Michael Molitor

15 September

Climate Tech VC is an amazing resource for everyone operating in this exploding space.  The two founders: Kimberly Zou and Sophie Purdom,  who run this site have done a great job of accumulating data about early-stage investments into climate tech startups.  Their most recent market survey showed impressive growth both in the total investment dollars as well as the total number of deals.  This is a very promising development for anyone interested in understanding how the market for climate tech is evolving.

$16 billion in investment by venture capital into climate tech startups in the first half of 2021, as reported by Climate Tech VC, looks like an impressive number but it needs to be unpacked and compared to investments into carbon-emitting assets and activities.  Estimates of the total amount of climate related investments globally over the last 12 months reach approximately $200 billion. This includes the $16 billion identified by Climate Tech VC as well as, for example, all the money invested into solar and wind energy installations and energy storage installations. 

Is It Enough? 

However, this $200 billion needs to be compared with the $2.4 trillion which was invested over the past 12 months into assets and activities which emit large quantities of carbon into the atmosphere‚ÄĒincluding, for example, new coal mines in Australia, new coal-fired power plants in China and Japan, and new gas production and distribution infrastructure in the US and Australia.¬† Climate tech funding is growing quickly but it is still an order of magnitude lower than investments into carbon emitting assets and activities.¬†

Our key climate objective is to make all possible attempts to maintain climate system stability to avoid the worst impacts of a climate system profoundly modified by human activity.¬† In the past 18 months we have already witnessed a shocking preview of what a world with a destabilized climate system will look like‚ÄĒdevasting fires in Australia and California, unprecedented flooding in Germany and Belgium, and larger and more frequent hurricanes in the Gulf of Mexico.¬† Unfortunately, not only is climate tech funding not large enough, it‚Äôs also not targeted to the key parts of the climate stability challenge.¬†¬†

What We Need

The most important driver of climate system instability is the total amount of carbon in the atmosphere and much less so the changes in the annual amounts of carbon emissions into the atmosphere.  Here is the pathway to keep in mind:  annual carbon emissions lead to increases in global atmospheric carbon concentrations which leads to more energy from the Sun trapped within our atmosphere and oceans which leads to an increase in the globally averaged surface temperature of the planet.  Since the beginning of the Industrial Revolution, our carbon emissions have led to an increase in the Earth’s surface temperature of 1.2 degrees Celsius.  This increase in temperature is clear evidence of more energy in the climate system and it is this additional energy which drives climate system instability. 

Total atmospheric carbon concentrations today are 415ppm compared to a natural background total of 280-290ppm. Currently, we are emitting 51 billion metric tonnes [1000kgs] of carbon dioxide equivalent [mtCO2e] into the atmosphere and, despite 30 years of UN-led climate negotiations and three international climate agreements, these annual carbon emissions continue to rise.  With a perverse global investment ratio of 10:1 in favor of carbon-emitting over decarbonization activities, it is not hard to understand why carbon emissions continue to rise. 

The steps necessary to have the best chances of avoiding the worst climate impacts are short and simple: 

  1. reduce global carbon emissions as fast as possible and 
  2. remove carbon from the atmosphere to lower concentrations to a minimum of 350ppm and a long-term target of 290ppm.  

Predicting how the climate system will respond to increasing atmospheric carbon concentrations is difficult. But the general guidelines flowing from the best available science suggests we should be reducing annual carbon emissions in half, as soon as possible and to get to net zero emissions as soon as possible thereafter.  

The Paris Climate Agreement, which has a goal of achieving global cooperation to keep surface temperature increases to no more than 1.5 degrees Celsius, has led to targets where global emissions need to be reduced in half [to 25 billion mtCO2e] by 2030 and to achieve global net zero emissions by 2050.  The recent extreme weather events in the US and Europe suggest these timelines are too long and that we will need to achieve bigger emissions reductions sooner.  What is clear from the latest climate science, as outlined in the IPCC report just released, is that climate system stability places a premium on reducing the most amount of carbon emissions and removals of carbon from the atmosphere as soon as possible. 

The Track Ahead  

Assuming the objective of climate tech investments is to maintain climate system stability and to generate robust returns for investors, then the focus of these investments needs to target the following seven super activities: 

  1. rapid decarbonization of the stationary energy system; 
  2. rapid decarbonization of the transport energy system through full electrification; 
  3. integration of the stationary and transport energy systems including stationary and mobile energy storage; 
  4. decarbonization of high carbon emitting industrial processes including steel, aluminum, cement, and glass 
  5. decarbonization of the global food system including regenerative farming and plant-based meat substitution; 
  6. massive global re-wilding of degraded ecosystems including, most importantly, forest ecosystems from temperate to tropical regions; and 
  7. early retirement of long-lived high carbon emitting assets [e.g. coal-fired power plants].

Marathon at a Sprint

Think of this challenge like trying to win the marathon in the Brisbane Olympics in 2032.¬† The good news is that, because we have already launched a large and growing climate tech ecosystem, we have qualified for entry into the race in 2032.¬† The bad news is that, due to the perverse global carbon investment ratio and a near complete lack of political will, all the other competitors will be getting a 10km head start in front of us.¬† The challenge now is how do we make up that 10km disadvantage over the remaining 32.2km in the next decade?¬† Solving the unreasonable global carbon investment ratio is fundamental as we will need to get annual global investments into decarbonization of $5 trillion as fast as possible‚ÄĒthis is where the 10km gap can be made up before the end of the race.¬†¬†

Achieving scale in climate tech has a much more urgent meaning than what the venture capital sector normally associates with this Holy Grail investment objective.¬† We are investing too much capital in the climate tech space which will not scale as defined by the objective of maintaining climate system stability‚ÄĒalmost all the tech we need to achieve the super seven activities outlined above are here today and many are operating at commercial scale.¬† Maintaining climate system stability is now almost uniquely a capital markets‚Äô activation challenge where the best climate tech might be fintech and blockchain.¬† The amount of capital required to scale climate tech towards our climate system stability objective is now so large that it cannot happen without investments from giant asset owners and asset managers‚ÄĒand this means something more substantial than the superfluous asset class known as ESG.¬†

The Gold Medal 

The key factor which drives success in our global climate challenge is the speed with which capital markets begin to value a stable climate system and to fully integrate this into the investment decisions of major asset owners and asset managers.¬† Getting to $5 trillion per year in decarbonization investments will happen quickly, as well as a rapid decline in carbon emitting investments, when capital markets can assign a value to climate system stability.¬† Imagine returns of investment which include both the traditional risk-adjusted financial return and a climate system stability return‚ÄĒthese will become the largest and most attractive investment opportunities in history.

photo by Isaac Wendland

Sep 15, 2021

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