US takes lead on carbon capture
Investors are taking advantage of the US’s enabling policy environment to fund the emerging technology
As debates over the necessity of carbon capture and storage (CCS) technologies continue to rage, one jurisdiction has put its chips on the table: the US.
The Inflation Reduction Act and US policymakers provide targeted support for carbon capture and storage, including the more controversial “direct air capture” (DAC) technologies, both through tax credits and public spending.
A total of $3.5 billion of public money will be made available in the coming years to support CCS.
Climeworks, the DAC developer for three of the government-selected projects, notes that the US is an “important, strategic market” because of its “favourable political and commercial environment”.
This “favourable environment” has also opened the door to institutional investors. Occidental Petroleum (Oxy) made headlines last November when it announced that BlackRock will invest $550 million in its first DAC project in Texas.
Larry Fink, CEO of BlackRock, said the DAC facility “represents an incredible investment opportunity” for the firm's clients and “underscores the critical role of American energy companies in climate technology innovation.”
The DAC facility, called Stratos by Oxy and located in the oil-rich Permian Basin region, will be the world’s largest when it begins operations in 2025 with an annual nameplate capture and storage capacity of up to 500,000 tonnes of CO2.
Oxy’s announcement said the new funding will advance construction efforts which were said to be 30% complete.
“We think CCS needs to be part of the solution, because the world isn’t moving fast enough to reduce emissions,” said Bill Rogers, global head of sustainable energies at CCP Investments. “ We are going to need traditional fossil fuel for longer to provide some of the services that are essential for society. We therefore need to find ways of removing carbon from either our industrial processes or from the atmosphere.”
Other asset owners, such as the insurance giant Zurich, share the same view.
Rogers added that CCP Investments has already made significant investments in CCS, such as the planned conversion of Aera’s underground reservoir in California into a carbon storage unit.
CCP Investments is also looking to use its knowledge of pipelines to build out the necessary carbon transportation infrastructure.
“We think it’s important to build expertise not only in our portfolio companies but also inhouse to enable the construction of midstream infrastructure that allows carbon to travel safely to a storage facility,” he added. “The best regime in the world is the US and we’re actively exploring opportunities.”
Part of what makes the US so attractive for building this type of infrastructure is the “certainty” that “you’re going to get paid for sequestering the carbon”.
There are still some challenges around transport and storage. For example, developers still need to create the pipelines and transport the carbon. But these are areas that CCP is working on with its portfolio companies and other key stakeholders to make sure the industry develops at speed.
Europe, on the other hand, has a “stop and start” policy environment for CCS, and therefore lacks the high level of transparency and certainty that investors need to be sufficiently convinced of the longevity of a project and start building long-gated assets.
Why the US is ahead
Florent Andrillon, global head of climate tech at Capgemini, said the US is moving faster than the rest of world, especially on DAC.
“This technology still suffers from a lack of market demand and patchy regulation in the rest of the world,” he said. “This isn’t the case in the US.”
European policymaking, both at the EU and the national level, "lacks clarity on how it supports and promotes the usage of CCS".
However, the Emissions Trading Scheme and the new carbon border adjustment mechanism (CBAM) will “probably accelerate” the development of the market in the EU.
Interestingly, Andrillon predicts that alternative CCS technologies, such as those that re-use the carbon captured to provide a degree of circularity, may end up being more attractive than the more traditional “storage” approach.
“A number of exciting venture-capital-backed start-ups have appeared in recent years,” he said. “Some of those involve turning the carbon into biochar [a form of fertiliser] and rocks that can be used as building material.”
UK-based Carbon8 combines captured carbon with industrial residues to create “carbon negative alternatives to virgin aggregate and fertiliser”.
The US start-up Charm Industrial turns plant-waste into energy-low crude-like “bio-oil” and injecting it underground. It recently signed a $53 million deal with Frontier, a coalition backed by Stripe, Alphabet, Meta and other tech giants that aims to spend nearly $1 billion on permanent carbon removals.
JPMorgan Chase has also agreed to pay Charm for nearly 29,000 metric tons of carbon removal over five years.
“It’s important to understand that CCS represents a diverse range of solutions,” Andrillon said. “Those that focus on reuse allow for permanent storage and avoid the sticky questions around storage, transportation, and leakage that have dogged the more conventional approach.”
Not all of the “reuse” start-ups are as far ahead as Charm Industrial. Most of them are still in the “pre-industrial” phase, meaning they either have a prototype or an industrial demonstrator, according to Andrillon.
This could change in the next two or three years, though the difficult fundraising environment might hamper their efforts to go industrial scale, which requires a significant capital injection.
That said, climate tech start-ups figure among the asset categories that attract the most money across venture capital funds. Even if they are getting less, they are still doing well relative to other asset classes.
Andrillon described the emergence of climate tech in terms of “waves”. First came the solar and wind energy generation wave, which is furthest ahead in maturity and deployment. Then came batteries, which are gaining “significant traction” with around “100 gigafactory” projects in various locations around the world.
CCS is part of the third wave, which also includes green hydrogen.
“This emerging technology isn’t just a venture capital topic anymore,” he said. “Capgemini studies show that close to three quarters of the executives of large organisations see climate tech as essential for their net zero plans. This means it’s moving from a small group of early investors to something which is on everyone’s radar, including large corporations and asset owners.”
Such a dynamic didn’t exist even a couple of years ago.
Criticism of CCS
There are three main pieces of criticism levelled at CCS.
Firstly, it is expensive, and all the money spent on sequestering carbon could be better spent reducing emissions by adopting renewable energy, energy efficiency, and behavioural changes.
In this argument, CCS is a "distraction".
The NGO Carbon Tracker argues that net zero is a matter "of returning the earth to where CO2 concentrations were before the Industrial Revolution (350ppm)".
"Fossil fuel companies should first remove 60-70ppm before making the case to use CCS to continue burning more fossil fuels," said Mark Campanale, founder of Carbon Tracker.
Secondly, because it is expensive, it might not make economic sense in the long run.
It currently costs a DAC plant from hundreds of dollars to over $1,000 to capture a ton of CO2. The US Department of Energy’s objective – the “Carbon Negative Shot” – is to reduce this to under $100 per ton of CO2 by 2050, but there is still a long way to go.
“Not only is CCS expensive to build and operate, it also makes burning fossil fuels more expensive if the cost is passed on to the consumer,” said Campanale. “This could make the whole business model uncompetitive vis-à-vis renewables and other genuinely low-carbon solutions, such as green hydrogen.”
Thirdly, some worry that it is "Trojan Horse" as the fossil fuel industry, heavy emitters, and some policymakers may treat it as a get-out-of-jail-free card and continue with business-as-usual.
This scenario is particularly troublesome if policymakers and investors bet big on the technology but it fails to deliver the desired result.
There are currently about 18 DAC plants operating worldwide that combined remove about 10,000 tons of CO2 annually.
The US Department of Energy estimates that by 2050, CCS will have to be operating at the scale of billions of tons (gigatons) of CO2 capture.
The scaling up required to achieve this is "one of the toughest remaining barriers to achieving net-zero”, according to the US government.