Carbon alchemy
For the first time in human history, the concentration of carbon in the air has reached beyond 420 parts per million (ppm), more than ~48 percent higher than pre-industrial levels. The latest CO2 reading was 421.76 ppm as of August 29, 2024. Yet, with hard-to-abate industries unable to drive emissions to net zero any time soon, it will be near impossible to achieve the necessary reduction in peak warming by curbing greenhouse gasses (GHGs) alone.
In reality, we must also remove up to 10 billion tons of atmospheric CO2 annually by 2050 to limit warming to 1.5°C and avoid the worst effects of climate change. Doing so requires an arsenal of carbon dioxide removal (CDR) technologies. While early-stage companies reliant on voluntary carbon markets faced headwinds over the past few years, a series of recent inflection points has made us revise our position.
In 2023, 66 companies operating across the carbon removal value chain received $1.25 billion in early-stage capital investment. Meanwhile, corporate and federal demand for high-quality credits - defined as permanent, measurable, scalable, and additional - skyrocketed to several billion, far outstripping supply. Between 2022 to 2023 alone, CDR purchases grew 7.3x from 0.615 megatonnes (Mt) to 4.5Mt. Zooming out further, the CDR market experienced a ~500% CAGR between 2020 to 2023.
As momentum grew, our team reflected on how carbon removal fits into our mandate to invest in paradigm-shifting regenerative technologies. We emerged with a thesis around CDR that spans boundaries beyond carbon, addressing regeneration and systemic transformation.
Advanced market commitments pave the way for innovation and scale. Last year marked the first significant execution of multi-year, multi-million dollar off-take agreements for CDR credits, providing upfront capital needed to establish projects and secure project financing. In May 2023, Charm Industrial signed a $53 million pre-purchase agreement to remove 140,000 tons of CO2 between 2024 to 2030. In September 2023, Heirloom Carbon secured a deal to remove 315,000 tons of CO2 over several years. In December 2023, Frontier Climate committed $57.1 million to Lithos Carbon to remove 154,240 tons of CO2 between 2024 to 2028. Around the same time, leading companies formed the Symbiosis Coalition, committing to buy up to 20 million tons of nature-based CDR credits.
Government and regulatory shifts stabilize the market. As demand for credits increased, governments stepped up to bolster tailwinds for carbon removal. In early 2024, the Department of Energy (DOE) committed to purchasing $35 million worth of high-quality CDR credits through the CDR Purchase Pilot Prize. Google matched this commitment. In March 2024, the DOE went a step further - launching an initiative encouraging private companies disclosing GHG emissions to purchase permanent credits from DOE-approved suppliers.
In Europe, the momentum continued. In March 2024, the EU passed legislation requiring member states to remove ~310 million tons of CO2 by 2030 in the land use and forestry sector. This legislation followed the EU's 2040 climate target, which aims for a 90 percent net reduction in GHG emissions from 1990 levels by 2040. To meet this lofty goal, the EU has proposed integrating CDR purchases into their Emissions Trading System, pushing large polluters to pay for their emissions.
While the market for ultra-cheap, hard-to-measure credits faces volatility, we have seen CDR buyers flock toward carbon removal pathways that can reliably store carbon (>1,000 year permanence) and leverage existing carbon sinks, with a path to being affordable (<$200/ton), scalable (>0.5 Gigaton removal per year), and additional (result in net new carbon removed). Understanding how to effectively remove CO2 in this way requires fixing the two system-level problems contributing to our current carbon crisis.
Over centuries, human activities destroyed many natural fast carbon sinks (forests, wetlands, and soils), which play a crucial role in the fast carbon cycle by absorbing CO2 from the atmosphere through photosynthesis and other biological processes.
The excessive transfer of carbon from the slow cycle to the fast cycle has compounded the problem. By burning fossil fuels, we are rapidly moving carbon that was sequestered over millions of years back into the atmosphere in a short timeframe. The sudden influx of carbon into the fast cycle overwhelms natural processes regulating atmospheric CO2 levels, leading to increased greenhouse gas concentrations and accelerating global warming. The imbalance created by this rapid shift from slow geological storage to fast biological cycles has profound implications for climate stability and ecosystem health.
We’ve distinguished nature-powered CDR as pathways combining the efficiency of advanced engineering with the resilience of natural systems to remove CO2, restore the balance between fast and slow carbon cycles, regenerate ecosystems, support biodiversity, and enhance planetary resilience. These methods recycle molecules, rely on renewable resources, use carbon as a beneficial output, and leverage components of the natural carbon cycle – inorganic systems like rivers and oceans or living organisms like fungi, plants, and microbes - to deliver scalable, cost-effective, and regenerative solutions to climate change.
Advantages of Nature-Powered CDR:
Lower Energy Requirements: Nature-powered CDR methods leverage renewable energy and replenishable or recycled inputs to power their processes, significantly reducing energy consumption and costs compared to engineered solutions.
Integration with Natural Systems: These methods work harmoniously with existing ecosystems, enhancing natural carbon sinks.
Positive Feedback Loops: By supporting and regenerating ecosystems, nature-powered CDR creates self-sustaining cycles that amplify carbon removal and ecological health.
Permanence: Nature-powered CDR attacks the root cause of climate change, moving carbon from the biological - atmosphere flux to highly permanent inorganic storage.
Scalability and Cost-Effectiveness: The reduced need for complex infrastructure and energy inputs makes nature-powered CDR more economically viable and scalable.
Recycling Molecules: Nature-powered CDR methods often transform captured carbon into valuable products, whether that be for life (eg. plants and microbes) creating additional economic benefits and supporting a circular economy.
One of our newest portfolio companies, Banyu Carbon, exemplifies nature-powered CDR with their sunlight-driven process that removes a pure stream of CO2 from seawater, which can be stored permanently or used in industrial processes and counteracts ocean acidification to support healthier marine ecosystems. Approaches like Banyu’s, which can generate surplus renewable energy, will become increasingly crucial as direct air capture (DAC) projects face insufficient access to clean energy due to demand from energy-hungry data centers and AI.
While we see massive potential for nature-powered CDR to make a meaningful impact on our climate and biodiversity crisis over the coming decades, several risks remain for any carbon removal company to overcome.
FOAK financing: Even with signed off-take agreements, many CDR companies must secure debt and/or project financing to break ground on first-of-a-kind (FOAK) assets. To solve this, companies can design systems that leverage existing infrastructure to reduce CAPEX while engaging with public agencies and grant-making institutions to finance pilot plants, demonstrating bankability to downstream capital providers with non-dilutive funding.
Environmental justice: Progress can be stalled if CDR assets are perceived as harmful or intrusive to the communities where they’re built. To solve this, companies must prioritize stakeholder engagement and education and prioritize CDR systems with clear co-benefits and economic outcomes for communities.
Market trust: If trust erodes in CDR due to a proliferation of low-quality offsets with reversal risk and fraud, the entire market could take a hit. To solve this, companies and buyers must continue building and adopting rigorous MRV (measurement, reporting, and verification) technologies and methodologies to ensure only the highest quality credits are bought and sold.
Our climate and biodiversity crisis is a temporal problem. It is no longer enough to focus on curbing the production of net new greenhouse gas emissions. The time is now to act swiftly to rapidly scale CDR solutions that can address legacy emissions and their “long tail” of impacts.