Part 3: 🐣+🥚...⁉️ (The chicken and egg conundrum). In absence of demand for modular direct air capture at current costs, how does it become a viable carbon removal solution?
Demand-side certainty with carbon purchase agreements, alongside the power of early customers, will serve as gateways for modular DAC to open up the ultimate goal of widespread carbon removal
By far the most cited barrier to deployment of direct air capture technology today is cost. While the first two pieces of this series set the scene as to the trillion tonne challenge ahead, and potential technical pathways using lessons from the laws of historical innovation to guide us down the road of progress, this post offers a deep dive into financial and policy based innovations to support modular direct air capture (DAC) in what it will take to achieve gigatonne scale deployment.
“What comes first: an increase in affordability promoting demand, or demand driving down costs which increases affordability?”
This is the chicken and egg conundrum in a nut (egg?) shell. Direct air capture is by no means alone in this situation. Not to keep banging on about it, but this was solar in the early 1960’s: a commercially producible technology, but too inefficient and expensive for anyone to really take notice. It usually takes one of two things to happen. A breakthrough technical innovation, or a trigger event to see renewed impetus. By definition, the first is not a regular occurrence and incrementalism almost always wins out. Fortunately, not just one but two trigger events supported early deployment of solar and the hatching of the egg. The space race was hotting up, and solar was seen as a promising spacefaring energy solution. This was demonstrated in 1964 by the satellite Numbus I being equipped with sun-tracking solar panels, and the Soyuz 1 - launched in 1967 - being the first manned spacecraft to be powered by solar cells. Then came an arguably bigger impetus for solar energy: the 1973 oil crisis. Nixon’s ‘Project Independence’ brought with it a US$10 billion federal fund (US$54 billion in today’s dollars) for investment in energy, of which solar was a small but important piece.
So what does this have to do with direct air capture technology? Well…
“In 1962, the first year that semiconductors shipped, the US government purchased every single one of them. In fact, from 1955 to 1977, government procurement accounted for 38% of all semiconductors produced in the US (The Engine, 2020).”
The point is, governments often play a key role in establishing a market for new technologies. When it comes to that of direct air capture, governments are, on the whole, conspicuously absent. To the best of my knowledge, governments around the world have purchased a grand total of zero tonnes of DAC-derived carbon removal. For all the bad rap that ‘big tech’ receive from governments, they have not only taken their mantle in wielding huge amounts of power, but are actually the ones playing the role of government in catalysing the market for direct air capture as the first customer. While some (largely R&D) funds are flowing into DAC and other carbon removal solutions at the margins - £100 million in the UK largely pushed by Dominic Cummings (the estranged former advisor to Prime Minister Boris Johnson), and ~US$400 million in the US for research, development and deployment of carbon removal technologies, I have another idea: just buy our sh*t. Buy carbon removal. Provide the demand to foster a market environment for direct air capture which facilitates cost declines and new entrants (competitors and buyers). It’s supply and demand economics 101.
“Similar to the power purchase agreements (PPAs) which have become ubiquitous in the deployment of renewable energy, CPAs [carbon purchase agreements] can offer demand-side certainty for start-ups in the field to invest in R&D, develop the supply-chain capacity, and manufacturing process innovation to provide for the nascent carbon removal industry what Germany's solar PV gift delivered for the world.”
(At this point I really should find new analogies for addressing the chicken and egg conundrum at play for DAC technology, but this one can’t really be avoided). Power purchase agreements (PPAs) - pioneered by solar project developers whose early customers were (surprisingly) big tech for their power hungry data centres - provide a replicable architecture for DAC and other carbon removal projects to follow. The most valuable aspect of a PPA is arguably the certainty they offer for all parties. It provides project developers with the revenue and cash flow certainty to model an anticipated financial return for project financiers on the supply-side, and it offers companies and utilities on the demand-side with the price and supply certainty to fulfil their energy needs and any clean energy procurement targets. The same dynamics are at play with respect to the DAC-to-CO2-removal market. Carbon purchase agreements would not only provide the demand-side certainty for DAC project developers to put shovels in the ground on projects and deploy additional capacity, but also offer DAC technology suppliers/developers demand-side certainty for further R&D investment and to hopefully reduce the price for the next carbon purchase agreement. Capturing additional market demand is the biggest incentive to innovation out there. CPAs are the most efficient mechanism to provide this market signal for the nascent DAC industry to make progress on deployment.
Finally, a quick note about the case of Germany and how their experiences with solar ties in with the supply and demand dynamics of DAC. The low carbon 'energy transition’ or energiewende in Germany initiated at the turn of the millenium brought with it policy certainty and a demand environment for solar - facilitated by hundreds of billions of euros in subsidies. This sparked China into action on the supply-side, investing in the manufacturing facilities and know-how to churn out solar panels for the German market, facilitating the emergence of the solar market as we know it today, now lauded by the IEA as the cheapest electricity in history. We will forever be indebted to German consumers for subsidising solar energy and making it cheap for the rest of us. The world now needs a Germany (or two) to over-pay in the short-term for DAC and other carbon removal solutions to scale-up to become viable options for the world.
To break free from the shackles and crack the shell of the 🐣+🥚 conundrum, we will need to make some difficult and ultimately expensive decisions. This reminds me of a concept Bill Gates appears borderline obsessed with from his recent book - ‘green premiums’. Those who can afford to pay for premium (green) products, aka engineered carbon removal in 2021, should do so. In the long-term, the learning-by-doing effects of this deployment will facilitate cost declines and enable greater access at decreasing levels of willingness to pay - just like what happened with solar. Governments must recognise the historical role they played in facilitating technologies like semiconductors, batteries and solar energy to become as ubiquitous as they are today, and initiate a state procurement policy for direct air capture if they want it to be a viable option as part of a suite of carbon removal solutions when we really need it. Further, recognising the volume limitations for ‘premium’ carbon removal beyond state and hundred billion dollar corporate balance sheets, carbon purchase agreements must evolve to enable pooled demand from a fragmented, low-volume purchasing market through the adoption of business model and technical innovations like crowdfunding and smart contracts.
The nascent position of the DAC industry is by no means a positive when it comes to tackling the defining challenge of my generation that is climate change. However, advantages appear when we consider our ability to construct the supply-chain, manufacturing and potential specialisation of production in the DAC ecosystem from scratch, and importantly adopt lessons from history and accelerate such experience with modern day technologies and methodologies. That is the focus of the forthcoming fourth and penultimate part of this series. In the meantime, subscribe below to receive it straight in your inbox and have a great week ahead!
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