Market logic of carbon capturing (own illustration based on Muslemani et al., 2020)

Four relevant problem spaces in carbon capture projects

The results of our carbon capturing market analysis indicate four relevant challenges, companies have to overcome

Applied Technology
Manuel Lopes
Noah Baader
Fabian Haedge
"CCUS is a necessary bridge between the reality of today’s energy system andthe increasingly urgent need to reduce emissions. Not only can it avoid locking in emissions from existing power and industrial facilities, it also provides a critical foundation for carbon removal or negative emissions." - Dr. Fatih Birol, Director IEA

Recently, the topic of carbon capturing has increasingly moved into the media spotlight. Although technologies such as direct air capture are still in their infancy, they are already seen as playing a decisive role on the road to climate neutrality. Politically, carbon capturing initiatives are also on the rise: For example, a carbon capturing plant for the cement plant of Heidelberg Materials is being financed with a government grant of € 15 million from the funding program "Decarbonization in Industry" on behalf of the German Federal Ministry of Economics and Climate Protection (BMWK).

While companies in the primary industry - such as steel producers, lime manufacturers and cement companies - have been involved with this technology for some time, it is still uncharted territory for many companies, including numerous German SMEs.

As a venture builder with a focus on sustainable innovations, we are intensively exploring the topic of carbon capturing. In doing so, we are guided by our proven "Research Sprint" framework. In these sprints, we identify the central problems and challenges of various industries. Only after experts have confirmed these problem areas in interviews do we develop initial solution approaches and rough product concepts. These are checked in the subsequent "Idea Validation" phase and either confirmed or discarded. An idea that meets all the important criteria - Desirability, Viability, Feasibility and Sustainability - finally leads to the development of an MVP (Minimum Viable Product) in the third phase, the "Product Builder".

Our approach to identify relevant challenges in the area of carbon capturing:

  1. Relevance of carbon capturing: Investigating the importance of carbon capturing in the current era.
  2. Market logic of carbon capturing: Analysis of the market logic of carbon capturing (technologies & interaction with stakeholder groups)
  3. Interviews: Exchange with leading industry players to gain direct insights into the practical application of carbon capturing.
  4. Challenges & problem areas: Identification of critical problem areas and challenges.

Let's start with the first point: what is carbon capturing and why is it so important today?

Relevance of Carbon Capturing

Carbon capturing refers to a group of processes that capture, process and compress CO2 from a source. Nature itself provides an illustrative example: Plants. These extract CO2 from the air and use the carbon contained therein as an essential building block for building their biomass. Similar processes can also be implemented chemically. Companies have been using technologies to remove CO2 from their emissions since 1972. The CO2 recovered was often used in the past for enhanced oil recovery, known as enhanced oil recovery.

Toward the turn of the millennium, the issue of sustainability moved more and more into the focus of politics and corporate culture. One milestone was the Kyoto Protocol in 1997, which committed the signatory states to concrete climate protection measures. Numerous international and national agreements followed, including the Emission Trading System. At the same time, consumer awareness of environmental issues grew, motivating many companies to take voluntary climate protection measures. Many of these measures pursue the goal of being climate neutral by a certain date, such as 2030. Companies strive to get closer to this goal by first determining their current CO2 emissions. Since 2023, this has also been mandatory under European legislation in the form of the Corporate Sustainability Reporting Directive (CSRD). Subsequently, measures to reduce emissions come to the foreground, such as the optimization of processes or the improvement of energy efficiency.

Figure 1: Capacity of current and planned large-scale carbon capturing projects compared to net-zero scenario, 2020-2030 (own illustration based on IEA)
Figure 1: Capacity of current and planned large-scale carbon capturing projects compared to net-zero scenario, 2020-2030 (own illustration based on IEA)

Although many companies strive to reduce their emissions, they are often unable to completely eliminate them from CO2-emitting production processes. This is where carbon capturing comes into play, capturing CO2 either directly at the source (= point source) or from the atmosphere (= direct air capture).

This was a trigger for the initial boom in carbon capturing technologies. But to actually achieve climate neutrality as a global community, it will take more than this initial push (see Figure 1). As of July 2023, planned carbon capturing projects amount to only about 30% of the capacity needed to achieve Net Zero by 2030. Therefore, the market for carbon capturing is expected to grow exponentially in the coming years, creating further challenges. But to truly understand the current challenges companies face in adopting carbon capturing, we must first address the underlying market logic.

Market Logic of Carbon Capturing

To understand the dynamics behind the carbon capturing market, 6 key aspects should be considered: the underlying technologies (1), government frameworks (2), the sale of allowances in the carbon market (3), financing options through capital markets (4), operational activities such as planning and maintenance (5), and interaction with other market participants (6).

