It is widely accepted that any possible pathway to limiting warming to +1.5°C requires the deployment of Carbon Dioxide Removal (CDR). Even if we stop emitting CO2 entirely, we still need to remove much of the additional CO2 that we have polluted the atmosphere with to decrease the chances of irreversibly damaging our world. This means we need to build an industry from scratch that can remove >1 GtCO2/year, an enormous mass (the weight of all 8bn humans combined is just ≈0.5 Gt).
However, there are very good reasons why it is extremely difficult to scale up carbon removal. So whilst we are sure that CDR will play a role in reducing our net emissions to zero, we also believe that the scale of emissions abatement from CDR will be at least 10x smaller than that from reducing our existing emissions. As climate investors, it is crucial that we understand the limitations of the carbon removal space, so that we can deploy our capital into the companies generating the maximum emissions reductions.
In this article, we will lay out the limits and opportunities present in the different parts of the carbon removal space. We examine these through the lens of a climate venture capital fund - and analyse which may be a case for investment.
We focus here specifically on carbon removal. Carbon sequestration/utilisation come partially “integrated” with some of the methods discussed, but are separate downstream steps for other methods (such as direct air capture).
If you’re reading this article, you will likely be familiar with the idea of a carbon offset (or carbon credit) - a certificate typically purchased by companies or individuals to compensate for emissions of their own. Carbon credits are traded in both mandatory markets (for example, the EU’s Emissions Trading System) and voluntary markets. In 2021, the mandatory market was worth around €270bn (largely due to the EU ETS), and the voluntary market €1bn (although this is growing rapidly).
A common misconception is that all of the carbon credits sold in these markets remove CO2 from the atmosphere. This is not true.
Only around 5 to 10% of carbon credits currently traded are removal credits that suck CO2 from the atmosphere. The rest are made up of avoidance credits, which pay the recipient to “avoid” emissions that would have otherwise occurred (for example, by financing projects such as renewables deployment or methane capture from landfill). Sometimes, avoidance credits make sense. For example, it’s better to avoid deforestation completely than to cut down virgin forest in one place and plant new trees in another. But in general, there are serious questions about additionality of avoidance credits and removal credits are seen as superior.
Today, carbon credits are experiencing a supply crunch, due to the recent explosion in demand from companies looking to offset their emissions. Additionally, demand specifically for removal credits has recently been created at scale by Frontier, an advanced market commitment to purchase >$900M of high-quality removal credits. We believe that demand for rigorously certified, high-quality credits will increase dramatically, due to both market demand and increasing regulation (for example, the EU’s recent Certification of Carbon Removals Framework). Already this year we could see two mega purchases by Microsoft with Heirloom Carbon and Ørsted.
Now that we understand the demand for carbon removal, let’s find out how credits are created.
There are three main steps in the process of capturing CO2 and issuing a carbon credit.
Companies in this space are typically: project developers, suppliers of removal technology, or project financiers (who supply capital to projects before they can generate revenue via the sale of carbon credits).
Often referred to as the “MRV” space, these organisations validate that CO2 has been captured, and normally fall into one of two categories:
Organisations in this space are in the business of matching providers of offsets with customers of offsets. This can include marketplace building, packaging/bundling of offsets, maintaining registries of offsets, and acting as “rating agencies” to support buyers in their decisions.
Now let’s dive into these three steps in more detail.
There are a multitude of ways to remove CO2 from the atmosphere. However, not all methods of carbon removal are equal: 1 ton removed by method A does not always equal 1 ton removed by method B. The quality of carbon removal depends on four pillars.
On the project development side, there are two critical considerations:
On the credit production side, there are two critical considerations:
With these criteria in mind, let’s now walk through some of the main methods for removing CO2.
Whilst simple and tangible, afforestation is inherently limited in scale, due to the fact that it is a one-time only use of land, and that there is a significant time lag (many decades) between planting and maximum CO2 sequestration. For example, to remove the lifetime emissions of all Germans (alive today) by 2050, a land area 10x the size of Germany would be required. High-quality afforestation projects are hard to come by, since it is hard to predict with certainty that the land won’t be sold to a livestock farmer in 10 years, who may cut down the trees, invalidating any climate impact. For these reasons, tree-planting is perceived as one of the least permanent methods of CO2 storage.
Despite this, trees are cheap, efficient, and come with ecosystem co-benefits. Thus we see afforestation/reforestation playing a role in CDR. Tree-planting offers deployment opportunities for different types of asset classes. While project development might be suitable for project financing, higher risk-return pools of capital could be deployed in enabling technologies (for example, assessing where best to plant which trees) or deployment technologies (for example, drone-seeding), have the potential for both high Climate Performance Potential (CPP) and strong defensibility.
Heating up biomass in the absence of oxygen produces biochar. This prevents the carbon in the biomass from being emitted as the biomass degrades, and if the biochar is safely stored for the long term, carbon is sequestered.
