3 Innovative Funding Solutions for Carbon Removal
How Advance Market Commitments, innovation prizes and venture philanthropy can give us more shots on goal to combat climate change
This is a special co-authored article written by Johannes Lohmann, Max Bode, and Na’im Merchant. Johannes Lohmann is specialized in financial, social and behavioral innovation. Max Bode is an Adjunct Professor for innovative finance and program design at Georgetown's McCourt School of Public Policy. Na’im Merchant is a carbon removal consultant and creator of The Carbon Curve newsletter. The views expressed in this article are the authors’ alone.
If we want to stabilize the global climate, we need to remove carbon from the atmosphere on a vast scale. Keeping global temperature increases ‘well below’ 2°C and ideally at 1.5C does not just entail cutting greenhouse gas emissions: we will need to remove a lot of carbon dioxide from the atmosphere.
Despite splashy announcements of the world’s largest direct air capture facilities in Iceland, carbon removal remains in its infancy. The facility in Iceland, for example, only removes 4,000 tons of CO2 per year. That’s a far cry from the estimated 10 billion tons of CO2 that will need to be removed globally each year by 2050 to meet the Paris Agreement’s goals. Ideally, that removed CO2 should be stored away for centuries or longer to avoid carbon sinks from becoming problematic carbon sources down the road. Reaching the 10 billion ton mark by 2050 means a growth rate of roughly 50% per year. That’s a considerably faster growth than solar (40%) or wind (37%) achieved between 1985 and 2015.
Currently, no technology exists that can remove CO2 at such a large scale, and funding is highly uncertain. This uncertainty hampers investments into R&D. So far, most carbon removal efforts have been funded by a handful of pioneering companies like Stripe, Shopify, and others willing to make voluntary purchases at premium price points. Revenues could also be generated by the sale of captured CO2 in products like building materials and other products. However, voluntary carbon markets are inherently uncertain, and utilizing captured CO2 in products will be insufficient for meeting climate targets.
To fund large-scale carbon removal, we need other solutions. While proposals to expand tax credits are being considered and government procurement of carbon removal is being contemplated, today’s investors in R&D cannot rely on unpredictable future policy changes. If we want to give carbon removal a real chance, we will need robust incentives for innovation, in addition to policy action.
Fortunately, we already have excellent funding tools at our disposal. Those tools were built to fund other types of innovation for the public good, for instance to reduce poverty and improve public health. We just need to adapt these for the monumental task of removing CO2 from the atmosphere.
In this post, we provide an overview of some of these innovative funding mechanisms:
A philanthropic version of venture capital (“venture philanthropy”) is needed to facilitate a broad range of innovative efforts
Innovation prizes can incentivize the most promising approaches to scale up
Advance Market Commitments can usher in a thriving carbon removal market, where the most viable approaches are employed at scale.
Note that all of these solutions could involve public, private, and philanthropic funding.
Why we need innovative funding mechanisms
The scale and urgency of the challenge we face calls for many “shots on goal”. As much as $1 trillion is needed to fund the annual removal of 10 billion tons of carbon that we will likely need to achieve by 2050 to keep warming to well below 2°C. Meanwhile, it could take many years, potentially longer than a decade, for any long-term carbon removal solution to reach real scale. That is why we should simultaneously develop and test multiple approaches. While we are still uncertain how many solutions we need and where they will come from, the more smart people are working on carbon removal, the better.
Given the nascent state of the carbon removal industry, investing is a risky and opaque proposition. As a consequence, innovators are reliant on scarce one-off deals to fund their efforts. If we want carbon removal to be a meaningful part of global climate efforts, that has to change.
Innovative financial mechanisms could jumpstart meaningful advances in carbon removal. Such mechanisms should ideally:
Furnish risk capital to rapidly develop and scale many different carbon removal solutions before they are commercially viable
Create a clear route to a large market so that carbon removal innovators are not reliant on one-off deals
Provide transparency, reliable verification, and strong incentives to ensure that funded initiatives result in long-term removal
1. Venture philanthropy can create a wealth of approaches
Before carbon removal innovators are anywhere near ready to sign contracts worth hundreds of millions of dollars, they need money to experiment. As more funds become available for climate technology innovation in general, carbon removal should not be forgotten.
