3 different types of first commercial facilities

Posted by Deanna on September 8, 2022

After last week’s look at commercial facilities that have been successfully funded, I wanted to better understand what projects in the future will need large first commercial facility (or large first-of-a-kind / FOAK for short) funding.

I went through the list of hard-tech climatetech technologies and think there's ultimately 3 types of startups that will need FOAK funding.

In order from most scale up risk to least scale up risk, assuming technology risk is equal:

  1. Those that need a plant to commercialize a set of large-scale chemical reactions – in other words, startups which have chemical processes at the core of the plant. Because these reactions require feedstock and offtake, the scale up risk is compounded by project-specific characteristics like site location, vendor access, and commercial agreements. Many of these projects find ways to attach themselves to an existing plant or asset to reduce this risk. There is also generally more uncertainty with a chemistry-based scale up as many things are environmentally sensitive and small changes can produce no product or unwanted product.

    This category typically includes renewable fuels, carbon capture, oxycombustion, pyrolysis, low carbon concrete, low carbon steel, chemical recycling, nuclear, new fertilizers

  2. Those that produce and install chunky assets – in other words, startups that rely on deploying big installations. The FOAK project is a single asset produced at a scale large enough to be commercially viable. The scale up risk in this case is less dependent on integration with the supply chain / commercial agreements around the project and more on the pure engineering of scaling up the technology itself. This simplifies the scale up a little more compared to #1 but also puts the onus of whether a project works on the technology. Since there are usually fewer third party companies involved in this type of project than in #1, third party validation of the technology holds more weight in derisking the project for an investor.

    This category typically includes utility scale energy storage, geothermal, carbon storage, clean aviation, concentrated solar power, wave energy, automated mining, automated waste sorting, hydrogen electrolyzers, hydrogen fuel cells

  3. Those that need a manufacturing / assembly / processing plant designed to handle volume – in other words, startups that have a need to produce product in large volumes. This is by far the largest category in terms of number of startups that could grow to need this kind of project. BUT this is also the category that may not require complete FOAK funding if the startups 1) successfully use contract manufacturing, 2) outsource most of the manufacturing and only need a small facility for assembly, or 3) acquire an existing manufacturing facility that produces a similar or adjacent product. Manufacturing is also arguably the easiest to scale up out of the three categories since there is less a scale up of technology and more a scale up of process, something which also has plenty of precedence in other industries.

    This category typically includes EV batteries and battery components, EVs, EV retrofits, EV chargers, heat pumps, smart thermostats, smart glass, soil sensors, e-scooters, e-bikes, green textiles, algae farms, new photovoltaics, alternative proteins

These categories aren’t necessarily mutually exclusive. A company that builds an automated waste sorting facility may also need a manufacturing facility for robots (see AMP Robotics). A company that that installs large flared gas-to-datacenter systems may also want to manufacture its data centers (see Crusoe). (By the way, these two were not included in last week’s list because their FOAKs were <$50mm.) But most startups that are still commercializing their technologies are only contemplating FOAK in one of the three categories.

So what’s the point in knowing these categories? Understanding which category a startup lands in when planning out a FOAK commercial project can help identify a peer group with a similar scale up risk profile. Perhaps there are milestones and timelines that can be informative for early stage project planning, best practices that can be used between companies in each category, or benchmarks that can be used to help pitch the project risk profile to investors. Since the universe of FOAK commercial is so limited in climatetech, being able to creatively find a peer group to help tell the story is more important than in other industries.

There are also different recommendations I would make for capital raising in each category:

Those that need a plant:

  • Plan out the feedstock / offtake carefully; if possible, secure the commercial terms on these agreements prior to fundraising
  • Try to find corporate partners or co-locate the project with an existing facility reduce project-specific risks
  • Since there are so many moving pieces with these projects, keep the first commercial scale up on the smaller side (while also making sure it’s economic) to reduce risk of complications

Those that need a large installation:

  • Get third party validation of the technology and/or technology scale up to compensate for fewer involved parties
  • Find corporate partners if they can help provide third party technology validation and/or reduce the cost of capital for a project
  • Plan out the next few installations as part of the story; since large installations are less dependent on supply chain integration/commercial terms and thus can be deployed quickly, have a plan to accelerate deployment once the technology is proven in the FOAK installation

Those that need a manufacturing facility:

  • Look to other industries for manufacturing scale up examples, especially if an adjacent product is already being produced
  • Look for alternative ways of scaling manufacturing – acquiring existing facilities that build similar products, utilizing contract manufacturing, or phasing the scale up can all be ways to avoid the FOAK problem
  • Build big; because the manufacturing scale up is more straightforward than that of the other two categories, startups have the luxury of choosing to scale big from the outset. Building for strong future growth can help avoid having to build another plant in the future + takes advantage of economies of scale

Would love to hear:

If you're a startup - does this framework make sense to you? Or is there another category that's missing? If you're looking for FOAK funding or thinking about your FOAK plans in the future, I would love to connect.

If you're an investor - are there different or additional recommendations you would give for each of these categories?

If you're part of a corporate - are you or have you contemplated the types of partnerships described above?

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Looking at 10 different first commercial facilities & how they got funded

Posted by Deanna on September 1, 2022

The scaling problem in hard asset climatetech is well-known and well-documented…valleys of death, unfit capital, project development challenges, etc. etc. Technologies that require some kind of plant, facility, or large chunky infrastructure to be built struggle the most with scaling. Here's how the ease of funding curve looks across a company's maturity (thanks, Lanzatech):

Initial funding for these technologies, if in small dollars, is relatively plentiful. For R&D and prototyping, startups can access grant funding and traditional VC capital (as well as capital from family offices, corporate VCs, incubators & accelerators, and other entities that surround the VC ecosystem).

After the technology has been prototyped and shown to work at lab scale, engineering work can take it to the next level and show that it can be used in the real world. Engineering work can mean expanding the team to include more engineers and/or contracting third parties like EPCs or labs to perform feasibility studies. Larger VC dollars can fund engineering work, though the pool of VCs that can write a later stage check for a pre-commercial tech is more limited than at the earlier stage.

Pilots and first demonstration assets / facilities are where the capital stacks start to detract from the normal VC ecosystem. Funding for pilots and demo facilities can edge into really late stage VC to growth equity levels of capital. Activities like permitting, buying construction materials, hiring a construction agency, adding plant personnel, etc. are expensive. Since the goal of this stage is to make sure the technology works and to prove out the engineering work, the plants are smaller, limited in connectivity to commercial outflows like roads or the grid or customers, and operate only for a fraction of the time. I’ve found that most of the “mature” hard tech climatetech companies with big plants to build are at this stage. This is especially true for the battery industry. Several of the names that have gone public via SPAC over the last few years – Solid Power, Quantumscape, FREYR, SES – are still undergoing pilots.

After the technology has been validated at smaller scale in the real world, both the technology and business model need to be proven together in building the first commercial version of the asset or facility. As we reach the trough of the growth curve, this is the hardest step to get funding for but the one that derisks the company the most. Building a commercial plant requires the capital of a pilot or demo facility scaled up to the point where the economics make sense + capital for additional personnel to run the plant or asset full time + capital for processes or certifications to enable the product to be sold commercially + capital for logistical infrastructure like trucks, roads, pipes, or other conveyances + capital for contingencies, unplanned downtime, regular maintenance….the list goes on. This step attracts investors looking for cash flow, which means that the technology has to be derisked, the financial model has to be airtight, and there has to be a high degree of certainty that revenue will occur.

Post-first commercial, companies can access the much larger pool of capital: private equity, infrastructure capital, and project finance equity and debt. These capital pools don’t have enough climatetech opportunities at their desired maturity levels and check sizes. A startup that reaches this stage usually has enough leverage to get pretty advantageous economics.

I wanted to better understand how a startup can get past that first commercial trough – are there any learnings that we can glean from past projects? To do this, I set out to collect examples of large commercial facilities (requiring >$50mm in capital) that have been funded climatetech.

Unfortunately, they were very difficult to find. My ideal dataset would be 30+…but I could only find 10.

Companies: CoolPlanet, Enerkem, LanzaTech, Monolith, Fulcrum Bioenergy, Lucid, Lanzajet, Arbor Renewable Gas, Carbon Engineering, Lithion

Some observations:

  1. Corporate involvement helps a lot. Half the projects on this list had some type of corporate sponsor or corporate partnership backing. For startups, working with a corporate on first commercial projects makes a lot of sense. Corporates often have already-permitted, already-functioning sites with access to logistical infrastructure, vendors, and/or customers. Corporates also likely have much lower cost of capital and may ask for less aggressive financial returns than a comparable institutional equity player, which translates to more favorable economics for the startup and other investors in the project. And finally, startups may be able to inherit best practices from a corporate partner – things like preventative maintenance, project management, safety regulations, and corporate governance – that can be difficult for a startup to learn on its own and prevent some painful lessons further down the road.

  2. Private and non-traditional equity can also play a major role in funding these projects. Most private equity firms don’t want to touch technology risk, which leaves a huge gap in equity offerings in the first commercial space. Tech-leaning private equity firms and non-traditional equity firms like family offices or sovereign wealth funds can play a big part in filling this gap.

    I was a little surprised to see a complete lack of infrastructure equity on the list. I know there has been a big push as of late to redefine infrastructure and push capital deployment up the risk spectrum…but maybe we just haven’t seen these projects manifest publicly yet.

  3. The new fuels space has enjoyed the most number of successfully funded large projects. 7 out of the 10 projects on this list produce some sort of fuel. Two reasons why:

    1) The technologies that underlie these facilities are familiar and have precedence. Though the IP can be new, the reactions are most likely a revival of chemical processes that have been studied and understood for years (e.g. Monolith’s pyrolysis). As a result, these projects probably have found a better ecosystem of firms and consultants with the ability to diligence the technology for them.

    2) Demand for the product exists today in large quantities. Most of these facilities aim to produce a drop-in fuel, which means that the market is easier to define and customers easier to sell to. Most other sectors of climatetech don’t have that luxury.  

  4. Other projects that didn’t make the list bypassed the first commercial hurdle by repurposing an older facility. You might look at the list and wonder why Lucid is the only EV manufacturer on it. That’s because other EV manufacturers have taken a different approach: purchasing existing factories. Tesla’s Fremont, CA factory, which it acquired in 2010 when it started mass-producing Model S’, used to be a GM/Toyota factory. Rivian’s first plant was also purchased – it used to be a Mitsubishi plant until it closed down 2 years before Rivian bought it. Hyzon purchased an old GM fuel cell facility in New York as its first plant.  

    This strategy hasn’t only been adopted by carmakers. Bolder Industries, a tire recycling startup, acquired an old tire recycling plant as its first plant.

    Acquiring an existing facility can save money (especially if the asset is distressed) and, like working with a corporate, provide access to strategic benefits like logistical infrastructure, best practices, and even labor. But of course, this strategy only works for technologies that can share a lot of assets with an already-scaled operation, which limits its usefulness to areas like EVs or chemical plants.

TLDR; funding for large first commercial facilities has limited precedence. As climatetech scales to need a greater number of large first commercial facilities, companies should look to the fuels space for learnings, corporate and tech-forward private / non-traditional equity for sources of capital, and acquisition of existing facilities as an alternative strategy.


