Squaring circular economics

PFI 757 - 15 Nov 2023 - 28 Nov 2023
5 min read

The transition economy is throwing up fascinating and perhaps improbable technical solutions, many of which appear to be getting funded under the Inflation Reduction Act in the US. Direct air capture is one that involves sucking carbon dioxide out the atmosphere. The sector got a big boost this month when BlackRock decided to invest US$550m. A new financial asset class is being born, carbon dioxide removal credits, an offset mechanism for carbon producers such as airlines.

Direct air capture (DAC) is one of a range of ideas being put forward to transition to a net-zero environment alongside renewables, battery storage, hydrogen, carbon capture, etc. It has a simple logic, just suck carbon dioxide out of the sky. Big producers of carbon can then offset the carbon they produce against the carbon taken out of the atmosphere elsewhere. A neat solution.

To be honest, personally I am not in favour of sucking elements out of the atmosphere. Indeed, I wonder about the amount of water needed to produce the new forms of hydrogen. That said, I am not a scientist. And when someone such as BlackRock puts up US$550m for one DAC scheme, Occidental's US$1.3bn Stratos project in Texas, it is time to take note.

As Rohan Dighe, a carbon capture analyst for Wood Mackenzie, told local newspaper the Houston Chronicle, the BlackRock deal "increases the likelihood of its Stratos project successfully being built in comparison with its competitors. It signals that banks may start to see DAC as a serious investment opportunity, which is exactly what the DAC space needs to keep the momentum going from technology development to actual execution and deployment."

In circular economic terms it is an inefficient way of getting to net-zero. Presumably, the cost of producing CO2 is a lot less than sucking it back. Occidental has a range of scenarios for the carbon dioxide removal (CDR) credit market depending on how it can reduce the costs of DAC given the 500,000tpa Stratos project, which is already 30% completed and should be online in 2025, is already over budgeted costs. At US$450 a tonne, Occidental sees demand for 10mtpa of CDRs in 2030, at US$400 a tonne 30mtpa, and at US$300 a tonne 50mpta – that is 6%–8% of the corporate carbon credit portfolio market.

It is difficult to see how the world could simply suck up as much carbon as it produces. But CDRs could be a useful tool for consumer-facing industries such as airlines. Sustainable aviation fuel (SAF) is another new net-zero technology which is gaining traction but struggling to get an economic foothold. Occidental makes the point that CO2 abatement using SAF costs US$750 per tonne and DAC CDRs are expected to cost less.

SAF has a further interesting problem – feedstock supply. Where is all this sustainable fuel going to come from? In the UK, for example, it is due to come from waste but there is not enough waste in the market, particularly as the fuel yield is low, 10%, with 1m tonnes of waste able to produce 100,000 tonnes of fuel. Occidental makes a further point though, captured CO2 could be used in the production of SAF – that would make the process more circular, although it is a long way off.

Occidental's senior VP and president of operations Richard A Jackson said "longer term, cost-effective access to atmospheric CO2 to create innovative new fuels or other products can provide a pathway to lower carbon materials and commodities for many industries". Occidental is planning its second DAC, the 30 megatonne hub in South Texas, which has provisional government grant backing from the IRA, and will be funded in 2024.

Certainly neat and if possible cheap technological solutions are required in the current environment.

NuScale, designer of the only small nuclear reaction (SMR) model that has been approved by the US Nuclear Regulatory Commission, last week dropped out of developing its 6x462MW SMR project in Utah due to rising costs. The target price for the Carbon Free Power Project (CFPP) scheme rose in January from US$58/MWh to US$89/MWh and several towns in the area have pulled out of the project, which was being procured by the Utah Associated Municipal Power Systems (UAMPS). Government grants can only go so far. The company has received US$600m from the Department of Energy since 2014 to support the design, licensing and siting of the project.

The world has gotten used to zombie interest rates over the last 15 years and now rates are back to their norm. Orsted pointed out in its bleak statements last month that interest rate levels were even more problematic than construction inflation. But it is a time to be optimistic. While many will fall by the wayside, all it takes is a few good ideas and a few innovative and enterprising developers.