Aviva Investors: Carbon capture Solution or pipedream?

10 November 2020 | Rick Stathers, Darryl Murphy, Stanley Kwong

Reducing the amount of carbon dioxide in the atmosphere is becoming an increasingly urgent priority in the fight against climate change. Both new and established pathways to remove the gas are under scrutiny, as decision makers around the globe grapple with how to take the most effective action.

Could commercial direct air carbon capture and storage play a major role in bringing atmospheric CO2 down?

On the roof of the energy-from-waste plant in Hinwil, Switzerland, sits an enormous frame housing multiple vents, designed to capture carbon dioxide (CO2) directly from the air. Vast fans pull air into ducts, where a sorbent is used to bind with CO2. Later in the process, heat is used to trigger the release of the gas, which is then piped to a greenhouse to enhance plant growth.1 Elsewhere, harvested CO2 is being used to add fizz to drinks, from mineral water to Pepsi. In Iceland, the captured gas plays a less useful role, pumped for storage into rock strata deep underground.

This raises a number of questions. Could commercial direct air carbon capture and storage (DACCS), like the solution offered by Climeworks at Hinwil, or any other commercial capture and storage approach, play a major role in bringing atmospheric CO2 down? Or might these bring their own issues if they allow difficult, but potentially more effective, consumption choices to be deferred?

A matter of scale

 “We have a huge challenge to face in the climate debate,” says Rick Stathers, senior responsible investment analyst and climate specialist at Aviva Investors. “Atmospheric CO2 is at record levels, about 40 per cent higher than it was in 1800, and that has worrying implications in many parts of the biosphere.”

Atmospheric CO2 is at record levels and that has worrying implications in many parts of the biosphere

Analysis of the carbon flux shows the gigantic scale of the problem. The net flow of CO2 to the atmosphere is around 17 gigatons - or 17 thousand million tonnes in layman’s terms - each year, as shown in Figure 1.2 Climeworks’ largest plant captures less than one million tonnes annually. The process costs around $600 per tonne, but the company claims that could fall by 80 per cent as it scales up in the next five to ten years.3 It reports receiving hundreds of unsolicited commercial enquiries, and is actively canvassing for individuals to play a more active role, paying subscriptions to have their carbon footprints reduced.4

Meanwhile, in Canada, another operator – Carbon Engineering – is exploring the possibility of using air-captured CO2 to make synthetic jet fuel. Bill Gates, Chevron, Occidental and BHP are all interested; they are established shareholders in the company.5

Significantly, both Climeworks and Carbon Engineering focus on utilisation. “Using (captured) CO2 as a feedstock can result in a cheaper or cleaner production process compared with using conventional hydrocarbons,” as a recent academic paper in Nature noted.6 For now, though, the technologies are still evolving, and DACCS is too small to make a significant impact in reducing emissions.

Figure 1: The carbon flux: Net average annual flows of CO2

Industrial revolution?

What about the carbon capture and storage (CCS) already taking place in industrial hotspots, from point sources in steel works, cement works and the like? These large-scale commercial plants are difficult to decarbonise, as CO2 is a by-product of the chemical processes taking place.

Take the plant operated by Emirates Steel Industries in Abu Dhabi, for example. A project that was planned for years has been capturing CO2 produced from manufacturing steel, then compressing it and running it into natural gas fields offshore.7 The process improves the recovery rate; it also allows CO2 to be stored in aquifers deep underground. In this case, the ratio of CO2 injected to natural gas freed up is one to 1.5. So, two issues are being addressed simultaneously, but there is more fuel gained than CO2 stored.

Capturing and compressing CO2 is highly energy intensive and increases the total energy requirement quite considerably

Although the UAE is committed to expanding renewables, the capture process - originally developed in the US oil and gas industry - perpetuates an energy model based around fossil fuels. Capturing and compressing CO2 is highly energy intensive and increases the total energy requirement quite considerably, which creates a site-specific ‘power penalty’. On the other hand, those involved with the project say their actions are equivalent to taking 170,000 cars off the road.8

“A lot of the scenarios being considered by the International Panel on Climate Change that get us to 1.5 degrees of warming rely on CCS,” says Stathers. “But the economics and logistics of capturing, then liquifying CO2 and transporting it to various locations to be locked away are not viable now. If we are going to have CCS as an effective solution, we need significant investment in infrastructure, and we do not have that right now.”

