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:
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.)
The full text: here
Other great summaries:
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:
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:
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:
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:
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:
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:
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:
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:
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:
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!
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:
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:
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.
Taking a left turn here this week to talk about family planning and emissions.
The reversal of Roe vs. Wade was a huge event for American politics and threw the abortion debate back into the spotlight. 27% of voters now say that their candidate must share their views on abortion, a record high, while 16% or voters say abortion is not a major issue, a record low.
For most people, the abortion rights issue is a deeply personal one. Abortion is seen as an infringement on a personal belief system, a symbol of the government’s protection of a personal human right, or a personal healthcare need (almost a quarter of women in the US will experience an abortion sometime in their life). It’s a sensitive and divisive subject, one that’s most often discussed as a social issue or, in some cases, a women’s issue.
It’s not just a social issue though. Family planning has documented effects on other parts of society, including workforce demographics, poverty, economic growth, childhood education, and public health. Its presence or absence can drastically influence how societies grow longer term, which can color how systems that work around that growth should be built. Climatetech, I suspect, is one of those systems. I’m writing on this topic today to better understand how to think about family planning relative to our climate problem.
Here's what I found:
I think when I came into this topic, I had the notion (perhaps because I spent a lot of time with the Project Drawdown estimates from the last few weeks) that family planning would have a huge impact on emissions. But the reality is that while the numbers aren’t insignificant, they are modest compared to the potential impact of new technology solutions, especially ones that target our underlying industrial systems. We can use it as an effective solution, especially as it addresses other social and economic goals in parallel, but it definitely cannot be the focal point for an effective climate strategy.
Another point worth mentioning is that family planning has already come a long way, especially in developed nations where emissions per capita are highest. If we stop paying attention to family planning and let fertility rates run unchecked, there could be multiplicative effects on emissions far greater than that of developing nations. So it’s definitely something we need to make sure to maintain at sufficient levels to allow our emissions problem to not grow too large for us to handle (though many might say we’re already there).
To continue with the circular economy theme, this week I’m covering different technologies that have emerged in recycling.
The landscape can be divided into two parts: inorganic waste and organic waste. Inorganic waste includes your typical recyclables (cardboard, plastic, glass) and other waste that is harder to break down in a landfill (textiles, carbon fiber). Organic waste is waste that contains organic compounds like food waste, biodegradable materials, wood, waste plants, etc.
When we think of recycling, we usually think of inorganic waste. Since it can’t be easily broken down by microbial organisms, inorganic waste must be 1) collected & transported to a sorting center, 2) sorted into different bales of material, and 3) shipped off to specialized processing facilities for recycling into new materials or products. Each one of these steps has a variety of startups attached to them:
(Note that the companies mentioned are not vetted or sorted. This is just a list I compiled of advertised technologies from various companies)
Recycling organic waste is also a very important part of the recycling ecosystem. Organic waste can generally be divided into food/ag waste, municipal waste, and waste wood (wastewater sometimes get included in this too, but I think water warrants its own topic).
All of this just covers a fraction of the innovation we need in recycling. Making anything valuable from discarded material is a hugely creative task and will require the scrappiest of entrepreneurs, pun intended.
*Circular SynTech is a client of Boundless Capital Partners, of which I am an advisor.
Today I want to talk about…recycling!
Recycling is often more so described as “cleantech” instead of “climatetech” because the conversation typically revolves around its impact on surrounding ecology – less trash = less wildlife in danger = better for biodiversity. It’s not commonly talked about in the context of reducing emissions, and in fact, many in the climatetech universe consider recycling to be a potential distraction away from climate goals. Consider these headlines:
But recycling does have a tangible and positive impact on emissions. It helps avoid both the process emissions from virgin materials (by sourcing those materials from recycled material) and the emissions from decomposition of landfill waste (by diverting landfill waste to recycling centers).