While biochar could be seen as a low-tech approach, pricing abilities vary across providers. This is mainly based on the fact that ~50% of the cost of biochar comes from transporting biomass to biochar production facilities. Therefore, businesses who have a unique strategy for securing biomass supply, or strong models (and proven execution) for decentralised production could prevail in the market. Biochar has the additional challenge of finding both high quality and high volume uses for the biochar that match the long term storage requirements.
Agricultural soils hold an extremely large capacity for sequestering carbon. Regenerative agriculture techniques can cultivate healthier soils and store more carbon in the ground, however the permanence of such carbon removal is often short term and easily reversible. For example, planting cover crops enhances soil carbon content, but when the soil is turned over in future, most of the carbon is re-released into the atmosphere.
Therefore, of most interest is the development of sustainable farming practices that do not require tillage and can be adopted by farmers for the long term including sustainably incentivised behaviour change in farmers, that will not cause reversal of behaviour in future.
As for biochar, similar pools of capital could provide support in the areas of project development and enabling technologies.
The natural weathering of silicate mineral rock is an existing process that takes CO2 from the atmosphere. Accelerating this process leads to additional carbon removal. Typically this means taking minerals, such as those in alkaline mining waste, crushing them up to maximise surface area, then spreading them out on land (or in the ocean) where they absorb CO2. Unfortunately, the energy required to crush and distribute the minerals can be high, typically limiting this to local production and distribution. Additionally, measurement and verification of carbon removal is challenging, from a chemical point of view it is quite predictable, but the question is over what timescale.
As a low-tech approach, differentiation in enhanced weathering comes from the logistics and ability to execute at scale. This alongside a rigorous MRV process can set companies apart.
Ocean-based methods for CO2 removal are among the least explored. Whilst research is still underway, the oceans cover 70% of our planet which means there is high potential for scalability. We can split ocean-based methods into three primary approaches:
Certification in ocean-based removals is highly challenging as the cycles and lifetime of sequestration can be difficult to assess effectively.
This is a space to watch for commercialisable deep tech innovation. Interesting to follow are:
Both of these approaches could be defensible via IP.
Whilst all the previous approaches have relied in varying degrees on nature for carbon capture, Direct Air Capture (DAC) is a fully tech-based solution.
The primary factor preventing DAC from scaling is energy consumption. Using current DAC technology, you usually save more CO2 by using renewable electricity to displace fossil fuel-generated electricity than using it to power DAC. Breakthrough science may improve upon this, but due to the thermodynamic difficulty of extracting CO2 from air, the required energy of future processes will remain substantial. Most companies active today are using ~10x the theoretical minimum amount of energy required to separate CO2 from air leaving plenty of room for innovation in the space. High efficiencies are extremely challenging to reach, and thus the required energy will likely remain substantial.
Interesting areas to watch:
As DAC is highly tech-driven, there is the potential to build large defensible businesses. The key metric is the cost per ton of CO2 removed. Approaches with low energy intensity, using cheap materials which allow for scalable manufacturing, are promising.
There is a growing demand for verification tech that is not only cheap, accurate, and scalable but also operates at high frequency and with high spatial granularity. We discuss three areas here:
Many companies developed solutions in the space of forestry verification. Forest coverage via satellite imagery and computer vision have become more and more open source, and the machine learning algorithms to turn forest coverage into carbon estimates are now available from multiple organisations. Higher accuracy is possible (at higher cost) using drones and LIDAR, but accuracy has diminishing returns on impact here: the real issues with forest credits lie not with carbon stock estimation but rather in faulty baselines, permanence and leakage.
Scalable verification of the carbon stored in soils will be a crucial enabler for farmers to be rewarded when using regenerative practices (such as cover crops, no-tillage, agroforestry etc.). Low resolution physical soil samples are currently dominant, but face issues in scaling. Remote sensing technologies that can see deeper could be promising solutions.
MRV technology for ocean-based CDR is one of the most technically challenging, since uptake of CO2 occurs across the entire ocean-atmosphere boundary. Interesting approaches target scalable measurability of CO2 uptake on the air-sea boundary.
In recent years a variety of marketplaces and blockchain-based carbon credit ledgers have developed in the voluntary market. We believe that marketplaces with a built-in traceability and a focus on high-quality credits that can secure additional supply could be promising enablers of the carbon removal market. Other areas that are of interest include:
Companies that act as independent “rating agencies” will be another important enabler of the market.
We see traceability as a critical enabler for trust in every carbon market. Whilst this will likely be built by marketplaces themselves, it is not impossible that independent traceability providers may be able to offer a service that is independent and more neutrally incentivised.
Developing carbon removal technologies and projects is often expensive, and can take years to yield carbon credits that generate revenue. We believe that financial innovations tackling this gap can be impactful.
The market for carbon removal is exploding and is only at the beginning of its growth phase. There are tangible opportunities for improved removal technologies to enter the market, but fundamental KPIs such as energy/ton of CO2 are crucial to keep in mind. The MRV space, whilst rapidly becoming crowded, is also an opportunity for startups that can demonstrate accuracy, scalability and defensibility.
We will continue to explore this exciting area and constantly develop our views.
If you’re building something that we mentioned above or something completely different that can save significant CO2 per year, we would love to hear from you. Get in touch at worldfund.vc/for-startups.