Who Pays for DAC? The Market and Policy Landscape for Advancing Direct Air Capture
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Who Pays for DAC? The Market and Policy Landscape for Advancing Direct Air Capture
The technological promise of DAC will be largely irrelevant to the climate crisis if the question “who pays?” cannot be resolved.
Direct air capture (DAC) is a key climate technology with the potential to make major contributions to stabilizing atmospheric CO2 levels (McQueen et al. 2021). It is location-flexible, uses relatively little land area, and produces a verifiable, high-purity stream of CO2 that can be permanently sequestered or utilized for a variety of purposes. These features have led to a great deal of interest in the technology, and aspirations to deploy it at large scale as part of the response to the climate crisis (Hanna et al. 2021).
However, as with all technologies, DAC cannot reach large-scale deployment without a profitable business model, in which the cost of building and operating DAC facilities is offset by revenue from one or more sources. This is particularly challenging for DAC because it does not directly displace a technology or product with an existing market.
Also, the current cost of the technology, roughly $500 per ton of carbon dioxide (tCO2), is high compared to most other options for removing CO2 from the atmosphere (NASEM 2018). Investments in research, development, and demonstration (RD&D) and learning by doing will bring this cost down over time, but the challenge of finding revenues will persist (Baker et al. 2020; Lackner and Azarabadi 2021). Therefore, realization of the technology’s climate potential requires an answer to the question “Who pays for DAC?”
Options to Pay for Direct Air Capture
Companies that build and operate DAC facilities have three basic options for securing revenue: sell CO2, participate in voluntary offset markets, and receive policy subsidies. These options have significantly different values, market sizes, and reliability. Some combinations of them can be jointly claimed by DAC facilities, while others are mutually exclusive. Currently, none are valuable or reliable enough on their own for a DAC company to depend on exclusively, which means that complex revenue “stacks” are necessary to make projects economically viable.
Sale of DAC-Sourced CO2 for Utilization
Although CO2 is an unwanted pollutant in the atmosphere, it has economic value in uses such as enhanced oil recovery (EOR), air to fuels, cement and concrete, commodity chemicals, and food and beverage. The sale of CO2 removed from the atmosphere to these markets is known as CO2 utilization. There is considerable ongoing research effort to expand such uses, and small amounts of early revenue for the DAC industry already come from niche utilization markets (Sandalow et al. 2017).
But the existing commercial market that provides CO2 relies on sources that are much cheaper than DAC, including capture from bioethanol and ammonia production plants (largely for the merchant market) and natural/geological sources (largely for the EOR market) (Lorch 2021; Nichols et al. 2014). While some small applications in the US merchant market pay well over $100/ton for high-purity CO2, the average price for CO2 used in EOR (by far the largest market) is approximately $40/ton, reflecting low production costs (Núñez-López and Moskal 2019).
Without major DAC technology cost reductions and/or policy intervention, it is hard to see how DAC-sourced CO2 could be economically competitive in CO2 markets at scale.[1] DAC companies are therefore unlikely to rely on utilization by itself as a revenue source, even though they may seek to secure some part of the revenue stack from EOR and/or merchant market sales.
In addition to these price and cost considerations, it is worth noting that the total market for CO2 utilization is well below the volume that must be removed to meet global climate targets (IEA 2019; NASEM 2019). Further, while some forms of utilization have a direct climate benefit by displacing the use of fossil fuel as a feedstock, many of these forms are best characterized as “recycling” because CO2 is returned to the atmosphere on timescales of days to months (Bhardwaj et al. 2021).
Thus while utilization has important climate benefits, they are less than those of DAC paired with geological sequestration or other permanent storage. These considerations will influence policymakers as they examine options for policy support (see below).
DAC Participation in Voluntary Offset Markets
Voluntary offset markets, which are largely ad hoc for DAC, consist of companies (or even individuals) that wish to buy carbon removal services to offset their own emissions without any government requirement or incentive to do so. DAC has begun to attract attention in this realm as traditional offsets, which are heavily reliant on forestry projects, face increasing concerns about their quality (Badgley et al. 2021).
Another driver for voluntary market demand is the growing number of companies declaring net zero emissions targets (Black et al. 2021). Several have recently begun to directly procure negative-emissions services as a form of carbon offsetting and have collectively made purchases of several thousand tons of CO2 removal and storage via DAC (Shopify 2021; Stripe 2021).[2]
Prices up to $775/tCO2 have been publicly announced, although this is for extremely small volumes with a clear indication that the buyer expects future prices to be lower due to technology cost reductions.
