It is impossible to discuss the transition to a low carbon future without considering the role of government and regulation. In fact, global government spending to support clean energy and carbon capture increased by more than USD500 billion in 2022 as more countries implemented new policies and offered subsidies.International Energy Agency, “Global government spending on clean energy transitions rises to USD 1.2 trillion since the start of the pandemic, spurred by energy security concerns,” December 2022.
“Government policy can be a powerful force in driving green innovation, both in the short and long term,” says Christoph Beuttler, chief climate policy officer at Climeworks, a Swiss start-up that captures carbon from the air for permanent storage.
Climeworks, whose first commercial plant went online in 2017 in Hinwil, Switzerland, removes CO2 directly from the atmosphere, rather than from the chimneys of industrial plants, where most carbon-capture projects operate.
The company’s direct air capture and storage (DAC+S) technology works by using fans to draw ambient air through shipping container-sized boxes. Filters inside absorb CO2. When the filters reach saturation, the system seals the boxes from outside air and applies heat generated from renewable energy to release the CO2. The trapped CO2 is then drawn away to permanent storage.
Beuttler sees government support as vital to the future of DAC technologies, which the UN’s Intergovernmental Panel on Climate Change has identified as necessary to meet global climate targets. He wants governments to create standards for monitoring and reporting on CO2 removal and for quantifying the results.
Regulations can define minimum standards for businesses and others to reduce greenhouse gas emissions, helping to create a level playing-field for all sectors to meet measurable targets. Economic incentives, such as tax breaks and direct subsidies, help start-ups to get on their feet, encourage businesses to invest in clean energy technologies, and drive behavioural changes for organisations and individuals.
Governments can also support or engage in research and development to advance clean energy and carbon-reduction science. Research such as climate modelling, materials science and other areas supports breakthroughs in clean energy, batteries, carbon capture and other technologies critical for mitigating the worst impacts of climate change.
New funding for a new industry
We can learn from existing legislation and how it impacts innovation to inform future policies and provide insights on what works and what needs improvement. For example, the tax breaks of the 2022 Inflation Reduction Act (IRA) in the US and the EU’s subsidies for cleantech offer competing solutions for spurring investment.
So enticing are the provisions of the USD375 billion IRA legislation that it has lured cleantech companies from outside the US to set up shop there. Some European solar, wind, battery, carbon-capture and carbon-removal companies find the IRA’s incentives for developing new projects in the US more attractive than the more complicated and slower-to-be-realised benefits offered by the EU. Another complicating factor is that it is up to individual European countries to establish rules for government investment in new projects. For example, although the EU’s Sustainable Finance Action Plan provides funding for more sustainable infrastructure projects, the governments of EU member states are often left to determine allocations and timing, and this can lead to bureaucracy and barriers to development.
The IRA significantly boosted existing US tax credits for carbon capture projects. The credit for capturing and using or storing carbon dioxide (CO2) from industrial processes jumped from USD50 to USD85 per tonne. The credit more than tripled for CO2 collected through direct air capture (DAC) from the atmosphere, to USD180 per tonne.Clean Air Task Force, “The Inflation Reduction Act creates a whole new market for carbon capture,” August 2022
Meanwhile, the Bipartisan Infrastructure Law, passed in 2021, provides USD3.7 billion for four regional DAC hubs, each capturing at least 1m tonnes of CO2 annually from the atmosphere and storing it permanently.US Department of Energy, “Biden-Harris Administration Announces $3.7 Billion to Kick-Start America’s Carbon Dioxide Removal Industry,” December 2022. This programme represents a massive investment in DAC, creating new opportunities for companies such as Climeworks, whose first commercial plant went online in 2017 in Hinwil, Switzerland, removes CO2 directly from the atmosphere, rather than from the chimneys of industrial plants, where most carbon-capture projects operate.
The company’s direct air capture and storage (DAC+S) technology works by using fans to draw ambient air through shipping container-sized boxes. Filters inside absorb CO2. When the filters reach saturation, the system seals the boxes from outside air and applies heat generated from renewable energy to release the CO2. The trapped CO2 is then drawn away to permanent storage.
Climeworks partners with Carbfix in Iceland, the site of its two largest plants, to store the CO2. “They inject our CO2 into Iceland’s basaltic bedrock, where it mineralises and is safely stored for thousands of years,” explains Beuttler. ”The process is fully measurable and verifiable, allowing us and our clients to state exactly how many tons of CO2 were permanently removed from the atmosphere.”
Climeworks is expanding to the US in the wake of the Regional Direct Air Capture Hubs programme, having received notification of selection from the US Department of Energy in the states of Louisiana, California and North Dakota.
Beuttler sees government support as vital to the future of DAC technologies, which the UN’s Intergovernmental Panel on Climate Change has identified as necessary to meet global climate targets.McKinsey & Co., “Now the IPCC has recognized that carbon removals are critical to addressing climate change, it’s time to act,” June 2022. He wants governments to create standards for monitoring and reporting on CO2 removal and for quantifying the results.
As the IRA illustrates, governments can also provide markets for technologies and services, such as DAC, that are critical for climate-change mitigation.
“Governments are vital in helping build markets for CDR (carbon dioxide removal) so the industry can scale to the volumes climate science clearly tells us we need,” Beuttler says. “Carbon removal needs to grow to several billion tons of annual capacity to neutralise unavoidable or historic emissions by mid-century. This translates to a trillion-dollar market and industry.”
Some of these technologies could face scalability challenges, but bringing together a variety of solutions, including carbon markets, could aid the energy transition.International Energy Agency, “Unlocking the potential of direct air capture: Is scaling up through carbon markets possible?,” May 2023
Investment insights
by Adam Johnson, Senior Client Portfolio Manager, Pictet Asset Management
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The transition to the a sustainable future is complex, challenging and disruptive, but it is essential. Governments have a key role to play in accelerating the transition and encouraging businesses to increase their positive impact.
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Our Positive Change team believes that investing in both the social and environmental transition allows investors to play a role in driving and encouraging real change. If companies have positive impact or the potential, willingness and ability to improve their impact, we believe they should be considered by investors looking to invest in the transition to the sustainable future. Through targeted engagement and active ownership, we believe that investors can have investor impact, encouraging and accelerating improving alignment to the SDGs and mitigating ESG risk.
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Companies which develop or deploy carbon capture have the potential to improve the impact of high emitting industries, reducing negative externalities and creating value for investors. We see such technologies as an important building block towards achieving net zero. The right regulation could further support and encourage this transition.
