San Francisco Climate Week 2024 Key Takeaways

Emerging Carbon Removal Technologies, Investor Trends and Other Key Themes

The TD Securities ESG Solutions and Energy Investment Banking teams discuss key themes from SF Climate Week including energy transition and the missing middle, carbon removal technologies, decarbonization, impact funds and voluntary carbon markets.

Carbon Removal in a Net Zero World

TD Securities hosted a forum on the state of the carbon dioxide removal (CDR) market and the role it will play in helping companies and economies to reach net zero at San Francisco Climate Week. The event brought together stakeholders from across the ecosystem including CDR buyers, institutional investors, carbon removal technology developers, and carbon credit standards and registries. We share key takeaways below.

CDR technologies and markets have emerged rapidly over the last two years. For the market to truly reach it's potential, more demand will need to materialize, and this will be driven in large part by price. CDR developers are addressing this head-on, clearly focused on driving down costs by proving out their technologies and rapidly scaling them. As CDR enters the mainstream, we expect the current bilateral nature of the market to shift toward more standardized agreements. While CDR remains in its early stages, there is an enormous opportunity for the technology to be a key lever for addressing climate change.

CDR Buyers Remain Concentrated Within a Few Sectors

Large companies in the technology, transportation and financial services sectors have dominated CDR purchases. The high price of CDR credits is more palatable for corporations that tend to have relatively high profit margins and smaller emissions footprints. These companies are buying highly durable credits with the intention of catalyzing growth and commercialization of the technologies, in addition to addressing their own GHG footprint.

Sizing Up the CDR Market

To date, over 10.5 million tonnes of CDR credits have been collectively purchased. To put this into context, the U.S. economy emits approximately 6 billion tonnes of CO2e per annum.⁽¹⁾ Based on buyers that have publicly announced their cost per ton, we estimate that at least $2.7B has been spent, or committed, to CDR credits since 2021. However, only 2.5% of purchases have been delivered.⁽²⁾

The business model for CDR developers is largely based on the sale of voluntary carbon credits. While 2023 represented a transformational year for CDR purchases, for these companies to truly scale, purchases of CDR credits will need to ramp up significantly. In the near term, offtakes that are 'bankable' (i.e., creditworthy counterparties) are key.

Drivers for CDR Market Growth

Corporate buyers, governments, investors and industry groups all have a key role to play in ensuring this market continues to grow. The U.S. Government announced late last year that it will invest up $1.2B in two direct air capture projects in Louisiana and Texas.⁽³⁾ The U.S. Department of Energy also announced it will procure $35M worth of CDR credits and is in the process of launching a challenge for corporates to purchase CDR.⁽⁴⁾ Investors have made significant investments in CDR technology development as well, most notably BlackRock's $550M investment in 1PointFive's STRATOS facility.

Industry groups like the Science Based Target Initiative (SBTi) will also play an important role in galvanizing demand for CDR credits. The SBTi has over 8,000 corporate signatories, with over 5,000 having set science-based targets⁽⁵⁾, and is set to release updated guidance to its flagship Corporate Net Zero Standard that may incorporate the use of CDR credits for Scope 3 emissions. TD expects that more corporates will include CDR in their carbon credit portfolios if this change occurs.

Looking forward, an important driver of growth is the potential for the acceptance of CDR credits into compliance markets which could increase demand and bring greater transparency and liquidity to the market. For example, the planned EU Carbon Removal Framework may serve as the basis for CDR inclusion in the EU ETS, the largest compliance market by value globally.⁽⁶⁾ However, for this to be realized, the cost of CDR credits would need to approach parity with allowances in the market.

CDR Developers Aim to Reduce Costs

Scaling is one of the most important factors to driving down costs and improving the affordability of CDR credits to a broader spectrum of buyers. In the case of direct air capture, there is a firm belief that larger, modular units will materially lower the capital and operating costs of the units. Optimizing the technology and system design via field tests is also a focus area as developers look to operate facilities across different regions and climates.

The CDR Market Remains Opaque Impacting Market Liquidity

Like the broader voluntary carbon market, the CDR market remains nascent and opaque. Credits are traded almost entirely over the counter, providing limited price transparency and accessibility for those outside the industry.

Contracting and execution of these transactions is done through bespoke agreements which provide buyers with a wide degree of flexibility to structure a deal specific to their needs. However, this can make the process more time consuming and costly and often requires external legal expertise. As the CDR market matures, it will likely shift toward standardized terms and contracts which will lower transactional costs and complexity.

1. U.S. Environmental Protection Agency
2. CDR.fyi
3. U.S. Department of Energy
4. U.S. Department of Energy
5. Science-based Targets Initiative
6. Bloomberg