These procurements have highlighted several challenges to scaling voluntary carbon markets: (i) a lack of well-established companies with mature carbon removal technologies that can participate in procurement processes, (ii) poor or inconsistent accounting regarding the longevity of storage of removed CO2, and (iii) confusion in the marketplace between carbon removal from the atmosphere and the avoidance of carbon emissions (Joppa et al. 2021).
As a technology solution for providing carbon removal and storage services, DAC paired with geological sequestration addresses some of these difficulties by offering pure removal with permanent storage. If technology costs continue to fall, DAC may therefore be well positioned for the growing voluntary market.
However, substantial uncertainty about future prices, market size, and reliability, together with competition from other lower-cost forms of carbon removal (such as high-quality forest offsets and biomass carbon removal and storage; Sandalow et al. 2021), make it likely that the voluntary market will play only a limited role in the DAC revenue stack beyond a certain scale.
Another complicating factor is that the emerging voluntary market may not accept DAC paired with certain forms of CO2 utilization such as EOR and CO2 recycling, preferring permanent storage instead. This would mean revenues from some forms of utilization and the voluntary market could not be claimed simultaneously by DAC companies, limiting the overall value of these options.
Government Policy Support for DAC
Government policy can support DAC through grants, production subsidies, tax breaks, or other mechanisms. The federal 45Q tax credit (CRS 2021) and the California Low Carbon Fuel Standard (LCFS)[3] are the primary policy support mechanisms available to DAC companies.
The 45Q tax credit is currently valued at $50/tCO2 for sequestered CO2 and $35/tCO2 for utilized CO2, while prices in the LCFS averaged $200/tCO2 in 2020. DAC projects can stack these revenues by claiming both under current policy, and this has directly influenced the economics of the first major planned DAC facility in the United States (McCulley 2020). The lower-value tier of 45Q can be claimed simultaneously with utilization, and EOR (but not other forms of utilization) is compatible with LCFS requirements.
However, both 45Q and LCFS have drawbacks as sources of revenue for DAC. In the case of 45Q, the credit is nonrefundable, meaning that a claimant cannot get more value from it than their current tax liability, which may be small in the case of newer DAC companies. Also, the facility must start construction before 2026, a challenging timeline for megaton-scale projects using novel technology. Legislation currently being debated in the US Congress would address these issues and increase the value of 45Q to as much as $180/tCO2, an important step toward making this policy effective.
The LCFS does not include these problematic features in its design, but it has the drawback of a relatively small market size of approximately 15 million tons of CO2 per year (45Q is unlimited in its effective market size). A small number of megaton-scale DAC projects seeking to sell credits into the LCFS could drive down prices substantially, undermining value.
While revenue support is tremendously important, other forms of policy are also needed to enable DAC to scale. These could include
- measures to reduce the cost of capital to finance plant construction (which is generally very high for novel technologies),
- public funding for the construction of CO2 pipeline infrastructure (enabling DAC companies to transport CO2 for sequestration or utilization at low cost),
- government procurement of products made with DAC-sourced CO2 or direct procurement of CO2 removal services (creating a market for DAC operations), and/or
- a federal mandate for a subset of companies to adopt or financially support DAC (Capanna et al. 2021; Meckling and Biber 2021).
Ongoing support for RD&D will also be needed to advance new concepts in DAC toward technological maturity and address unforeseen technical complications that may arise with DAC facilities at scale.
What’s Needed to Move Forward with DAC
The technological promise of DAC will be largely irrelevant to the climate crisis if the fundamental question “who pays?” cannot be resolved. Near-term support that blends the three broad categories described above will be a key part of the answer, despite the complexity that these multiple sources of revenue create for DAC companies.
While utilization and voluntary markets can play important early roles, large and sustained policy support is needed to truly bring DAC to the vast scale required by the accelerating climate crisis.
Jim Baird
It can pay for itself!
Carbonplan has observed growing interest in ocean-based carbon removal. Three of the eleven proposals in Stripes recent funding round interact directly with the ocean but went unfunded, including Thermodynamic Geoengineering (TG). As emphasized by the recently released National Academy of Sciences report on ocean-based CDR, fundamental knowledge around many ocean-based CDR mechanisms is lacking, and there is not yet a clear path to verification of removed carbon — if it’s even possible. Additionally, because many of these approaches involve shifting chemical equilibria rather than removing and storing particular molecules of carbon, they also require a new way of thinking about volume and permanence. Substantially more research and pilot-scale deployments will be needed to validate these approaches, they claim.