Market logic of carbon capturing (own illustration based on Muslemani et al., 2020)
Figure 2: Market logic of carbon capturing (own illustration based on Muslemani et al., 2020)
  1. Technologies: The technologies are at the core of the market. These are processes that capture carbon dioxide from a source. Subsequent processing is divided into two processes: Carbon Capture and Storage (CCS) and Carbon Capture and Utilization (CCU). In CCS, the captured CO2 is stored underground, either on land or at the bottom of the ocean. In contrast, with CCU, the CO2 is reused, e.g. for beverage production or after further process steps for the production of e-fuels. Both CCS and CCU often require special transportation infrastructure to transport the captured CO2 to the desired destination.
  2. Governmental frameworks: Policy provides some conditions within which carbon capturing operates. There are financial aids, such as the EU Innovation Fund, which supports projects for the development and application of low-carbon technologies. The government also promotes carbon capturing through legislation that incentivizes the use of the technology such as the introduction of the CSRD and the Emission Trading System (ETS) (see section Carbon Market). However, these legislations face limitations in some areas. In Germany and Austria, CCS cannot be implemented due to state-specific bans, despite nationwide permits. Therefore, companies either switch to CCU or transport the CO2 abroad.
  3. Carbon market: Companies can sell certificates for their stored CO2, which other companies or private individuals use to offset their emissions. There are both state-regulated compensation systems, such as the ETS, and voluntary compensation (see Figure 3). The ETS sets an upper limit for CO2 emissions. Companies that exceed this limit must purchase certificates.
  4. Capital markets: Beyond government subsidies, companies are seeking financing options on the capital markets. This can be done traditionally through bank loans or through green investors such as private equity funds. Innovative business models, such as convertible loans, in which the income from the sale of certificates is used to repay the loan, are increasingly appearing on the market.
  5. Other operational activities: This includes all operational activities related to the operation of a carbon capturing plant, such as management and maintenance.
  6. Other market participants: These include medium-sized and large companies that want to reduce their emissions by integrating the technology, and start-ups that offer complementary products and services

In summary, the market logic of carbon capturing forms a complex network of technologies, governmental frameworks, economic interests and other factors that all interact and shape the market. This complexity poses a significant challenge for companies in realizing their carbon capturing initiatives.

Figure 3: Differentiation between state-regulated vs. voluntary emissions trading (own illustration)
Figure 3: Differentiation between state-regulated vs. voluntary emissions trading (own illustration)

Challenges & Problem Areas

We identified key hurdles to the application of the technology in practice from our analysis, which we were able to validate in interviews with 15 companies currently engaged in carbon capturing. The 4 main problems are: Technology selection, CO2 sales market, investment decision and financing of CCUS facilities.

Grafik 4: Zentrale Problemfelder im Bereich Carbon Capturing
Grafik 4: Zentrale Problemfelder im Bereich Carbon Capturing
  1. Technology: The selection of the appropriate carbon capture technology as well as the suitable supplier represents a central challenge for many companies. This is mainly due to a lack of information on both the supply and demand side. Companies need to consider numerous factors in their decision-making due to the complexity of the issue, and this information is often difficult to access. In our research, we found that technology providers also have difficulties in identifying the product features and service requirements that are relevant for customers.
  2. Carbon usage: Since CO2 storage is largely prohibited in Germany and Austria, companies must find solutions for the use of their captured CO2. While there are now many options for CO2 offtake, the demand side often lacks access to reliable CO2 sources.
  3. Investment decision: From the interviews, it was evident that carbon capturing projects must meet one prerequisite above all: they should demonstrate a positive return on investment. The final return on investment is influenced by a variety of factors, some of which are difficult to determine. For example, costs can vary significantly by location. In addition, it may be necessary to interrupt production for a short period of time when integrating certain technologies, resulting in potential process downtime and significant associated costs. The precise modeling of these factors therefore proves to be a key challenge.
  4. Financing decision: The cost of carbon capture facilities can occasionally exceed €1 billion. Many companies do not have the necessary resources to realize such projects, especially because government subsidies often do not cover the entire costs. Therefore, finding suitable financing solutions is a barrier to technology diffusion.

Carbon capturing is more than just a buzzword in the current environmental debate. It represents a concrete solution in the fight against climate change. The technology holds enormous potential to reduce CO2 emissions worldwide. But as with many innovative approaches, there are challenges and uncertainties to overcome. Companies face decisions regarding technology, investment, financing and commercialization. While this may seem overwhelming for individuals, collaboration on a global scale, sharing of best practices, and continued advancement of technology offers hope. This article has only scratched the surface of this complex matter, but one thing is clear: carbon capturing will play a critical role in the coming years, and it is up to all of us to actively shape and support this process.

If your company is ready to explore this journey further and wants to rise to the challenge, don't hesitate to contact us. Together we can develop effective solutions!

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