Janna Jiang, WECC Content Team
This post is the first of a blog series, “With the Current”, we are starting in collaboration with The Wharton Current, WECC’s podcast on all things climate and energy tech. In parallel to each podcast episode, we will seek to provide a ‘101 primer’ on the industry discussed to help enhance your listening experience. In our most recent Wharton Current episode, podcast host Julie Barger sat down with Shashank Samala, CEO of Heirloom Carbon, a CA-based direct air capture (DAC) company building America’s first commercial DAC facility.
Carbon Markets 101
To understand DAC, it is important to first understand the broader construct of the Voluntary Carbon Markets (VCM)1 and therefore, crucially, how a company like Heirloom generates revenue and secures financing for its CAPEX-heavy businesses.
Let’s start with how they make money:
Companies like Heirloom are typically referred to as project developers. At the highest level, project developers deploy upfront capital to design and implement a project that avoids or removes carbon dioxide, then sells that avoided or removed carbon in the form of a “commodity” representing one tonne of CO2 equivalent (CO2e) removed or avoided to corporations, individuals, or governments2 who wish to ‘claim’ the impact that this tonne (also known as a ‘carbon credit’) represents. As such, fundamentally, the business model of project developers operating in the voluntary market depends on demand for these claims of carbon avoided or removed. There are a great deal of nuances that led me to write “commodity” earlier in quotations (lack of liquidity, lack of clear pricing and extremely wide ranges of pricing3, transactions largely done OTC), but this is the central idea. One additional nuance for a company like Heirloom operating in DAC or other “engineered” project types (versus nature-based solutions) is that they can also be eligible for government tax credits and/or subsidies. Such assistance can either be production or investment based – Shashank discusses both in the episode. This may raise a question in your mind along the lines of “should these credits really be sold to others claiming the impact if governments have provided the financing?”. This introduces the concept of financial additionality (how “much” does a carbon project need to rely on carbon financing in order to be considered additionally impactful) – a challenging question to which a comprehensive answer has not yet been found.
Financing in the Carbon Markets
For those experienced with the renewables, mining, or really any infrastructure world, this project development / revenue timeline will feel quite familiar – high levels of CAPEX deployed upfront, with a long tail of annual revenue tied to production. As you will hear from Shashank in the podcast episode, infrastructure is exactly how project developers wish their projects to be viewed and financed as, due to generally lower costs of capital and more institutional sources of funding (e.g., private credit, asset managers, pension funds). Each project financier, for each asset class, has their own “bankability checklist” of what they would like a project to look like before they are willing to underwrite the investment. In the solar world, this often involves a few main ingredients – long-term PPA with blue-chip offtaker signed (providing price guarantees many years into the future), EPC4 contract signed, insurance in place, tax equity partner identified, etc. The VCM has started to mimic this formula, starting with long-term offtakes. Much like power, carbon credits can be transacted “spot” (on exchange or OTC – similar to selling into the grid) or through offtake agreements with fixed pricing. In recent years, the ability of a developer to sign these long-term offtakes with household name buyers has become a signal of commercial credibility and market validation – which makes Heirloom’s partnerships with Microsoft and Frontier buyers impressive. It is, however, important to remember that there are several other components of the bankability formula that the VCM has not yet coalesced around.
The VCM is a supremely nuanced market and certainly cannot be captured in few words – please see below a table of terminology of often-used terms to help guide further education / reading on this topic.
Helpful carbon markets terminology:
| Project developer | Entity that designs, builds, and operates carbon projects (sometimes will outsource the design or actual operations) |
| Methodology | Detailed, standardized procedures defined at the registry-level, used to quantify and verify the reductions or removals achieved by a specific carbon project; one of the first choices a developer has to make is the methodology they will design the project under |
| Registry | Platform that a) defines the aforementioned methodologies b) verifies / validates carbon projects under methodologies and issues credits c) maintains the internal ledger of carbon ownership – tracking transfers and retirements of carbon credits (removes from circulation) |
| Ratings agency | “Self regulating” institutions (i.e., non-governmental) that provide third party ratings on the quality of specific carbon projects based on both the methodology as well as actual specific project design / implementation |
| Additionality | How necessary and impactful is the carbon revenue to the project’s activity? Are the activities already a part of local standard practice or regulatory environment? (if so – docked points for additionality) |
| Permanence / Durability | How long a project is likely to retain carbon dioxide out of the atmosphere (typically measured in # years or a range of years) |
| Co-benefits | Environmental, social, and economic impacts generated by carbon projects beyond the primary goal of sequestering greenhouse gases (e.g., community building, public health, biodiversity) |
DAC 101
One of the most common misunderstandings in this space is conflating CCS (carbon capture and storage) and its variants – CCU (carbon capture and use) and CCUS (carbon capture, use, and storage) – with DAC (direct air capture). The terms sound similar, but they refer to different technologies and use cases. CCS, CCU, and CCUS all refer to point source capture – meaning that the CO2 is captured at high-concentrations with clear source attribution and therefore represent emissions reductions. DAC captures ambient atmospheric carbon (legacy emissions; more energy intensive process given high dilution) and therefore reduces the existing stock of CO2, representing emissions removals. While this distinction may seem arbitrary to some, there is a deep dichotomy within the VCM in the price and desirability of carbon credits generated from removals versus reductions.
