Decarbonisation and climate capture has emerged as a critical tool in the fight against climate change, but it has also emerged as a means of economic acceleration across the globe.

By 2050, carbon dioxide removal could be a $1.2 trillion industry. Here we provide an overview of the business of carbon dioxide removal and how it could play a vital role in responding to hard-to-abate emissions in various sectors.

The basics of carbon removal

The Intergovernmental Panel on Climate Change has made clear that decarbonization is the most critical response to climate change, but research shows that decarbonisation alone may not be enough. The IPCC says carbon dioxide removal, or CDR, could play a vital role in combatting hard-to-abate emissions. What are these hard-to-abate emissions?

In terms of the human-made activities, the hard-to-abate emissions and what we call the hard-to-abate sectors are referred to as hard to abate because either they rely on energy from fossil fuels, or from inputs that come from fossil-derived sources, or they have activities that create emissions. And when those activities — things like heating and lighting and the raw materials — are important to our daily lives and economic growth, it’s very hard to cut them off or to stop using them.

What is it about CDR that’s so helpful for neutralizing these residual emissions?

The concept of carbon dioxide removal is, ‘if we can’t entirely cut out activities that are causing emissions, then let’s instead find other mechanisms to remove carbon dioxide, or gases that are equivalent to carbon dioxide’. The term “carbon dioxide removal” is a broad term that describes the removal of carbon dioxide in the atmosphere or carbon dioxide that’s being emitted into the atmosphere and trying to capture, contain, store, or permanently remove it.

Reaching the 2050 net-zero goal

If we want to reach net-zero targets by 2050, what level of CDR capacity would likely be required?

Estimates are in the range of 0.8 gigatons to 2.9 gigatons of CO2 per year of removal capacity at least by 2030. Talking about 0.8 or 2.9 gigatons. What does this look like? The current thinking talk is that the carbon budget of the planet is between around 500 gigatons to 600 gigatons. We are probably at the point of being about to pass or having just passed that budget.

Turning to natural and human-made solutions

What’s the difference between nature-based and technology-based removal solutions?

There are different mechanisms. These are broadly categorized as nature based and technology based. But even within those definitions, there is a wide variety of hybrid nature-based and engineered, or technology-based, removals.

Most nature-based CDR models start with some form of plant-based matter, or biomass, being converted into a state in which it can be stored semi-permanently or permanently.

Engineered, or technology-based, removals, range from separation technologies that focus on physical flow and separation of CO2 to technologies that rely more on chemistry to cause the reactions that can help convert CO2, capture CO2, or capture other gases that are also damaging and that lead to overall CO2-equivalent footprint.

The ocean is the largest ‘carbon sink’ on Earth - for its scale and potential for scaling removal strategies. For example, growing things in and around the ocean, or on the ocean, can achieve very low costs. The plants that grow fastest on our planet are generally micro - and macro-algae. The ability to store CO2 in the ocean is possible through multiple different mechanisms.

The principle of enhanced rock weathering [ERW] - when you spread rocks on soil, the rocks—generally in the form of dust or very small rocks—weather naturally and, in so doing, have the effect of storing carbon, which then naturally gets washed out through the soil.

The application of spreading rocks or rock dust onto soil for fertilizing purposes is centuries old. A number of companies are now embracing ERW.

The costs of carbon removal

The energy transition is changing the landscape of electricity generation. As decarbonization drives RES demand, RESs are expected to account for 45 to 50 percent of the global power supply by 2030 and 60 to 70 percent by 2040. With such booming demand, RES installed capacity could grow nine times from 2020 to 2050. The transition to RES, coupled with economic growth, will likely cause electricity to grow rapidly. Power grids will need to expand to meet the increasing demand for electricity and renewable energy. To achieve net-zero emissions by 2050, countries would need to double their investment in transmission lines and other infrastructure to €550 billion per year by 2030.

We face two real challenges at scale. Gigatons of impact means very large volumes of CO2 and therefore very significant deployment of capture technologies and the projects that embody the technologies.

In terms of industrial projects and infrastructure projects, (building things and moving things), the scale at which these removal approaches is to be undertaken is monumental. Very large portions of arable land that might be used for enhanced rock weathering technologies, for example, or very extensive deployment of carbon capture infrastructure. That means building things, pouring concrete, bending steel, and transporting materials on boats and land.

To prove that it works - smaller scale is needed - which tends to be much higher in cost per unit of CO2. Today, some of these technologies are well over $1,000 per ton of CO2. That’s not economical. A reasonable number for anyone in the carbon removal space is around $100 per ton, $150 per ton. This figure is a long-term goal.