TG capitalizes on the fundamental scientific relationship between temperature and the solubility of carbon dioxide in its prototype and makes possible the verification of this relationship at minimal cost.
It validates an approach that is vital to the solution to climate change.
It is a new way of thinking about the volume and permanence of carbon dioxide removal.
Ninety three percent of the heat of global warming is going into the oceans which are thermally stratified with lighter waters near the surface and denser water at greater depth.
This configuration acts as a barrier to the efficient mixing of heat, carbon, oxygen, and the nutrients vital to aquatic life.
Efficient mixing of these ingredients, as TG provides, eliminates all risks of climate change and produces more than twice as much energy as is currently derived from fossil fuels.
The pycnocline is the boundary between the ocean’s mixed layer and the deep water, which can be breached by heat pipes that move heat from the surface to the deep through the phase changes of a low-boiling-point working fluid, like carbon dioxide or ammonia.
The thermally stratified ocean lends itself to the conversion of a portion of the heat of global warming to work in accordance with the laws of thermodynamics and to the movement through heat pipes of surface heat to a depth of 1,000 meters, where it is no longer any kind of environmental risk.
The distance from the equator to pole is about 10,000 kilometers but 1 kilometer below the equator, where seawater is at its greatest density, it has half the coefficient of expansion it has at the surface. And below that, the coefficient of expansion increases again to 8 kilometers where sea level rise induced by thermal expansion is about equal to it is at the surface.
Heat moved to an average depth of 500 meters therefore produces a quarter of the sea level rise due to thermal expansion and heat moved to that depth is unavailable to melt the ice caps, which is producing about 20% of current sea level rise.
Between the equator and the North Pole about 15 times more heat transfers through the atmosphere and the ocean annually, mainly through the atmosphere, as is produced by global warming. This transfer is causing the Arctic to warm 3 times faster than the rest of the planet, which is only one of the problems solved by shifting surface heat into deep water.
In the tropics carbon dioxide and oxygen are degassing from the ocean with the result atmospheric carbon dioxide is increasing and fish stocks are declining. Increasing carbon dioxide levels in the atmosphere produce more warming, which induces more offgassiing, which produces more warming etc.
At the higher latitudes the oceans are a sink for carbon and oxygen, but this sink too is being impeded by a rapid warming of the poles.
Resplandy et al 2019 gauged warming by the increasing levels of atmospheric oxygen and carbon dioxide as the oceans warm and emit these gases and found that between 1991 and 2016 the oceans gained about 22 times more energy than we are consuming.
Rau and Baird in our 2018 paper "Negative-CO2-emissions ocean thermal energy conversion" show that each gigawatt (GW) of continuous electric power generated over one year by TG, removes roughly 13 GW of surface ocean heat to deep water.
With TG, 7.6% of the tropical surface heat can be converted to work undertaken on land, which is an extraction of heat from the oceans. And the 92.4% sent into the deep returns in about 226 years and can be recycled. Therefore, in about 3000 years all the heat of warming can be converted to work and the waste heat of those conversions can be dissipated to space.
The average heat input at the surface is about 1 Watt per square meter but in the tropics, the surplus heat input is about 70 watts per square meter. But ocean temperatures of at least 26.5 °C through a minimum depth of 50-meters are cyclone fuel so, a cubic meter of the tropical ocean surface contains at least 4900 watts of heat.
There are 7 seasonal, tropical cyclone basins that spawn about 96 cyclones a year and about 20 of these become intense tropical cyclones, super typhoons, or major hurricanes that release around 600 terawatts of power each compared to the 409 terawatts Resplandy estimated the oceans gained due to warming between 1991 and 2016.
It is little wonder then that no less than Neil deGrasse Tyson: exerted scientists in a 2017 interview to figure out how to turn hurricane energy into electricity. Which is what TG accomplishes.
A sealed lab scale model producing 300 watts of power can demonstrate that offgassing of carbon dioxide and oxygen as the surface warms can be reversed by moving these gases from the atmosphere back into the ocean by cooling the surface. Which is the consequence of converting heat to work that is consumed on land and by shifting 92 percent of the heat into deep water from where it diffuses back to the surface at a rate of 4 meters/year.
The 300 watt prototype scales to 1 gigawatt plants that produce either hydrogen or green fields that produce electricity from the oceans that can decarbonize every sector of the global economy.
Jim Baird
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