VCs are no strangers to the boom and bust cycles of industries and underlying technologies. Obviously, it’s great for the returns if one can successfully time the cycles; reaping all the benefits at the height of the boom and avoiding the bust.
That’s much easier said than done. Many who went through that very cycle for climate tech about a decade ago would probably agree.
The activities in the sector can hardly go unnoticed. We’re wrapping up 2021 with anticipated ~50B record-high investments in climate tech. Despite the capital rush, we stay disciplined to our market-driven approach, looking for deployable solutions with clear economic incentives.
The Simplified Mass Balance Equation
Now, with all the excitement of deep-pocket funds turning to climate techs, you’re likely to hear about a dozen promising frontier opportunities to explore. They can be overwhelming since each area tackles the problem from different angles. So, to set the stage for why something matters, let’s step back to look at a holistic picture.
The simplified version:
What we’re stuck with tomorrow = What’s there yesterday + Incoming – Outgoing
In this context, all eyes are on the anticipated amount of greenhouse gases (GHG) in the atmosphere, or “What we’re stuck with tomorrow.” It’s the causation of various negative impacts we await due to climate change, some of which we’re already experiencing today.
Let’s turn the loose terms in our simplified equation into specific variables to be further investigated:
Total atmosphere, t1 = The Looming Future
This is what keeps people up at night: the total amount of GHG in the atmosphere in the not-so-distant future (though strictly speaking, t1 can be at any time ranging from one second to a hundred years from now, t0). The worrisome point for most is that the t1 period is either within their lifetime or within the lifetimes of their children. The threat is quite tangible.
According to the latest IPCC report, the probability of limiting the warming to 1.5 °C by 2050\ (with no additional drastic intervention) is slim. The 1.5 °C targets were set in the Paris Agreement in 2015. In a way, it’s a magic number; once we move beyond this threshold, many effects become irreversible and the impact on human and animal lives exponentially worsens.
Total atmosphere, t1 is something we wish we could directly control. Unfortunately, it’s a ramification of the past and the present; a dependent variable.
Total atmosphere, t0 = The Karma
The first part of what makes up Total atmosphere, t1 is Total atmosphere, t0 , or so-called, “the past.”
Naturally, our present doesn’t solely define the future. In the context of GHG, there’s already quite a large amount of GHG accumulated in the atmosphere. That’s the baseline humanity needs to work with.
How relevant is this baseline? Let’s take a look at this optimistic scenario presented in the IPCC report where the world reaches net zero-emission in 2055:
Evidently, quite relevant. With ~50B tons of CO2e emitted each year, the standing accumulated GHG is ~40x what we presently have control over.
It’s because our historical emissions were enormously high, while the rate at which GHG naturally escapes the atmosphere is relatively low.
From IPCC Fourth Assessment Report, and as quoted by Lisa Moore’s Environmental Defense Fund blog
About 50% of a CO2 increase will be removed from the atmosphere within 30 years, and a further 30% will be removed within a few centuries. The remaining 20% may stay in the atmosphere for many thousands of years.
In the grand scheme of things, the fact that only 50% of CO2 remains in the atmosphere after 30 years is quite surprisingly planet-friendly, in comparison to the thousands of years timeframe required for a full absorption. The problem is how the emission term has exponentially increased year after year, that it’s left little room for natural absorption to make an impact.
Stepping back for a broader context, the point is that while Total atmosphere, t1 is a dependent variable, Total atmosphere, t0 is a constant. It’s the accumulation of what already happened in the past; a burdensome one, unfortunately.
The Present: Emission t1 – Absorption t1
These terms, Emission t1 – Absorption t1, represent actions we have control over today. They both warrant their own dedicated posts, but from a broad context of the carbon equation, they are responsible for “reaching zero”; a net zero GHG emission.
Expanding on the terms:
Emission t1 is a necessary evil. It has been on the rise along with civilization, embedded in all aspects of how we live—from the making of materials used to build our homes, the food we eat, to the energy required for us to move around. Most climate change activist conversations tend to revolve around personally cutting down on Emission t1, here defined as Individual Conservation t1 e.g., switching to walking to work, giving up red meat, avoiding going up and down the elevators, etc. While these may add up, it is miniscule. Carbon footprint of an individual driving to work, 30 miles round-trip, is estimated at 4.3 metric tons per year, or ~ 8.6 x 10-8 % of the global burden.