At the surface level, the quantity of this potential emissions reduction is small. Project Drawdown calculates ~0.2 Gt/year average impact (5.5-6 Gt over 30 years) assuming household and commercial recycling rates more than double to ~65-68% by 2050. But that estimate doesn’t cover potential impacts from recycling paper (~0.04 – 0.07 Gt/year), “recycling” organic waste like food scraps into compost (~0.07 – 0.1 Gt/year), digesting industrial scale organic waste from ag and wastewater into biogas (~0.2 – 0.3 Gt/year), digesting household organic waste into biogas for cooking (0.15 – 0.32 Gt/year), landfill gas capture (~0 – 0.07 Gt/year), and other waste-to-energy (~0.07 – 0.1 Gt/year), which all add up to about another 0.7 Gt/year impact. So all in all, the practice of recycling – in the broadest sense of the word – can reduce annual emissions by nearly 1 Gt.
And that’s only the direct impact of recycling to emissions. There are also indirect impacts which are harder to quantify.
The point is recycling does have an impact on the climate and we should care about it for climate reasons in addition to the much-discussed ecological and “courteous neighbor” reasons. It’s not a solution set we should deprioritize because of its arms-length relationship with direct emissions. Recycling is firmly within climatetech.
Next week, I plan to chart out the different types of recycling (and related circular economy) technologies. Stay tuned!
After researching the sustainability stack for corporates last week, I thought it might make sense to look at what a similar stack looks like for investors.
Incorporating ESG, and the closely related sister topic of sustainability, for investors has exploded, largely thanks to a combination of regulation, growing consensus around ESG’s role in long term risk management, and peer/parent pressure. ESG-mandated assets have more than doubled in the last five years to represent ~40% of all managed assets globally. By 2025, that number is projected to be closer to 60%.
Anyone who has worked around sustainability or ESG knows that there is a healthy amount of confusion present in almost all aspects of its incorporation in investing. A big question continues to be what information in this area is relevant to investors, with what’s widely considered relevant information (e.g. impact on environment, impact on community) notorious for being hard to distill down into usable metrics. ESG reporting provisions, which are supposed to help guide these metrics, are incredibly fragmented (over 600 exist as of 2021). And getting any of this information cleanly and regularly continues to be an IT challenge for most firms.
All of this has encouraged startups to develop new tools for investors to manage sustainability and ESG.
The software stack for investors can be divided into two parts: 1) third party data on companies that is compiled for use by investors, which feed into 2) overarching portfolio management tools. Both areas have a robust number of companies working on solutions within them, though the number of startups in general aimed at selling to investors seems markedly lower across the board than the number of startups aimed at selling to corporates (which is interesting because ESG is supposed to be an investor-facing framework, perhaps a factor of how stingy investors usually are with what software they purchase). Here’s how it lays out in more detail:
(Note that the companies mentioned are not vetted or sorted. This is just a list I compiled of advertised software applications from various companies)
A few observations:
It’s been interesting to observe the vast array of digital technologies available to help build out a company’s sustainability strategy. What initially started as a space largely dominated by consulting firms and ratings agencies (e.g. Bloomberg, Sustainalytics, and MSCI) has now grown to be a thriving software-driven ecosystem.
VCs are enamored with funding corporate sustainability software (or climate-driven software of any kind). Over $570mm have been invested in climate reporting software in the first half of 2021, which, while only ~1% of all climatetech investment in this period, was spread over a larger number of early stage deals. A similar report by CTVC highlights that Carbon, the bucket of companies that includes carbon tracking and accounting software, experienced significantly more growth Y-o-Y in number of companies funded and new unique investors than other sectors. At face value, this is one of the few subsectors in climatetech that VC is well primed for: it’s easily scalable, capital light, has a huge market size (any company that cares about sustainability, which is everyone these days), and directly benefits from the large number of corporate dollars going into transition.
There are several different flavors of corporate sustainability software:
(Note that the companies mentioned are not vetted or sorted. This is just a list I compiled of advertised software applications from various companies)
A few observations:
Some other resources for those that want to look further: