Cover image with thanks to ChatGPT and apologies to Francis Ford Coppola

Over the last month or so we’ve heard some troubling news and some very loud speculation about challenges in the DAC business. Climeworks, arguably the biggest name in DAC, has made headcount reductions estimated at 100+ while also revealing some significant delivery challenges at its largest plant to date, Mammoth.

Meanwhile, the deafening silence from the US Department of Energy, rumblings of setbacks at Heirloom and the “wait and see” approach in several corners of the investment community are also contributing to a general sense of disquiet among DAC believers and more than a little schadenfreude among DAC skeptics.

It’s not about Climeworks

I don’t believe that Climeworks’ apparent challenges should be read as a harbinger of DAC’s impending demise.

• DAC is notoriously hard; a resource-greedy tug-of-war with entropy. Among the first movers, Climeworks is learning a lot and their team is being honest about the obstacles they have encountered. They have been nothing short of trailblazing in creating demand, educating investors and policymakers and firing imagination - but their journey was never going to be easy. I hope their investors anticipated the inevitable major bumps in the road, the high capex burden to scale and the challenges of securing debt financing when they put $800m into a company that hadn’t yet delivered 1,000 tons of removal. For reference, these days we expect a Series A round to pay for a plant capable of delivering at least that much capacity. I really can’t get my head around such an enormous investment in an early stage business with little fundamental IP, but I also don’t think it can be held against the company.

• It’s important to remember that reductions and pivots are an important part of any high performance company’s growth, especially when markets shift under their feet, as they undoubtedly are here. Climeworks may be rationalising, but it still has a lot of valuable assets; not least the broadest base of offtake deals with corporates worldwide at premium prices that are the envy of the CDR industry and a very talented team. It’s far too early to count them out.

• Last but not least: failures are a vital feature of healthy competitive markets - and are to be expected in large numbers in an industry that is still forming. As I have said many times before, the DAC industry has a moral obligation to become as resource efficient as it possibly can be - and that will mean some approaches fall by the wayside. There will be many failures - and that is not an indication that DAC is a bad idea, either as a carbon removal solution or an investment opportunity,

Headwinds and Sentiment

So while I am sorry to see anyone dedicating themselves to carbon removal lose their job, I don’t read too much into the Climeworks layoffs or apparent headline underperformance. The company’s challenges seem somewhat predictable from where I am sitting, and may even be positive over time if we can avoid a spiral of doom-mongering reporting. Setting aside Climeworks, though, it is undeniably true that the market is facing real headwinds:

• As DAC critics will often point out, there are many better things to do with a spare MWh today than to spend it on DAC. Grids remain relatively carbon intensive, DAC has yet to reach its efficiency potential and electricity demand continues to skyrocket, so it’s considerably better right now to put a marginal green kWh into the grid than spend it on DAC - at least from a CO2e point of view.

• US federal support has been a mainstay of investor and operator confidence in the market. Whilst we’ve had no definitive announcements to suggest that DAC projects are in immediate jeopardy, headcount reductions in the relevant teams at the Department of Energy, delays in announcing federal support for purchases and rumblings about the DAC hubs are worrying.

• The demand side of the carbon removal industry is still forming. It remains heavily reliant on semi-philanthropic purchases in the short term and entirely dependent on regulatory demand that has yet to crystallise in the long run. Among removal solutions, DAC is particularly exposed to this market risk as most DAC companies don’t have much to sell besides removal certificates.

• In this nascent market, realistic financial models, together with the availability of suitably structured financing for capex-heavy, high techno-risk with limited offtake security are currently few and far between.

• Delays in construction, shortfalls vs nameplate capacity and issues over certificate delivery are not unique to Climeworks. Unfortunately they are likely to be widespread across carbon removal and indeed most industrial scale climate solutions.

• DAC was riding high in the hype cycle a few short years ago. Today the limelight has shifted and some of the investment round sizes and valuations of 2022 look positively fanciful. In mid 2025, I estimate there could well be more DAC companies than there are investors ready to back them. This is clearly an unsustainable imbalance.