I downloaded 13 carbon footprinting apps and here’s what I found

Posted by Deanna on August 25, 2022

Back to carbon footprinting! So after exploring carbon footprints around the world, how carbon footprints scale with wealth, and the general ecosystem of consumer sustainability software, I wanted to try out some of the consumer footprinting apps for myself.

First off, I had actually calculated my personal footprint using the same method from the previous posts. That served as a baseline for judging the accuracy of an app’s calculations. I’ve estimated my personal footprint to be ~28 tons (yikes!), with “splurge” categories being travel (flying about once a month), food (eating out), and discretionary purchases (this year has been a bit expensive because of moving but I also have an Amazon problem). For context, 28 is about twice the US median and in line with the average carbon footprint of someone in the upper middle class. It’s also 22x where the average person in developed nations should be by 2050. In other words, I’ve got my work cut out for me. And hopefully the apps can help!

I actually downloaded 21 apps to start off with. But six out of the 21 did not work for me for various reasons (CarbonTracker – couldn’t create an account, Earthly – couldn’t connect bank account, GreenFoot – clunky survey, SWRM – ungainly logging of individual actions, Offcents – not available in my region, Personal Carbon Footprint – was unable to load profile again after completing the survey). Another two out of the 21 were not included in the analysis to avoid an apples to orange comparison. Those two were Aerial, which tracks flight and rideshare emissions with email access, and Wren, which is a web app.

The rest, 13 apps, all successfully calculated current emissions but with varying degrees of accuracy. 4 out of the 13 were within 10% of the 28 number, 2 landed at around a 15-20% error rate, 3 had a 35-50% error rate, and the remaining 4 exceeded a 50% error rate. Most apps used surveys as either the main form of gathering data for emissions or as an accompaniment to bank account data.

The features of all of them also varied. 8 apps sold carbon offsets, 7 apps allowed the user to log carbon actions, 11 apps offered the user climate education in some form, and 5 apps included social features like group formation and group competitions.

A summary of my comparison below:

Links to the apps (add me as a friend!):

  1. Joro
  2. Decarbon
  3. Earth Hero
  4. Capture
  5. Yayzy
  6. Pawprint
  7. LiveGreen
  8. Klima
  9. One Small Step
  10. Carbn
  11. Greenly
  12. Carbon Donut
  13. Footprint

After using all of these apps for a period of time, here’s what I observed:

  • The personal footprinting market is still in its early days. While itwas difficult to get real numbers on how many users each app had, there were a few datapoints that gave some clues. First, the number of reviews in the app store. Earth Hero had the most number of reviews at 392, followed by LiveGreen at 269, Carbn at 170, Klima at 154, and Joro at 130. For context, the average app in the App store has 455 reviews.

    Earth Hero discloses the number of total users it has in its global stats – 86,429. That’s 220 users per reviewer…if we apply this 220:1 ratio across the reviews for each app and assume in the very bullish and unlikely scenario that each app has totally unique users, that’s 275,880 total people globally that are using these apps. Compare that to 588 million Apple users worldwide and you get 0.05% of the market. In other words, there are very few people actually using these apps and jury is still out on which one will take market share.
  • Some surveys were difficult to answer unless you already have a firm grasp on your activity and energy use. When determining consumption, many questions asked how often you buy new or used clothes, how much you buy relative to the average consumer, how many times a week you ate meat, etc. I found some of these difficult to answer – for example, do I buy the average amount, more than the average amount, or way more than average amount of electronics? Do I buy 4 outfits a year or 12? That’s not something I intuitively know unless I have dived into my purchasing history in detail.

    For someone who lives in an apartment, some of the energy questions were a little too biased to a homeowner. I don’t have a way to install solar panels in may apartment…in fact, I don’t even have a way to control the energy profile of my bill. I also don’t know how my water is heated or if the apartment uses gas for heat. I pay a single sum for utilities to my apartment and they control the rest.

    Even travel was kind of hard. How many people know the number of hours they flew in 2021? Or even how many miles put on their car? I had to wrack my brain to estimate those numbers – and if I was an impatient app user, I might have just given up in the middle of the survey.

    It seems like the easiest, most painless way to onboard a user – while also making sure the footprint is adequately accurate — is to use a combination of surveys and bank account information. Joro, Decarbon, and Yayzy all take this approach and use Plaid to protect user privacy. Greenly also does this but only connects to European accounts with an unknown service.

  • The calculations need to be more transparent. One thing that struck me was that, in seeing the large variance in footprint numbers across these different apps, it was hard understand exactly how these apps got to their numbers. For the vast majority of apps, the emissions factors used to calculate the footprints were not disclosed. As someone who was informed enough on emissions to want to use the app, curious enough to understand what actions I can take to reduce my emissions, and climate-incentivized enough to buy offsets for my emissions, I was a little frustrated at how low of a resolution most apps provided into what exactly was driving the numbers, especially since the numbers determined how much I would have to pay each month to offset my emissions.

    One app that did this well was Decarbon. Decarbon was able to show me the carbon footprint of each individual transaction, its backup calculation, and the source(s) for the emissions factor used. That resolution gave me more comfort that the footprint it calculated was accurate, which made me feel more comfortable buying offsets based on those numbers.
  • Incentivizing the user to change behavior is hard and accurately tracking that change is even harder. Gamification is not enough. Almost all the app makers had some gamification elements incorporated – points, leaderboards, challenges, streaks, levels, etc. Some had rewards like being able to spend points on trees planted or charities to donate to. There were also UI elements that provided the user with immediate gratification for a completed action – satisfying button presses, swipes, animated point totals that went up or CO2 emissions totals that went down.

    All of these exist in an effort to engage the user regularly in carbon reduction actions. In my experience, and as someone who never really got into video games, these weren’t enough. I consistently just did the actions I already wanted to do, like recycling or adjusting the AC. For the things that I didn’t want to do, like taking a cold shower, I struggled to find the motivation for it, even if it did get me points that would put me on a leaderboard. It seemed much easier to just pay $10 to offset my emissions from water heating for a year.

    And add to that, if I really was motivated by the points or levels, the tracking was usually easy to game. Some apps, like LiveGreen and Carbn, incorporated connections to cameras and Apple Health to reduce fraud, but most just relied on user input. It seems like the apps were trying to thread a needle – finding a user that was “almost green” who was motivated enough to download the app and to have gamification drive her to change behavior but honest enough to keep herself accountable to what her actual actions were.  

    The incentive is much stronger and the game much more fun if I can play with friends. So I see social features as a necessary part of these apps going forward (and it does seem like the apps without social features have it on their roadmap). But even with social features, it will be a constant race to try and make the game more interesting for the user if the incentives are driven by these gamification elements. 
  • Offsets varied widely in price and type and sometimes seemed a little too abstract for the average user to feel compelled to buy. The apps that had offsets by project charged anywhere from $7 to $154 per ton while the apps that had a single offset offering charged anywhere from $9 to $25 per ton. Most apps sold offsets related to forestry and renewable energy generation, but some also sold regen farming, cookstove deployment, carbon capture, and carbon sequestration projects. All in all, offsets varied a lot and for someone who isn’t in climatetech, the variance can feel overwhelming.

    For me, I felt a little disconnected purchasing an offset. The apps usually provided some information on each project, but most were just at most a couple paragraphs about what and where the project was. It was hard to visualize how my offset contributed or made an impact on that project. I also had to have faith that the money would go to the project in some useful and productive way. For some people, perhaps a guilty conscience is enough to motivate them to buy an offset and trust that the offset is doing good, but for many, I suspect that we’ll need additional transparency about the offsets and what they’re doing for them to want to make the purchase.

    Again, social features may overcome this. If it was en vogue to personally go carbon neutral, maybe the offset transparency doesn’t matter as much.
  • All this to say that the apps are worth downloading. Anyone who cares about climate should try these apps, know their footprint number, help the developers make them better, and maybe even buy and offset or two. Some might argue that personal footprint apps are a distraction – that individuals can’t really make a difference to our emissions goals and that it’s better to focus on decarbonizing the backend infrastructure. But I think these apps play a key role in building a conscientious and climate-forward consumer base that can be an informed advocate for a net zero future.

    Knowing how much my lifestyle has cost me in emissions has made me care more about the sustainability initiatives in industries I previously had little connection to. For example - not only will I think twice about that next Amazon purchase, I’ll be more interested in their zero-emissions shipping efforts knowing that they’ll reduce the impact of my bad shopping habits by half a ton. I think that alone has changed me as a consumer for the better.

TLDR; The personal carbon footprinting market is still small. There are things that can be improved in the apps around accuracy, usability, and features offered. But knowing and understanding my footprint number was a valuable exercise for me as a consumer.

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You don't get a credit! And you don't get a credit! The impact of IRA’s new clean vehicle credit

Posted by Deanna on August 18, 2022

On Tuesday, President Biden signed into effect the Inflation Reduction Act. In the last two weeks, I’ve looked at the climate-related credits and the methane emissions reduction fee in the bill. This week, I thought I might be returning back to the topic of carbon footprinting and away from the thrilling world of tax policy…but the question around the EV adoption was nagging me so much that I needed to look into it. So here we go.

For the most part the IRA is extremely positive, but as mentioned before, the EV credit is the one credit that seems regressive compared to the previous credit, limiting the credit with North American assembly, battery sourcing, buyer income, and MSRP requirements. Summary below:

Overall, some concerning effects about the new credit:

The bill cuts out 73% of previously-qualified EVs/PHEVs in 2022 and at least 65% of previously-qualified EVs/PHEVs starting Jan 1, 2023. The remaining EVs/PHEVs are (unsurprisingly) mostly American.

Out of the 80 EVs and PHEVs that we know are actively being produced for 2022 and 2023, 66 or 83% qualified for the credit (all or some portion of $7,500 depending on battery size and whether the manufacturer’s cap was met) under the old EV credit rules. The ones excluded previously were all of the GM and Tesla vehicles, which have already passed their 200,000-car manufacturer’s cap + the two fuel cell EVs in production – the Toyota Mirai and Hyundai Nexo – which weren’t included in the EV credit but had their own fuel cell vehicle credit that expired at the end of 2021.

Now, with the new clean vehicle credit:

  • The NAM assembly rule went into effect the moment that Biden signed the bill, which immediately excluded 50 cars from getting any credit. So only 30 cars, or 38% of EVs/PHEVs, still qualify for the existing old credit through the end of 2022 + the new credit starting in 2023
  • What that means is that through the end of 2022, only 18 cars actually have a credit, since out of the 30 cars mentioned above, 12 still have the manufacturer’s cap in effect until the end of 2022. So we go from 66 cars with a credit down to 18, a reduction of 73%
  • Starting in 1/1/2023, most of the other rules take effect. This includes lifting the manufacturer’s cap + adding MSRP limits + adding battery critical minerals and components requirements to scale the credit instead of battery size. Lifting the manufacturer’s cap adds back 12 cars but the MSRP limits removes 7, giving us a net gain of 5 cars. So now 23 cars have the credit NOT including the battery requirements. Going from 66 down to 23 is a reduction of 65%.

