Last month, COP26 left many with mixed feelings. Limiting global warming to 1.5C now appears much less likely and ambiguity remains around each country’s implementation details. However, there is much reason for optimism. Several incredible actions were pushed forward such as ending fossil-fuel subsidies, an agreement on US-China cooperation as well as unprecedented 2030 targets on deforestation and methane emissions.
Perhaps most importantly, a historic agreement was reached amongst the world’s financial organizations to ensure their whopping $130T of assets under management (AUM) meet 2050 net-zero goals. As the transition to a clean economy is basically a massive construction project, the availability of future finance to help pay for it is a major leap forward. But we’ll still need effective implementation mechanisms for allocating such capital as rapidly as possible.
In order to explore one such mechanism, let’s separate the climate problem into two subproblems: energy production and carbon reduction. The former involves everything to do with moving electrons to power civilization and the latter involves how we reverse the accumulation of carbon dioxide in the atmosphere. These dimensions are both deeply related, but they have crucially different economics as of today.
Financing (renewable) energy production
Electricity from new wind and solar projects is becoming increasingly cost competitive with fossil fuels. As energy accounts for over 73% of emissions, this is some of the best news for our climate. But how is this happening? Cost reductions from hardware efficiencies in panel design, inverters, and installation techniques are only part of the story.
A major driving force behind the uptake of renewables in the United States actually comes from corporate purchasing. Over the last decade, well-known names like Amazon, Google, and Facebook have been procuring 10s of gigawatts worth of wind and solar. They do this by either directly owning equity in a renewable project, acquiring RECs (a market instrument for enabling an energy consumer to own and trade megawatts produced by renewables, irrespective of their physical consumption), or through CPPAs (fixed-price renewable supply contracts). What’s unique about corporate power purchasing agreements is that they can lower the cost of capital for planned renewable projects and help them break ground faster. Through an offtake agreement, project developers can reduce risk by obtaining a guarantee for future revenue, and corporate buyers get to avoid volatility in their energy costs while meeting decarbonization goals. While offtakes are relatively well-accepted in the power purchasing arena (with renewable projects getting unlocked in even the most oil-dependant economies), their value is perhaps most urgent in our second subproblem: carbon reduction.
Financing carbon reduction (and removal)
To avoid the worst of long-term climate impacts, it won’t be enough to just produce clean power. According to a recent report, we’ll need to be pulling down at least 1 billion tons of CO2 per year through negative emissions technologies by 2025. This is in addition to emissions reductions from decarbonizing energy, transport, manufacturing and agricultural industries. It’s important to consider that current planned projects are over an order of magnitude away from this goal. Net negative technologies include things like bioenergy plants coupled with carbon capture, direct air capture, forestation, and enhanced weathering (i.e. using mineral carbonation). According to the Coalition for Negative Emissions, these are expected to cost $60-130/tCO2 on average when deployed at scale. With the IMF’s proposal for a carbon price target of $75 per ton by 2030 for high-income countries, there is reason to be hopeful that carbon removal will eventually ramp up to industrial scales within a few decades. But we don’t have the luxury of waiting a few decades. This is where the same offtake agreements that helped accelerate renewable energy production could help accelerate carbon removal.
In this case, the offtake would allow a buyer to purchase carbon commodities at a set price point in the future. This is particularly useful for implementing natural climate solutions which require lots of upfront capital for operations and accounting and have longer payback periods. As future carbon credit pricing is hard to predict (certainly in voluntary markets), green investors have been reluctant to invest. But with companies like Microsoft setting goals to take-back their entire emissions since 1975, demand for high-quality, verifiable credits is likely to outpace supply making offtake agreements an even more appealing method of accelerating development of carbon removal projects.
Looking to the future
In order to enable this, standards need to be established for what “high quality” carbon projects look like. Supply-side financing, government commitments and agreed upon mechanisms for how negative emissions are accounted for will also be critical. Innovative companies such as Evergrow are positioned to play a crucial role in synthesizing the data products and financial instruments necessary for buyers to include new forms of carbon removal as part of their long-term, net-zero strategies.