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There’s a looming problem in the carbon removal space.

By one count, nearly 800 companies around the world are exploring a wide variety of methods for drawing planet-warming greenhouse gas out of the atmosphere and storing it away or putting it to use, a gigantic leap from the five startups I could have named in 2019. Globally, venture investors poured more than $4 billion into this sector between 2020 and the end of last year, according to data provided by PitchBook.

The trouble is, carbon dioxide removal (CDR) is a very expensive product that, strictly speaking, no one needs right now. It’s not a widget; it’s waste management for invisible garbage, a public good that nobody is eager to pay for.

“CDR is a pure cost, and we’re trying to force it to be something that’s profitable—and the only way you can do that is with public money or through voluntary markets,” says Emily Grubert, an associate professor at Notre Dame, who previously served as deputy assistant secretary in the US Energy Department’s Office of Carbon Management.

Both of those are playing a part to certain degrees. So far, the main markets for carbon removal come from government procurement, which is limited; government subsidies, which don’t cover the cost; and voluntary purchases by corporations and individuals, which are restricted to those willing to pay the true cost of high-quality, reliable removal. You can also use the CO2 as a feedstock in other products, but then you’re generally starting with a high-cost version of a cheap commodity.

Given these market challenges, some investors are scratching their heads as they witness the huge sums flowing into the space.

In a report last summer, the venture capital firm DCVC said that all of the approaches it evaluated faced “multiple feasibility constraints.” It noted that carbon-sucking direct-air-capture factories are particularly expensive, charging customers hundreds of dollars per ton.

“That will still likely be the case in five, seven, even 10 years—which is why we at DCVC are somewhat surprised to see hundreds of millions of dollars in capital flowing into early-stage direct air capture companies,” the authors wrote.

Rachel Slaybaugh, a DCVC partner, said of direct-air capture in the report: “I’m not saying we won’t need it. And I’m not saying there won’t eventually be good businesses here. I’m saying right now the markets are very nascent, and I don’t see how you can possibly make a venture return.”

In background conversations, several industry insiders I’ve spoken with acknowledge that the number of carbon removal companies is simply unsustainable, and that a sizable share will flame out at some point.

The sector has taken off, in part, because a growing body of studies has found that a huge amount of carbon removal will be needed to keep rising temperatures in check. By some estimates, nations may have to remove 10 billion tons of carbon dioxide a year by midcentury to keep the planet from blowing past 2 °C of warming, or to pull it back into safer terrain.

On top of that, companies are looking for ways to meet their net-zero commitments. For now, some businesses are willing to pay the really high current costs for carbon removal, in part to help the sector scale up. These include Microsoft and companies participating in the $1 billion Frontier program.

At the moment, I’m told, corporate demand is outstripping the availability of reliable forms of carbon removal. There are only a handful of direct-air-capture plants, which take years to construct, and companies are still testing out or scaling up other approaches, like burying biochar and pumping bio-oil deep underground.

Costs are sure to come down, but it’s always going to be relatively expensive to do this well, and there are only so many corporate customers that will be willing to pay the true cost, observers say. So as carbon removal capacity catches up with that corporate demand, the fate of the industry will increasingly depend on how much more help governments are willing to provide—and on how thoughtfully they craft any accompanying rules.

Countries may support the emerging industry through carbon trading markets, direct purchases, mandates on polluters, fuel standards, or other measures.

It seems safe to assume that nations will continue to dangle more carrots or wield bigger sticks to help the sector along. Notably, the European Commission is developing a framework for certifying carbon dioxide removal, which could allow countries to eventually use various approaches to work toward the EU goal of climate neutrality by 2050. But it’s far from clear that such government support will grow as much and as quickly as investors hope or as entrepreneurs need.

Indeed, some observers argue it’s a “fantasy” that nations will ever fund high-quality carbon removal—on the scale of billions of tons a year—just because climate scientists said they should (see: our decades of inaction on climate change). To put it in perspective, the DCVC report notes that removing 100 billion tons at $100 a ton would add up to $10 trillion—“more than a tenth of global GDP.”

Growing financial pressures in the sector could play out in a variety of worrisome ways.

“One possibility is there’s a bubble and it pops and a lot of investors lose their shirts,” says Danny Cullenward, a climate economist and research fellow with the Institute for Responsible Carbon Removal at American University.

If so, that could shut down the development of otherwise promising carbon removal methods before we’ve learned how well and affordably they work (or not).

The other danger is that when an especially frothy sector fizzles, it can turn public or political sentiment against the space and kill the appetite for further investment. This, after all, is precisely what played out after the cleantech 1.0 bubble burst. Conservatives assailed government lending to green startups, and VCs, feeling burned, backed away for the better part of a decade.

But Cullenward fears another possibility even more. As funding runs dry, startups eager to bring in revenue and expand the market may resort to selling cheaper, but less reliable, forms of carbon removal—and lobbying for looser standards to allow them.

He sees a scenario where the sector replicates the sort of widespread credibility problems that have occurred with voluntary carbon offsets, building up big marketplaces that move a lot of money around but don’t achieve all that much for the atmosphere.

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