DAC has always seemed like a method of last resort for reducing carbon emissions, but current federal and state initiatives focused on reducing cost through scale-up may be enough to support early projects. Pioneering DAC projects can receive construction grants, federal tax credits through the Inflation Reduction Act (IRA), state regulatory support with the Low Carbon Fuel Standard (LCFS), as well as currently commanding a substantial premium in the Voluntary Carbon Offsets Market (VCOM). However, no large-scale DAC systems have been built yet, and cost estimates vary widely based on uncertain system efficiency projections.
The DAC system design suggested in earlier work from Carbon Engineering Ltd. uses oxy-combustion of natural gas and estimates a Levelized Cost of Capture (LCOC) at $310/t-CO2 for its first system and $203/t-CO2 for an advanced system with a 12% capital recovery factor (34% DCCI1 adjusted 2016 estimate).2 This factors in a natural gas price of $3.69/MMBtu. Using these values, we can begin to construct the potential monetization pathway for DAC projects with a few basic assumptions around transportation ($10/ton) and storage costs ($15/ton) with an additional cost (46%) for associated CO2 production.
With the current IRA 45Q funding of $180/ton, DAC projects would need an additional $52/ton over the first 12 years to achieve a 12% return. After 12 years the IRA credit will no longer be generated, and other revenue will be needed to cover continued operation for the remaining 13 years of project financing considered. For reference, underlying these levelized cost estimates for capture is a total operating cost estimated at $61-73/ton accounting for consumables and natural gas.
Carbon removal offsets have received premium prices in voluntary markets, which could provide enough revenue to cover these expenses. They have sold from $250/ton3 to over $2000/ton4 for atmospheric CO2 removal. Despite vague quality assurances plaguing voluntary offsets, DAC systems have the advantage of directly quantifying the captured CO2. High-quality offsets are likely to be able to maintain preference in the voluntary market as they offer the most tangible verification of emissions reductions.
Instead of targeting a “pure” carbon removals pathway that ends in permanent CO2 sequestration, DAC can be used to supply CO2-EOR operations. The resulting decrease in the 45Q tax credit from $180/ton to $130/ton could be absorbed in the revenue from produced crude oil and the associated carbon reduction monetized through LCFS or in the development of a “blue” oil market. DAC projects can produce LCFS credits by showing a reduction in atmospheric CO2, regardless of any subsequent CO2 utilization for CO2-EOR as the comparable practice of traditional oil production has no carbon removal involved. However, in contemplating these various structures care must be taken to avoid double dipping on any value obtained from a reduction in carbon in carbon intensity-based markets such as VCOM and LCFS, as unlike the 45Q credits, they are based on quantifiable reductions in CO2 emissions.
LCFS credits currently trade at $82/ton and can also be stacked with 45Q tax incentives to provide revenue to DAC projects. The value of LCFS credits continues to fluctuate but is projected to stabilize near $215/ton in 20305. The market for a low carbon intensity oil could become as large as the growing demand for sustainable aviation fuel (SAF) and renewable diesel (RD) as carbon management practices mature but differentiating “blue” crude and regular barrels does not currently have any value. Monetizing DAC through the LCFS market and subsequent CO2-EOR production can then be considered using the current and future LCFS price, a lease operating cost of $25/BOE, and a crude price of $75/bbl with an CO2 injection efficiency of 89% accounting for the additional 46% of CO2 produced from the DAC system operation.
The operation of a DAC system does not fully avoid some potential pitfalls in negative public perception of carbon reductions. A 1 million metric ton per year plant requires over 50 MW of electricity to operate and 3.8 MMBtu/ton-CO2 in process heat for the calcium regeneration cycle. Carbon Engineering Ltd. proposes an integrated heat and power natural gas system where turbine exhaust circulates through the capture fluid, generating 1.46 million tons CO2 total for storage or use, including 0.46 million tCO2 from the plant’s own emissions. This can easily be misconstrued as a perpetual consumption of natural gas for the continued use of natural gas elsewhere. Operators will need to maintain quantified records of all carbon removed from the atmosphere as well as very open and transparent processes in order to maintain public favor.
Through all these monetization schemes, the federal support of DAC system with the 45Q credit and project grants provides a significant portion of revenue that makes DAC feasible. Cost reductions in project capital expenses will be required to maintain positive project revenues without government incentives. This leaves significant uncertainty around the long-term viability of DAC systems. Demand in voluntary carbon offset markets is highly unstable, with no price guarantees above $100 even from the largest market makers. The LCFS market has shown some resilience and liquidity for continued monetization of carbon reduction credits, but price volatility may continue to be problematic. The actual cost of CO2 captured could still end up far exceeding projections. Other estimates peg current costs for DAC systems at up to $780/ton-CO2 and scaling up to large facilities remains unproven. The Department of Energy's ultimate goal is to drive down DAC costs to $100 per ton-CO2 at which DAC systems would remain profitable, but there is no current indication that those cost levels can be achieved today.
1 S&P Global
2 Keith, D. W., Holmes, G., Angelo, D. S., & Heidel, K. (2018). A process for capturing CO2 from the atmosphere. Joule, 2(8), 1573-1594.
Legal Entities Disclosure: PEP Advisory LLC (member FINRA/SIPC) is an affiliate of Pickering Energy Partners LP.
This technical report is not an advertisement and does not constitute a research report, an offer of any securities or investment advisory services. Any offering may only be made pursuant to the securities laws, an offering document and related subscription materials all of which must be read and completed in their entirety. This technical report is intended exclusively for the use of the recipient(s), and it is not to be reproduced or redistributed to any other person without the prior consent of the sender’s company. If the reader of this technical report is not the intended recipient or an agent responsible for delivering it to the intended recipient, you are hereby notified that you have received this document in error and that any review, dissemination, distribution, or copying of this technical report is strictly prohibited. If you have received this report in error, please notify us immediately by e-mail, and delete the original message. The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request. It is not intended for distribution to retail investors in any jurisdiction.