Unlocking the Carbon Management Value Chain
Unlocking the Carbon Management Value Chain
Managing Director and Head of Sustainable Finance, BMO Capital Markets
Jonathan Hackett is Managing Director and Head of Sustainable Finance at BMO Capital Markets. He advises clients on opportunities as they navigate the transition to…
Jonathan Hackett is Managing Director and Head of Sustainable Finance at BMO Capital Markets. He advises clients on opportunities as they navigate the transition to…
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In our latest episode of Sustainability Leaders, Jonathan Hackett, Managing Director and Head, Sustainable Finance, BMO welcomed Justine Fisher, CFO of Svante, to the show to discuss the state of carbon solutions, regulations, and carbon credit markets. Svante is a Vancouver-based carbon capture and removal solutions provider.
Listen to our ~18-minute episode
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Justine Fisher:
We do see demand from corporates for avoidance of emissions. The challenge there is the economics. Because there is not an appropriate price of carbon on just avoiding emissions, yet, we have companies who really want to pursue that as a solution, but for whom it's tough to justify the returns. What gets interesting is when we have those biogenic sources of point source removals, companies get very interested.
Michael Torrance:
Welcome to Sustainability Leaders. I'm Michael Torrance, Chief Sustainability Officer at BMO. On this show, we will talk with leading sustainability practitioners from the corporate, investor, academic, and NGO communities to explore how this rapidly evolving field of sustainability is impacting global investment, business practices, and our world.
Disclosure:
The views expressed here are those of the participants and not those of Bank of Montreal, its affiliates or subsidiaries.
Jonathan Hackett:
Hello, I'm Jonathan Hackett, Head of Sustainable Finance at BMO. It's Climate Week here in New York, and I'm joined by Justine Fisher, CFO of Svante. Vancouver-based Svante is a leading carbon capture and carbon removal solutions provider. The company makes filters and machines that capture and remove CO2 from industrial emissions and from the air. Justine, I'm excited to have you on the show today. Maybe we can start with how you got involved in the carbon management business.
Justine Fisher:
Well, I worked in finance for 18 years in New York before I ever came to Vancouver and got involved on the corporate side. And when I was in finance, I covered emitting industries such as steel, metals of mining, aviation, and shipping. I moved to the corporate side and worked in mining for a few years, but then I decided to make the move to Svante because it was interesting to work on decarbonizing all of the sectors that I used to cover.
And I was keenly aware of how difficult it would be to decarbonize those industries with new technology. And what seemed obvious to me was, number one, carbon capture for those industries because there are existing facilities that are not fully depreciated and it's very difficult to rebuild that footprint.
So I think an obvious option is to capture the CO2 from existing capacity, and then to capture CO2 in other ways where you can help industries like aviation that have limited abilities to do it themselves. And so it was an exciting move to make.
Jonathan Hackett:
That's fantastic. And how are you seeing the demand for that? You talked about all of these facilities that have that need to decarbonize. How is that translating into the demand for the technology to actually drive that decarbonization?
Justine Fisher:
I think there is significant demand for a solution for companies to reach their decarbonization goals. We know that a lot of companies have set goals for 2030, 2040, and 2050. For some companies, those goals are within reach within their own operations. There might be technologies that are being developed or ways that they can create efficiencies in what they do to reach those goals.
But again, a lot of industries just don't have those opportunities available. At Svante, we manufacture filters in our facility in Vancouver, and those filters can be used to capture CO2 from both the air and from industrial point source emissions. And from the air, we have an agreement with Climeworks where we send our filters to Climeworks. When we talk about point source capture, we can avoid emissions at steel mills and cement factories by capturing the CO2 that they emit.
We can also remove emissions that have biogenic sources. And so if nature, plants, trees, for example, have already absorbed CO2 from the atmosphere, if upon combustion we can take that CO2 and sequester it, that counts as a removal. So we do see demand from corporates for avoidance of emissions. The challenge there is the economics.
And because there is not an appropriate price of carbon on just avoiding emissions yet, we have companies who really want to pursue that as a solution, but for whom it's tough to justify the returns. What gets interesting is on the point source side, when it's a removal, when we have those biogenic sources of point source removals, companies get very interested.
As you know, there are a lot of technology companies that are looking to purchase carbon removal credits in order to offset their footprints. And so we see a lot of enthusiasm on that end. We also see enthusiasm from the emitters themselves who have the ability now to add an attractive cash flow stream to their existing business.
Jonathan Hackett:
And so just to make sure we're unpacking here, so when we talk about biogenics, in this case for a pulp and paper company, that would actually be that trees are absorbing carbon dioxide. They're going through photosynthesis and everything we learned in high school biology, or I guess elementary school, depending on where you went.
And then after they've captured that CO2, normally when you burn it, when you process it, whatever the process might be, you'd emit that CO2 back in the atmosphere and that's just a cycle, a closed loop. But instead, if you intercede and you capture, you're actually taking the work that they've done and then translate it into something that you can capture and store permanently. So we can complete the work of the trees absorbing CO2 from the atmosphere.
