This Startup is a Breath of Fresh Air

Welcome Shareholders,

Every Sunday, We'll highlight one company to do an in-depth breakdown of their business, financial situation, and whether or not it's a worthy investment opportunity - large or small. In today's edition, we'll break down a sustainability-focused startup that's been making waves by combating climate change.

So sit back, grab a snack, and enjoy!

Many have dubbed the next ten years as 'the climate decade,' which could be pivotal in meeting the ambitious sustainability targets set out many years ago. Recent Environmental Hazards coupled with stakeholder demands have accelerated the need for companies to look at their ESG goals beyond purely making pledges. Zurich Based Climeworks, which aims to capture emissions directly from the air, could be the first of many companies to develop a solution that addresses the growing need to reduce emissions to address climate change. 

What is Climeworks? 

Founded by two Swiss engineers in 2009, Climeworks aims to combat climate change by capturing Carbon from the air. The company has achieved this by building the first commercial plant to capture carbon dioxide directly from the air. Climeworks' current plant can capture up to 4,000 tons of CO2 annually, which is roughly equivalent to the emissions produced by 900 cars. While this is a tiny fraction of the total carbon emissions produced globally, Climeworks says it aims to capture 1% of the total emissions by using its technology. This would involve building 250,000 carbon capture plants worldwide, which is an ambitious target, to say the least. 

But does the world need direct carbon capture solutions to combat climate change when nature-based solutions have dominated the market for the better part of a decade? Let us take a closer look. 

Reaching Net Zero 

The COP26 summit, conducted in November 2021, was a pivotal moment when governments from around the world committed to reducing emissions to combat the dangers of climate change. In order to limit the temperature increase to 1.5 °C above pre-industrial levels, governments committed to reducing carbon emissions by 45% by 2030 relative to the 2010 level and to net zero by 2050. 

While governments will no doubt influence the climate transition through policy initiatives, it is, in fact, the Private Sector which has and will lead the charge in the future. Many of the world's largest companies have voluntarily announced new plans to combat global warming in recent years. Globally, 5,200 businesses have already pledged to meet their net-zero targets by 2050, and over 450 banks, insurance providers, and investors, who collectively represent $130 trillion in assets, have committed to making their portfolio climate neutral in the same period. 

Analysts at McKinsey expect that the Capital spending rewired to reach net-zero emissions is expected to increase from $5.7 trillion annually to $9.2 trillion over the next three decades. The estimated increase is equivalent to $105 trillion over 30 years, and such a drastic shift in capital allocation will likely trigger innovation & growth, reshaping entire industries in the process. 

The Current State of Affairs 

Companies that have set out a target to reach carbon neutrality have broadly relied on a few measures to reach their targets. These include- 

Streamlining Production Processes - The first and most obvious solution is to work on optimizing the existing supply chain to reduce the carbon footprint. This involves a combination of recycling existing inputs as well as innovation in material sciences leading to lower carbon emissions. Companies like Apple and Coca-Cola have been working with their suppliers to change the production processes in recent years to be more Carbon efficient. Coco-Cola has been working with suppliers to modify its packaging while streamlining its refrigeration process to reduce total emissions. Apple has taken this one step further; in addition to reducing the carbon footprint and waste from the packaging, the company has also focused on recycling and reusability. The company has been working with its manufacturing partners to sustainability dispose of/recycle older products, retrieve materials like Rare Earth Minerals & Aluminium, and build new iPhones and iPads using these materials.  

Energy Efficiency - Technology and Software companies primarily engaged in shipping services rather than products have focused on reducing energy consumption by investing in energy-efficient equipment and infrastructure. For instance, companies like Salesforce and Atlassian have started investing in their buildings and infrastructure to run on renewable energy sources like Solar and Wind to cut carbon emissions from traditional fossil fuels. Furthermore, these companies have also worked with their vendors and suppliers to reduce emissions by efficiently managing their supply chain. 

Carbon Removal - The third and most popular way for large corporations to meet their net zero targets in such a short time frame is through large-scale Carbon Removal Projects. More than half of the 1 billion tons of Carbon currently being offset (in the form of carbon credits) are related to land use changes, whereby companies fund to invest in the restoration and protection of forests and natural ecosystems, especially in less developed social demographics across South America, Africa, and Asia. The benefits are self-explanatory - Reforestation and Conservation is a natural solution to capture Carbon while offering additional, critical ecosystem benefits, including protecting biodiversity, rebuilding eroded soil, and improving groundwater quality.  

While existing solutions are a great first step, they are flawed and may not lead to the desired outcome of combating climate change. 

Let us tackle each measure to see the drawbacks and why it's imperative to take a more direct approach to reach carbon neutrality. 

Why Existing Solutions are Flawed 

The carbon neutrality solutions of today are half-measures at best and outright virtue signaling at worst.  

For instance, while reengineering the production process to use less Carbon through recycling and reuse can substantially reduce emissions compared to the previous decade, there are underlying issues in the industry that prevent it from being an effective solution. The amount of Carbon being generated on an absolute basis will be higher as demand continues to rise exponentially over the next few decades. 

