), the credit ramps up to $35/MT. For carbon dioxide stored permanently in geologic formations, the credit ramps up to $50/MT. The bad news is most carbon capture and storage technology costs well in excess of $50/MT, so we have seen very little commercial response to the 45Q tax credit.
To rapidly scale carbon dioxide removal technology, we either need a richer tax credit or a program similar to the renewable portfolio standards (RPS) enacted by the majority of US States that led to the rapid reduction in the cost of renewable energy. As Dr. Friedmann writes in the same report: “Without additional policy measures, most US electric power markets will not support CCUS retrofits, even with the expanded 45Q credits. The amended 45Q tax credit is smaller than equivalent production tax credits for wind and solar and lacks the additional investment tax credits and mandates of renewable portfolio standards. Unsurprisingly, it is insufficient to close the financial gap for potential investors.” Said another way, we need a bigger stick, or a bigger carrot, or both.
A case for CCUS mandates, and the experience curve (aka the learning curve).
With no market of any size today, most carbon dioxide that is captured is a product with no demand. It’s similar to municipal solid waste (MSW) in that way, and yet, we do not have garbage piling up in our streets. In most municipalities, we pay taxes to fund a waste pick-up and disposal program. The difference between MSW and carbon dioxide is the latter is colorless, odorless, and drifts with the winds, thrown away in our atmosphere for free in a debt against the future — the epitome of a tragedy of the commons. But that is a debt that is rapidly coming due.
Unlike the decades it takes to adopt new energy technology, covered in Article 2 — There Is No Climate Change Deus Ex Machina, with adequate investment, certain energy technology can decline in price quite rapidly. It has been shown that most technology follows a predictable decline in cost every time the quantity produced doubles, a phenomenon known as the experience curve.
Chris Goodall explains the experience curve well in his book Switch:
“In the late 1960s, the Boston Consulting Group (BCG) investigated the cost of producing semiconductors for one of its clients. The consultants found that every time the aggregate number of electronic devices that had ever been made doubled, the cost of each individual item fell by about 25%. If, for example, producers made a total of 1,000 units and the cost was $10 each, then by the time a total of 2,000 had been made, the cost would be $7.50 per unit. Bruce Henderson, the founder of BCG, called this the ‘experience curve’ and his company later showed that the cost declines arising from this effect were pervasive across different industries, countries, and time. Although the rate of cost reductions tends to be fastest in products that are manufactured using automated processes in large factories, the experience curve phenomenon can also be seen in office-based or even agricultural activities.”
This experience curve can be seen at work in the solar industry in what has come to be called Swanson’s Law in which the price per watt of solar power has declined by a ‘predictable’ 20% per year for the past 40 years.
Source: BNEF 2018 Factbook via The Freeing Energy Project.
Energy storage technology seems to be following a similar predictable price decline. The cost of lithium-ion energy storage, in particular, is falling rapidly.
The key to understanding why energy technology such as solar, wind, and energy storage follow predictable cost declines is because they are technologies that can be built-in large-scale automated factories, and capitalize on free fuel. The majority of the lifetime cost of solar, wind, and energy storage occurs up-front. Conversely, coal and natural gas plants are major construction projects with few iterations to improve efficiency and yet the majority of the lifetime cost to run a coal or natural gas plant comes from the cost of the fuel that must be sourced and burned every day. The price of hydrocarbon fuel is inherently unpredictable but has built-in inflationary susceptibility because it’s a depleting resource.
While it’s not yet provable, it follows that carbon removal technology should experience a similar cost decline curve as it can make use of automated manufacturing and abundant renewable energy. If you believe this, then it makes sense for States to begin mandating an increasing level of carbon dioxide removal from the major utilities and oil companies operating within their state. The cost of the mandate for utilities could be passed on to ratepayers, similar to the cost of providing transmission, distribution, and generation of power. Oil companies could pass the cost on to consumers in the form of higher prices of gasoline and heating oil. There is a certain Spockian logic that the cost to remove carbon should fall to the customers of utilities and oil companies, who at the behest of every customer (you and me), emitted carbon into the atmosphere for decades to heat our homes and power our vehicles.
Dr. Friedmann’s recent report (cited above) points out that certain states have started to implement this rate recovery concept, stating, “Today, most utilities lack the legal authority to allow CCUS projects or plants in their rate case. Recently, nine states have modified their renewable portfolio standards by increasing the range of technologies allowed and through carbon-reduction ambition (100 percent) (Fitzpatrick et al. 2019). These “clean energy standards” or “zero-emissions power standards” would allow rate recovery for CCUS projects, as would the Federal Clean Energy Standard Bill (US House 2019b).”