Assuming the battery requirements are met, those 23 cars consist of:

  1. Chevy Bolt EV
  2. Chevy Bolt EUV EV
  3. Chevy Blazer EV
  4. Chevy Silverado EV
  5. Cadillac Lyriq EV
  6. Ford Mustang Mach-E EV
  7. Nissan Leaf EV
  8. Rivian R1S EV
  9. Rivian R1T EV
  10. Tesla Model 3 EV
  11. Tesla Model Y EV
  12. Tesla Cybertruck EV
  13. VW ID.4 EV
  14. Audi Q5 PHEV
  15. BMW 3-Series PHEV
  16. BMW X5 PHEV
  17. Chrysler Pacifica PHEV
  18. Ford Escape PHEV
  19. Jeep Grand Cherokee PHEV
  20. Jeep Wrangler PHEV
  21. Lincoln Aviator PHEV
  22. Lincoln Corsair PHEV
  23. Volvo S60 PHEV

That’s 18 American cars (5 GM cars + 5 Ford cars + 3 Stellantis / Chrysler cars + 3 Teslas + 2 Rivians) or 78% of the list.

For EV purists, here are the numbers with EVs only:

Out of 43 total cars, 31 or 72% qualified for the old credit (again, 12 had already met the manufacturer’s cap). With the NAM assembly requirement, only 8 cars have a credit through the end of 2022 (assuming VW produces this year’s ID.4s in its new Tennessee factory), a reduction of 74%. With the caps lifted and MSRP requirements added in, and assuming the battery requirements are met, 13 cars will qualify for the new credit starting 1/1/23, a reduction of 58%.

It's possible that more cars will qualify as they ramp up their US factories over time. But this will take at least a couple of years for factories to be built and/or for existing factories to be configured for EV/PHEV production.

The battery minerals requirement is actually achievable near-term, but it will likely push battery pricing and also bias EV battery producers to LFP cells.

For the EVs/PHEVs that do qualify for the credit with the MSRP and NAM assembly requirements, there is still the question of whether they also fulfill the critical minerals and components requirements to receive either half (with one requirement fulfilled) or full credit (with both requirements fulfilled).

The critical minerals requirement states that in 2023, 40% of the value of the battery’s critical minerals must be sourced from the US or countries with a free trade agreement with the US. The percentage goes up to 50% in 2024, 60% in 2025, 70% in 2026, and 80% for 2027 and beyond.

Though the list of critical minerals in the bill is long, only six are material to EV battery composition: lithium, cobalt, nickel, manganese, graphite, and aluminum. The requirement states that the percentage is based on “value” of the critical minerals, which will probably be further clarified by the IRS, but we’ll take to mean market price of each mineral for now. Taking the average composition of minerals in each cell type and multiplied by the market price of each mineral, we get the following matrix:

Different battery chemistries have different value mixes and supply chain challenges. For NMC811 and NCA+, the 40% requirement can be fulfilled by sourcing just nickel from the right countries. For NMC523 and NMC622, the 40% requirement can be filled with lithium + nickel or lithium + cobalt or nickel + aluminum. For LFP, lithium alone can fill the requirement. (This is all assuming for simplicity’s sake that each mineral will be sourced from one location. It’s probably more likely that each mineral will come from a bunch of different locations. The IRS has their work cut out for them to figure out the accounting around all of this.)

If we take a look at the production of each of these minerals by country, we can tell how challenging it might be to source these minerals from the US or the qualifying free trade countries. Lithium is by far the easiest mineral to source with 77% of production in countries with free trade with the US (Australia, 52%, and Chile, 25%). Next is manganese with 17% of its production in qualifying countries (Australia, 16%, and Mexico, 1%). Nickel has 11% (Australia, 6%, Canada, 5%, and the US, 1%). Aluminum has 10% (Canada, 5%, Australia, 2%, Bahrain, 2%, and the US, 1%). Cobalt has 8% (Australia, 3%, Canada, 3%, and Morocco, 1%). Finally, graphite has a measly 1% (Canada).

First off, thank goodness for Australia. Without Australia’s lithium production and their free trade agreement with the US, most EVs would be screwed.

Second, if we combine this sourcing info with the minerals value matrix above, we can guess that most companies will be relying on lithium + nickel or lithium + nickel + aluminum sourcing to fulfill the requirement. 38% of lithium demand is for EVs at this point, so with 77% of production in the right places, there should be more than enough lithium supply now from the right countries to fill the requirement. The same can be said for nickel, though it’ll be more of a squeeze: nickel for EVs only compose 3% of the nickel market so vs. 11% of production, there should be enough supply for now (it’s probably enough of a shift for prices to go up though). Finally, aluminum is extremely abundant and presents little issue. Current aluminum demand for batteries represents <1% of aluminum production so vs. the 10% production number, manufacturers should have options.

The point is - theoretically, there’s enough production to source battery minerals from qualifying supply sources. Whether manufacturers are already doing that and if not, how long it takes for them to shift to the right supply sources, is a different question. Also, since most EV batteries are NMC, if shifting supply drives nickel pricing up, we may see overall EV pricing go up as well.

Finally, because of LFP batteries’ abundance of minerals concentrated in lithium and aluminum, it’s possible we see an accelerated shift to LFP by automakers to ease supply chain burdens and do more business with US-friendly countries. Tesla already uses LFP batteries in its Model 3 and Model Y base models and will probably qualify for this part of the credit as a result.

Graphite will be an issue for most EVs after 2024

A caveat to the above statement is that part of the battery minerals requirement is that no minerals or components will be sourced from a foreign entity of concern (China, Russia, Iran, or North Korea) in 2024+ (2025+ for minerals, 2024+ for components). For graphite, this is a big issue.

82% of graphite currently comes from a foreign entity of concern (79% from China, 3% from Russia, and 1% from North Korea). That’s vs. 33% of graphite that’s used for battery production. And because of graphite’s dominance in battery anodes, anode production is also concentrated in foreign entities of concern (mainly China with 85%), placing the components requirement in danger too.

If we don’t find another source of graphite, it’s possible that the majority of EVs will lose the credit either after 2024 because of the graphite sourcing or after 2023 because of anode sourcing.

The battery components requirement is trickier to get near-term

IRA requires that at least 50% of battery components to be manufactured or assembled in North America. This increases to 60% in 2024 – 2025, 70% in 2026, 80% in 2027, 90% in 2028, and 100% in 2029 and after.

65% of cathodes, 85% of anodes, and 76% of battery pack cells are manufactured in China, which does not bode well considering any included components from China after 2023 will disqualify cars from receiving the credit.

The percentage that the credit will be based on is also, similar to the minerals requirement, tied to the “value” of the components. It’s a bit more difficult to figure out what “value” means in this context and if the IRS will reach into individual supply agreements to figure out pricing for each component (hard to imagine that being practical). It seems like several sources (Novo, Visual Capitalist, University of Munster, Benchmark Minerals) point to the cathode being anywhere from 30 – 67% of the cost (depending on cathode pricing), the anode another 15%, the separator anywhere between 10 – 20%, and the electrolyte 5 – 10%. To get to the 50% requirement, manufacturing at least the cathode domestically seems necessary. Though there have been some announcements (Tesla, GM, Redwood, Lithium Werks) on large scale domestic cathode production, most facilities are in the earlier stages of development, which leaves at least 2 years of limited options for OEMs to qualify for this credit.

The flip side of this is depending on the interpretation of “manufactured or assembled,” it’s possible that all that matters is that the components are assembled in North America. If that’s the case, then there are existing options. Several OEMs already have cell production in the US (GM, Ford, Tesla), with many more battery cell factories on the way.  

So in summary, for the 23 cars that will qualify for the credit after 1/1/23, I’m…

  1. optimistic that most will meet the minerals requirement near term
  2. not so optimistic that most will meet the components requirement near term
  3. not so optimistic that graphite won’t disqualify almost all cars by 2024

…which translates to the average credit being $3,750 until 2024, when most credits will turn to $0 because of foreign graphite/graphite anode production.

Hope I’m wrong and the IRS issues guidelines that totally turn over these interpretations, qualifying more cars.

A few more observations:

This credit favors existing automakers and handicaps emerging ones

The sucky thing about this credit is that it removes the credit for some automakers at the critical launch point vs. later on when the cars have had enough consumer traction to grow on their own.

The two fastest growing EVs this year behind the Tesla Model 3 and the Model Y are the Hyundai Ioniq5 and Kia EV6, both relatively new EVs that have launched in the last year or so and both no longer qualifying for the credit. With an average EV premium of ~$10k, the lack of credit will this price point out of the reach of many consumers that have been considering these cars. Personally, I myself have been looking for a good AWD EV and am struggling a bit to justify paying $51k for an AWD Kia EV6 vs. a $38k fully loaded AWD Kia Sportage (I don’t even get surround view or a sunroof in the former). That sentiment is echoed across many different forums that I follow (r/electricvehicles, r/KiaEV6, r/Ioniq5) and I suspect that this will reflect poorly in Q3 and Q4 sales numbers going forward.

The problem is exacerbated for startup companies. Rivian is set to barely qualify for the credits with their base models but their higher margin near-term deliveries will exceed the MSRP caps. Fisker and Polestar both don’t fulfill the NAM assembly requirement and won’t get the credit. For a startup OEM, slower sales in the beginning has an outsized negative impact on further growth, limiting their ability to generate cash flow to reinvest in further growth or raise more money from investors. An incumbent OEM has 1) the advantage of being able to eat some of the losses of a lackluster launch with their other product lines and 2) the advantage of an existing brand and consumer traction to support their EV growth.

With the new credit favoring existing automakers with the resources to pivot production, source more expensive materials, and/or have enough traction to not need the credit, the startup OEMs have higher hurdles ahead.

This credit also excludes a good portion of buyers likely to buy an EV

The bill imposes income limits of $150k / single and $300k / joint filers to qualify for the credit. While this is reasonable, it does mean that an estimated 42% of EV buyers are now excluded from qualifying for the credit.

Money matters, especially in America…52% of Americans state that cost is a major barrier to getting an EV. 53% of Americans surveyed would NOT pay more for EVs vs. 22% of consumers globally.

A tax credit helps. 35 - 48% of Americans state that they’re much more likely to get an EV with a tax credit.

Again, like most of the requirements in this new credit, it’s hard to say how much the income limits will affect EV adoption…but 42% is a lot of people to exclude. And your average American seems reluctant to overpay for an EV unless it comes with a tax credit. We can only hope that more Americans will see the value of getting an EV despite the cost and/or OEMs will start lowering prices to appeal to the American buyer.

EV adoption in the US will probably slow down

A quick perusal of Reddit provides plenty of anecdotal evidence that consumers are rethinking EVs with the (lack of) new credit, but how much will this actually slow down EV adoption?

The good news is that most of the recent US transactions are from cars that will continue to have the credit going forward (or at least some credit, depending on the minerals and components requirements). 66% of 1H 2022 y/y growth in EV/PHEV sales were driven by 16 cars that will qualify for the new credit (mostly Tesla and some Jeep and Ford PHEVs).

That does leave 34% of growth without a credit though…and that 34% of growth represents 43 car models. This portion of the pie has also been growing much more quickly, boasting a CAGR of 119% vs. the credit-carrying group’s CAGR of 57% over the last 10 quarters.