The Fundamental Need remains Unchanged

The future of DAC has always rested on overcoming many and varied challenges; this should come as no surprise. Despite all these hurdles, however, I believe the structural drivers behind DAC (and indeed carbon removal more generally) remain unchanged. My conviction on the importance of the technology is based on first principles of economics, carbon maths, scalability and energy substitution:

• Yes, DAC is expensive - today. On a cost per tonne of net removal basis, however, it will be competitive with other permanent carbon removal pathways in the long run. Most DAC technology benefits from strong economies of scale and the best can reasonably be expected to come in below $200/tonne at the scale of hundreds of kilotons per year. This contrasts with a number of approaches that are less costly today but may well face rising marginal costs as they scale up, discount for uncertainty or incorporate reversal risk.

• In the very long run, the cost of DAC will be less than the marginal abatement cost for 10-20 Gt of global emissions. Put simply, it will be cheaper to pay for DAC than to mitigate our hardest to abate industries. If we accept that decarbonisation is a given in the very long term, then DAC is an obvious economic choice for many.

• As well as being cost-competitive, DAC is uniquely scalable. Other pathways are often constrained by input resources (biomass, land, minerals) or unacceptable tradeoffs. DAC does need a lot of resources too, but for the most part we understand how to bring them together without too many externalities.

• DAC can be sited broadly anywhere, allowing developers to lean into geographies, geologies and the coming availability of excess and intermittent renewable energy to deliver system efficiencies and supply chain sweet-spots that create environmental. economic and social advantage.

• Over the coming years, the easiest opportunities to decarbonise through electrification will get taken up, roughly in order of increasing difficulty. Today we expect a single well targeted renewable megawatt-hour to abate 2-3 tons of CO2e, but in a decade or so that figure might be as little as 1 ton. At that point (my guess is 2035-2040) the marginal CO2e/MWh balance will begin to tip in DAC’s favour. Today’s most energy efficient DAC approaches project net removal of ~1.3 tCO2/MWh.

Why now? Well we probably have ~ 25 years before DAC really needs to be working really well at a climate-relevant scale. That’s about the space of time it took for the mobile phone industry to go from impractical-prohibitively-costly-prototype to ubiquitous-technological-miracle in arguably the fastest ever adoption of a new technology by humans. So unless we start now, DAC simply won't be ready when we need it.

The Investment Opportunity Persists… Selectively

Of course it is possible to recognise these structural imperatives for the relevance of and need for DAC and also remain unwilling to underwrite its foundations today. But again, I think the arguments for the investability of DAC are ineluctable.

• Like mobile phones, DAC will be a trillion dollar business by 2050. If you had seen what was coming to the mobile phone space in the 1990s and early 2000s, you would have made a killing by investing in the foundational IP that has come to underpin our everyday lives. The time is now, because once DAC is scaled it will be a boring, heavily consolidated utility scale infrastructure business with thin margins and low IRRs. Mobile operators are huge but unexciting businesses for investors today.

• The road to this boring future will be full of twists and turns that create exit outcomes for founders and investors. Over the medium term there are clear structural reasons why we should see significant consolidation, broad-based licensing and an accommodative regulatory backdrop, some of which I will touch on later.

• That doesn’t mean you can place a bet anywhere in DAC and expect to hit the jackpot. Investors still need to think really hard about the leverage that capital creates and consider risk adjusted returns. You could also have lost a great deal by investing in mobile phone towers before demand was in place, in big content deals before high-speed networks were invented and handsets could keep up, or in OEMs made obsolete by the iPhone. In DAC as in all other emerging technology, the smart bets are those that enable great leaps forward. DAC investors will do extremely well if they navigate the adoption curve thoughtfully. I focus on early stage venture, but the same principles apply throughout the capital stack in their own way.

• The energy lobby knows all this and is a powerful advocate for DAC. It’s critical to their long term future in offsetting otherwise un-abatable emissions, producing carbon neutral products and ensuring their long term shareholder value.

So what will happen?