Sequestering (or storing) a meaningful portion of industrial flux would involve an enormous scaling up of CCS. There were 19 CCS plants in operation around the world in 2019, with a further four under construction and others in various stages of development.9 (See Figure 2 for European expansion plans.) Sequestering just over 15 per cent of today’s industrial CO2 emissions would imply a one-hundred-fold increase in global CCS capacity.10

One practical issue lies in identifying sites suitable for low-cost geostorage. The fossil fuel industry has around 1,000 gigatons of capacity in fuel-depleted sites,11 and there has been a surge of interest in locations where geologists see potential, like Australia’s Cooper Basin. There, the latest to join the rush is energy giant BP, which recently agreed with Santos to sequester CO2 on the site of Australia’s largest onshore oil and gas field.12 Here, it is calculated CO2 abatement could cost as little as $20 per metric tonne.13

Carrot or stick

Public policy decisions will determine what happens next. If the financial penalties for emitting CO2 rise sharply, or subsidies are enhanced, the current practical challenges are more likely to be addressed. Conversely, if penalties remain low, CCS development is unlikely to pick up pace. (For now, only a small part of the world’s emissions (around 20 per cent) are subject to pricing.14)

There is no consensus around the pathway to deliver net zero

“There is no consensus around the pathway to deliver net zero, where greenhouse gas emissions are constrained and warming is limited,” says Darryl Murphy, Aviva Investors’ managing director of infrastructure. “In the very near term, governments are going to have to define it and set out a granular plan about how it is going to be achieved. In reality, it is most likely to result in governments picking technologies to support.”

Meanwhile, the environmental clock is ticking. “We need to remember it’s 2020, and emissions have to decline by around 50 per cent in ten years,” Stathers says. “In my opinion, CCS technology won’t be at the required scale to facilitate that in the timeframe we have.”

Figure 2: Existing and planned carbon capture and utilisation facilities in Europe

If the economics of CCS are not compelling now, it may still play a greater role in future. “If we are looking out to 2040 and 2050, there is scope for a lot of change,” says Stanley Kwong, Aviva Investors’ associate director of environmental, social and governance (ESG) for real assets. “We can see that in the way in which renewables have ramped up, both onshore and offshore, in the past 15 years.

“One pragmatic view might be that some carbon-intensive fuel will be required on the path to net zero, and CCS might form part of that,” he adds. “Running a low-carbon economy solely with renewables will be a challenge and may not be achievable immediately.”

Natural solutions

Aside from technical solutions, there are various natural pathways that sequester carbon too. Nature already ensures a vast flux of CO2 to the land via photosynthesis; as the concentration of atmospheric CO2 has increased, so too has the pace of plant growth.15

On the other side of the equation, however, more and more forest around the world is being lost. In 2019, millions of hectares of primary forest were destroyed, releasing 1.8 gigatons of carbon, equivalent to putting another 400 million cars on the road.16 The soil itself is also a gigantic carbon store, containing around 2,500 gigatons of carbon, far more than in the atmosphere and in living plants and animals.17 But its capacity to act as a sink has been diminished by the way land is being converted for agriculture and managed.

The capacity of soil to act as a sink has been diminished by the way land is being converted for agriculture and managed

“About 25 per cent of global emissions are generated from the way we use the land,” Stathers says. “At the moment, 77 per cent of agricultural land is used in the production of meat, whether for feedstock or for raising the livestock themselves. But the meat produced only contributes about 18 per cent of our global calorie intake. It’s an 80/20 rule.

“We can address this if we shift our diets. That could bring about a significant change to the volume of emissions overall. If we were to cut meat consumption by 80 per cent, and we all ate meat just once a week, you could convert the land used for livestock to growing forests, fixing carbon through natural sequestration, and supporting biodiversity at the same time,” he adds.

In fact, academics believe that just managing soils on cropland better could remove as much carbon as that produced by the world’s entire transport industry.18

An investable opportunity?

With countries beginning to set out their ambitions to achieve net zero emissions in line with the goals of the 2015 Paris Agreement, the ways to enhance natural sequestration and generate value from it are getting more attention. Increasing plant yields, producing bio-derived chemicals or forestry products are all options that could prove useful carbon sinks. As they receive greater scrutiny, so are the routes to investment.

Around 50 per cent of the mass of a tree is made up of carbon

Commercial forestry harvested in rotation is one option. Around 50 per cent of the mass of a tree is made up of carbon, and there is a worldwide shortage of forest products. Wood, plant-based packaging and bioenergy feedstocks are all in demand, but the rate at which different species carry out sequestration varies considerably, as Figure 3 shows.