Many estimates have EVs growing to ~3050% of US new car sales by 2030. At the low end, that represents an additional 4 million car sales vs. 2021 numbers. If the credit-carrying category keeps up a 28% annual growth rate until 2030, we can theoretically reach this number without needing other models. And so far, that category has been posting CAGRs much higher, so maybe we’re ok.

But if we assume that the projections slow Tesla growth to a more mature growth rate, as EVAdoption has done, then we’ll more likely need 3.5 million cars from other OEMs by 2030. 2.5 - 2.8 million of those cars will likely be from non-credit carrying cars. If the lack of EV credit slows down adoption of these cars by 5% a year, we’ll be looking at closer to 25% of new car sales by 2030 instead of the currently projected 30%. If it slows down adoption by 10% a year, that’s 22% of new car sales by 2030.

So yes, this credit will probably have a negative impact on EV adoption. The numbers CAN be compensated by more aggressive growth assumptions for Tesla, GM, and the other automakers that do qualify for the credit, but that’s only if these automakers can deliver on production and sell more to consumers with lower incomes.

Basically - we’ve either crippled our adoption by a few percentage points OR placed a large portion of our bets on a few companies to help deliver on 2030 projections.

TLDR; the new EV credit, while likely to help boost domestic manufacturing and sales of US car brands, does so at the expense of EV adoption. It will make EVs more expensive for the consumer by limiting supply chain, handicapping competition, and removing the credit for a good chunk of EV buyers.


The IRA's Methane Reduction Program is a gentle push in the right direction

Posted by Deanna on August 11, 2022

Last week I did a review of the new IRS climate credits in the Inflation Reduction Act (Sections 13101 through 13802). The other climate-related portions of the act (Sections 21001 - 23003, 30001 - 30002, 40001 - 40007, 50121 - 50303, 60101 - 60506, 70001 - 70002, 80004) cover appropriations to states and government agencies for various programs (home rebates, EV manufacturing, electric transmission, air pollution, etc.) with loose guidelines as to use of funds. For a more detailed list of what funds are assigned to what programs, check out the CTVC database.

I didn’t focus too much on these sections since how those funds will be deployed out of those agencies is still currently unclear. It’ll take time for these government agencies to figure out their rules for what projects / entities qualify for those funds. And then it’ll be an additional step to figure out how to enforce those rules in a practical way. Until then, the impact of these parts of the legislation are hard to judge.

That being said, Section 60113 is worth discussing.

Section 60113 is a methane tax on the oil and gas industry. It places a methane fee on oil and gas facilities that report >25,000 metric tons of CO2e / year. For whatever emissions exceeds the emissions threshold for that facility, the charge would be:   

  • $900 / metric ton of methane in 2024
  • $1,200 / metric ton of methane in 2025
  • $1,500 / metric ton of methane in 2026+

The emissions thresholds are as follows:

  • For offshore or onshore upstream production, either 1) 0.2% of natural gas sold from the facility or 2) 10 metric tons of methane per million barrels of oil if no natural gas was sold.
  • For natural gas compression, transmission, and storage, 0.11% of natural gas sold from the facility
  • For natural gas gathering and processing and LNG facilities, 0.05% of natural gas sold from the facility

There’s also an exception built in to exclude facilities that that are already regulated by state-level methane emissions requirements, provided that those requirements would result in emissions reduction equal or greater to those that would be imposed by EPA’s proposed rule from last year.

Using current GHG reporting, the potential impact from this fee is 37 Mt CO2e, maybe less

The >25,000 metric tons of CO2e / year is the same threshold used by the EPA to determine eligibility for facility-level GHG reporting, so we actually have an idea of what emissions would be subject to this new tax.

In 2020, the 2,103 qualified oil and gas facilities that reported to GHGRP emitted a total of 0.3 Gt CO2e / year. Of that amount, 77% or 0.2 Gt CO2 are from CO2, and 23% or 0.07 Gt CO2e (which is equivalent to 2.6 Mt methane) are from methane. To put this in context, the total emissions in the US right now is 5.8 Gt CO2e, so the covered facilities represent ~5% of the total.

If we impose the methane fee on the facilities that exceeded their thresholds we can see that an estimated 63% of current facilities are currently not compliant. Those facilities represent ~1.5 Mt methane in excess, or the equivalent of 37 Mt CO2e. With the 2024 fee amount, that’s ~$1.3 billion in fees paid to the government.

The numbers are possibly smaller considering the regulatory exception that may allow some facilities to bypass this fee. Facilities in states like Colorado can follow state regulations instead if the emissions reduction would be greater or equal to those imposed by the currently proposed but not active EPA rule. It’s unclear how that emissions impact would compare to this fee.

The economic impact won’t cripple operators by any means but can be significant

A non-compliant facility on average would pay $1.9mm for 2024’s emissions measurement. That translates to $0.43 / mmbtu or 4.3% of estimated revenue using today’s prices. Though 4% of revenue is no small change, commodity swings can be much larger for oil and gas facilities. Cost structures often take this potential volatility into account and are sized appropriately to be able to handle them. So at today’s prices, the economic impact should be easy for most operators to handle (9 facilities actually would have the fee take up more than 50% of revenue, but those are large outliers).

That being said, commodities do shift quickly and if pricing drops down close to the breakeven, the extra punch from the methane fee could hurt a lot more (average of 12% at $40 oil and $2.50 gas). So hopefully that itself gives operators enough incentive to take emissions reduction seriously.

These thresholds are generally in line with what industry has already set for itself but will incentivize laggards to comply

OGCI, composed of many of the large oil and gas majors, already met its 0.20% methane intensity target in 2020 and is now setting up to have a target of well below 0.20% by 2025.

ONE Future, a natural gas consortium, has publicly stated its goals to be 0.28% / 0.08% / 0.111% / 0.225% for upstream / gathering / processing / transmission & storage. These are much higher than the methane fee thresholds, BUT in practice (or at least in what's reported), the consortia has already reduced its emissions to be well under their goal and the methane fee thresholds. In 2020, they reported 0.11% / 0.04% / 0.02% / 0.14% for upstream / gathering / processing / transmission & storage, which, save for a 0.03% difference in transmission, are in compliance with these new methane fee thresholds.

So for the operators that have already set goals and are working on their methane intensity numbers, this fee should have low to minimal impact on their efforts.

But looking at the wide distribution of methane intensities across operators, there are many that are egregiously off base. This fee would hopefully help push those laggards to keep up with the rest.

The fee doesn’t apply equally, hitting the smaller facilities harder than larger ones

A couple of interesting trends to observe: the non-compliant facilities tend to be smaller facilities, having an average of 48 Tbtu production, more than 4x lower than the compliant facilities (perhaps a factor of the methane intensity goals mentioned above). Offshore facilities also tend to be more non-compliant than onshore facilities. LNG, though with very few facilities in general, is much more compliant than its traditional gas counterparts.

GHGRP under-reporting is a real issue and could handicap the emissions impact

What was confusing to me was the discrepancy in methane emissions accounted for under GHGRP and the methane emissions estimated by EPA’s GHG Inventory (GHGI). According to GHGI, methane from natural gas and petroleum systems account for 0.2 Gt CO2e in 2020, almost three times higher than the 0.07 Gt CO2e that is reported in GHGRP. That’s out of a similar 0.3 Gt CO2e number of total emissions. In fact, for some reason, the proportion of methane emissions reported in GHGRP is switched from the proportion of methane emissions reported in GHGI. I double and triple checked these numbers but couldn’t figure out why these don’t reconcile.

But beyond what could just be a government database problem is the overarching issue with GHGRP emissions accounting. There are more and more studies that point to GHGRP under-reporting for all sorts of reasons - industry non-compliance, bad methodologies, and reporting thresholds that exclude the majority of emissions. That's an issue not only for determining the fees in a rule like this but also for eligibility for GHGRP in the first place. Though GHGRP does put in place some verification procedures and requires operators to document all emissions reporting, there are still plenty of ways an operator can bypass the system, deliberate or not. Once there’s a real monetary incentive to do so, I suspect that under-reporting may be even more prevalent.

The way to counter this is with technology. With better methane monitoring technology will come higher standards for reporting. That will in turn allow EPA to not only verify the emissions numbers more easily but also allow operators better manage their own footprints in real time.

Some companies working on this problem: Project Canary, Kayrros, LongPath, Earthview, Seekops, Qube, GHGSat

TLDR; the methane fee is more of a gentle push vs. a kick in the butt. It likely won't have a big emissions impact, but it will play an important role of pushing industry laggards to catch up with industry leaders that are already setting similar methane intensity targets. Plus it generates an extra $1B for the government.


Latest beach read: the Inflation Reduction Act

Posted by Deanna on August 4, 2022

Taking a break from consumer footprints this week to talk about the Inflation Reduction Act (IRA), groundbreaking legislation for the climatetech world. It was introduced last Wednesday as a substantial revamp of the Build Back Better Act (BBBA). With BBBA-opposer Senator Manchin’s support, this budget reconciliation bill opens back up the possibility of passing key climate provisions introduced back in BBBA.

I’ve taken a (painfully) close read of the bill and summarized the climate credits provisions below. There are additional sections that provide funding for government entities / agencies for specific programs that aren’t covered but that are listed out in other sources, also below.

A few observations first:

  • The new EV credits seem awfully strict. To qualify for the full revised credit (which stays the same in total amount as the current credit), the cars have to be assembled in North America, be below a certain MSRP, have a major part of their battery materials and components sourced from the US or countries we don’t have a problem with (AKA not China), and be bought by individuals below a certain income. Considering many new and popular EVs like the Hyundai Ioniq 5 or Kia EV6 are assembled outside of the US, this could reduce the number of qualifying purchases pretty significantly…worryingly to the point where it slows down EV adoption.

    The good news is that with the manufacturer’s cap lifted, American automakers like Tesla and Chevy will be eligible for the credit again. But with the long wait times and continued supply chain issues, it’s unclear if driving demand in that direction will result in the same amount of EV uptake as if we kept the old credit.
  • The big winners of the bill seem to be emerging technologies, especially CCUS and hydrogen. A theme throughout the legislation was broadening the scope of existing credits to non-renewable clean technologies. The manufacturing credits, for example, includes hydrogen equipment, carbon use, recycling, and fuel cells. The electricity ITC added in dynamic glass, biogas, energy storage, and microgrid controllers. The post-2025 electricity credits make a point to be technology agnostic. There’s an underlying message being sent that we’ll need more than renewables to get to net zero – and that’s a very good incorporation by this bill.

    Out of all the technologies in the bill, CCUS and hydrogen seem to benefit the most.

    There’s a substantial uplift provided to the 45Q credits, near term doubling their value for non-DAC projects and quadrupling their value for DAC projects. With state incentives added in, projects should have access to anywhere from $60 – 260 worth of credits depending on their configuration. This should cross the breakeven point for most capture projects.

    The hydrogen credit also is a substantial change since hydrogen production previously had no applicable credit. The potential $3/kg credit can help bring costs down substantially – even to the point of being at parity with gray hydrogen for certain blue hydrogen projects. Scaling the credit based on emissions rate instead of technology type was also nice to see as an acknowledgement that there isn’t necessarily a winning technology in hydrogen yet, despite the nearly synonymous definition of green hydrogen with electrolysis these days. An interesting bonus for the hydrogen credit is also its ability to pair with the electricity credit. Most of the other credits exclude each other…but hydrogen is one of the exceptions. With that, it’s possible for an electricity-powered hydrogen production operation to receive double the credits for one project.

    The hydrogen and CCUS credits also have the benefit of qualifying for direct pay in the first 5 years of a project. Direct pay can help avoid the headache of structuring and sourcing tax equity, which can get earlier stage technologies off the ground faster by avoiding tax risk. Tax equity providers tend also to shy away from first facility projects, of which there are A LOT in the hydrogen and CCUS world. The direct pay exception will hopefully lead to slightly more derisked project economics and thus faster development.

  • Prepare for an infrastructure rush. It’s clear that this bill was meant to spur US manufacturing and infrastructure development, but some of the deadlines are quite tight. The electricity ITCs and PTCs without the zero emissions requirement have a construction deadline of end of 2024, which means that projects pretty much need to be FID-ed in the next 2 years. Given this, we should see a lot of early stage infrastructure projects pop up in the next 6 months if this bill is passed.

Here we go!

(Note 1: I am no lawyer and tried my best to interpret the bill given its language and the other sources mentioned below. If you notice any mismatches with your own interpretation, please give me a shout)

(Note 2: all of the following rates are NOT inflation adjusted like they should be to get the real rate.)

  • Pre-2025 PTC / ITC extensions and expansions (Sec. 13101 - 13103)
    • Extends PTC qualification deadline by 3 years to projects beginning construction before 2025 – this applies to wind, biomass, geothermal, hydropower, municipal solid waste, landfill gas, wave energy….and SOLAR, which had lost its PTC back in 2006
    • PTC stays at 1.5 cents / kWh ONLY if the project meets prevailing wage and apprenticeship requirements. Otherwise, it is 0.3 cents / kWh
      • There’s potential for two stackable 10% bonuses: 1) if the project’s products used in the facilities are produced domestically and 2) if the project is in an energy community (like a coal town)
    • Extends ITC’s qualification deadline for the highest rate (solar and geothermal electric had permanent 10% rates past the deadline) by 1 year to construction before 2025 for solar, fuel cells, small wind, waste energy recovery, and microturbine projects. Geothermal pump projects get a 10 year extension to construction before 2035
    • ITC reverts back to the pre-phase down rate of 30% to solar, fuel cells, small wind, and waste energy recovery projects meeting the deadline (if constructed after 2019 and placed in service before 2022, the rate is 26%), stays at 10% for microturbines, and upgrades to 30% for geothermal electric, combined heat and power, and geothermal heat pumps (with the last item starting a phase out rate schedule starting 2033). Energy storage, biogas, dynamic glass, and microgrid controllers get added to the 30% rate category. These rates are only available with prevailing wage and apprenticeship requirements and is otherwise divided by 5 (6% and 2%) if those requirements are not met
      • Additional 10% bonuses for domestic content and energy communities
      • Additional 10-20% bonus for wind and solar located in low income communities or housing
  • Post-2025 PTC / ITC creation (Sec. 13701, 13702, 13704)
    • Clean Electricity Production Credit  - Starting in 2025, any zero-emissions facilities regardless of technology can qualify for a 1.5 cents / kWh PTC (assuming prevailing wage and apprenticeship requirements are met) for 10 years + 10% bonuses like above
    • Clean Electricity Investment Credit – Starting in 2025, any zero-emissions facilities regardless of technology can qualify for a 30% ITC (assuming prevailing wage and apprenticeship requirements are met) for 10 years + 10% / 10-20% bonuses like above
    • Both of these credits will start phasing out after at least 2032 or when the US electricity emissions reaches less than 25% of that in 2022
    • Clean Fuel Production Credit – Starting in 2025, low carbon transportation fuel can qualify for a PTC of $1/gallon (assuming prevailing wage and apprenticeship requirements are met) * percentage decrease of the emissions rate from 50kg CO2e / mmBTU (e.g. 100% decrease, aka zero emissions fuel, would result in the full rate of $1/gallon)
      • For sustainable aviation fuel, the rates are upped to $1.75 / gallon * percentage decrease of emissions rate from 50kg CO2e (again, assuming prevailing wage and apprenticeship requirement are met)
      • This credit expires after 2027
  • Nuclear credit (Sec. 13105)
    • PTC for nuclear of 1.5 cents / kWh (assuming prevailing wage requirements are met) for nuclear facilities that are not advanced nuclear facilities (those already have a PTC) and are in service by 2024
    • Credit is reduced once revenue exceeds a certain threshold – as calculated by 80% * (revenue - 2.5 cents / kWh * kWh produced)…basically if my math is right, credit goes to 0 once average electricity sales price hits 2.875 cents / kWh
    • Credit doesn’t go into effect until 2024 and expires after 2032
  • Hydrogen PTC / ITC (Sec. 13204)
    • Creates a hydrogen PTC / ITC credits for projects beginning construction before 2033
    • Potential PTC credit of up to $3 / kg if prevailing wage and apprenticeship requirements are met (otherwise divided by 5) and according to this emissions rate schedule:
      • $0 / kg credit if emissions rate > 4kg CO2e / kg H2
      • $0.60 / kg credit if emissions rate is between 2.5 - 4kg CO2e / kg H2
      • $0.75 / kg credit if emissions rate is between 1.5 - 2.5kg CO2e / kg H2
      • $1.00 / kg credit if emissions rate is between 0.45 – 1.5kg CO2e / kg H2
      • $3.00 / kg credit if emissions rate is < 0.45kg CO2e / kg H2
    • Creates a hydrogen ITC credit of up to 30% if prevailing wage and apprenticeship requirements are met (otherwise divided by 5)
      • 0% if emissions rate > 4kg CO2e / kg H2
      • 6% if emissions rate is between 2.5 - 4kg CO2e / kg H2
      • 7.5% if emissions rate is between 1.5 - 2.5kg CO2e / kg H2
      • 10% credit if emissions rate is between 0.45 – 1.5kg CO2e / kg H2
      • 30% credit if emissions rate is < 0.45kg CO2e / kg H2
    • Can’t double qualify for hydrogen and CCUS credits
    • Can include retrofitted facilities
    • Can double qualify for electricity PTC / ITC and hydrogen PTC / ITC
  • Sustainable fuels credits (Sec. 13201 – 13203)
    • Extends biodiesel and renewable diesel credits 2 years through to end of 2024
    • Extends alternative motor vehicle fuel credits 3 years through to end of 2024 (had already expired end of last year)
    • Extends second generation biofuel credit 3 years through to end of 2024 (had already expired end of last year)
    • Creates a sustainable aviation fuel credit at a base $1.25 / gallon ($0.25 more than the biodiesel credit) + $0.01 for each percentage point GHG reduction exceeding 50% up to a total of $1.75 / gallon
      • In order to qualify, the fuel must have a GHG reduction of at least 50%
      • Credit doesn’t go into effect until 2023 and lasts for 2 years until the end of 2024
  • Manufacturing PTC / ITC credits (Sec. 13501, 13502)
    • Expands current 30% ITC for manufacturing of renewable / clean energy equipment to include recycling facilities, decarbonization-related facility upgrades (must reduce GHG by at least 20%), and facilities that manufacture hydropower equipment, energy storage equipment, grid modernization equipment, CO2 use equipment, hydrogen production equipment, fuel cell vehicles and vehicle parts, charging infra parts, hybrid vehicle parts
      • Can’t be stacked with other ITCs, 45Q, or 45V (hydrogen) credits
      • Starts in 2023
      • Adds prevailing wage and apprenticeship requirements
    • Adding an advanced manufacturing PTC through the end of 2032 (with 25% / year phase out starting in 2030)
      • Examples of PTC rates: for PV solar cells, 4 cents / watt; for PV wafers, $12 / sq meter; for solar-grade polysilicon, $3 / kg; for polymeric backsheets, 40 cents / sq meter; for a solar module, 7 cents / watt; for offshore wind vessels, 10% of the price of the vessels….
      • Covers other components like wind components, inverters, battery cells, battery modules, electrode active materials, and critical minerals
  • Clean vehicle credits (Sec. 13401 – 13404)
    • Eliminates the 200,000-vehicle manufacturer’s cap, allowing OEMs that have already reached that cap (Tesla, GM, Toyota) to qualify for the credits again
    • For new cars, credit qualification requires that the car have final assembly in North America - this goes into effect immediately vs. 1/1/2023 like most of the other requirements
    • For new cars, the credit is no longer scaled based on battery capacity but bifurcated into $3.75k if critical minerals requirement is satisfied and another $3.75k if the components requirements are satisfied. For PHEVs with small batteries, that’s up to a $5k credit increase than before
      • To qualify, at least 40% of the battery’s critical minerals must be sourced from the US or countries with a free trade agreement with the US. 40% increases 10% each year to 80% by 2027 and beyond. After 2024, any percentage of critical minerals from a foreign entity of concern (namely China, Russia, Iran, North Korea) will disqualify a vehicle
      • To qualify, at least 50% of the battery’s components must be manufactured or assembled in North America. 50% increases to 60% in 2024 through end of 2025 then 10% every year after until reaching 100% by 2029. After 2023, any percentage of components from a foreign entity of concern (namely China, Russia, Iran, North Korea) will disqualify a vehicle
    • For new cars, buyers have an income limits and cars have MSRP limits to qualify for the credits
      • Income limits are $150k for individuals, $225k for heads of household, and $300k for joint filers
      • MSRP limits are $80k for SUVs, vans, and trucks and $55k for other cars
    • Creates a one-time credit for the purchase of used EVs/PHEVs, which is the lesser of 30% of the value of the car or $4k
      • Used cars have to be sold by a dealer, at least 2 years old, and priced at $25k or less
      • Buyers have income limits of $75k for individuals, $112.5k for heads of household, and $150k for joint filers. They also are limited to 1 credit for every 3 years
    • Buyers of both new and used cars can transfer the credits to the dealer, meaning that buyers can receive the discount upfront instead of having to file for the tax credit. This takes effect in 2024
    • Both new and used car credits expire by end of 2032
    • Creates a credit for commercial clean vehicles (defined as >15kWh battery for over 14k lbs and 7kWh battery for under 14k lbs, capable of using an electric charger) of 15% of the vehicle value if it has a fossil fuel component or 30% if it doesn’t
      • Caps this credit at $7.5k for under 14k lbs (same as non-commercial) and $40k for over 14k lbs
      • Expires by end of 2032
    • Extends the clean fueling station ITC, which covers ethanol, natural gas / CNG / LNG, LPG, hydrogen, and biodiesel fueling or electric charging, 11 years (it had expired last year) to end of 2032
    • Clean fueling station ITC stays at 30% but has a cap of $100k per item vs. $30k per location, additional prevailing wage and apprenticeship requirements, and now only applies to stations in non-urban areas
  • Buildings credits (Sec. 13301 – 13304)
    • Extends residential home improvement credits by 11 years (had expired end of last year) through end of 2032
    • Modifies the residential home improvement credit to 30% of the total paid for energy efficiency improvements and energy property (like boilers or heat pumps) expenditures (as opposed to 10% of energy efficiency improvements and 100% of energy property expenditures) but raises credit limit to an ANNUAL limit of $1,200 from a LIFETIME limit of $500. Individual annual limitations are also included ($600 for energy property, $600 for windows, $500 for doors, $2,000 for heat pumps/boilers/stoves)
    • Extends residential clean energy credit by 11 years from end of 2023 to end of 2034
    • Changes residential clean energy credit from current 26% to tiered structure:
      • 30% for projects placed in service before 2033
      • 26% for projects placed in service starting 2033 and before 2034
      • 22% for projects placed in service starting 2034 and before 2035
    • Adds batteries to residential clean energy credit
    • Extends the credits for energy efficient new homes by 11 years through end of 2032 and raises credits for homes eligible for certain Energy Star new homes programs by up to a couple thousand depending on situation (also has prevailing wage requirements)
    • Effective 2023, raises the credits for energy efficiency improvements made to commercial buildings from $1.80 to $2.50 - $5.00 / sq ft (depending on how much energy costs are reduced) assuming prevailing wage and apprenticeship requirements are met
      • Additional guidelines put in place for retrofits; partial credits also eliminated
  • 45Q extension / expansion (Sec. 13104)
    • Extends deadline for qualification of projects 7 years to before 2033 instead of before 2026
    • Expands qualification to facilities with lower capture requirements (for electricity generating facilities, 0.01875 Mt from 0.5 Mt / year; for DAC, 0.001 Mt from 0.1 Mt / year; for others, 0.0125 Mt from 0.1 Mt / year) but adds a 75% capture requirement for electricity generating facilities
    • Increases credits for all years before 2027 to $60/ton for EOR/utilization and $85 (previously below $35 before 2026) and $85/ton for geologic storage (previously below $50 before 2026). For DAC facilities, the credits more than double to $130/ton and $180/ton, respectively. This is all provided that the prevailing wage and apprenticeship requirements are met (otherwise divide by 5).