Justine Fisher:
Those were actually exactly the words that I was going to use. We are continuing the work that the trees have already done by permanently storing that CO2.
Jonathan Hackett:
And one of the other things you touched on there is the question of an appropriate price. I think we talk about carbon pricing a lot and the spectrum of pricing that exists between EU markets, between 45Q incentives in the United States where we are right now, and carbon pricing in Canada. When we talk about an appropriate price, what's the benchmark or the comparison that you would drive to explain why we're not there yet compared to just something that would incentivize a company naturally?
Justine Fisher:
Well, if I take 45Q as an example, 45Q is set at $85 a ton, and that was set several years ago. And when we run the numbers for our projects, that compensation price has not kept up with the rate of inflation that we've seen across the board from the cost perspective. And so when we run that as the revenue line in a model, the returns on the project are single digits, low single digits, mid single digits, but you've got to be at least high single digits and probably closer to mid-teens.
And so when we look at the level, at least in the US when you're talking about stacking 45Q, you certainly need over $100 of all-in compensation, mid to high hundred dollars for some project. So it really depends on the project there, but that's how we think about it. We look at the compensation you get and the return that generates on the project. And if that return is not sufficient for either a corporate or a lender, then the project is a non-starter.
Jonathan Hackett:
45Q is an interesting thing because it's the carrot side of the equation. But as we think about the evolution of carbon as part of the economy, the regulatory environment is both sides of that equation, both carrot and a stick. How do you see the current regulatory environment? Is it supportive? Is it helping pave the way? Are there gaps? Where do you see it evolving?
Justine Fisher:
I think the IRA was a good kickstarter for the regulatory environment. Again, it's a carrot, not a stick, but I think that it's a good start to help put a price on carbon even though it's not high enough. But again, it's a good start to even try and quantify it. And the IRA got the DOE, various other parts of the government focused on what we need to do in order to decarbonize. We have the investment tax credit in Canada for 50% of the cost of CCUS Projects, which is important, and we're seeing the regulatory environment in Europe develop. And so those are all great moves.
Jonathan Hackett:
So one of the discussions I've been hearing here at Climate Week as you get people from around the world is that difference in policy and different jurisdictions and almost a friend or foe discussion of, is it competition? Is it collaboration? When we see different jurisdictions copy, is that the best kind of flattery, or is that a sign of an evolution of the market?
Do you see that if we combine a few of these pieces that we get there? Do you think that the way in which regulators or I guess governments in this case are approaching it, are we going to see an adding of more of these factors in different jurisdictions?
Justine Fisher:
Well, I do think that as the social cost of carbon becomes ever more apparent, for example, on the private side in what we pay for insurance premiums, for fire insurance and for flood insurance, and a lot of the cost of that insurance, at least in the US, is now being borne by the federal government because they have to step in as the insurer of last resort in some areas and for some types of insurance if private insurance companies aren't willing to offer it.
So when that cost becomes apparent, when the cost of adapting to climate change is apparent for municipalities that need to worry about sea level rise or other catastrophic consequences of climate change, I think we'll see certainly moving forward on the regulatory front versus moving backward on the regulatory front.
And I think that the more financiers and the more that corporates have a voice in this, my hope is that that leads to some more standardization across regions, because that reduces the amount of moving targets that corporates and financiers and everybody across the carbon management value chain needs to solve for.
Jonathan Hackett:
Fair. On that value chain, what is the current state of play? We think a lot about there's technology developers, there's project proponents, there's markets, there's the end buyers. Where do you feel you guys play within that space, and what do you think the current state of the market is? Do we have enough players at the different various stages?
Justine Fisher:
At Svante, our anchor and origin is as an OEM. Our history is in R&D and the development of the metal organic framework that we use. It's a solid sorbent that we use to capture CO2. And not only identifying the metal-organic framework, the MOF, that is most effective for capturing CO2, but also patenting the structured laminate process whereby we coat the metal-organic framework in the form of a slurry onto a carbon fiber substrate to create filters and the stacking of those filters to optimize CO2 capture.
That's how we were born. What has become most apparent to us with respect to the broader carbon management value chain is that it really takes a village to get these projects delivered. If you're an OEM, it's impossible almost to walk up to an emitter and say, "Hey, I've got some great technology for you. Can you please figure out how to finance it," and then walk away.
And that's especially true because many of the high emitting industries tend to be very cyclical industries, and so they may not have the wherewithal to finance carbon capture through the cycle. And so we've quickly realized that we need to stretch into other areas of the carbon management chain in order to bring our projects to fruition. So what does that mean? Number one, it means partnering with EPC companies.
We're partnered with Kiewit in North America, with Technip in Europe, and with Samsung Engineering in Asia, and we're working with these partners on perfecting engineering for identifying the optimal compressors and heat exchangers for the installation of our equipment because we have to X-ACTO knife our equipment into brownfield facilities. We then also have to look at the financing side where we're talking to funds.