So logically, ~70% of the emission is traced back to 100 corporations. While, it’s arguable that these companies engage in such activities due to consumers’ demand, the collective demand is not going to miraculously disappear. As a society, we are not going to voluntarily reverse civilization. Thus, coming up with solutions (likely a technological one) for 100 corporations to reduce the Baseline Emission is more realistic and impactful than relying on the goodness of people’s hearts.
This is why we invested in companies like Terra CO2. The making of cement is responsible for 7% of the world’s CO2 emission. Terra CO2’s technology cuts CO2 emission by over 40%, while maintaining all the performance and competitive costs.
Another opportunity area is addressing heat exchanger fouling, accounting for 1-2.5% of global CO2 emission. It also negatively impacts the economic bottom-line for the operators. As such, a solution that addresses the fouling, reducing emission while improving corporate profit margins, is a win-win approach.
Next, Absorptiont1 is a negating term responsible for driving the “Present” down. It’s essentially impossible that Emissiont1 drops to zero on its own (well, unless humanity is wiped out, given how human activities are responsible for 100% of global warming since 1950).
The first contributor, Natural Absorptiont1, is similar to what we discussed above for the t=0t0Natural Absorptiont. It is relatively small. Focusing on the first 50% of CO2 that can be naturally absorbed in 30 years, that’s ~1.67% per year, roughly assuming a linear rate (ignoring the remaining 50%, as that takes a few hundreds – thousands of years). As the name indicates, Natural Absorption isn’t something we can easily adjust. This leaves over ~98% of the CO2 emitted during t1 year to be dealt with, if the net zero is to be upheld.
Enter Active Absorptiont1. Notice that it is the last term in the carbon equation; which until now, if striving for a manageable Total atmosphere, t1, it’s a failure. Since Total atmosphere, t0 is a high-value constant, Emission t1 term is positive, and Natural Absorptiont1 is negligible, the stake is rested on Active Absorptiont1.
Today, active absorption activities can largely be categorized into Direct Air Capture (DAC) and Carbon Capture (+ Utilization and Storage: CCUS). First, DAC is just like what it sounds; catching carbon out of thin air. The largest DAC plant, called Orca by Climeworks, recently opened in Sep 2021, at a 4000 tons CO2 capacity per year. In 2019, the costs were $500-$600 per ton of CO2 captured, a far reach from the U.S 45Q carbon capture tax credit priced at $50 per ton. On the other hand, CCUS seems more affordable from a per unit basis. This approach attaches an additional carbon capture unit to an existing carbon emitting facility, so that CO2 can be captured before reaching the atmosphere. With improved solvent technology, David Heldebrant and his team’s recent work showed that the CCUS may be feasible at $47.10 per ton captured. The catch is the upfront costs for a CCUS facility, which is in the range of $400M – $500M per unit.
So, here’s the hard truth. Active Absorptiont1 is an option, but the current economic incentives simply fall short of facilitating actions. It also relies heavily on carbon market and government policies, which are too nascent and unpredictable. For companies that take initiative to act (at the expense of maximizing profits for their shareholders) struggled to find acceptable solutions with sufficient capacity. With just two companies, Microsoft and Stripe, aiming to reach net zero AND retract their historical footprints, demand already surpassed supplies.
Where do we go from here?
There are two terms in the carbon equation that can have measurable impacts on the climate outcome – Baseline Emissiont1 and Active Absorptiont1.
Given the technological breakthrough required to reduce costs, nascent carbon market, and unattractive economic incentives for companies, Active Absorptiont1is not a good fit for our market-first, deployable solution investment thesis. To be clear, that does not mean it should not exist.
On the contrary, I hope my arguments above outlined precisely the opposite; that Active Absorptiont1 term is our savior.
Our sweet spot for an investment, however, is in Baseline Emissiont1; targeting B2B customers to cut down emissions from their operations, while improving margins and/or performance. If your company is doing just that, please reach out. We’d love to hear from you.