· 8 min read
Tackling climate change will be nearly impossible without advancements in climate tech. There is a consensus that we need a set of technologies to address the challenges of climate change. New solutions to decarbonize sectors like energy, heavy industry, food, mobility, and the built environment show promise that we might be able to reach net zero emissions by the middle of this century to mitigate the worst effects of global warming.
However, the first global stocktake of the Paris Agreement, presented at COP28 in Dubai last year, reaffirmed that we are off track with our decarbonization efforts to meet the 1.5°C target. Most of the technologies needed to meet our targets are not ready yet. According to the International Energy Agency (IEA), 35% of the emissions reductions needed by 2050 will come from technologies that are currently only under development or not yet at commercial scale.
By the time, global leaders and the climate community meet in Baku for COP29, parties of the Paris Agreement will have submitted their updated nationally determined contributions (NDCs) outlining their plains to reach net zero by the middle of this century.
While emissions reductions will be the main source of climate mitigation until 2050, we will also have to actively remove CO2 from the atmosphere. We will need carbon dioxide removal (CDR) to get to a true net zero, especially in industries with hard-to-abate emissions. But just like emissions reductions, CDR is not on the right track yet. A very recent study by a group of researchers from the Mercator Research Institute on Global Commons and Climate Change indicates that if countries do not adjust their policies, we will also see a large “CDR gap.” According to the study, CDR will increase by up to 1.9 billion tonnes of CO2 per year by 2050 if governments implement their current mitigation pledges. Depending on different IPCC scenarios, there will be a “CDR gap” in 2050 between 0.4bn - 5.5bn tonnes of CO2 removed per year.
To sum it up: There is a Net Zero gap – both reductions and removals are falling short
There are several tools to bridge this gap, but certainly funding for net zero technologies is one of them. There is currently a financing gap of up to $2 trillion to meet our targets. This is especially the case for capital-intensive hard-tech and infrastructure projects. Not-yet-mature technologies, lack of buyers, and the green premium (i.e., the additional cost for clean technology vs. conventional technology) hamper the appetite of investors.
So, it is no surprise that funding for CDR is lagging behind. In 2023, there was a total of $1.25 billion in early-stage capital investment in all forms of CDR, which was only 0.076% of the accumulated climate tech investment ($1.64 trillion). Looking into the future, these figures represent only a fraction of what is needed to scale up CDR to where we need it to be: according to McKinsey, cumulative investment in CDR required to deliver net zero in 2050 ranges between $6 trillion to $16 trillion, depending on the removal volumes needed.
Today, one key source of funding for CDR is the voluntary carbon market (VCM). Current projections indicate that the VCM could reach a $3 billion value this year. The estimated demand for durable CDR is about 40–200 Mt CO2 ($10 billion–$40 billion) in 2030, and up to 80–870 Mt CO2 ($20 billion–$135 billion) in 2040.
Yes, private investments in CDR companies as well as the demand for carbon removal are growing, but we need to think about how to finance the “rest.”
Besides the private sector, we also need to see governments move quickly: fiscal incentives, regulatory frameworks, and strategic investments are needed to scale up CDR to bridge the net zero gap. COP29 will be the next moment to globally address this issue.
NDCs N/ure
By 2025, countries will have to unveil their new national climate commitments under the Paris Agreement, known as nationally determined contributions (NDCs). The Paris Agreement requires parties to put forward new NDCs every five years. As part of the NDCs countries need to outline and communicate their efforts by to reduce national GHG emissions and adapt to the impacts of climate change. One year after Dubai, the climate community will judge countries ambitions for net zero in Baku.
The timeframe of the NDCs is until 2035 – half-time between 2020, the year states started implementing their NDCs, and 2050, the target year for global net zero. Therefore, the next NDCs will be crucial to aligning short- to mid-term actions with long-term targets.
In order to bridge the net zero gap, countries will need to set up ambitious NDCs which align current efforts to drastically reduce emissions with plans to scale up carbon removal activities. A key element for achieving this mission is the establishment of a net zero infrastructure.
Support
Net zero will first and foremost mean drastic emission reductions. The EU for example has committed to reducing its GHG emissions by 55% compared to 1990 levels by 2030. For 2040, the outgoing EU Commission proposed a reduction of 90% by 2040. In addition to reductions, we will also need carbon removals. For 2040, the EU Commission has proposed a land sink and carbon removal target of 400 Mt carbon dioxide equivalent (CO2e) annually.