Scaling CCUS will provide a myriad of attractive investment opportunities.
Within afforestation and reforestation, there are interesting companies focused on precision planting, and carbon offset verification/trading. As an example, one company taking a creative approach is RenewWest, led by founder Michael Smith. RenewWest partners with landowners of fire-scorched forest (mostly in California) and rejuvenates the earth by replanting it with native species. As the trees grow, RenewWest is able to earn carbon credits for the carbon captured by the trees. In addition, value accrues intrinsically to the land by turning the earth from moonscape back to lush forest and directly by selling hunting permits and access for other nature-loving tourist activities.
Point source carbon capture is a particularly good candidate for carbon-to-value, a ‘tip-of-the-spear’ investment opportunity. There is currently no market for carbon dioxide today of any size, but that could change as companies learn to turn carbon dioxide into useful products including aggregates, chemicals, and fuels.
Ernest Moniz, et al explain in EFI’s Report Clearing the Air:
“The current global market for CO2 is around 80 MtCO2 per year, the majority of which is in North America. This existing global market is small compared to the annual global emissions from fossil fuels and industrial activity of approximately 36.2 GtCO2 (approximately 0.2 percent by volume). Considerable uncertainty exists concerning the potential future scale of CO2 utilization, both in terms of the total amount of CO2 that could be utilized and the size of corresponding markets, but it could collectively approach at or near a one gigaton scale per year globally with further technological and RD&D advancements.”
Carbon-to-value promises to be a fertile hunting ground for attractive investments in the circular economy. For example, there is an obvious symbiotic relationship between capturing CO2 and vertical farming (will likely explore sustainable agriculture in a later article).
Current estimates for direct-air capture range from $90-$600 per ton of carbon dioxide but could follow solar and energy storage down a predictable cost curve once scaled. Scaling DAC technology will cost hundreds of millions in further R&D and billions to scale. This is not a project for Silicon Valley investors alone which is why additional incentives are required to attract institutional financing. According to a presentation given by the CEO of Carbon Engineering at the Canadian Consulate last year, Carbon Engineering is working on building a plant in Texas which would suck 1 million tons of carbon dioxide out of the atmosphere every year and cost an estimated $1B to build. The company plans to turn the carbon dioxide into fuel and sell it into the Low Carbon Fuel Standard market in California. To suck 5–20 gigatons out of the atmosphere every year, we’ll need 5,000–20,000 plants of similar size.
There will likely be interesting opportunities to invest project financing directly into building out DAC plants. Additionally, there are likely to be dozens of successful asset-lite “picks-and-shovels” companies that make up the supply chain, service the plants, transport the carbon dioxide, and manage the trading of the physical commodity, not unlike the natural gas value chain.
I had a recent conversation on the topic of CCUS with Ernst Sack, a friend and founder of Blue Bear Capital, an energy transition venture capital firm. Ernst weighed in, “What we call ‘the financialization of carbon’ is taking many forms. This includes a wave of startups leveraging software and business model innovations from companies like Everactive which stops fugitive emissions at the source, to ReWatt Power which supports verification and tracking of carbon offsets from renewable power generation, to Pachama which creates economic incentives to protect and restore forests. We’ve probably met over a hundred startups on this mission and see their commercial maturity accelerating. For customers, this stuff is moving out of the R&D or even PR budget and becoming a real business imperative.”
APPENDIX — Background on Carbon Capture, Utilization, and Storage (CCUS), aka Carbon Dioxide Removal (CDR) Technology
What is carbon capture, utilization, and storage (CCUS)?
Per the United Nations Environment Programme (UNEP), CCUS sometimes called carbon dioxide removal (CDR) or negative carbon emissions, refers to “a cluster of technologies, practices, and approaches that remove and sequester carbon dioxide from the atmosphere.”
How to think about how a billion tons of carbon dioxide. Perhaps, use a “wedge”.
In what is now a seminal article on the Earth’s carbon budget, published in 2004 in Science Magazine, Stephen Pacala and Robert Socolow introduced their concept of stabilization wedges to provide an easy comparison between different carbon mitigation strategies. Quoting the paper, “a wedge represents an activity that reduces emissions to the atmosphere that starts at zero today and increases linearly until it accounts for 1 GtC/year of reduced carbon emissions in 50 years. It thus represents a cumulative total of 25 GtC of reduced emissions over 50 years.”
