With the marriage of corporate Environmental, Social, and Governance (ESG) commitments and government financial infusions on the federal and state level, demand for carbon offsets is on the upswing. In order to meet the pressure of Net Zero and similar action plans with deadlines in the next five to 25 years, startups are melding the advancement of breakthrough research, technology, and climate-positive legislation (such as President Biden’s Inflation Reduction Act) to bring the world solutions.
Carbon scrubbing, for example, is the first nationally recognized method of emission reduction through sequestration. Though there are businesses and coalitions worldwide that target scrubbing, within the United States, two of the largest advocates are Frontier and the First Movers Coalition. Both initiatives are extending their investment reach to new ventures, especially those which are exploring natural capture systems. Carbon mineralization, kelp-sinking, and biochar are a few up-and-coming examples undergoing feasibility studies, ensuring they can meet the two greatest challenges in long term removal and storage: scale and cost.
Startups such as Charm Industrial, 4401, TravertineTech, and Running Tide have all taken different approaches to tackling emission reduction and are making significant traction. However, there is some disconnect between investors and new entrants regarding quantifying demand for carbon removal: Is there a need? Is it too early to invest? Is the technology efficient, scaleable, and is there validity in the claims made about efficacy? Why invest in nascent technology rather than improving existing ones (such as air capture)?
The reality is – as mentioned by Peter Reinhardt in an a16z podcast – we are at the bottom of the demand curve, but companies like Charm are selling out of ‘credits’ until at least 2025 at their current capacity. For efforts that are using earth’s own natural processes (just sped up 10,000x+), there is great potential for early investment. To put a number on VC capital flowing into the space, Pitchbook reported that Q2 of 2022 saw the highest-ever VC investment in carbon capture startups, with $841.5 million split across 11 deals. On a global scale, PwC reported that climate tech funding in 2022 represented over a quarter of every venture dollar invested in 2022: a sum of over $50 billion this year alone.
Knowing that deep-pocketed companies partnered in Frontier and the First Movers Coalition have taken steps towards carbon neutrality, what about newly-created startups? Should they be expected to follow suit?
As the public becomes more aware of carbon credit systems and the sphere of carbon containment and storage, advocates have voiced that ESG efforts are not solely reserved for Fortune 500 companies. The debate surrounds ESG strategizing for small businesses strapped for cash – should they be held to the same standards as larger corporations with enormous budgets? A recent Harvard Business article looks at the advantages startups have in constructing an aligned growth strategy as they mature rather than scrambling to rework when they have grown large and complex. Thinking from this perspective, ESG strategies shifting from differentiation to operational necessity is a likely scenario. Startups who start planning early will bloom, and investment dollars will follow – fueling the next generation, building a cleaner, greener world, and driving demand for carbon credits being issued by a variety of new players in the industry.
