December 2024 | Theme of the Month

Carbon Management

Environmental problem:

Atmospheric CO2 plays a key role for life on Earth: plants need it for photosynthesis, and without the greenhouse effect that CO2 is mostly responsible for, the average global surface temperature would be below freezing. However, since 1900, the concentration of CO2 in the air has risen significantly, increasing from 300 parts per million (ppm) to 420 ppm. This means that one out of three CO2 molecules in the atmosphere has been added since the industrial revolution started the fossil fuel era.

The very greenhouse effect that maintains Earth’s temperature habitable for humans is therefore being supercharged, resulting in an increase in average global temperatures which in 2023 reached 1.4° C above the average since 1850. Beyond climate change, increased CO2 concentrations are also responsible for ocean acidification: CO2 in the atmosphere reacts with water molecules on the ocean surface producing carbonic acid, which lowers oceans’ pH levels and raises their acidity. Since the start of the Industrial Revolution, the pH level of ocean surface waters has dropped from 8.21 to 8.10, reflecting a 29% increase in acidity.

Environmental solutions:

To slow down climate change and ocean acidification the obvious first step is to eliminate CO2 emissions. However, climate scientists widely agree that current efforts to reduce emissions, for example by shifting to renewables and electrification, are insufficient to limit warming to 1.5° C, a threshold that would avoid catastrophic impacts on both nature and human activities. Therefore, most emission scenarios compatible with the Paris Agreement emphasise the need for a significant expansion of carbon capture, removal, sequestration and utilisation, jointly referred to as the “Carbon Management” industry (see Figure 2). This approach aims to both accelerate the pace of emission reductions without entirely substituting fossil fuels, and to remove CO2 that has already been emitted.

Although fundamental for climate change mitigation, Carbon Management does not generate any direct economic value in most of its applications and would not exist at the necessary scale without either subsidies, regulatory obligations, or voluntary contributions. Currently, the only commercially viable application of the industry today is the capture of byproduct CO2 from natural gas processing for “enhanced oil recovery” (EOR) – a technology first employed in the 1970s. Natural gas reservoirs contain 3-80% of CO2, which must be removed for the gas to be commercialized. This makes the cost of capturing CO2 a sunk cost. When oil prices are sufficiently high, injecting this captured CO2 into oil wells becomes profitable, as it boosts oil extraction. Around 75% of current carbon capture capacity and 90% of emissions ever captured follow this model, with debatable benefits from a climate mitigation perspective as it enables the extraction of more fossil fuels and in turn results in higher CO2 emissions.

Other use cases of carbon management, such as carbon capture from steel and cement production, bioenergy with carbon capture and storage (“BECCS”), and carbon removal, can deliver more tangible benefits to the carbon budget when the CO2 is sequestered in a dedicated geological storage, but with a catch: being a highly energy intensive process, the net emission reduction is dependent on the nature of the energy used, and dedicating scarce zero emissions energy to carbon management competes with the direct displacement of fossil fuels which can deliver greater benefits. However, the cost and complexity of capturing carbon dioxide is highly dependent on its concentration, which is typically lower in applications where CO2 capture would deliver the highest impact:

Investment Opportunities:

Although it is unlikely that the carbon management industry will be scaled to the extent prescribed by 1.5° C scenarios, it can nonetheless become a market worth tens of billions of US dollars per year: 1 billion tons of CO2 captured, a fraction of the 7-12bn required by climate models, can generate 85bn US$/year in subsidies with the current IRA framework, or a similar amount of avoided spending in CO2

We see the likely timeline for this market to mature to be in 2030-2035 considering that:

  • Except for enhanced oil recovery, most applications of carbon management are at initial stages of industrialisation, with the first large scale plants in cement, BECCS and carbon removal set to become operational in 2025-2028, and new more efficient technologies being tested in the field. The future of the industry is highly dependent on the results of these projects.
  • Carbon management initiatives, particularly geological storage, are large, one of-a-kind engineering projects, with geological studies and engineering efforts  taking multiple years, extending the time from establishing feasibility to operation.
  • To deliver real climate benefits, processes need to be powered by zero emissions energy, and until renewables are a scarce resource they are better used elsewhere. For example in displacing coal or powering heat pumps.Market participants in the oil and gas value chain are the main potential beneficiaries today:
  • Oil and gas producers, Engineering, Procurement and Construction (EPC) contractors, and industrial gases companies have developed most of the proven technologies and have the relevant know-how and assets such as for instance pipelines and drilling equipment.
  • Other market participants that could benefit from the growth of this industry, such as equipment providers and components suppliers (compressors, heat exchangers) used in adjacent applications, and consumables providers (solvents, membranes) typically generate most of their existing revenues from oil and gas. The size of the opportunity remains small relative to the existing business over 5-10 years.

For investors with higher technology risk appetite, the biggest opportunities lie in nature-based solutions and in utilisation. In the former, there is no competition for renewable energy and the cost per ton removed can be very low, while in the latter finding commercial applications that can deliver value from CO2 without reliance on subsidies and regulation can truly unlock growth in the carbon management industry.

Important information

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