The removal of CO2 into permanent storage on this scale needs to be understood as a public good or public good infrastructure. CDR functions as planetary waste and recycle management. In certain cases, it can also provide renewable energy; in other cases, it provides a sustainable source for carbon, especially for industries with hard-to-abate emissions.
The public-good nature of CDR demands governmental action and intervention. For the EU, this means that the bloc needs to support this public good infrastructure – the net zero infrastructure – as part of its green transition.
Setting up this net zero infrastructure is capital-intensive and from an investor’s perspective a high-risk and long-term commitment. Hence, governments will need to play a more active role. We will need to build an infrastructure to remove, transport, and store the CO2. For this to happen, we see three potential levers to finance the net zero infrastructure for CDR.
1. Public
To spur demand in CDR, governments need to consider public procurement. For CDR, public procurement can take the form of (1) Feed-in Tariffs (FiTs), (2) contracts for difference (CfDs), and (3) direct procurement of carbon credits.
FiTs have been an effective tool for scaling up mature and less mature renewable energy technologies. In the case of FiTs for carbon removal, governments would set up long-term agreements with carbon removal suppliers, agreeing on a fixed price for a designated payment period.
CfDs have been put in place to provide security for the volatile price development of the green transition. Through CfDs, governments fund the price gap between market prices and actual costs for production. In the future, the price of carbon removal credits will likely also become more volatile. Putting CfDs in place can lower insecurity for investors, help to secure other funding options like debt funding, as well as create incentives for developers of CDR infrastructure projects.
A third option for spurring demand in CDR would be dedicated public buying programs for carbon removal credits. In contrast to FiTs, such a procurement program would be more targeted at the VCM, functioning as a “trust signal” for potential buyers.
2. Subsidies
In addition to strengthening the demand side, governments also need to consider how to strengthen the supply side. Supporting infrastructure development can, for example, happen through direct subsidies or tax credits.
The EU for example has the option to directly fund and subsidize CDR projects through its Innovation Fund. Financed through the current EU ETS scheme, the Innovation Fund has a total volume of 530 million ETS allowances (the de facto funding depends on the price of carbon). One prime example of the EU’s engagement in CDR is the BECCS Stockholm Exergi project. For now, the EU Innovation Fund is limited to selected technologies, but achieving net zero by 2050 will require a portfolio of permanent CDR pathways.
Tax credits for carbon removal can also help to overcome the high initial capital costs of CDR projects. Tax credits can work ex-ante or ex-post. The US model (45Q) belongs to the latter: It provides a tax credit for each tonne of CO2 removed through the project developer (up to $180 per tonne). The Canadian Investment Tax Credit for Carbon Capture, Utilization and Storage (ICT CCUS) provides support before the actual carbon removal activity. With tax credit rates of up to 30% of CAPEX, the ICT shows how net zero infrastructure projects can be supported right from the start.
3. Public
A third option for governments is to establish and use public credit guarantee schemes (PCGSs) to attract private investment. PCGSs can help to attract private funding by de-risking private capital and reducing the cost of capital for CDR technologies. Especially for hard-tech, high-CAPEX infrastructure, venture capital investment alone is not sufficient; larger debt funding is needed. Technical readiness, commercial offtake agreements, and forecasted cash flow should be taken into account as determining factors. For some CDR suppliers, PCGSs have already helped to secure debt funding for their projects. Setting up net zero infrastructure projects will need dedicated guarantee schemes that make them bankable and mitigate technical risks.
Governing
The journey towards climate neutrality has already started. We have identified the path to get there, but we still need to figure out how to accelerate and how to bridge the gap in our way: the net zero gap – both emission reduction targets and permanent carbon removal targets are at risk if we do not start building our net zero infrastructure now. Understanding carbon removal as a public good commands public actions enabling the infrastructure and technologies we need for this.
Besides setting the regulatory framework for CDR, governments also need to further develop their toolkit. COP29 will be the right platform to discuss strategic investments and smart fiscal and economic policies to steer demand and crowd in private and public funding for net zero infrastructure.
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