In these early stages of the market, venture philanthropists can play a vital role. Venture philanthropy would provide grant funding (and potentially return-seeking capital) for early innovation and push innovators towards achieving measurable outcomes as the technology reaches maturity. Commercial venture capitalists will undoubtedly have an important role to play, but since it is uncertain whether carbon removal will ever be fully commercially viable, a philanthropic mindset will be crucial during the early stages.
We can learn something about successful venture philanthropy from the fight against poverty. USAID’s Development Innovation Ventures (DIV) engages in what we would think of as a philanthropic VC, investing money into early ventures that aim to reduce poverty. Nobel Prize-winning economist Michael Kremer estimates that, in its first years, USAID DIV generated $17 in social value for every dollar invested, an astonishing social rate of return.
USAID DIV’s early success provides helpful clues for what might work for early-stage carbon removal efforts. To ensure rigorous decision-making, its investments are evaluated by a panel of experts and academics. To ensure diversification, DIV makes broad investments and uses a tiered investment approach, providing seed funding to many small but promising innovations. While it’s unlikely that any given investment will succeed, a few in the portfolio will. As investments mature, they become eligible for increasingly larger sums of money, rewarding solutions that scale.
Venture philanthropy can go beyond early-stage grant-making, as demonstrated by the Global Innovation Fund. Small early-stage investments can be made to many carbon removal innovators, and larger investments can be made once some of those innovators have a clear path to commercial viability. Gains from those investments can then be recycled back into the ecosystem.
Venture philanthropy efforts can be particularly powerful if they pool funds from a number of funders. The Global Innovation Fund, for example, is funded by the governments of the US, the UK, Australia, Canada and South Africa as well as several foundations. Joining forces can allow funders to leverage their collective capital and know-how and build a bigger, more diversified portfolio. A group of venture philanthropists could explore many different solutions together, lowering the risk and ensuring that only the most promising ideas get funded.
2. Innovation competitions can provide incentives to scale
As the field of potential solutions grows, innovation competitions can provide large incentives for the most promising efforts. In fact, such competitions are already fostering innovation in carbon removal. Just last year, Elon Musk announced a carbon removal X Prize competition, with $100 million at stake. Such prizes are likely to produce a flurry of innovative solutions that strive to meet clear standards for success. Crucially, winning solutions would need to demonstrate the capacity to operate at a large scale.
We hope the existing carbon removal prizes are just the beginning of a wave of funding for innovation in this space. Ideally, competitions would get bigger and go beyond one-off funding events to sustain continued innovation and operations. The longer we wait to create a carbon removal market, the more carbon we will have to remove and the longer it will take to drive down costs. Despite growing investment in carbon removal research, development, and deployment (RD&D) by the Department of Energy, it still falls well below the recommended public sector innovation investments in carbon removal. While they wait for longer-term funding and a more mature market, prizes can be a lifeline for innovators.
3. Advance Market Commitments are the ideal long-term solution
We consider Advance Market Commitments or AMCs to be the best funding mechanism to usher in a large-scale market for long-term carbon removal. In AMCs, a group of funders offer to purchase a set quantity of a good at a certain price conditional upon predetermined criteria of success. This effectively guarantees the creation of a market once providers are ready to produce the desired quantity at the predetermined price. AMCs are suited for carbon removal because the uncertainty over funding and market potential impedes the investment in solutions that would improve the lives of many people.
AMCs are best known for funding the broad roll-out of cheaper pneumococcal vaccines to hundreds of millions of people in developing countries. Governments and other philanthropic donors set out $1.5 billion as a commitment of funding for pharmaceutical providers who could roll out the vaccines quickly and cheaply enough. Operation Warp Speed, for which the US promised to purchase COVID vaccine doses upon FDA approval, is a more recent example of a successful AMC-like push for innovation.
If the world is serious about carbon removal, we need large-scale AMCs to create a thriving market sooner rather than later.
Just as past AMCs have rapidly mobilized vast efforts to overcome technical, logistical and pricing hurdles, they could also serve as a powerful driver to shape a burgeoning carbon removal market at speed and scale. Some of the key considerations for adapting AMCs to carbon removal are already discussed in a previous blog post. AMCs may ultimately make innovation prizes obsolete. However, given the urgency, innovation prizes could play an important role preparing carbon removal solutions for true scale.