  • Direct pay & credit transfer options (Sec. 13801, 13802)
    • Includes direct pay for PTCs / ITCs for tax-exempt entities, state or local governments, Indian Tribal Governments, or an Alaska Native Corporation
    • Includes credit transfers for everyone
    • Includes 5 years of direct pay for hydrogen, CCUS, and advanced manufacturing credits for everyone
  • Superfund taxes (Sec. 13601)Raises hazardous substances superfund tax for barrel of oil to 16.4 cents / bbl from 9.7 cents / bbl and adds an inflation adjustment
    • Starts in 2023

The full text: here

Other great summaries:


How our carbon footprints scale with wealth

Posted by Deanna on July 28, 2022

This week, following a similar vein to last week, will also be about personal carbon footprints. So if you’re sick of personal carbon footprints at this point, well, I’ve got a week or two more left on this subject! 😊

As I’ve mentioned before, people with higher incomes have a much larger impact on the environment. Rich people eat more, fly more, buy more…the list goes on. We saw this last time with the different incomes and corresponding footprints across countries.

But when you hold in-country infrastructure and emissions factors constant, how does wealth really scale personal footprint? Understanding this can help us figure out:

  1. What activities can people be more conscious of (for the sake of the environment) as they experience social and economic mobility?
  2. What are the most egregious contributions to carbon by the wealthy?

This might also provide some firmer benchmarks for me in understanding where I personally land on the carbon footprint spectrum compared to my income peers (which, by the way, has dramatically shifted since I quit my investment banking job…).

I looked at three income inflection points: 1) going from poverty to middle class, 2) going from middle class to upper middle class, and 3) going from upper middle class to ultra-wealthy. I assumed:

  • For a household at the poverty line, a household of 2.5 people was assumed to make & spend $22k / year, consistent with the federal guidelines. Also assumed that their main form of transport was by bus, they took no air travel, they lived in a house under 1,000 sq ft, and that their largest monthly spend was food ($282)
  • For a middle class household, a household of 2.5 people was assumed to spend $60k / year, which is the US median. This family uses 2 cars, flies once or twice a year, lives in a 2,500 sq ft house, and spends significantly more on food ($644) but also has significant other expenses.
  • For an upper middle class household, a household of 2.5 people was assumed to spend $122k / year, which is the average of the highest quintile reported by BLS and consistent with other ranges. This wealthier family drives more miles (imagine more members of the family having access to cars and Ubering here and there), flies four times a year, lives in a home with over 3,000 sq ft, spends even more on food (eating out more, buying premium groceries, etc.), while also doing a fair bit of shopping and recreation-related spending.
  • For an ultra-wealthy household, the author did not have great sources for what that spending was like, outside of celebrity divorce filings and a really well-researched Quora answer. But a household of 2.5 people was assumed to spend $1mm / year (which corresponds to a 5% return on $30mm, the definition of ultra-high-net-worth, minus taxes), flies almost once a month in a private jet, owns three large homes, and spends the most on clothing/goods and other services (housekeepers, financial managers, secretaries, etc.).

Note: Very similar calcs as last time were used in this analysis but done just for the US and using BLS-anchored income brackets. The full methodology is detailed at the end of this post.

Here are the results:


  1. Different income inflection points correspond to different carbon jumps. From poverty to middle class, the largest jump came from transport, but for middle class to upper middle class, the largest jump came from health and personal care (surprisingly) and for upper middle class to ultra-wealthy, the largest jump came from air travel (unsurprisingly). This does not correspond with the largest spending jumps – for poverty to middle class and middle to upper class, the largest spending jumps come from housing, while for upper middle class to ultra-wealthy, the largest spending jump comes from other services.

    As the budget expands, the impact of carbon-intensive non-essential spending grows disproportional to spending in general. For people in middle class, being able to drive and eat nicer food drives carbon footprint increases vs. people in poverty. For people in upper middle class, being able to afford nice personal care or expensive wellness items becomes a large source of carbon, but air travel, which is still a semi-luxury, remains a smaller source. For the ultra-wealthy, air travel becomes incredibly accessible and dominates the carbon footprint.

    As people experience socioeconomic mobility, they need to be conscious of different non-essential carbon “spending” throughout their life. There’s no one or two categories to always pay attention to (though certain categories are more common culprits than others – transport, air travel, and health).  

  2. We already talk about “lifestyle creep”…but we should also be talking about “carbon creep.” Lifestyle creep is what occurs when increased income leads to increased spending on what were previously considered luxuries. But, as this analysis shows, “carbon creep” is a separate phenomenon. Checking lifestyle creep doesn’t coincidently check carbon creep.

    Maybe understanding the relative carbon intensity of certain activities can help us make better choices with more discretionary funds available to us. In fact, one of the best things we can probably do is increase volume of purchases towards lower carbon intensity items that currently have to charge a green premium, hopefully increasing economies of scale enough to lower the price for future consumers that can’t pay the green premium. Early Tesla consumers helped do this (offset recently by supply chain issues…).
  3. Understanding the dollar vs. carbon trade-offs can help us make climate-forward purchasing decisions. Tracking the amount of money spent per ton of carbon can tell us how “expensive” or “cheap” our carbon is. The below shows the average dollar spent for a ton of carbon in each category:

    So in other words, it only takes $461 to emit a ton of carbon on air travel, while it takes more than 8x that amount to emit a ton of carbon on clothing / goods purchases. We can use these numbers to make better climate-forward purchasing decisions, like:
  • Wanting to save a ton of carbon only takes a budget reduction of $476 on the personal care side, equivalent to $40 / month vs. a budget reduction of $3,450 for housing, equivalent to $288 / month
  • If I want to “spend” 1 ton of carbon, that 1 ton essentially buys me $2,989 ($3,450 - $461) in additional budget if I spend it on housing vs. air travel
  • If I have $5,000 to spend, I can use it on air travel, which will generate 10.8 tons of carbon, or housing, which will generate 1.5 tons of carbon. To offset this carbon, at a price of $11/ton (2030 price), I will need to spend another $119 for air travel or $16 for housing. Thus for $5,000, I have incurred a set of additional fees of $119, or 2.4% of the total, vs. $16, which is only 0.3% of the total

    One side note about the last point: carbon offsets pricing does vary a lot compared to the actual $ spent per carbon emitted. The average offset right now is actually closer to $8/ton according to commodity markets, but as a consumer paying for offsets, your options vary from paying $15 - 22 / ton for services like Terrapass or Ecologi or up to $50 / ton paying for individual projects listed on marketplaces like that on Gold Standard’s website. Either way, the price paid for an offset is much less than the “price” paid to reduce carbon in one’s everyday budget, so there should be more incentive for those with the discretionary budget to do so (and the desire to be carbon neutral) to buy offsets.

Hope that was interesting and useful. I had fun with this one (especially combing through trashy articles to figure out how much celebrities spend).


The footprint profile for each socioeconomic class was calculated at the household level (because most of the spending data available was household spending not individual spending) and the divided by 2.5 people, the average number of people in a US household.

The household footprint was split into three different sections:

  • Transport – this was further divided into road travel and air travel. Thank you to FHA for contributing average car mileage, ICCT for LCA emissions factors, and EPA for average fuel economy. For air travel, I depended on Our World in Data for passenger-km, Climatiq for the emissions factor, and Carbon Footprint for the radiative forcing multiple.
  • Housing – this was based on average energy use for a house provided by EIA and Carbon Footprint’s US-specific emissions factor.
  • Stuff – this covers food, health, clothing & goods, electronics, recreation, and other (which includes things like childcare, insurance, banking, and education). The emissions for these categories were based on ton CO2e per dollar spent and the factors were pulled from Carbon Footprint. I assumed the US was a heavy-meat eating country (as confirmed by this table) and used the appropriate emissions factor from Carbon Footprint. The breakdown of expenses for each socioeconomic class were mostly taken from household budget surveys provided by BLS, except for that of the ultra-wealthy, in which the author used her best judgement (and some imagination) based on the sources mentioned above.   

Carbon footprints around the world

Posted by Deanna on July 21, 2022

After looking into emissions across different regions and income levels for the family planning post and the consumer sustainability post, I was super curious to explore a detailed breakdown of these emissions numbers. How does the US have some of the highest emissions per capita at 14 tons, more than double – or even triple --- some of its developed nations counterparts like Sweden (3.8 tons), the UK (4.9 tons), or Japan (8.2 tons)?

I first suspected that some of this was due to the US’ high oil and gas production. And indeed, many of the countries with the highest emissions per capita are some of the world’s largest oil producers (Qatar, 37 tons, Saudi Arabia, 18 tons, Kuwait, 20 tons) but the correlation isn’t perfect. Norway, which lands in the top 5 for most oil production per capita, only produces 7 tons CO2 per capita. Russia (10 tons) also comes in below the US despite ranking higher in oil production per capita.

So lifestyles are playing a part in driving these emissions numbers. But to what degree? To test this, I wanted to see if I could replicate emissions per capita for several countries using average household budgets, miles traveled, and emissions factors.

I hoped to understand better:  

  1. What does the US do in excess to get to such a high emissions per capita number compared to other developed nations? How far can we decarbonize while minimizing impacts to our quality of life?
  2. What are developing nations with very low emissions per capita sacrificing in quality of life to achieve those numbers? What kinds of practices can help them achieve a better quality of life in a sufficiently sustainable way?

The 7 countries I studied were: US, UK, Sweden, India, Argentina, Nigeria, and Japan. This group had good availability of data, “different-enough” geographies and lifestyles, and a wide distribution of emissions per capita numbers.

