The 3 Things VC Investors Should Know About Carbon Removal

By: Daniel Ketyer, Summer Associate at Piva Capital

SOURCE: ClimateWorks Foundation

In October 2018, the UN Intergovernmental Panel on Climate Change (IPCC) made a ground-breaking claim: To limit global warming to 1.5° C above pre-industrial levels, avoiding additional CO2 emission is not enough — we need to remove CO2 from the atmosphere. Carbon dioxide is tricky — it doesn’t care who put it into the air, and it hangs around for up to 1,000 years. According to the IPCC and McKinsey, we need to remove 1.6–3.0 Gt by 2030 and 5–10 Gt by 2050 to stabilize our climate. That is a monumental undertaking, considering in 2020 we captured and removed only 40 Mt of CO2. We need to score a touchdown, and we haven’t made it past our own 1-yard line.

But there’s good news. Today there is a surge of innovation, government support, and private sector funding targeted at carbon capture and removal — on track for $1B this year, per Cleantech group. I spent this summer at Piva Capital exploring the opportunity landscape.

My three most important learnings are summarized below:

1. Carbon removal is a multi-billion dollar opportunity — but not winner- take-all

Hitting 2030 targets requires a portfolio of solutions, including mature tech (e.g., point source carbon capture from high CO2 concentration plants like gas processing) and emerging tech (e.g., direct air carbon capture & sequestration — DACCS). Today, there is a trade-off between price and quality. The lowest cost solutions tend to have negative attributes: for example, forest carbon has low permanence, particularly in wildfire-prone areas — though it is the lowest cost carbon removal solution today. DACCS technologies, meanwhile, can offer near-permanent CO2 removal while also capturing commodity CO2 that can be utilized — but costs are currently uneconomical. Tomorrow, high-quality solutions will see costs decline, and low-cost solutions will see quality improve. By 2030, there will be a thriving and diverse market for carbon removal technologies.

SOURCE: Goldman Sachs, Vivid Economics

2. Distributed business models are better for venture returns, centralized better for infrastructure investors

At Piva, we view carbon removal technologies in two dimensions — high vs. low CO2 concentration, and centralized vs. distributed business model. Infrastructure investors are better at building and financing centralized, capital-intensive projects, whereas venture investors can help scale products and technology-enabled solutions. Looking at Direct Air Capture for example, oil majors are leveraging technology from Carbon Engineering and Global Thermostat to build centralized projects. Venture investors, meanwhile, are exploring more modular, distributed approaches like Mission Zero, Remora, and Noya. These distributed business models reduce the technology scale-up risk inherent to infrastructure projects and can be located close to utilization or sequestration customers — eliminating transportation costs. They can also achieve economies of scale from mass-production of modular devices, rather than building custom, large-scale solutions.

SOURCE: Piva analysis

3. Cost of inputs will fall and demand for outputs will rise, driving profits

Both supply-side and demand-side factors will contribute to growth in the carbon removal market. On the supply-side, novel approaches are reducing the cost of inputs. For example, Noya is building a DACCS solution leveraging existing cooling tower infrastructure to reduce air contactor expense. Mission Zero, meanwhile, has developed electrodialysis technology that runs on low-cost, clean electricity without the need for thermal solvent regeneration. In the forest carbon market, Pachama and NCX take advantage of low-cost satellite and drone imaging to improve baseline carbon inventories and effectively measure sequestration.

On the demand-side, a combination of government tax incentives, escalating global compliance carbon prices ($200B+ market today), demand for voluntary carbon sequestration (potentially reaching $50B+ by 2030), and demand for commodity CO2 for use in industrial processes (e.g., cement manufacturing) are creating a willingness-to-pay for carbon capture and removal that has never existed. Demand will grow as we witness climate change in everyday life, highlighting the need to capture and remove carbon.

At Piva, we recognize that carbon capture and removal is essential to limit global warming to 1.5° C above pre-industrial levels — and we’re excited to invest in solutions. While distributed business models and modular tech are most interesting to venture investors, this is not a winner-take-all market.

Please share your thoughts and reach out if you’re building a business in this emerging sector!

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