Two factors that are driving strong demand are the growth in the population and the improvements in the quality of life. 

• The United Nations forecasts that the total population of the world should increase by 2 billion over the next 30 years and peak at 11 billion by 2100. 

• Furthermore, the global poverty rate decreased from 42.6% in 1981 to just 8.7% in 2018 on the back of technological advancements and industrial development. As global purchasing power continues to rise and more economies transition to a capitalistic-centric economy, consumption is expected to surge. 

While the current solutions of streamlining production will no doubt cut emissions comparatively, companies will need to go further as time progresses and demand continues to rise.  

Similarly, other measures like improving energy efficiency through clean energy investments and working with supply chain partners seem more like half steps than effective solutions to reach carbon net zero. Investments in Solar and Wind still take 6-10 years to break even and have a useful lifespan of about 25 years. Disposing of older solar panels and dismantling wind farms could generate additional Carbon, implying that the solution can only work in the interim. Furthermore, while vendors and suppliers may commit to meeting the goals set out by these companies, it is hard to monitor and keep track of their progress. This would involve conducting periodic audits, which can be expensive and time-consuming and isn't the best solution for smaller firms. 

Finally, While companies are touting Investments in Wildlife and Forest Conservation to Offset Carbon Emissions, this is perhaps the most ineffective solution to combat carbon reduction. In theory, these investments look like a win for all parties involved. The companies keep their promise to investors by shrinking their carbon footprint. Impoverished communities receive financial aid while preserving forests to offset carbon emissions.

However, climate experts have argued that avoiding deforestation isn't the same as removing greenhouse gases from the atmosphere. Furthermore, it can be hard to keep track of forest conservation and reforestation efforts, as trees can die, be cut down, or burnt over the course of their lifetime, making it hard to track how much Carbon was removed. 

Another problem that arises with Offsetting carbon emissions is the carbon credits market. While companies like Amazon, Nike, and Apple can buy carbon credits to mitigate emissions, it isn't sustainable over the long term. If everyone company chooses to offset Carbon by buying credits to reach their 2030/3040/2050 goals, there wouldn't be enough credits to go around. Long-term prices of Carbon Credits are expected to surge tenfold by 2030, which would mean that it would be cheaper in the long term for companies to remove emissions rather than rely on offsetting them.  

With the existing solutions being a half measure at best, it is imperative for companies and governments to tackle carbon emissions through a direct approach. This demand could propel Climeworks Carbon Capture Solution, which is more efficient and effective at capturing Carbon from the air. 

Direct Carbon Capture

While the prospect of drawing Carbon from the air can seem like a daunting prospect, Climeworks has come up with an effective solution developed over a decade to combat emissions. 

The company achieves this by building a large-scale direct air capture plant comprising a modular system of Carbon Dioxide (CO2) collectors. Each CO2 collector is roughly the size of a small car and is modular, enabling the company to stack it to build small or large plants based on the requirement. On the front of each collector, there are large ventilation blinds, while the back of the box comprises 12 fans that pull air through the box. 

To remove Carbon from the air, the company's CO2 collectors draw air into the plant, where a selective filter material binds the CO2 to the moisture in the air. Once the filter is saturated with CO2, it is heated to 100°C (212°F), which breaks down the bond between the filter and the CO2. This is collected as concentrated CO2 gas, while the CO2-free air is related to the atmosphere. This process repeats itself several times per day after each cycle is completed. Since the filters are reusable and can last for several thousand cycles, the process is seamless. 

The captured CO2 has various applications, both niche and broad. For instance, Climeworks has previously worked with companies to sell CO2 to make fizzy drinks, carbon-neutral fuels, or fertilizers. The long-term solution is to store the Carbon underground. This is done through the company's partnership with CarbFix, whereby a mix of CO2 gas and water is injected into suitable rock formations, with a chemical reaction turning the Carbon into stone. 

The company's solution also has the benefit of being simple and accessible to deploy nearly anywhere in the world. In addition to the company's modular CO2 collectors, the only other inputs required are a renewable energy source and a suitable geological site if the CO2 is to be stored rather than sold. 

Cost Vs. Benefit 

Climeworks' solution is technically superior and more effective than the existing solutions deployed by companies. However, the primary hurdle that the company could block its growth over the next few years is the costs associated with the process compared to other solutions that are much cheaper. 

For instance, the current incentives offered by governments to incentivize reducing carbon emission is paltry in comparison to the cost involved. Climeworks currently charges its customers $1000 to offset one metric ton of Carbon from the air. By comparison, the tax write-off benefits associated are at a fraction of the cost. This doesn't even account for the recent increase in cost pressures due to supply chain issues and inflation, which has driven the prices of Steel, Cement, and Electrical Hardware higher. If inflation continues to be a multi-year problem, the company could face additional challenges. 