Here are the results (and for those curious on methodology, that’s at the bottom of this post):

Observations & takeaways:

  1. Road transportation is a huge factor in emissions numbers. The largest share of emissions for most of the countries with cars or motorbikes as a main form of transport (US, UK, Nigeria, Japan, and India all drive >3,000 miles/person in vehicles every year) is road transport. On an absolute emissions basis, the single largest contributor to personal emissions across the 7 countries is the US’ road transport category, at 4.4 tons / person / year. So transport is well-deserving of being targeted as a high-impact category for energy transition.

    If the US were to switch to EVs, we could see that 4.4 tons number drop to 1.4 tons, a 70% drop in emissions. If the US were to switch to high efficiency vehicles (average of 45 mpg), we could see a 43% drop in emissions per capita (4.4 to 2.5). With denser urban populations, it’s possible that VMT drops. Assuming the US average drops to the New York average and changing nothing else, that would drop our emissions per capita by less than 30%. But waiting for that drop to occur means waiting for enough urban transportation to develop to replace a car, which can take a loooong time in addition to being unrealistic for many people who can’t work in an urban setting.

    So clearly the highest impact (and for most people of sufficient means, the easiest) action we can take as a consumer with minimal impact to lifestyle is to switch to an EV. For those that don’t want to give up the reliability of current gas infrastructure, the equivalent reduction in emissions can be achieved by driving a super high-efficiency vehicle, or a car with fuel economy above 80mpg (some PHEVs can already do this if driven long enough in EV mode).

  2. Decarbonized grids + smaller, more energy efficient houses can very effectively minimize housing emissions, another big chunk of the equation. The big eye-opener here was Sweden. Sweden’s electricity emissions factor is 0.012 kg CO2e / kWh, 98% below the US at 0.48 kg CO2e/kWh, which is also the world average. Sweden’s grid has almost completely decarbonized and homes in Sweden use electricity for heating. That means that there is almost no contribution to emissions per capita from energy use in homes. For the US, that can save 2.4 tons / person / year.

    Japan’s emissions per capita for housing is also much lower than the US’ (1.2 tons, 50% lower than the US at 2.4 tons). Japan’s grid, unlike Sweden, is not decarbonized. Its emissions factor is actually higher than the US’ at 0.49 kg CO2e / kWh. But size and energy efficiency of the average home more than compensate for the higher emissions factor. The average Japanese house is 1,310 sq ft, which works out to be 582 sq ft per household member vs. the US at 2,301 sq ft, or 920 sq ft per household member. The average Japanese energy bill is 4,932 kWh vs. the US at 11,000 kWh, which is not completely proportional to the reduction in square feet. Japanese homes, being more energy efficient, use 3.8 kWh / sq ft vs. 4.8 kWh / sq ft in the US.

    So even if we don’t do anything about our grid or home heating, and keep our homes just as large going forward, we can reduce our housing emissions by 20% by reaching the Japan’s level of energy efficiency. But that’s not enough since that still leaves us with the largest housing emissions per capita than the other countries examined here. One pathway to at least achieving parity with Japan (the second highest in this list): lower the US’ average home size to 2,000 sq ft, match Japan’s current level of energy efficiency per square foot, and lower the grid emissions factor by 30%. That’ll bring us down to half the footprint without sacrificing much in lifestyle.
  3. Spending on health and wellness is an unexpectedly larger contributor…air travel, an unexpectedly smaller one. I hadn’t realized how carbon intensive healthcare is. The emissions factor for health and pharmaceutical spending is almost 8x that of spending on clothes, furniture, and other goods. I suspect the big reason is the large amount of plastic used in healthcare and health products. Even so, that was a surprise for me. Every $100 spent on health a month produces about 1 ton CO2e a year for each person.

    It's unrealistic to expect a big reduction in this number since healthcare is such an essential need. But the US spends more on health than any other country in this analysis, which can indicate 1) that it’s an expensive healthcare system but also 2) some of the spending could be in excess. It’s not a secret that the US has the biggest consumer markets in the world for things like supplements and fancy personal care products. How much of that do we really need? (I’m asking myself that question as a sucker for new skincare.)

    The other unexpected category was air travel. Air travel has traditionally been the hallmark of personal emissions in excess –  how many times do we refer to the classic irony of billionaires traveling around in private jets to environmental summits? But the truth is the average person in the US only takes 1.4 trips / 3,700 miles, which amounts to 0.5 tons of CO2e, or 1 ton if adding in the radiative forcing multiplier (basically emissions at higher atmosphere have a more damaging effect). So on an emissions per capita basis, air travel is not as big of a contributor as road emissions, food, health or housing.

    And actually, the emissions factor for air travel is lower on a per mile basis than that of a single occupancy car (0.13 kg / passenger-mile vs. 0.4 kg / mile for an ICE car). So for the same distance, flying is actually the greener option (being crammed into 900 square feet with 140 other people does have its benefits, I suppose). The flip side of that is that flying usually happens in couple-hundred to couple-thousand-mile chunks, which adds up on the emissions side very quickly. So for those that take several plane trips a year (myself included), plane travel’s contribution to emissions is much, much greater. But, thanks to the 53% of Americans that never fly, on average, it’s not a big driver of the US’ average emissions per capita.

    I realize, of course, that this can change very quickly if most Americans start taking several trips a year (not unfathomable with how cheap flying has gotten domestically). If we assume Americans start taking an average of 6 trips a year vs. the current 1.4, airline travel would shoot up to occupy a similar proportion to road travel on an emissions per capita basis.

  4. This just highlights how much change the world, especially the developed world, will need to experience to achieve 1.5. The goals currently set by the 1.5 pathway are 25 Gt / year by 2030 and net zero by 2050. 25 Gt / year in 2030 (with 2030 population growth) is equivalent to everyone achieving 3 Gt per capita. The only country that comes close to that in this analysis is Argentina – so basically imagine if everyone in the world switched to living an average lifestyle like the people of Argentina. That’s a huge change for most developed countries. In fact, looking at the UN’s Human Development Index, out of all the countries that score above 0.8 – the general threshold for developed countries – 90% have an emissions per capita higher than Argentina’s and 40% have an emissions per capita double Argentina’s.

    And then we add in the impact of developing countries. 80% of the population lives in a country with HDI lower than 0.8 and an emissions per capita of 3 tons. Out of these, about half live in a country with HDI between 0.7 and 0.8 and emissions per capita of 5 tons (think China, Mexico, South Africa – the “near developed” countries – let’s call this Group A) and the other half live in a country with HDI lower than 0.7 and an emissions per capita of 1 ton (like India and Nigeria from this analysis and most of Africa – let’s call this Group B). In order to facilitate a just transition, we need to make sure that the countries that need to raise their HDI can do so.

    Just plugging in an Argentinian budget / home energy use into the Nigerian and Indian profiles, we get 3.1 – 3.7 tons / person (that’s assuming these countries keep their transport the same). So in order to meet a relatively good quality of life (HDI > 0.8) and allow some room for “growing pains,” we must at least allow Group B to reach 3.7 tons / person.

    That will allow countries like India with extremely small homes (average home size of ~500 sq ft, which translates to a little more than 125 sq ft a person with 4 people) and small budgets to afford enough food and basic necessities. If we did that, that would leave the developed countries and Group A with just 11 Gt to split between them. Accounting for the larger population and further development that is needed in Group A, we assume that they can only get down to the 3 ton / person world average, which would leave the developed countries with a target of 1.3 tons / person.

    That’s right…to achieve our 2030 target, we may need to be aiming for nearly net zero in the developed world.

  5. There are other factors to consider that are beyond consumer living. A big flaw in this analysis is the fact that I assume emissions factors for expenses is pretty much the same across all geographies. The reality is that the industrial systems and infrastructure behind what consumers see and interact with can make a huge difference on the emissions factor, or the dollar spent per unit emissions. I don’t know what the variation is between countries, so I don’t know how much industrial change is needed to produce what magnitude of impact. This makes an improvement here a big dark horse since we don’t necessarily have these factors measured or benchmarked. But with many companies aiming for net zero, hopefully there is fast enough improvement that this makes the burden mentioned in #4 a lot lighter.


The footprint profile for each country was calculated at the household level (because most of the spending data available was household spending not individual spending) and the divided by the average number of people in a household (as provided by each country’s census data).

The household footprint was split into three different sections:


Consumer sustainability software: the dark horse

Posted by Deanna on July 14, 2022

I’ve always believed that for a carbon economy to be whole, consumers need to be part of the market. Consumers drive demand which can structurally shift supply chains towards cleaner, greener sources. By buying things at a green premium, consumers can make non-rational (in the economic sense) choices to push for sustainable products. This can incentive the industrial system that would, outside of what comes from investors, have little to no financial motive to transition.

Of course, the carbon economy can function just fine without consumers. Businesses produce carbon and buy offsets from other businesses and businesses can also pledge to be green for reasons other than consumer involvement (e.g. avoiding climate risk, investor pressure, or just plain wanting to do good). So it’s incorrect to say that consumer involvement is a necessity for energy transition.

But consumers do have power. The rapid proliferation of data, apps, social networking, and online marketplaces has given the consumer an unprecedented amount of optionality in almost every area of consumption. Food, cars, flights, electricity, gadgets…as a consumer, we’re armed to the teeth with choice. And with that choice comes leverage.

The other side of it is that consumerism has led to a substantial increase in emissions. The emissions gap between the wealthy and poor is well documented, with the richest 16% of the world having more than 7x per capita emissions as the poorest 50%. Even a wealthy microcosm like the US clearly shows this gap. Many of the same countries with the highest household final consumption expenditure (HFCE), a marker for consumer spending, appear at the top of the list for emissions per capita as well (most of the exceptions being those countries that are net exporters of industrial products, which ends up counting against them on the emissions front despite their low consumption).

If we can engage consumers in emissions monitoring and reduction, maybe we can redirect that consumerism to more sustainable sinks, which can have big impacts. If the US lowered its average per capita emissions to where Japan’s level is right now, we can reduce our emissions by 43%, or almost equivalent to Biden’s 2030 goal.

Anyway, I’ve justified this post enough! The point is that the consumer side of the carbon economy is worth engaging. It can be the dark horse in the race to net zero. There are already software tools in the market for the emerging “prosumer” – or the proactive consumer – to use in leading a more sustainable life. These software tools target four main functions, with the first three part of what I call the prosumer cycle.