Bringing all hands on deck
We need carbon removal solutions, and we need them fast. Since we’re essentially starting from scratch and need to scale very quickly, we need many shots on goal by innovators and funders to bring all hands on deck. That means supporting a broad range of efforts and incentivizing them with the promise of substantial amounts of funding. Government support will be crucial for this, but given the urgency of the problem, we need additional and diverse funding sources, including public and private funds.
We believe that Advance Market Commitments are the best long-term funding solution we have. Since it may take a while to get to an AMC with sufficient scale, we need intermediate solutions that help build that broad range of efforts. We have described two such intermediate options here: innovation prizes and philanthropic venture capital, which could complement AMCs and build a thriving market of solutions from the ground up.
We have the tools to make the change we need happen, but much work remains. Thanks to some of the pioneers mentioned in this article, we are off to a running start. Now, we need to rapidly structure and implement the funding mechanisms that will power carbon removal. To quote Nick Stern: “Why are we waiting?”
This article was written with the input of Simon Black, Climate Economist at the International Monetary Fund, and Greg Larson. The views expressed in this post are the authors’ alone and no compensation was received for publishing it. To receive regular ideas and analyses on carbon removal and the new carbon economy, please subscribe. If you enjoyed this post, please share it with friends. And if you’d like to get in touch, you can find Na’im on LinkedIn and Twitter.
Great post! Totally agree we need to be going bigger/bolder and there's a role for innovative finance in all the ways you outline, and others to boot. It's so hard for people to wrap their heads around the role that (unimpeachably near-permanent/additional) CDR will be playing decades from now. In part because even experts underestimate the compounding effect of learning rates / cost reduction as you go up the deployment curve - so people are gobsmacked when you see just how low cost structures can get for solar/PV, LIB, HIV drugs, etc etc.
Agree with Lian's comment that government $ is crux as that scaling happens, and Carbon 180 is wisely laser-focusing on USG CDR procurement over the long haul. But philanthropy clearly has a gap-bridging role to play.
Quick reflections on venture philanthropy specifically ... a simplistic view of that is philanthropy backing specific innovators bringing specific techs toward market and retiring fundamental science risk, maybe even early engineering risk. And getting those techs/ventures to point where they can offer attractive potential returns to investors on a viable timeframe. But don't think we should think that narrowly about venture philanthropy role.
Wrt CDR, what Additional Ventures is trying to do for the Ocean Alkalinity Enhancement field is a good case in point. They're not trying to replicate the Prime playbook by (e.g.) grant-funding Ebb Carbon etc. to develop their core technology. Instead, they're running successive RFPs to advance the field in ways that complement the investor $ that Ebb / Planetary Tech / etc are able to raise. Specifically, AV is trying to a) set up new central platform / single coordinating actor to drive more accelerated research on the core OAE fundamental science Qs ("Focused Research Org" model a la March of Dimes / polio vaccine); b) advance cross-cutting technologies that will be important to the leading ventures like Ebb/Planetary but often outside their core proprietary tech; c) help develop public goods (e.g. permitting processes, hub sites, etc.) that will advance the OAE field.
And that'll be tens of millions just for OAE, and partial at that ... so many needs across CDR writ large.
AMC -- big potential, whole other kettle of fish ... lots to learn from the pneumo AMC and excited to keep talking with everyone involved in pushing that vision forward. One big set of Qs among many is what's the post-AMC state you're working backward from (i.e., what's the 'handoff' to) and how you'd need to size it & design it to have it to bridge effectively to that handoff point -- what's the post-AMC demand picture, deployment stage / cost level, etc.
Every time I read a piece like this (well written, by the way) I wonder whether we are making things way too complicated.
Most leaps in infrastructure were done with government money, if I am not wrong. Who paid for the railroad networks, highway systems, and man on the Moon. Who paid for massive electrification initiatives? Who pays for wars, when they happen and sustains the military when they don't.
Why are we talking about philanthropy? Don't we all believe that climate change is critical?
I guess, with all due respect, my question for the writers is whether we are, as a society, thinking big enough.