The potential of the carbon removal market

Estimates for the industry for carbon dioxide removal are that it could be worth up to $1.2 trillion by 2050. Furthermore, cumulative investment required to deliver on net zero by 2050 would be between $6 trillion and $16 trillion depending on a range of factors. How could investors benefit by starting to take action in this space?

This will become an industry. Today, it may just look like technologies and projects that are first of a kind or one-of-a-kind projects. But with the regulatory path that we’re on across most of the developed nations, and certainly Europe and North America, with the incentives that are being applied, and with the public process to promote the technology development and the projects, we are seeing a material acceleration.

We should expect this to continue, and as it happens, it will evolve as an industrial sector in its own right. We expect the supply chains for carbon removal to mirror the efficiency and the efficacy of the supply chains that we see for things like energy and materials, food, agriculture.

For example - you will plan your inventory for carbon removals. You will buy based on a price that is set by market mechanisms and from which you will decide if it’s worth buying and storing more of it. And for that reason, we should expect that there will be opportunities for anyone who’s applying capital into establishing that.

Today, it’s the realm of what we call “climate focused” venture capitalists, funds that are investing pension fund money, money that folks have put into mutual funds. They are choosing to put a portion of that portfolio into climate investing funds, and those funds are increasingly the ones looking to deploy the capital into carbon removals.

So what is the opportunity for individual investors? It is recognizing that at some point, the supply will be materially constrained relative to the demand. That should be an opportunity for an outsize return, just as it would be in any other sector.

Many investors are educating themselves and embracing this as a category for investment.

What’s in it for the suppliers if they start to get an early move on this?

The potential for any supplier is to have a lead in both technology and project development and, just as you would in any other sector, turn that into an IP [intellectual property] that’s defensible.

Will there be brands for carbon removal? What sort of incentives do we need to create?

The new carbon market

The buying landscape today consists of what we call the “voluntary” market, which is mostly companies that have made a commitment to decarbonization while engaging in the procurement of carbon credits and purchasing carbon removal credits. There is demand [for carbon removal credits] in the future that will come as markets become more regulated and companies in emitting sectors are required to participate in the purchasing of carbon removals or to conduct it as an activity within their own business.

The demand today in the voluntary market is relatively concentrated. The reason for that is that there are a few very large companies that have very large carbon footprints—they’re growing significantly—that have committed to aggressive decarbonization goals and have a high level of transparency to how they’re achieving them.

Advance commitments

How do we move buyers in that direction? What are some of the initiatives that are already starting to happen?

There is a high level of innovation taking place, not just in carbon-dioxide-removal technologies and projects, but also in the efforts to accelerate the market. And one of those mechanisms is this concept of advance market commitment - AMC

AMC is a concept borrowed from the pharmaceutical industry, where the principle to achieve broad adoption at a low-unit cost, you need to help the developers and the manufacturers to achieve scale. One of the most effective ways to do that is to provide advance commitments to purchase, often at a higher price, which these early producers and developers can take to the bank - demonstrating real demand, even though they are at a much higher cost and a much lower volume than they intend to be.

This principle is now being adopted in the carbon removals sector. Firms commit to forward purchase ‘X tons of CO2’ from promising carbon removal providers at a high price, in the short term, in order to help them to grow, scale, and reduce their price more quickly over time.

Looking to the future

So what does investment look like for the gigaton industry?

We must establish scale for carbon removals in the next 25 years to 2050. If we do not, and we do not scale the other approaches to carbon dioxide reduction, most of the climate models point to a scenario where material climate shifts will be harder to recover from.

This is why most policies at a national level, and now at an international level, are focusing on how to scale removals over the next 20 years. Our dependence on energy as the driver of economic growth and quality of life means that the proliferation of more and more consumption of energy globally is only going to put more pressure on us to continue to deliver on these negative emissions, on these removals.

Invariably, CDR will actually be a source of economic acceleration, where technologies will deliver much higher efficiency gains.

Decarbonizing the global economy will require vast amounts of electricity to be generated, of which one solution is renewable sources such as solar and wind. RES infrastructures are already available and rapidly increasing. However, taking advantage of renewables requires a power grid that can accommodate these intermittent energy sources. Operators have a way to go to make this happen, but they can start now by rethinking their planning, connections, and operations and coordinating across stakeholders to construct a global net-zero power grid for the future.

Hugo Pearson is a Partner at Lion Group

Lion ESG and climate investments