Wedges can take any form, including zero-carbon power substitution for hydrocarbon power, energy efficiency, and carbon removal. Pacala and Socolow give examples of a wedge (as defined) including: increasing the fuel economy of 2 billion cars from 30 mpg to 60 mpg, removing 800GW of coal power plants, and capturing the emissions from 1,600 GW of natural gas power.
With these examples in mind, it becomes obvious that removing 5 gigatons of carbon dioxide annually from the atmosphere is a shi…pload of carbon emission removal…20 gigatons is 4x a shipload, whatever the word for that is.
What is the current state of the CCUS industry?
According to the Energy Future Initiative, the current global market for carbon dioxide is 80 million tons per year and the largest use case is for EOR. Enhanced oil recovery is a process in which carbon dioxide is pumped underground to increase the pressure of the hydrocarbon reservoir allowing greater recovery of oil and natural gas. If you think that using carbon dioxide to recover more hydrocarbons sounds like hoisting our own petard, trust your instinct. But it might be a pragmatic near term bargain in order to scale carbon sequestration.
There are currently three groups of carbon removal technologies. I won’t go into every type of technology but will pick the most promising from where we sit today.
The first broad group makes use of the natural carbon cycle (as detailed in Article 3) by promoting organic carbon capture. The most promising is the 1 trillion tree initiative, originally based on research done by Dr. Thomas Crowther.
Afforestation, the establishment of a forest in an area where there was no previous tree cover, and reforestation, the intentional restocking of existing forests that have been depleted have an important role to play in carbon dioxide removal. According to a paper written by Dr. Crowther, et al, in July 2019 called The Global Tree Restoration Potential, there are nearly 2.4 billion acres of available land (unused by human development) that could be planted with trees, and doing so “could store 205 gigatons of carbon in areas that would naturally support woodlands and forests.” Per Table S2 below, pulled from Dr. Crowther’s paper’s supplementary material, the question remains how much of these biomes could be planted with trees and how long would the trees take to maximize carbon removal?
Assuming it takes 30 years for the trees to maximize their carbon storage potential and 50% of the total potential acres are successfully planted with trees (which are both optimistic assumptions), this method could capture somewhere between 2–3 gigatons of carbon every year by 2050 which gets us approximately halfway to the 5 gigatons UNEP outlined above. But we will likely still need to pull much more carbon out of the atmosphere. Up next…
The second broad group is point source carbon capture which describes a set of scrubbing technologies that are attached to power and industrial plants to capture all emissions from flue gas and store them. These technologies, which either absorb CO2 into a liquid solvent or adsorb CO2 onto a solid surface are not new concepts but have not been widely used to filter carbon dioxide, because, frankly, no one requires them to be used. There is an exciting field within material science called membrane gas separation in which different nanoparticles are used to filter CO2, but these are mostly still in the laboratory phase. Preventing widespread adoption of point source capture is the associated cost due to parasitic energy load, the contamination of the flue gas stream with other noxious particles, and the cost of transportation and storage. Which leaves…
Ambient air cleansing. This can be accomplished either by accelerated weatherization or potentially the more scalable, direct air capture (DAC), which identifies a set of futuristic-looking technology that sucks in the ambient air, removes the CO2, and returns the remaining air back to the atmosphere. There are three prominent start-up companies chasing this space: Carbon Engineering, Global Thermostat, and Climeworks, as well as a host of start-up companies in varying degrees of scale (most still in the laboratory). The theoretical advantage of this technology is the plants can be located on cheap land and near cost-effective transportation and storage. The disadvantage is the low concentration of CO2 in ambient air compared to flue gas, which therefore requires significantly more energy to capture an equivalent amount of CO2.
About the Author:
Benjamin M. Hogan, CFA
At Inherent Group, Ben led investments into companies enabling the transition to a lower-carbon economy, with a particular focus on the energy sector. In addition, Ben engaged with management teams to improve their ESG practices. Prior to Inherent Group, Ben led energy investing at Orange Capital, a $1.5B AUM special situations and activist hedge fund. Prior to Orange Capital, Ben worked in private equity at AMF, a subsidiary of Credit Suisse, which successfully invested $1B into 21 asset managers. Ben started as an M&A Analyst at Berkshire Global Advisors, a boutique M&A advisory firm focused on the asset management industry. Ben holds a B.Sc. in Economics from Duke University as well as the Chartered Financial Analyst (CFA) designation. In addition, Ben is pursuing a part-time M.Sc. in Sustainability Science at Columbia University with a focus on climate science.