Venture Capital Investment Trends in Emissions Reduction Technologies

Two areas in climate tech that are worth watching this year.

John MacDonagh 4 October, 2022 | 4:28AM
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ESG investing

As legislation, policy, and net-zero emissions pledges encourage decarbonization across the globe, startups developing carbon and emissions technologies are reeling in investors.

And though venture capital investment in carbon and emissions tech has been somewhat lower this year than in 2021, a few segments have still seen strong investment.

In its recent “Carbon & Emissions Tech” report, Morningstar company PitchBook covers venture capital investment in a diverse group of technologies associated with the decarbonization movement, including:

  • Carbon tech: Technologies to capture and store carbon dioxide, plus related activities such as carbon accounting, carbon utilization, and carbon financial technology (including carbon-trading marketplaces and carbon-linked consumer financial products).
  • Green industry: Decarbonized alternatives to conventional industry, including chemical production, mining/resource origination, and recycling technologies.
  • Built environment: Low-carbon construction materials and approaches, energy-efficient heating and cooling, passive insulation, and energy-conserving building automation.
  • Land use: Technologies to monitor noncommercial or residential land for emissions or stored carbon, or to reduce emissions from these spaces (for example, through use of low-emission fertilizers).

The PitchBook report finds that total venture capital investment in carbon removal (and the supporting ecosystem of carbon accounting and carbon fintech) reached a new high point in the second quarter, driven in part by very high global growth in emissions reduction pledges. Further, investment in decarbonized built-environment technologies has been strong in the first half of 2022.

Carbon Tech

In the second quarter, carbon tech attracted US$2.0 billion in venture capital funding—more than any other carbon and emissions tech vertical—and the current policy landscape for carbon technologies provides more support than ever before.

The increase in emissions reduction pledges is significant here, both at the country level and the level of smaller regions, cities, and individual companies.

Country-level pledges are critical in informing national policies for carbon emissions, which then strongly influence the viability of carbon technologies. At the subcountry level, these pledges provide more assurance to the carbon tech space that if a government changes its stance regarding emissions (for example, following a change in leadership), there is still support and demand for carbon technologies.

These pledges have grown substantially in the past three years. Now, most countries have made carbon reduction pledges of some kind (varying from loose objectives to policy codified into law).

The recent signing of the Inflation Reduction Act in the United States also enhances the 45Q tax credit. This determines the federal incentive for carbon capture projects, increasing the value of the credit from US$50 per metric ton to US$85 in most cases, with direct air capture technology (in which CO2 is captured directly from the air) benefiting from an increase to US$180 per metric ton. This kind of federal support for carbon technologies shifts the value proposition for many carbon emitters and creates a better opportunity for carbon tech startups in future.

Within the carbon tech segment, total venture capital deal values in the first half of 2022 were higher than full-year 2021 values in all subsegments other than the carbon fintech and consumer subsegment, which saw extremely high deal values in 2021. (Other subsegments include point source carbon capture, direct air capture, biological carbon capture, carbon utilization, and carbon accounting.)

This represents strong growth in the carbon tech space at a time when other sectors are seeing lower venture capital investment.

Built Environment

The built environment has long been recognized as a major source of greenhouse gas emissions, but decarbonization has historically focused on other sectors that are considered easier to decarbonize. Profit margins and technological maturity have historically hampered built-environment decarbonization, particularly for construction materials.

As global policy has shifted, this proposition is changing, and efforts are now being made to spread decarbonization efforts across a wider range of sectors.

For example, green cement startups are developing viable low-carbon alternatives to cement, which is responsible for approximately 8% of global CO2 emissions. And these alternatives are becoming more viable thanks to the progress of carbon pricing schemes such as the EU Emissions Trading System, which is gradually reducing the amount of carbon that can be emitted by certain sectors, thus increasing the cost of emitting carbon.

The first half of 2022 has been very strong for decarbonized built-environment venture capital deal activity (US$1.4 billion across 81 deals), with the first quarter being the strongest quarter on record. Though it is too early to know for sure, this deal activity is on track to exceed total 2021 values.

The future for decarbonization technologies in the built environment looks strong. Emissions reduction pledges are now the norm, and the strength of these is increasing (including their translation into policy).

We have finally reached a tipping point, where widespread decarbonization efforts spread beyond a few core sectors, and we expect venture capital activity to grow in the built-environment space, in addition to overall growth in the carbon and emissions vertical.

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About Author

John MacDonagh  is Senior Analyst, Emerging Technology at PitchBook Data, a Morningstar Company.

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