Transition Center of Expertise: Carbon Management

Key takeaways

• Carbon management includes technologies that capture, transport and either store or reuse carbon dioxide.
• While essential to reducing emissions in hard-to-decarbonize industries, carbon management still relies heavily on government and other incentives.
• Monetizing removal credits is becoming easier, with voluntary and compliance markets experiencing growth, and maturing.
• CO2 utilization is primarily deployed in enhanced oil recovery today, but should expand as companies take an R&D approach and newer technologies mature.
• To manage the technology and regulatory risks, large companies are bringing in more investment partners through joint ventures and other structures.

Introduction

Low-carbon power generation and the electrification of energy deployment are projected to contribute the lion's share of the global decarbonization. But other strategies are needed for harder-to-abate sectors—with carbon management a leading candidate. As a category, carbon management encompasses various technologies — both well-known and researched and innovative new ones — that capture, remove and then either deploy or store CO2. As an investment, the economics of carbon management vary, depending on the source and the approach to managing it. The three broad categories include:

Carbon capture and sequestration involves capturing CO2 emissions from sources such as power plants and industrial processes, transporting it to a storage site, and depositing it underground or in cement. This process prevents CO2 from entering the atmosphere. In this technology, there is no revenue stream and the financial benefit comes from government incentives and voluntary markets.

Carbon dioxide removal aims to reduce the overall concentration of CO2 in the atmosphere. It can be as simple as reforestation, but also includes more complex techniques such as raising the alkalinity of oceans. The financial incentives are similar to carbon capture and sequestration, with the added cost of capturing carbon from a more diluted source, often through a more energy-intensive process. Carbon capture and utilization captures CO2 and uses it to produce fuels, chemical feedstocks, or building materials. This approach offers a dual economic opportunity from the financial incentives related to mitigating emissions, while also creating marketable low-carbon products.

CO2 economics

Carbon management comes with high initial costs for technology and infrastructure. Policy and market incentives such as tax credits, subsidies and carbon-credit markets are critical to making carbon management economically viable in most industries. The cost to capture carbon can vary depending on the technology used and the concentration of CO2 in the gas stream or air. For highly concentrated CO2 sources, the cost can be as low as US$10 to US$30 per tonne, with higher costs for more diluted sources.¹

The cost of capturing CO2 can account for as much as 75% of the total cost of carbon-management projects, especially in applications where it’s necessary to separate CO2 from exhaust gas.² As operational and permitting experience grows, capture technologies improve and economies of scale accrue, those costs could be expected to fall.

Even as costs fall,³ carbon-management economics will continue to rely on policy incentives and voluntary carbon credits. Policy frameworks for carbon management have started to accelerate in many countries and markets, notably including the U.S., Europe, Japan, China and India.

The long view

Carbon management relies on government and market incentives. So the long-term projections of its adoption depend on the low-carbon transition policies that countries choose to adopt.

Fast transition scenarios, such as achieving net-zero CO2 emissions by 2050, would call for higher deployment of carbon capture technologies, reaching 6-8 gigatonnes of carbon capture a year, whereas scenarios where current policies continue as they are would see 500 million tonnes to 2 gigatonnes of CO2 captured annually. If costs decline and additional incentives are adopted, however, we see more momentum building for carbon management.

How would you describe carbon management?

Pieter Houlleberghs: Carbon management is a broad category of anything that’s an emissions reduction or a drawdown of CO2 from the atmosphere. It could be abatement in the form of avoiding an emission, or a carbon offset where a buyer can reward someone else for having removed the carbon from the atmosphere.

Doug Vaccari: It also encompasses a range of technologies. There are nature-based solutions like forestry, then there's equipment-based solutions to remove carbon. 

They're in different stages of commercial readiness, both from a technological and economic perspective.

William Su: Today, most carbon-management projects don’t work without subsidies or regulations. I think this is going to require a reliable legislative framework and more public-private partnerships to define what long-term support will look like, because they will almost certainly require ongoing financial assistance in the foreseeable future.

This support could come in the form of direct investment incentives or as we develop greater liquidity in traded markets like low-carbon fuel credits in California and the emissions trading system in Europe.

Where do you see growth in carbon management today?

P.H.: We spend a lot of time looking at various technologies across different sectors, and there are a couple carbon removal technologies that break the mold, and fit between what people call nature-based solutions versus engineered, as well as between direct-air versus point-source capture. Those are the ones that are interesting, where you're working with the laws of nature or with thermodynamics and what you end up with are pathways that are low-energy, low-cost and effective at producing a durable credit.

For example, we just invested in a mineralization-based technology out of Europe that uses recycled concrete to absorb CO2 from biogenic sources. The company works with biogas plants, where there's a fairly concentrated CO2 stream you can get access to. This generates a credit that's interesting to the corporate buyers in the voluntary market.

D.V.: We see opportunities to partner with large companies on carbon-management projects across the world for a few reasons. Public shareholders expect energy companies to prioritize returning capital to shareholders. At the same time, carbon-management projects are typically very capital-intensive, with returns that are more similar to traditional infrastructure.

So these companies want partners to share the risk, share capital, and to collaborate. Large companies like Occidental Petroleum for example, our partner in the STRATOS carbon capture facility, have the technical and operational expertise to develop, build, operate, and commercialize large projects in this space. And for an investor that provides a real competitive advantage.

W.S.: You're seeing big U.S. names invest more aggressively in carbon capture assets, building out CO2 pipelines, making venture investments into direct air capture technologies, and setting up better-defined carbon-sink areas in the Gulf of Mexico.

While public shareholders are generally pretty allergic to long-duration and loss-leading investments, more companies are viewing carbon-related investments at this stage as R&D - a portfolio of options that could have asymmetric payoffs down the road. I think investors today are more accepting of these investments when the expenditures are ratable, contained, and do not detract from the key proposition of returning significant cash to shareholders.

Looking out, where do you see carbon management headed?

P.H.: We’re still in the early days. One of our portfolio companies is active in the carbon markets as an advisor and supplier of high-quality removals credits. The team includes about 60 world-class climate scientists, and it provides companies with advisory services on reducing their CO2 footprints, and as part of that conversation, where carbon removals credits can fit in for that given player.

By virtue of having run RFPs for carbon removals for large corporations, it has a broad set of relationships with developers of carbon removal projects and can structure unique and proprietary, high-quality portfolios.

Last year, the broader market woke up to the need for more stringent quality of credits. And this investment gives us a perspective across the whole carbon market.

W.S.: We see opportunities arising in the broader economy. Everyone’s talking about AI-enabled data centers now, and I think it’s just amplifying the dilemma of how you meet society’s demand for growing energy while lowering emissions.

The fast-growing energy needs of AI and other digital technologies may require constant, carbon-emitting energy sources like natural gas plants for power. And the only way you can do that while limiting carbon emissions, let alone reducing them, is through investments that accelerate the technology curve in carbon capture.