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Carbon Capture, Utilization & Storage (CCUS)

Carbon Capture, Utilization & Storage (CCUS)

Direct Air Capture’s $10 Billion Carbon Bounty

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The debate is settled—the climate crisis is real. Maintaining global warming at a sub-catastrophic level would require halving current greenhouse gas emissions by 2030 and achieving net-zero emissions by 2050. As we discussed last month, the Sixth Assessment Report (AR6) by IPCC clearly highlighted the dire need for Climate Tech innovation in finding answers to this defining issue of our time. These next-gen solutions include carbon capture, clean hydrogen, third-generation renewables, such as nuclear fusion, and various energy storage solutions, including batteries. 
Within this mix, Direct Air Capture (DAC), which is a new branch of carbon capture, has gained lots of attention, including solid apex level support and increased VC funding. In January 2021, the US Department of Energy allocated $15 million towards DAC research, followed by a further $24 million in March 2021. Just this week, the Swiss startup Climeworks launched the world’s largest DAC plant, while laying plans for another that is ten times bigger. 
Although currently very nascent, we estimate DAC has a ~$10 billion Total Addressable Market (TAM) in the US alone and has the potential to be a driving force in containing global warming at a sub-catastrophic level. Let’s dive deep! 

What is DAC and why has it gained attention? 

Carbon capture generally refers to capturing carbon dioxide (CO2) emissions from industrial flue stacks at fossil fuel-fired power plants and heavy industrial manufacturing sites. 
DAC, on the other hand, captures CO2 from ambient air in its natural state. Here are a few reasons why DAC has really attracted attention: 
  • DAC removes existing CO2 from the atmosphere: Halving current emissions by 2030 is not possible by controlling future emissions alone. Technologies that are capable of removing existing CO2 from the atmosphere, such as DAC, would be vital to the cause. 
  • DAC can be employed by industries that do not have active flue stacks: This allows industries with indirect carbon footprints, such as construction and data centers, to achieve net-zero emissions or even a carbon negative status. Non-stationary CO2 emissions, such as those produced by the transportation sector, can also be removed.
  • Rapid renewable adoption enhances DAC potential: DAC is highly energy-intensive and needs to be backed by renewables. Widespread renewable energy adoption would not only bring down costs but would also allow DAC plants to be deployed at even the most remote locations with maximum efficiency. 
  • CO2-consuming industries are potential users of DAC: The global demand for commercial CO2 is around 250 million tons per year, and mainly comes from the fertilizer and O&G industries. DAC could provide these industries with on-demand CO2 by deploying units at the relevant manufacturing sites, as well as open up novel carbon utilization pathways such as chemicals and biofuels

What is the current status of DAC? 

DAC is still at a very nascent stage with a global operational capacity of only around 15,000 tons per year and only one commercial offering (compared with conventional carbon capture at 40 million tons). The Swiss startup Climeworks has been selling DAC carbon removals since 2019 and has attracted more than 8,000 individual and business customers across 56 countries to date (although most of them are likely to be individual customers). Carbon Engineering (Canada) and Storegga (UK) are two other first movers in commercializing DAC, having onboarded their first customers earlier this year, but are still only taking pre-orders. American startup Global Thermostat is also a possible contender but has not developed a commercial facility yet or taken any pre-orders. We have identified the following noteworthy DAC startups across North America and Europe.

How much CO2 can DAC capture?

The total CO2 emissions in the US was around 5.8 billion tons in 2020. However, with the rapid renewable drive over the next few decades, we expect total emissions to decrease to around 5.4 billion tons by 2050 in line with Energy Information Administration (EIA) estimates. Around 1.8 billion tons of the above could be captured by conventional carbon capture technologies. These would primarily include flue gas emissions from power plants and other large industrial emitters (around 30% of total industrial emissions). 
The target market for DAC is likely to be smaller industrial emitters (for whom conventional capture would be uneconomical) as well as transportation, residential, commercial, and non-energy emitters (e.g., agriculture and construction) that do not have a stationary flue stack for conventional capture. The total CO2 emissions from these sectors aggregate to around 3.7 billion tons.

Who can afford DAC?

The monetization model for DAC is still quite ambiguous. The likes of Climeworks primarily take a B2C approach in offering subscription-based DAC offsets for individuals. A B2B model is also relevant for the industry, however, it is likely that these businesses would eventually transfer the cost of the offset to end-customers (e.g., a customer paying extra to offset the footprint of their e-commerce transaction at checkout or an airline using DAC offsets, adding the cost of the offset to the ticket price).
Climeworks states that its gross cost of capture is around $550/ton while the company sells offsets at around $1,075/ton. Climeworks expects its cost of capture would come down to around $90/ton over the next 5-10 years. Carbon Engineering estimates its net cost of capture to be around $94-232/ton, and the net cost of capture of its proposed one-megaton commercial plant is expected to be a “little less than $200/ton”. The company also states that its net cost of capture needs to fall below $150/ton for the technology to make commercial sense. Global Thermostat also estimates that its cost of capture (does not disclose whether the cost is gross or net) would be around $100/ton. 
In comparison, carbon futures in the UK Emissions Trading System are currently priced at around $55-65/ton of CO2 equivalent, suggesting that DAC is still far from being economically attractive. At a DAC price of $100/ton, which seems to be a reasonable longer-term price point based on the above estimates, an average American would need to spend around $90 per month to offset their personal carbon footprint. We believe, at this level, only around 2-3% of Americans would likely pay for offsets (based on the findings of this 2018 survey by Climate Change Communication, which suggests that only around 2% of Americans are likely to spend more than $100/month extra on renewable energy).

What is the market opportunity for DAC in the US?

The total addressable market (TAM) for DAC in the US is estimated to be $9.6 billion based on the above estimates. 
The DAC pipeline in the US is currently limited to the proposed one-megaton Carbon Engineering facility, which is expected to start construction in 2022 and to be completed in two years. This restrained pipeline makes a robust take-off in the technology over the next five years somewhat less likely.
Nevertheless, as DAC cost comes down and the technology becomes more affordable, higher adoption can be expected toward the latter part of the decade. We expect the DAC market to grow at a five-year CAGR of 78.1% to reach $3.6 billion by 2030, assuming DAC cost falls below $150/ton over the forecast period.  
Our expansion case expects the market to grow at a five-year CAGR of 96.8% to reach $5.9 billion by 2030, assuming DAC cost falls below $125/ton over the forecast period. Our conservative case expects the market to grow at a five-year CAGR of 60.3% to reach $2.1 billion by 2030, assuming DAC cost fails to decrease at the expected rate. 

What are the risks for DAC growth? 

  • The technology is both challenging and expensive: Flue gas from a coal-fired power plant has a CO2 concentration of around 10-12%, while the CO2 concentration of ambient air is heavily diluted at a rate of around 400 particles per million. Capturing ultra-dilutive CO2 from the atmosphere requires developing next-gen materials with strong binding affinities while the process is also highly energy-intensive.
  • DAC efficiency relies on geography: Despite being touted for its ability to capture emissions directly from the atmosphere, DAC facilities cannot be readily deployed at any given location and require a large land area that is meteorologically suitable—Climeworks’ technology requires its DAC facilities to be located in dry conditions, while Carbon Engineering’s liquid-based technology prefers colder conditions—with access to renewable energy.
  • Might not be preferred as a long-term solution: Carbon capture is a short-term fix to slow down the climate problem. In the long run, the world is likely to focus on more sustainable alternatives such as renewables and electric vehicles. Unlike conventional capture, DAC is not ready to go to market immediately. By the time DAC eventually matures, carbon capture runs the risk of being outdated.

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