Should Direct Air Carbon Capture benefit from public financing?

Public financing can significantly boost Direct Air Carbon Capture and Storage (DACCS) by supporting research, pilot projects, and market creation, facilitating its development. However, substantial investment, political and economic stability, and balanced climate strategies are crucial for its success. A coordinated effort among public and private sectors is essential to maximize DACCS's potential in combating climate change.

Direct air carbon capture and storage (DACCS) technologies are emerging as a critical tool in the global effort to mitigate climate change by directly removing carbon dioxide (CO₂) from the atmosphere. It is referenced in the 2023 IPCC report (chapter 4.3) as one of the potential systemic changes required to meet the 1.5°C target of the Paris agreement. 

Understanding DACCS

Direct Air Carbon Capture and Storage is a process that directly removes CO2 from the atmosphere through chemical reactions. The collected carbon dioxide is then stored in so-called geological formations, i.e. underground natural reservoirs that can be filled without leakage risks. Depleted oil and gas fields and salt deposits are often mentioned as possible options. 

Deployed at scale, DACCS would be a powerful tool to fight climate change as it would offer a direct option to remove CO2 from the atmosphere, thus reducing the risks linked to climate change. The main difficulty however is that CO2 concentration in the atmosphere is quite low and therefore significant quantities of air need to be treated in order to start having a meaningful impact. This explains why the technology is currently ranked among the least effective in terms of carbon removal. The cost-to-abatement ratio is currently too high compared to other carbon removal solutions such as afforestation and reforestation (AR), biochar, enhanced weathering, soil carbon sequestration or bio-energy with carbon capture and storage (BECCS). Although a lot of uncertainty remains on the actual cost of industrial-scale DACCS, the first estimates put its cost at USD 1,000 per tonne at least.

According to the International Energy Agency, there are currently 27 DAC plants in operation in the world, most of them being small-scale installations, meant to test technologies and economics. Up to 130 plants are planned but most of these projects are at an early stage and most may not reach the final investment decision. Indeed, the main difficulty for DAC plants is to find a business model that allows them to operate. The prohibitive abatement cost cannot be matched by carbon pricing mechanisms such as carbon taxes or carbon markets. In the current regulatory paradigm, existing incentives are not sufficient to develop this technology in spite of its promising aspects.

Rationale for public support

As Philippe Aghion et al. pointed out, innovation is a key parameter in our ability to address the consequences of climate change. The problem is that innovation is a “path-dependent process”, meaning that today’s choices heavily determine future research efforts. Initiating new research directions will only get more expensive as time passes. The purpose of public intervention is to shift both public and private R&D efforts towards technologies that can provide solutions to mitigation and adaptation issues in the coming decades, away from the fossil-fuel dominated paradigm of innovation that still prevails due to path-dependency.

Conversely, DACCS is a technology that is still in its early stages that still needs to demonstrate its ability to reach significant levels (above the million tonne of CO2 removed threshold) at a reasonable cost. The output of the process, pure CO2, currently has limited industrial utility. It is mostly used in the food industry and for some marginal cases in other production processes. Even though research efforts are being pursued to use it as a component for synthetic fuels, the issue still stands, there is little economic value and a limited market for industrial CO2. DAC plants hence have to store the extracted CO2 and find external sources of revenues.

This is where public financing comes in. Given the potential interest of the technology and its ability to contribute to the decarbonisation of hard-to-abate sectors, there is a public interest to develop and test it. Public funds can take the risk of failure and provide a faster, more efficient learning curve in the early stages of industrialisation. As with renewable energies, whose cost structure was initially prohibitive, public subsidies can help over time to reach a cost structure that is compatible with existing market conditions.

Public financing can help scale up DAC technologies by supporting pilot projects and demonstration plants. These projects are essential for testing the viability of DAC systems in real-world conditions and for optimizing their performance. Public funds can de-risk these initial investments, encouraging private sector participation. Moreover, successful demonstration projects can provide valuable data and insights, which can be used to refine the technology and reduce costs over time.

Finally, in terms of industrial policy, there is a window of opportunity for the country that will be able to develop the skills and the industrial base required for the global expansion of DAC technologies. This is an example of first mover advantage, whereby a country can cement a strategic advantage by defining the norms and standards for a new technology, develop and protect intellectual property and create self-sustaining innovation ecosystem for a technology that is crucial to achieving carbon neutrality – and negativity in the second half of the century.

Recent policy developments have clearly identified this potential. The Inflation Reduction Act (IRA) in the United States has provided significant tax credits for the development of DAC plants and up to USD 1.2 billion have been awarded for two pilot projects in Texas and Louisiana. The European Union has recently adopted a voluntary certification framework for direct carbon removals defining quality standards for their inclusion in the achievement of national decarbonation strategies (NDCs). The EU Innovation Fund, which invests the proceeds from the auctioning of emissions allowances on the EU carbon market, is also contributing to Carbon Capture research and development. 

A difficult road ahead

Despite these advantages, there are several limitations to public financing in fostering DAC technologies. One of the primary challenges is the sheer scale of investment required. DAC technologies are still in the early stages of development, and the costs associated with capturing CO₂ directly from the air are currently high. While public financing can provide critical support, it is unlikely to be sufficient on its own to cover the extensive capital and operational expenses required for large-scale deployment. This necessitates significant private sector investment and the development of innovative financing mechanisms, such as public-private partnerships, to bridge the funding gap.

Another limitation is the potential for political and economic instability to impact public financing commitments. Changes in government priorities, budget constraints, and economic downturns can lead to fluctuations in funding levels for DAC projects. Long-term stability and predictability of funding are crucial for the sustained development of DAC technologies. Governments need to establish durable policies and funding mechanisms that can withstand political and economic changes to provide consistent support for DAC initiatives.

Additionally, public financing alone may not address all the technological and market challenges associated with DAC. While it can support early-stage R&D and pilot projects, significant technical hurdles remain in terms of improving the efficiency and reducing the costs of DAC systems. Achieving these advancements requires collaboration between public and private sectors, as well as international cooperation. Furthermore, creating a viable market for captured CO2 requires addressing issues such as the regulatory framework, public acceptance, and the development of value chains for CO2 utilization.

Moreover, there is a risk that public financing could lead to the allocation of resources towards DAC at the expense of other critical climate mitigation strategies. While DAC has significant potential, it should be viewed as part of a broader portfolio of solutions that includes renewable energy, energy efficiency, and natural climate solutions. Policymakers must carefully balance investments in DAC with other mitigation measures to ensure a comprehensive and effective approach to addressing climate change.

Finally, a potent political argument is often raised against Direct Air Capture. By providing a solution that would remove CO2 from the atmosphere, DAC would also de facto reduce the incentives to cut emissions. It would remove the impetus for the transition to a greener economy and would allow existing polluting industries to perpetuate their business models. While conceptually true, the argument overlooks the high levels of uncertainty surrounding the technology, the timetable for its potential industrial deployment and the actual effects of climate change. In front of such high levels of uncertainty, having a portfolio of technological options that reinforces collective adaptation capabilities remains the safest way forward.

In conclusion, public financing is crucial for fostering the development and deployment of direct air capture technologies. It can support R&D, pilot projects, market creation, and infrastructure development, thus accelerating the adoption of DAC systems. However, the scale of investment required, potential political and economic instability, technological challenges, and the need for a balanced approach to climate mitigation present significant limitations. To maximize the impact of public financing, a coordinated effort involving public and private sectors, as well as international collaboration, is essential. Only through such concerted efforts can DAC technologies reach their full potential in contributing to global climate goals.