We're talking to banks. We recently closed $100 million of financing with the Canada Growth Fund, the proceeds of which are going to be used to catalyze projects and to take equity stakes in projects. So we're really working to bring the financing together because this is not in the wheelhouse of the corporate treasurers at a lot of the emitters. We are also working to bring the CDR to the table, the carbon removal credit buyers to the table.
And so when we have those biogenic projects that we talked about, we're talking to CDR buyers who can then come into the deal, make it bankable, then you bring the financing in, and then we put all the puzzle pieces together. We have partners on the transportation and storage side. Those are quite specialized areas of the management chain.
Jonathan Hackett:
So you mentioned CDR credits there, and you talked about your partnership with Climeworks, which I think is where a lot of people's mind goes to when they think about carbon dioxide removal as DAC and taking it out of the atmosphere. How do you think about what you're doing on the point source side and how it fits into the space of carbon dioxide removal and what are you seeing from buyers in that space?
Justine Fisher:
Well, to us as we approach the CDR market, it feels like it's a bit of a barbell now with inexpensive nature-based credits on one end that, again, are inexpensive but have been challenged because of their durability, because of their measurability and a host of other issues. On the other end of the barbell, you have direct air capture, which is a fantastic opportunity for removal.
You don't need cooperation from consumers or emitters. It just requires constructing the facilities and capturing the CO2. It's also great because it is measurable. It is durable. It meets all of the engineered requirements that off-take buyers are looking for. But DAC is still very expensive. And we think that our point source CDR credits fill the white space in between the nature-based and the DAC removals because we are as engineered as DAC.
We will capture CO2 directly from, for example, a pulp and paper mill or an ethanol plant or a waste to energy plant. We can measure that CO2. We can sequester it permanently and get all the benefits of engineered credits. But because of the higher concentration in the flue gas, which is anywhere from 14 to 20%, we can capture that CO2 much more cheaply than for DAC. And so when we run the models of where our credits would price, it's probably a half to a third of the cost of DAC.
Jonathan Hackett:
One of the discussions we've been having here is about the challenge for buyers of the complexity in navigating procurement in a space where there's new technologies, in a space where prices, to your point, range hundreds of percents difference for something with the same level of verification or data behind it.
How do you think about the conversations with buyers and having I don't know if it's an education process or what you're getting in terms of questions from them, but how do you think about reaching the buyers for the credits that you'd be developing?
Justine Fisher:
I think that with the size of the market now, nothing's ever easy, but there just aren't that many buyers. I think you're totally right that it does become quite difficult for buyers to do the diligence on all of these projects. And so at some point, you need intermediaries. And we know that there are companies, the verification companies like Piro and Isometric and the various companies that analyze carbon credits. We know that those companies are the intermediaries that are stepping between the sellers and the buyers in order to vet projects.
And that's a great first step, but I think there could also be more standardization there as well. I also think that there is room for intermediaries on the distribution side, and we see it in certain industries where OEMs in those industries, original equipment manufacturers, might say, "Look, we sell to many, many, many customers in addition to selling them aircraft, for example. Why don't we sell them credits as well?" And if they know that we have vetted those credits, then there's an element of trust.
Jonathan Hackett:
We're here at Climate Week. I reflect on just how much this event has grown over the years. What's your feeling of the vibe, the energy here and what you're hearing? Do you think it's optimistic? Is it positive? Are people dealing with the challenge in the space well?
Justine Fisher:
I would characterize it as sober optimism. Maybe it had been irrational exuberance in previous years and then gone down to outright depression in other years. But I do think that it's sober optimism, and I think the optimism comes from the fact that there are more and more people coming to this event who care. There is more and more capital being committed to the transition. Where does the sobriety come from?
Not from the various cocktail events that are held during Climate Week, I can tell you that. I think the sobriety with respect to the industry comes from the fact that we probably still don't have the right incentive structures for other companies to decarbonize. Companies need to show the risk reward of decarbonization to their boards. They need to understand the prices at which they're committing to carbon.
And for companies that might not be willing to hedge other inputs such as diesel fuel, why would they hedge carbon out 15 years when they're not really sure what the price of those credits is going to be down the line? And so I think there's a lot of work to do in terms of putting the right price on carbon that in turn making projects bankable or financeable, which then unlocks the capital.
Jonathan Hackett:
Justine, thanks for stopping by and sharing your insights during what is a very busy week.
Justine Fisher:
Thanks for having me. I appreciate it.
Michael Torrance:
Thanks for listening to Sustainability Leaders. This podcast is presented by BMO. You can find our show on Apple Podcasts, Spotify, or your favorite podcast player. Press the follow button if you want to get notified when new episodes are published. We value your input, so please leave a rating, review and any feedback that you might have, or visit us at bmo.com/sustainabilityleaders.
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