CDR Wrap-Up: Europe 2024

Bridging the "CDR Grand Canyon": Innovative Financing Strategies for Carbon Removal Startups

Scaling carbon removal (CDR) startups presents significant challenges, requiring a shift in strategy. While early capital typically comes from specialised venture funds and public grants, as companies mature, they need to attract a broader range of investors capable of supporting the capital-intensive scale-up phase. This transition from early-stage to growth capital is commonly referred to as the “valley of death” for climate tech companies, requiring substantial structured finance solutions to build facilities and ramp up operations.

While early-stage investors often prioritise technical and innovation risk, growth-stage investors look for a clearer path to revenue, commercial traction, and market scalability. Bridging this gap often demands significant capital outlay to build facilities, deploy infrastructure, and achieve commercial readiness—challenges that most conventional VC-style investors are hesitant to fund without proven cash flows or market demand.

Within carbon removal specifically, regulatory and market uncertainty stemming from the evolving landscape of carbon credits and removal standards makes it difficult for startups to project reliable long-term revenue streams.This, combined with the capital intensity and prolonged timelines required to scale many of these solutions can make traditional venture capital at later stages a poor fit.

To bridge this “CDR Grand Canyon of death”, CDR startups are increasingly turning towards blended finance strategies. Some successful approaches include:

• Grant Funding & Public Subsidies: These can be crucial in early stages, however, accessing this type of funding is not always straightforward, with a recent survey of European CDR startups indicating that only 22% of startups considered non-dilutive funding accessible, with bureaucratic delays and inflexible terms hindering timely access​ (Latitude Media).
• Equity & Venture Debt: Equity financing remains essential for growth stages, but several CDR companies in their scale-up phase have supplemented equity raises with venture debt to fund specific capital expenditures without significant dilution. This approach allows companies to roll-out their production while maintaining control over their equity base.
• Project Finance: For larger-scale deployments, project finance is a powerful tool. As CDR projects scale, project finance structures enable companies to raise large sums tied to specific infrastructure developments, secured against predictable cash flows.
• Carbon Market Instruments: Forward contracts and pre-purchase agreements have become common in CDR, as companies look to secure future revenues. Many carbon removal companies are obtaining pre-purchase agreements from large buyers or coalitions such as Frontier, which ensures upfront liquidity and clearer commercialisation pathways.
• Corporate Partnering: Forward-looking corporations that have established operations and deep balance sheets in areas adjacent to CDR companies’ solutions are beginning to see strategic growth opportunities in some of the associated supply chains.

Despite the  obstacles of growing in an ill-defined, frontier market, some CDR startups are breaking through by implementing innovative structures, such as long-term offtake agreements, co-developing infrastructure projects with industrial partners, and leveraging public-private partnerships to de-risk growth.

Neustark is a recent success story, having recently secured €69 million in funding to scale its CDR operations. At the Carbon Unbound Summit in September, the company’s co-CEO shared how they attracted strategic and growth-stage investors by enhancing their carbon credit business with a “storage as a service” model and collaborating with strategic partners. This approach de-risked their business and broadened market appeal.

To achieve similar success, CDR startups will need to develop versatile business models that reduce risk. Creating pathways that generate co-products or diversified revenue streams will be critical to unlocking larger capital pools and building resilience against the uncertainties of a developing market.

Building an equitable CDR market to bridge the global carbon finance gap

Carbon finance presents a once-in-a-generation opportunity to mitigate climate change and dismantle the extractive business models that contributed to our climate crisis. This opportunity calls for a mindset of abundance—one focused on innovation, collaboration, valuing natural assets, and mindfully engaging and rewarding communities that are the stewards of many climate projects. It also requires a robust understanding of the risks of building a new CDR market, which will shape how we quantify, manage, and invest in existing and frontier CDR solutions.

In my view, emerging markets, especially the Global South, are the most compelling markets for scaling CDR solutions. Not only does the region offer immense potential for tangible environmental impact—it also offers great business opportunities that can generate significant ‘alpha’ over similar opportunities elsewhere. There are several reasons for this:

Entrepreneurial Talent and Innovation 

Emerging markets are filled with resourceful and entrepreneurial minds, especially those embodying the "jugaad" spirit—a Hindi term that describes innovative, frugal solutions to complex problems. This mindset goes a long way in a field like carbon removal, where we need to try many pathways, and unconventional, creative approaches are essential for success.

