Trends in venture capital investments in emission reduction technologies

As legislation, policy and promises of net-zero emissions drive decarbonization around the world, startups developing carbon- and emission-reduction technologies are attracting investors.

And while venture capital investment in carbon and emissions-related technologies was slightly lower this year than in 2021, several segments still saw significant investment.

In its recent Carbon & Emissions Tech report, Morningstar PitchBook covers venture capital investments in a diverse group of technologies related to the decarbonization movement, including:

  • Carbon technology: Carbon capture and storage technologies and related activities such as carbon accounting, carbon utilization and carbon finance (including carbon trading markets and carbon-related consumer financial products).
  • Green industry: Decarbonized alternatives to conventional industry, including chemical production, mining/resource extraction and processing technologies.
  • Integrated environment: Low-carbon building materials and approaches, energy-efficient heating and cooling, passive insulation and energy-saving building automation.
  • Land use: Technologies to monitor non-commercial or residential land for emissions or carbon sequestration, or to reduce emissions from these premises (for example, through the use of low-emission fertilizers).

A PitchBook report found that overall venture capital investment in decarbonization (and the supporting ecosystem of carbon accounting and carbon finance) reached a new high in the second quarter, driven in part by very strong global growth in pledges to reduce emissions. In addition, in the first half of 2022, investments in decarbonized technologies of the built environment were significant.

Carbon Tech

In the second quarter, carbon technology attracted $2.0 billion in venture capital—more than any other technology sector related to carbon and emissions reduction—and the current policy landscape for carbon technology provides more support than ever before.

The increase in commitments to reduce emissions is significant both at the national level and at the level of small regions, cities and individual companies.

Country-level pledges are critical to informing national carbon policy, which then strongly influences the viability of carbon technologies. At the sub-country level, these pledges provide greater confidence in the carbon technology space that if a government changes its stance on emissions (for example, following a change in leadership), support and demand for carbon technologies will remain.

These pledges have grown significantly over the past three years. Most countries have now made some commitment to reduce carbon emissions (from vague targets to policies codified in law).

The recent signing of the Inflation Reduction Act in the United States also strengthens the 45Q tax credit. It defines a federal incentive for carbon capture projects, increasing the credit value from $50 per metric ton to $85 in most cases, with direct air capture technology (where CO2 is captured directly from the air) benefiting from an increase to $180 per metric ton ton. This federal support for carbon technologies changes the value proposition for many carbon emitters and creates better opportunities for carbon technology startups in the future.

In the carbon technology segment, the total value of venture capital deals in the first half of 2022 was higher than the value for the whole of 2021 in all sub-segments, except the carbon fintech sub-segment and the consumer sub-segment, which saw exceptionally high deal values ​​in 2021. (Other sub-segments include point source carbon capture, direct carbon capture, biological carbon capture, carbon utilization, and carbon accounting.)

This shows significant growth in the carbon technology space at a time when other sectors are seeing less venture capital investment.

The built environment

The built environment has long been recognized as a major source of greenhouse gas emissions, but decarbonization has historically focused on other sectors that are considered easier to decarbonize. Profit levels and technological maturity have historically hindered the decarbonisation of the building environment, especially for building materials.

As global politics have changed, so has this proposition, and efforts are now being made to spread decarbonisation efforts across a wider range of sectors.

For example, green cement startups are developing viable low-carbon alternatives to cement, which accounts for about 8% of global CO2 emissions. And these alternatives are becoming more viable thanks to the development of carbon pricing schemes, such as the EU Emissions Trading System, which gradually reduces the amount of carbon that certain sectors can emit, thereby increasing the cost of carbon emissions.

The first half of 2022 was very successful for decarbonized built environment venture deals ($1.4 billion across 81 deals), with the first quarter being the strongest quarter on record. While it’s too early to know for sure, this deal activity will surpass 2021’s totals.

The future looks strong for decarbonisation technologies in the architectural environment. Pledges to reduce emissions are now the norm, and their power is growing (including their translation into policy).

We have finally reached a tipping point where broad decarbonisation efforts have spread beyond a few core sectors, and we expect venture capital activity to increase in the built environment in addition to overall growth in the carbon and emissions verticals.

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