4 questions investors should ask CDR startups
Interrogating several key issues can help investors gain confidence when evaluating carbon removal startups.
Many investors are only just beginning their journey with carbon dioxide removal (CDR) startups, and deal counts and sizes will likely grow with time. To protect investments and direct more funding toward quality technologies, it is important for investors to ask about scientific foundations and monitoring, reporting, and verification (MRV) plans. Ensuring quality low-carbon energy procurement strategies and life cycle and techno-economic assessments is also vital.
This post is based on a presentation covering techno-economic and life cycle assessment I developed for the AirMiners Investor Academy. If you are an accredited investor, I recommend signing up. It’s free!
Carbon dioxide removal is a new area for many investors, which may make some hesitant to invest as much or as quickly. CDR technologies are also often capital intensive and require relatively long investment horizons. Asking the right questions and receiving satisfactory answers can help increase confidence and potentially accelerate the funding process. Below are four such questions informed by my work with a wide variety of CDR stakeholders that could be useful in this process.
1. What external scientific research informs your approach?
Due to the level of capital flowing and the climate-induced urgency to scale, there is no shortage of hype in the CDR world—if only we could power our processes with it! The prospect of supply growth outpacing the number of new buyers may also leave some technology and project developers with an incentive to exaggerate the benefits of their own approach to crowd others out of early deals and entrench their position. Corresponding information asymmetries paired with the level of technological and scientific complexity in the space can leave investors feeling in the dark.
Therefore, investors must proceed cautiously. Startups should ideally have an academic foundation for their approach. It is a red flag if a company does not cite multiple publications in trusted peer-reviewed journals or other reputable outlets that support different aspects of their process. While many startups develop proprietary advances on top of foundational discoveries, most approaches will likely have been previously developed or at least explored by a lab or scholar.
There are a few notable examples. Carbon Engineering famously published on their process in Joule. The founders of Verdox published on their process in Energy & Environmental Science. Matt Eisaman, the co-founder of Ebb Carbon, also published several papers on oceanic carbon removal before starting the company.
A strong scientific backing is necessary but not sufficient to undergird claims. Bad science can easily make its way into peer-reviewed journals. Quality, independent technical verification is still required to support substantial investments.
2. What is your plan for monitoring, reporting, and verification (MRV)?
In a podcast with The Carbon Curve, Peter Reinhardt noted that MRV is (almost) the product of CDR companies; while the actual activity is removing and storing carbon dioxide for long periods, companies generally only get paid on the basis of removal offset creation that is enabled by MRV. Proper MRV enables the trust that is the sine qua non of scaling CDR markets.
The trouble is that MRV strategies are as diverse and nascent as the CDR approaches they aim to verify. For ocean CDR alone, there are multiple pathways, and MRV approaches for each feature their own uncertainties. Considering additional MRV needs for soil carbon, geologic sequestration, enhanced weathering, storage in long-lived products, and emerging pathways demonstrates the difficulty of this challenge.
Current protocol development methods from carbon offset verifiers like Verra, Gold Standard, and so on have proven their inefficacy, so new methods for CDR will need to be held to a higher standard. All protocols must carefully consider energy use, transportation impacts, material and feedstock sourcing, co-products/by-products, impact allocation, waste management, counterfactuals, emissions timing, and so on. CDR startups have a tremendous responsibility to ensure they are developing or seeking out scientifically sound, representative, robust, understandable, and transparent MRV strategies for their pathway.
3. What is your low-carbon energy procurement strategy?
As detailed in one of my previous posts, CDR technologies that require large amounts of artificial energy must use primarily low-carbon energy to not create more emissions than they remove. Certifiably procuring low-carbon energy, however, can be a difficult task. Large corporates with renewable energy goals often build in-house procurement teams and engage with expensive consultancies and law firms to source and negotiate deals. Small, resource-constrained startups naturally struggle with this.
Operating in clean grids alone would limit scalability and could be parasitic. Behind-the-meter generation can be difficult to co-develop with projects or finance at small scales. Voluntary renewable energy certificates (RECs) generally do not support new low-carbon power, meaning that dirty power may be spun up to support new demand from CDR. There are increasing concerns about additionality and temporal and geographic matching of low-carbon energy supply and demand with power purchase agreements (PPAs). 24/7 carbon-free energy (CFE) is likely required to support true carbon removal, but the capabilities for it are quite nascent. Moreover, CDR verification protocols and regulators do not seem to have come to a consensus about the proper treatment of any of these tools when doing emissions accounting.
CDR startups that make use of significant amounts of artificial energy therefore must have a convincing, credible plan for this that likely involves transitioning to higher-quality procurement over time. Cost claims should also be interrogated. $0.01/kWh solar available 24/7 is probably not going to be here anytime soon.
4. What factors do your techno-economic and life cycle assessments consider?
Most initial techno-economic and life cycle assessment models will focus on the costs and emissions of feedstock sourcing and process energy consumption. This is a great starting point as these will be large drivers for many if not most CDR processes. However, complete models should consider far more factors for an accurate picture.
In addition to materials and energy, complete life cycle assessment models must also consider emissions from material and equipment transportation, end-of-life raw materials disposition, onsite emissions sources (e.g., leaks), equipment manufacturing, and any other necessary utilities like steam or nitrogen. If relevant, direct and indirect land-use change should also be analyzed. It is important to note that even low-carbon energy sources have emissions arising from the supply chain of the equipment. While these emissions are often at least an order of magnitude lower than those for fossil-sourced energy, they are not zero. Assuming zero emissions for low-carbon energy will lead to incorrect results, particularly for energy-intensive processes.
Full techno-economic assessments must also consider many more factors than just energy. There are other important OpEx categories such as direct labor, supervision, employee benefits, maintenance, royalties, property tax, insurance, and land and building rent that may be relevant to a project. CapEx categories that could be important in a TEA include equipment transportation, installation, and replacement; connectivity infrastructure like piping, valves, and wiring; land; structures and buildings; instrumentation and controls; other plant infrastructure costs (OSBL); permitting; civil work; electrical systems; engineering fees; contractor fees; and contingencies. Finally, there are CO2 management costs such as those for compression, transportation, sequestration, and MRV that may also be relevant.
The devil is in the details when it comes to this kind of modeling. One small mistake or exclusion can radically change the results of a model. It is also far easier to improperly exclude cost and emissions drivers than it is to improperly include them, which creates a bias toward lower estimated costs and emissions in early-stage assessments. This has been empirically demonstrated such as in the figure shown below from a dated but interesting RAND study titled “Cost Growth in New Process Facilities.”
When paired with the general bias for presenting pollyannish results to investors, this likely results in systemic underestimation of costs and emissions for early-stage processes. To help resolve this, investors should demand and reward comprehensiveness and accuracy over merely positive results.
Conclusion
If a CDR startup can answer all the questions posed here satisfactorily, then you have evidence that they have (a) an approach that is rooted in at least some level of science; (b) a sound strategy for proving the quality of their removal offsets; (c) a defensible plan for low-carbon energy procurement; and (d) reasonably inclusive cost and emissions estimation models. While there are many other aspects to verify during due diligence, these questions are particularly important when investigating CDR startups and can provide a reasonable starting point for the process.
Chapeau Gramt! This is absolutely phenomenal! Your analysis is not only brilliantly clear but also remarkably unbiased – a rare and impressive feat! Fantastic job!