Natural Carbon Sinks 

Emerging markets are home to some of the world's most abundant natural carbon sinks. Tropical forests, mangroves, and other ecosystems in these regions provide a unique opportunity for carbon sequestration, offering a natural solution to climate change that aligns with local ecological systems.

‘Additionality’ of Impact

Investors and buyers today are increasingly focused on the broader social and environmental impacts of their carbon finance activities. Emerging markets, with their potential to involve and reward communities and enhance biodiversity alongside carbon removal, are becoming the "additional" places for investment. These projects offer a multiplier effect—benefiting both the environment and communities. This is why it is critical that buyers/investors aim for long-term, forward-looking agreements, aiming for sustained and long-term impact, instead of focusing simply on spot markets. 

Early Mover Advantage

As the CDR market matures, the early movers in emerging markets stand to benefit the most. With lower upfront costs and potentially faster cost curve reductions, these regions offer a diversified investment opportunity that could yield higher returns. 

For all the positives linked to scaling CDR in emerging markets, it's critical to also point out some of the challenges. 

We need a well-developed capital stack to support project development and scaling, a clear policy landscape, and a clear understanding/mitigation of both macro and project-level risks.

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Information & Incentives are key solutions to create new CDR buyers

There's no question that nothing is more talked about in the carbon removal ecosystem than how to expand the base of buyers. While a few companies have stepped up to purchase carbon dioxide removal (CDR), most remain on the sidelines. Many organizations have the capacity to contribute but hesitate to engage. Recent data from CDR.fyi's quarterly update confirms this trend: the number of unique buyers has slightly decreased this year, with new buyers declining even faster.

In the emerging CDR market, buyers serve two critical functions: seed and scale. The scale part is straightforward. Buyers provide the capital needed to expand the market and help suppliers reach their potential. Transitioning from removing hundreds of thousands of tonnes to billions by mid-century requires substantial investment now. Early purchases enable suppliers to gain experience, build infrastructure, and reduce costs through economies of scale. Building a new industry takes decades— building bespoke solutions for the first time at scale, training people, establishing companies, securing permits, and developing new energy sources. The scale component demands an immediate start.

But not all CDR methods are alike. Some are ready for scaling today, while others are still in the innovation phase where we are figuring out what works best. This is where the seed function comes into play. Buyers drive innovation by getting a diverse ecosystem of methods and tested in practice. The most effective carbon removal methods may still be in development, and supporting a range of technologies increases the likelihood of breakthroughs that could lead to scalable and sustainable solutions. Even modest purchases can help new methods move from the lab to real-world application, making a significant impact. Milkywire for example has purchased from 27 early-stage CDR suppliers accelerating these companies’ deployments. Early CDR buyers can set a full table of tried and tested solutions for governments to scale. Even if voluntary purchases never reach massive volumes, each contribution plays a vital role in building a diverse portfolio of options ready for large-scale deployment.

Another crucial point to remember is that CDR doesn't have a natural buyer. Unlike renewable energy, green steel, or electric vehicles—which have consumers purchasing the end products—CDR is essentially invisible waste disposal without a direct market. Companies and governments are the only potential purchasers. That's why it's extra important for companies to start buying it—the market won't develop through any other means.

A lack of clear incentives is a primary reason for the shortage of buyers. Frameworks like the Science Based Targets initiative require permanent carbon removal for net-zero goals but do not yet mandate early action. Companies might see little immediate benefit in investing now when their targets are set for future dates. Purchasing CDR has also been complex, often requiring specialized knowledge and direct relationships with suppliers, but this is being remedied by actors such as Milkywire and Frontier. High costs and expectations of future price drops further discourage immediate investment. Yet price reductions depend on scaling removal efforts now; delaying purchases slows progress along the learning curve.

Information is key. One reason more companies are not buying may be a lack of understanding of why they should. The message outlined above needs to become better known. Standard-setting bodies should also incentivize immediate investments, for example by requiring interim targets that encourage near-term purchases. Accelerating the development of measurement, reporting, and verification standards—and publicly registering delivered tonnes—will enhance trust and reduce fear. 

Achieving net-zero emissions and stabilizing global temperatures depends on expanding the pool of CDR buyers and developing a robust, diverse supplier ecosystem. Early and strategic engagement ensures that promising technologies are tested and refined, preventing the market from converging on less effective solutions. By acting now, we're laying the groundwork for a sustainable and scalable carbon removal industry that can meet the demands of the future.