The prosumer cycle includes: 1) calculating your personal carbon footprint, 2) purchasing offsets, and 3) making greener decisions. The cycle goes like this -> the prosumer calculates her carbon footprint, buys offsets to “neutralize” that footprint, then proceeds to make greener decisions that feed back to the footprint calculation, which hopefully produces a lower number. Many companies in the prosumer cycle help the consumer with two or three parts of the cycle, most often combining calculating carbon footprint with either buying offsets or lifestyle recommendations. Some examples below:

  • Carbon footprint calculators:
    • Klima, which calculates carbon footprint and sells offsets
    • Wren, which calculates carbon footprint and sells a monthly subscription for offsets
    • Capture Club, which calculates carbon footprint with GPS tracking and sells monthly or auto-offsets
    • Joro, which calculates carbon footprint with spending data and sells offsets
    • OffCents, which auto-calculates emissions from travel and sells offsets
    • Evocco, which calculates carbon footprint from groceries and sells offsets
    • Footprint, which calculates carbon footprint and recommends sustainable products
  • Offsets marketers:
    • Ecologi, which sells a monthly tree planting subscription
    • Terrapass, which sells a monthly offsets subscription
    • Treeapp, which lets users offset for free by planting trees in return for watching ads on sustainable products
  • Green decision apps:
    • Impact Score, which helps consumers scan products for sustainable info while shopping
    • Sustained, which helps consumer understand the carbon impact of their groceries while shopping
    • PlasticScore, which allows consumers to rate restaurants for plastic use and sustainability
    • DoNation, which enables consumers to organize campaigns for climate action

Outside of the prosumer cycle is how the consumer can support the climatetech ecosystem through investing choices. Many different companies are working to bring the consumer into green companies and projects. Just a few of them here:

  • Cooler Future, which screens and recommends sustainability funds for investors
  • Clim8, which builds and manages sustainability-themed portfolios for its investors
  • Ando, which offers banking services and uses its deposits to fund green initiatives
  • Abundance Investment, which allows individuals to invest in renewables projects and businesses
  • Energea, which allows individuals to invest in renewables projects
  • KlimaDAO, which is a DAO that offers tokenized carbon offsets

A big obstacle for these consumer apps is getting consumers to actually understand how to use these correctly. It’s not as natural to use a carbon footprinting app as it is a budgeting app or a social media app. I suspect that even the more popular apps on this list struggle to get the scale they need on the consumer-side…and I suspect that’s why many of these footprinting apps have developed enterprise products as well.

It'll be interesting to see what drives adoption of consumer sustainability software since there isn’t really “ESG pressure from stakeholders” for consumers as there is for companies…yet. The “stakeholders” for a consumer include friends/family, coworkers, and lenders (for car, house, etc). Will consumers be held accountable with an ESG score like they are with credit? Or will a peer-led movement drive adoption instead?

Something to ponder!


The impact of West Virginia vs. EPA: not great but not terrible

Posted by Deanna on July 7, 2022

Last Thursday’s SCOTUS decision on West Virginia vs. EPA made waves across the climatetech community in denying the EPA’s authority to set power plant emissions targets using generation shifting and market mechanisms like cap-and-trade. It set a restrictive precedence on the EPA’s ability to accelerate energy transition and removes one of the key regulatory levers that the US has in its emission reduction battle.

I wanted to better understand what the impact of this ruling can be on absolute emissions numbers, power sector participants, and general ecosystem dynamics.

First, to provide some context on the case…West Virginia vs. EPA emerged from West Virginia (and other states) suing the EPA over the Clean Power Plan (CPP). The CPP was issued in 2015 by the Obama administration and was never actually put into action. It was replaced in 2017 by the Trump administration’s Affordable Clean Energy Rule (ACE), which eventually also died. So none of the policies being argued about in this case are actually active in any sort of way.

Nonetheless, the case resurfaced on the Supreme Court docket in October 2021 and SCOTUS decided to grant it for review.

The language under consideration is in Section 111(d) of the Clean Air Act (CAA), the main air quality law for the US and one that gives the EPA administration rights over emissions control. In Section 111(d), the EPA is granted authority to establish a “standard of performance” for emissions sources — aka an emissions limit — using “the degree of emission limitation achievable through the application of the best system of emission reduction.” In non-legalese, that means that the EPA can set emissions limits based on systems they believe an operator can achievably put in place to reduce emissions to that limit.

In the CPP, the “systems” they argue can span three “building blocks”: 1) internal facility improvements like making plants more efficient by upgrading equipment, 2) shifting generation from coal-fired units to natural gas-fired units, and 3) shifting generation from natural gas-fired units to renewable generation sources or nuclear. CPP also includes the option for states to establish a multi-state credits trading system in order to achieve those emissions goals.

The ultimate ruling of the court claimed that building blocks 2 and 3 + the potential cap-and-trade system were not clearly systems covered by “best system of emission reduction” in the CAA and that, because of the ambiguity and significance of future generation mix, the major questions doctrine applies. Under the major questions doctrine, the regulatory agency must be given clear authorization by Congress to decide on major issues. Since the EPA has not been given clear authority by Congress, it has no authority to put systems in place to shift generation sources.

My first reaction to this was that the case presents a troubling degree of triviality coupled with just straight misinformation. The court’s argument over the interpretation of “systems of emissions reduction” was anchored by its repeated statement that the EPA had never implemented similar system-wide mechanisms previously. For example:

  • “The first building block was ‘heat rate improvements’ at coal-fired plants—essentially practices such plants could undertake to burn coal more cleanly…This sort of source-specific, efficiency improving measure was similar in kind to those that EPA had previously identified as the BSER in other Section 111 rules. Building blocks two and three were quite different…”
  • “Prior to 2015, EPA had always set Section 111 emissions limits based on the application of measures that would reduce pollution by causing the regulated source to operate more cleanly… never by looking to a ‘system’ that would reduce pollution simply by ‘shifting’ polluting activity ‘from dirtier to cleaner sources.’”
  • “Finally, the Court has no occasion to decide whether the statutory phrase ‘system of emission reduction’ refers exclusively to measures that improve the pollution performance of individual sources, such that all other actions are ineligible to qualify as the BSER. It is pertinent to the Court’s analysis that EPA has acted consistent with such a limitation for four decades.”

But there is precedence for EPA establishing external mechanisms as “systems of emissions reduction.” The EPA has several existing emissions trading programs. The one it offered up in response to the court’s criticism is the 2005 Mercury Rule, which the court said was not applicable because “in that regulation, EPA set the emissions limit—the ‘cap’—based on the use of ‘technologies [that could be] installed and operational on a nationwide basis’ in the relevant timeframe.” The court continues to argue, “By contrast, and by design, there are no particular controls a coal plant operator can install and operate to attain the emissions limits established by the Clean Power Plan.”

This seems to be at best, misinformation, and at worst, misdirection. The CPP did incentivize operators to switch emissions sources, but the limits provided were very reasonable. For new coal plants, the limit of 1,400 lbs CO2 / MWh assumed an efficient steam unit with partial carbon capture. For existing coal plants, the CPP did mandate that some level of emissions reduction had to occur but acknowledged that the limits would depend on each individual units’ potential performance vs. the sweeping limit placed on new plants. That means that it was likely that for an existing coal-fired plant, the limit would have been much higher. And even if we do take the 1,400 lbs CO2 / MWh as the limit for existing plants, there is research indicating that equipment upgrades like CCS retrofits or ultra-supercritical steam generators can be cost competitive with generation shifting.

The emissions impact is minimal to modest. As said before, the CPP, or even its less restrictive ACE counterpart, was never put in place, so there is no direct policy impact from SCOTUS’ ruling.

It’s also arguable what kind of impact CPP would have had in the first place. Despite not implementing CPP, the US has already reached the CPP’s 2030 target of reducing power sector emissions 32% from 2005 levels (32% of 2,411 Mt CO2 energy emissions in 2005 is 1,640 Mt…we’re at 1,551 Mt as of 2021). Nearly all of this can be attributed to coal retirements / conversions to NGCC and switching to renewables. Since 2007 (the peak in the last two decades), the US is down ~1,118 GWh of coal, offset by increases in nat gas, +679 GWh, and wind/solar, +459 GWh. Out of the corresponding 871 Mt CO2 decrease in power sector emissions, ~44% is due to using more nat gas and the remaining 56% from increase in renewables.

At the current rate of coal-to-nat gas and renewables switching (assumes linear rate of coal retirements and 60/40 switching to nat gas vs. switching to renewables), the US can get power emissions down 248 Mt by 2025 and 681 Mt by 2032, nearly completely switching from coal by the end of the decade. That’s a ~60% decrease from 2005 emissions levels, much more than the 52% that Biden recently announced as a goal for overall US emissions for 2030.  

No doubt that the CPP, if implemented now, would accelerate a transition. If we assume that all existing coal plants have an emissions limit of 1,400 lbs CO2 / MWh (an aggressive assumption for the reasons outlined in the last section) vs. the current average of 2,223 lbs CO2 / MWh, emissions from coal would go down 336 Mt in 2021. Additionally, if, as a result of CPP, half of the coal plants in the US decide to switch to nat gas (which has an emissions intensity of 859 lbs CO2 / MWh) instead of retrofit, that impact number goes up to 446 Mt. It takes 3-5 years from announcement to completion for a coal conversion project, so we can take these numbers to be comparable to the 2025 emissions numbers mentioned in the previous base case. Even with a mass wave of retirements that an emissions limit would incentivize, CPP would only reduce 2025 emissions by another 198 Mt and accelerate the complete coal retirement timeline by perhaps 2-4 years.

Bottom line is that even without policy-driven generation switching, the shift is already happening, and adding policy can provide an incremental but modest boost to switching.

Others in the ecosystem will need to step up to the plate. Although there is already a healthy amount of generation switching, what this ruling does is take away EPA’s ability to set up an even more accelerated schedule of switching until Congress gives it explicit authority to do so. This will put pressure on Congress to be more active in putting out legislation that makes this authority clear or specifying the regulations themselves.

The increased difficulty of the EPA to create carbon pricing or additional cap-and-trade programs might also be problematic. Cap-and-trade in the US has had a tumultuous history, with several failed attempts in Congress over the years to establish a program. It’s unlikely if EPA is not given the authority that Congress will be able to pass such a measure in time for it to make a meaningful impact.

There are luckily other ways for the ecosystem to regulate itself. One less tool in the EPA toolbox means one more that needs to come from elsewhere. The three market participants I see that will have a larger responsibility as a result of West Virginia vs. EPA:

  • Capital providers – most of the incentives for current power producers to switch are the ESG and transition requirements to access capital (especially in competition with peers). Current coal retirements are being led by utilities/power producers with pressure from their investors to meet net zero goals. As the EPA loses some of its leverage, the onus will continue to be on capital providers to establish financial consequences for not meeting industry-wide environmental benchmarks.
  • Startups working on the carbon economy – An organically built carbon pricing market can develop to serve as a proxy for a regulatory one. Many startups are already working to build tools and exchanges for creating transparent carbon pricing and a more liquid carbon market (e.g. Nori, Carbonfuture, Pachama, Puro, Sylvera, Viridios, etc.). Without the likelihood of a federal carbon pricing program, startups will have to keep pushing for the voluntary markets to fill the gap.
  • Other regulators – the SEC, state regulators, and Congress can all play a bigger part in attacking the regulatory issue from other angles. The SEC is already putting in requirements for climate reporting, though this only takes care of publicly traded companies. State regulators have the ability to put in state-wide cap-and-trade programs, like California has successfully done, or work with regulators in other states, as in the case of the Regional Greenhouse Gas Initiative. Congress, as mentioned before, has the greatest leverage in its ability to confer authority at the federal level.

All in all, though West Virginia vs. EPA is pointed to as one of the most significant environmental rulings in many years, I feel hopeful that the actual impacts from the decision are minimal. Emissions in the power sector are already organically decreasing because of non-regulatory market forces. Active environmental leadership will still come from the companies that have already made it a priority. And we have a good number of non-regulatory levers that we can pull to incentivize industry-wide movement.  Call me naïve but I have faith that structures we’ve built outside of regulation can continue to keep us afloat.

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