ClearBridge Investments analyst walks through the nuances and the potential to move the needle on climate change
With less than three decades left to honour the global pact of net-zero emissions in 2050, both the public and private sector are pulling out all the stops where they can. But as all signs point to elevated global demand for energy in the coming decades, and broad-scale adoption of renewable energy solutions still a long way off, the world can’t divorce itself from fossil fuels just yet.
One way to pick up the slack is through the use of carbon capture technology. In its federal budget earlier this month, the government introduced an investment tax credit for carbon capture, utilization, and storage (CCUS) technology.
“By lowering the carbon footprints of Canada’s traditional energy producers, the credit aims to ensure that they are a stable source of cleaner energy both domestically and internationally,” the budget said.
With the tax credit, the federal government said it aims to “[secure] Canada’s place as a leader in CCUS.” For investors who want to support the fight against climate change, that might sound like an interesting opportunity to make an impact … but first, they need to understand how it works.
“There are two big categories of carbon capture technology: there’s stationary carbon capture, and there’s direct air carbon capture,” explains Dimitry Dayen, Senior Research Analyst for Renewables and Environmental Services at ClearBridge Investments, specialist investment manager of Franklin Templeton, who recently wrote a white paper on the topic.
As Dayen explains, stationary carbon capture technology pulls from fixed sources of carbon emissions, like cement manufacturers, power plants and large industrial processes. Aside from being further along in their development, stationary technologies tend to operate more economically because they capture carbon emissions at the source, before they’ve dissipated and spread through the atmosphere. After the carbon is captured, it’s transported to a storage location, usually underground, where it will stay for a long period.
On the other hand, direct air capture (DAC) is focused on absorbing carbon that’s already in the wind. A more nascent and avant-garde technology, it faces the issue of having to capture carbon dioxide at very low atmospheric concentrations, estimated at roughly 400 parts per million or 0.04%. But unlike stationary technology, it can be set up across more locations where geologic storage is available, and it has the potential to capture emissions that were generated decades or even centuries ago.
“Conceptually, direct air capture is more scalable because it can actually reverse climate change, which makes it a uniquely interesting type of technology that’s being investigated right now,” Dayen says.
Generally speaking, the incentive for companies to invest in carbon capture technology depends to a large degree on how much it will cost to operate. Focusing on stationary capture technology, Dayen cites a December 2019 report from the National Petroleum Council in the U.S., which suggests at a price of US$100/ton of carbon, it could be economic to capture and store as much as 8.5% of U.S. CO2 emissions, equivalent to roughly 450 million tons.
DACs face more challenging economics than stationary capture projects. At one pilot plant in Iceland set up by a company called Climeworks, operating costs are pegged at US$700 to US$900 per ton, though that’s eventually expected to decline into the US$100-US$200 range as it builds out into a larger processing complex. Another company based in Canada, Carbon Engineering, is working on a joint venture to build a large-scale facility in Texas; ClearBridge estimates operating costs there are in the US$200-US$300 range, but Carbon Engineering believes it can capture carbon at US$100 per ton as it scales and replicates.
How big is the market for carbon capture technology? According to one model, 7.38 gigatons of CO2 per year will need to be removed from the atmosphere. Assuming that carbon is priced at US$137 per ton – that’s the national carbon tax in Sweden, which is the highest in the world – Dayen calculates that the carbon capture technology can potentially amount to a US$1-trillion total addressable market.
“If you estimate the carbon price to be US$100 per ton, that’ll come out to something just north of US$700 billion per year,” he says. “So this could be a very large industry.”
But because the carbon capture landscape is tilted more towards stationary technology than DACs, it creates a dilemma for ESG-minded investors: getting exposure to carbon capture now means enabling heavy carbon-emitting companies that have the greatest incentive to build and use the equipment. In his paper, Dayen says oil majors are leaders in global CCUS investments, with Exxon, Chevron, and Total among those at the forefront.
In Canada, he says oil sands companies are also taking an interest as they make collective plans to get to net zero by 2050. Suncor, along with some other companies, has entered into a $1.3-billion agreement with an American company called Air Products, part of which will involve developing carbon capture projects to facilitate the generation of “blue hydrogen”— hydrogen made from natural gas with CO2 emissions captured. Enbridge also recently got approval from the Alberta government to pursue development of a CO2 sequestration hub in Edmonton.
“It's still a small venture relative in the context of the company, but they do have ambitious plans to grow that side of the business significantly over time,” Dayen said.