Figure 3: Illustrative natural sequestration rates

Nature-based solutions have their own dilemmas, if you seek results that demonstrate additionality (i.e. sequestration above natural rates) and wish to invest at scale.

If you stray too far towards generating a return, you may find you are not achieving as much sequestration as you might think

“How can you access the land you need, then balance that with other environmental considerations?” Kwong asks. “Carbon sequestration is one factor, but there are other ESG considerations too, like the importance of maintaining biodiversity and equilibrium in the water cycle. If you stray too far towards generating a return, you may find you are not achieving as much sequestration as you might think. If you are not careful, you might even lock-in emissions, because you think you are sequestering more than you are.”

Timing considerations are important too, as destroying primary vegetation cover and replacing it with commercial forestry may initially create a carbon debt, because the newly planted trees absorb less carbon than the untouched woodland.19

There are also practical challenges, as the frameworks for measuring carbon lock-in are voluntary and not standardised.

“We need to focus on how sequestration is measured,” Kwong says. “We have codes like the Woodland Carbon Code, but we need a unified code that would address what sequestration is and exactly how to measure it. If, for example, you choose to be involved in agroforestry, salmon farming and forestry, each of which can each achieve net negative carbon impacts, there are three different voluntary standards to be monitored and adhered to. It gets complicated very quickly. Even within forestry, if you choose to invest in the US, Europe and the UK, there are different guidelines. Starting to address these issues would be helpful.”

Achieving net negative emissions through bioenergy

Combining the pathways that lock in carbon for long time periods in construction materials or shorter periods for bioenergy are other important considerations. Bioenergy is receiving a lot of attention, particularly alongside CCS (known as BECCS), because power stations are major C02 emitters. If natural feedstock is grown in a sustainable way, perhaps by using marginal land unsuitable for agriculture, it can then be harvested and burnt to generate electricity with the resulting CO2 permanently stored underground. Hence, in theory, BECCS delivers negative carbon emissions overall. Once again, there are trade-offs to be made, as wood has lower energy density than coal, so a wood-fired station requires a larger volume of fuel to achieve the same output.

Using hydrogen could significantly improve the prospects of achieving net-zero emissions

One potential spin-off from BECCS is that it could also drive the growth of hydrogen as fuel. The energy generated can be used to heat organic material to a high temperature, then broken down into its component parts, releasing the hydrogen. The appeal is that hydrogen is a zero-carbon energy carrier; when burnt, water is the only by-product. Using it could significantly improve the prospects of achieving net-zero emissions, but hydrogen is also highly flammable and corrodes steel, so may require the creation of a parallel infrastructure or network upgrades to enable the use of a fuel blend.

In the UK, commercial power generator Drax is using BECCS in a pilot project to feed the national grid. Around one tonne of CO2 is being captured each day and injected under the North Sea.20 Drax’s experience has been a learning process: its carbon analysis initially failed to take a whole lifecycle approach, so the carbon cost of getting the feedstock to the plant via a lengthy transatlantic journey was not taken into account.

“The issue here is that there are a number of problems to be addressed at the same time,” says Kwong. “It’s not just that we are trying to reach net zero and our only focus is carbon sequestration; that discounts many of the wider factors that also need to be considered. As well as achieving net zero, we would like to achieve a just transition, where the economic benefits of a greener economy are more widely shared, and we also need a secure energy supply. BECCS contributes to secure energy and creates jobs.

“It illustrates the central dilemma,” he adds. “If we really want to get to net zero, and there is already a net zero commitment by the UK, should we only invest in assets that are purely green?”

Time for action

Although there is growing consensus around the need to reduce the net flow of C02 into the atmosphere and lock-in more in various sinks, there is little agreement around how best to achieve it; the gulf between technological optimists and pure environmentalists feels large. All the options take time to implement, but the growing prevalence of extreme climate events makes the need for action increasingly urgent.

We cannot keep looking over the horizon for solutions with silver linings that allow us to continue as before

“There are proven technologies and approaches that can start to make a change immediately,” Stathers says. “Renewable energy works, the price of energy storage is coming in, electric vehicles are becoming more effective, and managing the land better can make an enormous difference as well. There are significant changes that need to be made, and we don’t have time to waste. We cannot keep looking over the horizon for solutions with silver linings that allow us to continue as before.”