Additionally, though we typically refer to DAC by just the ‘capture’ component, there are really 2 important components that are required for true carbon removal:
- CO2 capture – how do we go from CO2 in diluted ambient air to pure, compressed CO2 that can be transported for storage? (typically involves 2 steps: a) initial capture b) separation and compression)
For CO2 capture, technology pathways primarily differ by how the CO2 is initially captured – liquid-solvent systems use chemical solutions to absorb CO2 from ambient air and then regenerate the solvent to release a concentrated CO2 stream, while solid-sorbent systems use engineered filters or porous solids that bind CO2 and are later regenerated with heat, vacuum, or humidity swings. Newer approaches, like Heirloom’s mineral-based process, use limestone-derived calcium oxide to react with CO2 directly from the air, described by IEA as a limestone/calcium-looping form of DAC. - CO2 storage – how do we store the pure CO2 in a way that is ‘permanent’ / durable and therefore does not get re-released into the atmosphere?
For CO2 storage, the most common pathways today involve either a) Geological carbon storage – injecting CO2 into deep underground rock formations, such as saline aquifers b) Concrete injection and mineralization – injecting CO2 into concrete during mixing, where it mineralizes and becomes permanently trapped, also providing a cobenefit of increased compressive strength of the concrete.
Therefore, when we refer to DAC project developers, we are often referring to companies that just specialize in #1 (CO2 Capture) and rely on partners for storage – e.g., Heirloom Carbon, partnering with CarbonCure; Octavia Carbon, partnering with Cella. The ‘attribution’ of who is able to sell the carbon credits is determined largely on a partnership to partnership basis, but typically the capture providers are the ones issued the carbon credits, making the storage partners more of a ‘service provider’.
As one can imagine with a CAPEX- and energy-intensive, energy-intensive climate technology, DAC continues to face an uphill battle in becoming an economical, scalable, financeable5 method for carbon removal. However, it also benefits from modularability, flexible siting (anywhere with access to clean energy / appropriate access to storage), and being one of the most easily mentally digestible climate solutions.
If you are interested in going deeper on the commercial aspects of DAC (such as pricing, availability, current and future capacity etc.), we recommend reviewing the DOE Carbon Management Pathways to Commercial Liftoff and IEA’s DAC Overview.
What to Expect in the Episode
If any of the above interests you, we encourage you to listen to Julie’s fantastic conversation with Shashank to further deep dive on these topics. Some highlights you can look forward to from their conversation include:
- How AI has both a) enabled Heirloom’s operations through improved techno-economic analysis / factory simulations and b) increased competitiveness in project siting
- What Shashank believes has been the key (or at least contributors) to his TopCo fundraising success to date
- How Shashank brought his early learnings on product-market fit from Square and constructing a founding team at Tempo to Heirloom
- Some fun tidbits – why the company is named Heirloom, what is “Heirloom snack-gate”?
We hope that this has provided a helpful primer on both the VCM and Direct Air Capture. Please do not hesitate to contact us (Janna Jiang – jjiang15@wharton.upenn.edu; Jonny Naylor – jwnaylor@wharton.upenn.edu; Julie Barger – julbarg@wharton.upenn.edu) with any feedback on this new content series as we continue our collaboration with the Wharton Current.
- In supranational converging compliance-voluntary markets (e.g., Article 6.2, 6.4)
- Carbon credit market (buying, selling, and trading of carbon credits) not covered by any compliance regime (e.g., carbon tax or cap and trade)
- Shashank mentions in the podcast episode of the “magical number” of achieving a production cost of $100 / tonne removed — however, across other project types, costs can range from <$5 / tonne (avoided deforestation) up to $1K+ / tonne (DAC).
- EPC (Engineering, Procurement, and Construction) contract is a major agreement under which a developer contracts with a contractor to design, procure, and construct a project and deliver it ready for operation at a fixed price and timeline.
- Given a projected declining cost curve, some traditional project financiers / real assets investors do not want to be left with stranded assets.