Even with the new measures introduced in the Inflation Reduction Act by the Joe Biden administration, the tax credits to offset a ton of Carbon have only gone up from $50 to $85 for Carbon stored underground. The reason companies still resort to carbon offsets to reach their net zero targets is that the prices are very low compared to direct carbon capture costs. These credits cost companies between $3-$5 per metric ton of carbon offset. Even if prices rise to $200 by 2030, as experts anticipate, it is still a far cry from the prices being charged by Climeworks to remove emissions on a comparable level. 

Reaching Scalability 

If the costs of direct carbon capture are so high, why should anyone company or government invest in the solution? It comes down to the technological benefits, such as scalability and efficiency, coupled with the long-term economies of scale that will make the company's solution more effective over the long term. 

Direct carbon capture is significantly more efficient and effective compared to traditional nature-based solutions, resulting in achieving scalability and using less land. Climeworks estimates that on a land area of 0.42 acres, the company's plant can remove up to 4,000 tons of CO2 from the air annually. A forestation approach would result in 220 trees being planted in the same area, removing total emissions of 4.62 tons of CO2 per year. This suggests that the Climeworks solution captures close to 865x more Carbon in the same footprint, making the solution rapidly scalable over time while also ensuring that less land is used in the process. Climeworks carbon capture technology also has the benefit of quantifiably measuring the total Carbon that it can remove from the air compared to Nature Based Solutions, which are much harder to track. 

Another factor that comes into play over the next two or three decades is the cost reduction due to economies of scale and improvements in the capture process. The company plans to achieve lower costs by building larger plants and making its process more efficient to improve margins. While the current cost of removing a ton of CO2 from the air is $1000, it is emitted to be halved to $500 by 2025. This is expected to fall further to $300 a ton by 2030 and $200 per ton by 2035. As governments ramp up regulatory efforts and the price of carbon credits starts rising, the eventual benefits of adopting the Climeworks solution could potentially outweigh the costs associated. 

From Millions to Billions

Climeworks' current solution is nascent in terms of potential growth and commercial application. The company currently caters to high-profile corporate customers, including Microsoft, Stripe, Shopify, and individuals but could become a front-runner in a multi-billion dollar industry if things pan out. There are a few factors that could help achieve this feat-

Climeworks opened its first commercial air carbon capture and storage plant called Orca in Iceland in September 2021. The facility, which comprises high carbon capture modules from 44 shipping containers with filters inside, is expected to remove 4,000 tons of CO2 annually. The company is planning to build the 'Mammoth,' which is its newest and largest direct air capture and storage plant. Mammoth is the company's 18th carbon capture project and its 2nd carbon plant. Instead of using eight modular filters in the Orca plant, the company plans to use 72 in its Mammoth plant, resulting in a carbon capture capacity of 36,000 tons annually. The company expects the construction of the facility to be completed in the next 18-24 months, which will be a significant milestone in displaying that the technology has the potential to be commercialized. It is no secret that there is significant demand from governments and corporate customers to deploy direct carbon capture solutions. To get a sense of the potential market available, one only needs to look at the net zero targets set by the US and the European Union and the efforts required to achieve them. The United Nations has estimated that roughly 10 billion tons of CO2 must be removed from the atmosphere per year until 2050 to meet the net zero targets. Assuming that the cost associated with capturing a ton of Carbon comes down to $100 over the next decade, this itself represents a $1 trillion market opportunity annually.

And this is only assuming that governments will successfully reduce their emissions until that period. If they fail to meet their targets, the potential addressable market could be many magnitudes higher when it eventually needs to be addressed two or three decades later. All in all, it is pretty clear that significant investments and incentives will need to be deployed to greatly incentivize large-scale carbon capture projects, which could be where Climeworks derives the majority of its value in the future. Finally, while the upside is potentially generating several hundred billion dollars over the next two decades, the downside is limited compared to other industries due to the recision reliance of the business. 

Now, critics will argue that a recession could lead to a freefall in valuations and funding across the Sector as corporations look to cut unnecessary spending as growth slows and margins decline. After all, this is exactly what happened across the cleantech sector during the great financial crisis in 2008 and the Eurozone crisis in 2012. However, the Carbon Capture market and Clean Tech, in general, are vastly different and more mature industries compared to the previous decade. With an increased urgency and awareness to wean the world off fossil fuels and net zero targets looming large, companies don't have the luxury of time as they did in previous downturns. Furthermore, regulatory pressures from governments worldwide will only increase the urgency of the transition, making climate spending an essential rather than a luxury.  

Bottom Line 

Now more than ever, climate-conscious corporations and governments are making significant investments to reduce their emissions and meet their net zero goals. However, many existing solutions, like streamlining the production process, using renewable energy, or investing in reforestation projects to combat emissions, are half-measures and may not meet their long-term targets. Climeworks' direct carbon capture technology is a leap forward, delivering quantifiable results by capturing more emissions in a smaller footprint than alternate solutions. While the company still needs to solve the challenges of scale and high entry price, investments and incentives from governments could help close the gap, enabling the company to reach its goal.