The transition to a low-carbon future is well underway1: countries representing more than 80% of global emissions have made net zero commitments, as well as more than 700 of the world’s largest companies.
Carbon capture and storage (CCS) has a key role to play in achieving this. CCS refers to a combination of technologies that can be used to capture and store carbon dioxide (CO2) from point-of-source emissions. CCS is made up of three processes:
- Capture This involves separating CO2 from other gasses produced in large industrial process facilities such as coal and natural gas power plants, steel mills and cement plants.
- Transport Compressing captured CO2 and transporting it to a suitable geological storage site.
- Storage CO2 is injected into deep underground rock formations.
Here we explain how CCS can make a difference, why investment is ramping up, and how investors can take advantage of burgeoning opportunities in this potentially transformative technology.
How CCS can help
According to the International Energy Agency (IEA), in order to achieve net zero goals CCS is a necessity, not an option2. For heavy industries like cement, steel and petrochemicals that cannot utilise electrification or renewables to reduce emissions it is the only viable means of doing this, and is critical in helping to decarbonise the oil and gas sectors (Figure 1)
As such, the IEA’s net zero roadmap estimates CCS could lead to a 15% reduction in greenhouse gas emissions.
Figure 1: CCS contribution to sector CO2 emission reductions
Source: Liberium, 2023
While CCS technologies have been around for some time, three catalysts are driving increased adoption: policy incentives, improving economics, and new infrastructure.
Policy On the policy side, the US Inflation Reduction Act (IRA) and Infrastructure Bill provide significant financial incentives and are spurring further development. The IRA increased tax credits for CCS by more than 70% to $85 per ton of CO2 captured (Figure 2). Because the act requires projects to be under construction by 2032 there is an incentive to act quickly.
Figure 2: Prior 45Q credits vs. new IRA credits
Source: Columbia Threadneedle Investments
Meanwhile, the Infrastructure Bill allocated $12 billion to the Department of Energy (DoE) for CCS3, and this money is already flowing. For example, in August the DoE allocated $1.2 billion to develop direct air capture hubs in Louisiana and Texas, in conjunction with private sector companies including Occidental Petroleum, Climeworks Corporation, and Heirloom Carbon Technologies4. In October, meanwhile, the DoE announced $7 billion in funding for America’s first clean hydrogen hubs. Of the seven hubs, four will generate blue hydrogen, which is hydrogen produced with natural gas, coupled with carbon capture and storage.5
Costs are falling The cost of CCS depends on the industrial application. Those with higher CO2 concentrations are less expensive to capture, while access to transport and storage also factor into the overall cost. Thanks to IRA tax credits, CCS projects for highly concentrated CO2 streams such as those from natural gas, ethanol, and ammonia are now profitable. The economics are also vastly improved for less-concentrated industries such as cement and steel (Figure 3).
Figure 3: cost of CCS for different industries
Source: BNEF, Columbia Threadneedle Investments
Technology will also play an important role in reducing the costs around CCS. But with most capture technologies still in the early stages, their bespoke nature means cost declines are likely to be gradual. As part of our ongoing research, we are continuously monitoring the space for both incremental and breakthrough improvements in technology.
The most commercialised type of carbon capture technology is chemical absorption with liquid solvents. Here, cost-reduction efforts are focused on developing solvents that can last longer at lower temperatures, and on re-engineering the absorber. Some private players estimate that these efforts could lead to a 30%-50% cost reduction in the next five years6.
Infrastructure is ramping up Although infrastructure investment is increasing, there remains a chicken-and-egg challenge when it comes to developing CCS. To commit to building storage facilities, companies need to have confidence there will be sufficient capture and transport infrastructure in place. Despite this conundrum, there has been a significant increase in CO2 storage projects announced in the past year. If all of these come online the market will see a greater balance between capture and storage (Figure 4).
Figure 4: Operational and announced capture and storage capacity
Source: IEA, 2023
There has also been strong progress on transportation infrastructure in the US. Exxon’s acquisition of carbon emissions solutions company Denby in August 2023 gives it access to the largest CO2 pipeline in US, spanning around 2,000 kilometers and 20 storage sites. The acquisition is viewed as a critical part of Exxon’s plan to help develop a large-scale CCS hub in the Houston area. Elsewhere in the US, private infrastructure developers in the midwest are working on three projects across five states to develop CCS hubs for an ethanol production cluster.
Headwinds remain Perhaps the biggest headwinds to building CCS infrastructure are the permitting and development processes. This can take up to four years for pipelines and storage facilities, with opposition from local communities delaying or preventing some projects. Even when projects get the green light, they take many years given their complex nature.
While the pickup in transport and storage infrastructure is encouraging, we remain cautious on their ability to keep pace with the growth of the capture sector. For the CCS market to scale effectively, all three components need to grow in tandem.
Significant investment required
While CCS is promising, it also requires significant investment. The IEA estimates $1 trillion in investment is needed by 2030 and $3 trillion by 2050.7 The required scale opens up significant opportunities for investors, but there are economic and execution challenges. Figure 5 outlines the key challenges and the catalysts.
Figure 5: challenges and catalysts
Opportunities are emerging
CCS is a multi-decade theme that provides investment opportunities across the value chain, from capture to transport to storage (Figure 6). The US offers the most supportive policy environment and the most attractive investment opportunities, in our view.
Figure 6: the CCS value chain
Source: Columbia Threadneedle Investments, 2023
At present, spending on CCS is dominated by oil and gas majors like Exxon and Occidental Petroleum, and by industrial gas companies including Linde and Air Liquide. We believe such players are best positioned to capture future market growth.
However, there are many other potential beneficiaries and a variety of investment opportunities to suit different risk tolerances and return targets. Examples include pure-play companies working on the next generation of capture technology, pipeline developers repurposing existing infrastructure, and specialty providers focused on seismic data, design, monitoring and equipment manufacturing.
CCS has the potential to play a major role in delivering ambitious emission-reduction targets. After many years of halting progress, we are encouraged by increased investment in CCS infrastructure on the back of supportive policy and improving economics. However, caution is warranted as bottlenecks remain. For those looking to invest in CCS opportunities, a deep understanding of the technologies, policies, projects and constraints should underpin selective investment decisions.