I don’t have a crystal ball, but I am lucky enough to know a lot of leaders in the DAC space and to have a privileged vantage point. My expectation is that the pack will thin considerably over the next 5 years, through a combination of natural attrition and consolidation. Meanwhile the best companies will survive and thrive to help create an ever more resilient and resource responsible DAC economy.

• DAC 1.0 companies will find themselves at a structural disadvantage and some of their early head start could turn into cumbersome baggage. The bigger you are, the harder it is to change. In the early days of the search engine market, Altavista and Yahoo! dominated a handful of broadly similar competitors. Both were thoroughly outmanoeuvred by nimble upstarts with new technological approaches and a whole new level of agility.

• Life may be even harder for DAC 2.0 companies, who have neither the commercial traction of first generation leaders (with the notable exception of Heirloom) nor the bleeding edge technology of their newest competitors, and the mixed blessing of having raised capital at the peak of hype. I expect we will see a high failure rate in this segment.

• The DAC 3.0 cohort have grown up in a much tighter funding environment and maybe with a bit more financial discipline that will stand them in good stead. Given the way the market is evolving I expect we will see greater focus on revenue and so extreme competition for scarce commercial deals - offtake, licensing, JV - all options are on the table. Since there are a lot of early-stage players here, we can expect this to mean quite a few casualties.

• My guess is that DAC 3.0 companies will begin to surpass today’s big names players in installed capacity terms around 2028. I don’t mean to throw shade on any company here, but working day-to-day with companies at the cutting edge of DAC, their intrinsic advantages are clear as day to me. Lower headline energy, improved tolerance for intermittency, built-in energy storage, longer lasting sorbents, useful co-products… the list goes on..

• This doesn't mean the end for Climeworks and their peers, but it could bring an era of significant consolidation. The funding pressure on early-stage companies, combined with the more established players’ need for new technological advantage will surely lead to a flurry of M&A activity. I expect Climeworks will become acquisitive, that Oxy will continue to look for complementary DAC companies to join their emerging portfolio and that other energy players will follow their example.

• This will heighten the opportunity for innovative ‘ingredient plays’ to serve the DAC segment. Makers of sorbents, air contactors, electric furnaces, membranes and electrodes and so on will have plenty of opportunity to innovate and address a growing market. DAC developers are unlikely to be able to compete based on home-grown solutions from top-to-bottom.

In the near term, I expect all but the most exceptional DAC companies will find it hard to raise capital over the next 12-24 months. So what do these “ most exceptional companies” look like?

• They have the potential to reach capex efficiency at small scale. The market won’t sustain breakneck capital spending ahead of sustained performance - both technical and commercial. 100kt/yr is the usual benchmark for scaled operations, but companies that can demonstrate decent capex efficiency at the 20-50kt/yr mark will have a huge advantage.

• They secure early revenue. Carbon removal sales are front and centre, but companies who are able to serve more than one market will have an unfair advantage. Until the demand side and sequestration infrastructure catch up, carbon utilisation could be an important - and premium - beachhead market for those that produce pure CO₂ (ideally with a stoichiometric green H₂ supply!). CCS customers without waste heat, with very low concentration flue gas or very high humidity environments could also be an interesting customer segment, but DAC companies will need to deliver a step-change improvement over established solutions to justify their involvement.

• They offer monetisable co-benefits that solve real and unmet needs. Energy recovery and storage, preventing renewable curtailment, saleable coproducts, regulation compliance, green hydrogen, at or below market price - these diversifiers will help DAC companies weather the storm.

• They inspire confidence in delivery. The more things go wrong, the more emphasis investors will place on delivery risk. In DAC, the journey from TRL 6 to TRL 9 may be substantially harder than from 3-6, but very few companies have taken that journey and those that have are still licking their wounds. Success will rest on hiring exceptional teams capable of meeting the myriad unforeseen challenges that moving billions of cubic metres of air through a complex system will inevitably bring.

Meanwhile at Counteract, we still believe that large scale carbon removal will be inevitable - and we’ll continue supporting great companies that create real and fundamental value, irrespective of where we happen to be in the hype cycle. That applies to DAC just as it does to every other carbon removal pathway.