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Why Finance is a Key to Accelerating Carbon Removal Technologies

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Sustainable Finance Energy Transition September 28, 2023
Sustainable Finance Energy Transition September 28, 2023
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The Paris Agreement identified carbon dioxide removal (CDR) as an important tool to solve the climate challenge, but deployment currently lags behind what is needed to limit warming to well below 2°C.

Scientists and engineers in disciplines as diverse as polymer chemistry, solid state physics, and ocean sciences are working on new CDR technologies. From injecting CO2 into liquid concrete to building giant fans powered by geothermal heat, these tools are crucial because some industries are difficult to decarbonize entirely, and we have almost used up all of our carbon budget.

Nearly every scenario that caps global warming at 1.5°C or even 2°C relies on novel CDR tools. Even though they currently make up just 0.1% of strategies in use, that is still the equivalent of around 200 million tons of CO2 emissions. Accelerating these solutions will play a part in bringing the world closer to net zero.

As a part of BMO's ambition to be our clients' lead partner in the transition to a net-zero world, we are helping companies understand how the development of CDR technologies can scale while also uncovering potential opportunities. Finance, as it turns out, has an important role to play.

Finance can help address the high cost of carbon removal

Many of these technologies are past the proof-of-concept stage and at the point where scaling them is vital.

In 2021, BMO was the first bank to pre-purchase carbon removals using Carbon Engineering technology, kicking off a wave of other early adopters to move the CDR market forward. Carbon Engineering has a unique focus on direct-air capture (DAC) technologies, which literally suck carbon out of the air to be stored indefinitely or turned into something else.

Since BMO's investment, market development has been steadily growing. The U.S. government is investing up to US$1.2 billion in DAC hubs in Texas and Louisiana that pool technology and resources. Occidental Petroleum, backed by Warren Buffett, recently spent more than US$1 billion on Carbon Engineering.

However, the challenge continues to be the cost of carbon removal. It is far above US$100 per metric ton, the price below which the U.S. Department of Energy believes the technologies would become commercially viable. Many of these technologies could operate efficiently once they reach a certain scale. But, owing largely to capital demands, the costs of carbon removal are both high and variable.

A comparison with the solar energy industry is instructive. In 2023, annual investment in solar projects is expected to surpass outlays on oil production for the first time, according to the International Energy Agency. Innovative financial tools, such as purchase agreements and non-recourse project financing, have had an important role in bringing down the cost of solar photovoltaic systems and enabling them to proliferate. In the past decade alone, utility-scale solar prices have dropped more than 80%.

Certainly, solar technology development isn't exactly analogous to CDR — even from the outset, investors could easily visualize the commercial and residential market potential of solar panels. But lessons learned on the financial side of solar's development can help us see a path toward scaling the CDR technologies market at a faster pace.

New financial solutions involving offtakes will help the market reach scale

To develop novel CDR technologies at scale, the market needs the more robust offtakes that financial services require to enable new projects.

This was why in 2022, BMO became the first Canadian company to join Breakthrough Energy Catalyst (BEC), a platform that funds and invests in project companies, including those utilizing novel CDR technologies. BEC, founded by Bill Gates and whose partners include leading global companies, provides concessionary capital needed for projects using early-stage emissions-reducing technologies.

To help commercialize and scale them, BMO is contributing $50 million over five years, project finance capabilities, and our energy transition expertise. The goals, as BEC put it, are to accelerate technology adoption and reduce so-called green premiums, the additional cost of clean energy solutions over those that emit greenhouse gases.

Concessionary capital is of course only one innovative approach. With the challenge of reaching net-zero emissions globally, we will need many financing solutions that feature an offtake and support start-up or early-stage companies deploying CDR tools.

The market for CDR technologies will also need more sources of growth capital.

The market for CDR technologies needs expanded investment

Many venture investors are aware of the opportunity of CDR technologies, and they have been active in the market.

However, to accelerate development, growth investors will likely need to participate, too. As growth investors, some of us are conditioned to see technology development as a race, where we aim to overweight a portfolio with a single winner. I sometimes hear institutional investors say they already have their bet on CDR technologies. As in, a singular technology.

But we need to think a little more like venture investors, who typically invest across technologies. At this point, there is no clear early-stage winning bet on CDR technologies. Not when the U.S. alone needs to remove some two gigatons of carbon a year by 2050 to reach net zero. The magnitude of this challenge is significant, but so is the opportunity.

BloombergNEF estimates the value of the DAC market could grow from just above US$1 billion currently to US$150 billion by 2050. The market for another group of tools to capture emissions at the point of production is also expected to expand sharply. Focused on hard-to-abate industries such as petrochemicals and cement, capacity in the Carbon Capture, Utilization, and Storage sector is forecast to grow six-fold by 2030.

Indeed, there is room for many winners in fields as diverse as biochar and ocean deacidification. Growth investors can participate in this market, knowing that it represents not a binary outcome like a stock price rising or falling, but an expanding set of solutions needed to reach a net-zero world.

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Jonathan Hackett Co-Head, BMO Energy Transition and Head, Sustainable Finance


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