Factoring Unknowns into Carbon Dioxide Removal Investment

Exhibit: Verification Confidence Levels and Frontier’s View on Investment

Source: Frontier and CarbonPlan

Key Points: CarbonPlan has calibrated uncertainties in measuring how much carbon is removed by various technologies. This is feeding Frontier’s decision process — and should add confidence for other buyers/investors to step in — to support emerging Carbon Dioxide Removal companies. It also gives CDR companies incentive to invest to minimize these uncertainties.

An effort to bring rigor to assessing uncertainty in verifying carbon removal. CarbonPlan’s quantification exercise establishes Carbon Dioxide Removal (CDR) technology “verification confidence levels” (VCLs), i.e. how much uncertainty there is across various factors in net permanent removal of carbon (net = after factoring in the emissions associated with the materials or the energy it takes to implement the CDR operation).

VCLs part of the invest/do not invest decision for Frontier. Frontier is to use these Verification Confidence Levels as a factor in deciding if to invest and how much to discount for uncertainty. A low VCL dictates that the technology isn’t ready for larger purchase commitments from Frontier (offtake commitments); Frontier may (only) be willing to support the development of the technology through more modest “pre-purchases” or it may determine that in fact the technology isn’t ready for its funds at all, but rather should (continue to) be funded through research grants (see Exhibit).

For more on Frontier’s investment business model and its focus on nurturing CDR technologies with the potential to massively scale, please see a previous Payne Financial Flow that discussed its inception and fundraise.

 A larger discount (and thus cost) to “claimed” results based on a lower VCL. Frontier’s discounting mechanism applies a specific uncertainty estimate (each VCL encompasses a range) to the claimed amounts of tons removed. In its illustration, Frontier suggests that Direct Air Capture (DAC) has a 5% uncertainty discount (it is VCL 5) whereas Enhanced Rock Weathering is given a 34% uncertainty discount (VCL 2). Thus if a DAC project claims it can remove 100 tons, Frontier would assess the project’s delivered tons as 100 * (1-0.05) = 95 tons. Similarly, if the project claims $800/ton of removal, Frontier’s calculated cost would be $800 / (1-.05) = $842/ton.

Frontier is quick to point out that a lower VCL does not preclude investment. Technologies with (or that Frontier believes can scale to) large removal potential but still higher uncertainty levels may make sense. But a more rigorous quantification of the uncertainty allows Frontier to make that determination. Separately, Frontier is signaling the benefit for CDR companies of reducing uncertainty — in that greater uncertainty raises the effective cost of the technology vs. other candidates for investment. And it is indicating an interest in investees’ commitments/initiatives to reduce uncertainties, for example in new sensing tools tied to the specific CDR technology.

VCLs set by each characteristic of six removal technologies. CarbonPlan evaluated the VCLs for six CDR technologies: Direct Air Capture, Biomass Carbon Removal and Storage, Enhanced Weathering, Terrestrial Biomass Sinking, Ocean Biomass Sinking (with and without Harvest) and Ocean Alkalinity Enhancement (Electrochemical and Mineral). For each technology, the uncertainty is assessed for each factor related to the effectiveness and durability of removal (as well as the emissions associated with the materials or energy required to have it function). Ranges are used, which reflect degrees of uncertainty (about the uncertainty).

9/21/2022