Category: Types of carbon removal

CfDs have worked in other markets; they just might work for durable carbon dioxide removal.

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As momentum builds around durable carbon removal, one assumption keeps resurfacing: that compliance markets will eventually unlock the scale and stability the voluntary markets have failed to deliver. What we are missing is a bridge that establishes price certainty today while preparing CDR developers to compete in tomorrow’s compliance landscape.

One of the most effective financing tools may already be in our policy toolkit: Contracts for Difference (CfD). Borrowed from the renewable energy industry, CfDs could offer carbon removal the market infrastructure it needs to scale by guaranteeing a specific price, thus catalyzing investment and enabling long term planning.

To start, let’s define what a CfD is.

CfDs are one of the clearest examples of smart public-private risk-sharing, and are used widely already in a different industry: energy. Contracts for difference have become a key market mechanism for scaling low carbon power (specially solar and wind) since its inception in 2014 in the United Kingdom. At its core a CfD guarantees a fixed price (Strike Price) for electricity over a long term (15 years in the UK). If the Wholesale market price (Reference Price) falls below this Strike Price the government pays the project operator the difference. If the Reference Price exceeds the Strike Price then the generator must pay back the excess to the government (Claw Back Mechanism).

Here’s a quick illustration, from a report by the Bipartisan Policy Center:

In the energy sector, this structure offers electricity generators a  secure, predictable revenue stream while ensuring the “public” or rate payers recoup gains when prices are high. In doing so, the CfD evolved from a simple subsidy into a risk sharing financial hedge.

Why did the renewable energy industry adopt CfDs?

In the energy industry, risk defines value. Who carries it, who mitigates it, and who gets paid to take it.

The industry realized that one of the most effective instruments seen for rebalancing risk between public and private actors (without distorting the markets) is the CfD.

At its core, a CfD is a long-term financial contract that stabilizes revenue for power generators by hedging against market price volatility. But beyond the pricing mechanism lies its strategic importance: CfDs allocate risk to the party best positioned to manage it. Governments absorb short-term market volatility while developers retain responsibility for construction, performance, and resource variability.

It’s a clean split. And it works.

For governments, this isn’t just a subsidy: it’s a market signal, a risk management tool, and – in some cases – a revenue-generating hedge. Current CfD structures are designed to require the project operator to pay back any revenue it earns above the agreed strike price, allowing governments to claw back¹ the upside and when prices collapse, they guarantee the floor that makes projects bankable. The result is a scalable, fiscally responsible way to accelerate investment in critical infrastructure that can be applied to offshore wind, solar, or carbon removal.

How CfDs enabled renewables to scale

Before CfDs, intermittent renewable energy (offshore wind and solar) struggled under volatile wholesale markets. These projects were capital intensive and had unpredictable revenue. Enter CfDs, by absorbing price risk governments created the financial certainty that developers needed to build large scale infrastructure and commit to large scale projects. 

Between 2015 and 2022, UK offshore wind saw a steep cost curve decline:

 

Developers responded by delivering massive capacity at ever-lower prices. For instance, the world’s largest offshore wind farm, Dogger Bank, secured its CfD in 2019 and achieved financial close soon after, clearing the path for a £9 billion project that began generating power in 2023.

By providing revenue stability, CfDs unlocked unprecedented levels of private investment, accelerating deployment and reducing clean energy costs in tandem.

The power of the two-way CfD lies in how it allocates risk between public agencies and private developers:

• • Price risk: the wild swings in wholesale electricity prices is transferred to the public sector, which funds or collects payments. This insulation grants generators the confidence to plan and build.
  • Volume and delivery risk related to actual performance, weather, and construction timelines remains fully with the developers, incentivizing them to manage and operate efficiently.
    
  • Upside returns when markets boom are recaptured by consumers or taxpayers, thanks to the clawback mechanism. Meanwhile, developers receive a stable, long‑term income regardless of market volatility .

Why this could work in Carbon Dioxide Removal 

Much like renewable energy in its early days, durable carbon dioxide removal (CDR) today is trapped by three interlocking market failures: high upfront costs, no long-term price certainty, and limited bankability.

Removing carbon dioxide from the atmosphere is a critical component of any credible pathway to net zero; however, despite growing recognition of its importance, the market for durable CDR has not grown as much as needed to achieve climate goals. The problem doesn’t seem to be its technological potential, but rather, it’s a gap in the economic structure. 

Developers face significant capital expenditures long before they can deliver a single tonne of removed CO₂. Outside commitment to substantial infrastructure investment is in many cases necessary upfront, with payback periods that are uncertain and years away. This happened already in the early challenges of offshore wind and utility-scale solar, which struggled to attract financing without predictable revenue streams.

At the same time, today’s CDR buyers (mostly voluntary corporate purchasers) offer no consistent long-term price signal. Carbon credit prices are fragmented and obscure, negotiations are bespoke, and there is a need for long term offtake agreements beyond a few years to support deep project financing. In this environment, even the most promising technologies remain non-bankable. Without a clear price floor or guaranteed demand, developers can’t raise debt, and equity investors face too much risk to deploy capital at scale.

Renewable energy broke through this impasse with the introduction of long-term contracts, in the form of CfDs. These contracts restructured risk: governments absorbed market price volatility, while developers retained delivery risk. By guaranteeing a fixed price for electricity for 15-20 years , CfDs enabled governments to shift market risks away from developers and unlock billions in private capital. This single innovation transformed renewables from speculative ventures into investable infrastructure. Today, CDR needs the same financial infrastructure.

CfDs for CDR can provide developers with the revenue stability needed to raise financing and commit to long term investment. And by anchoring demand though public procurement governments can send the same kind of credible signals that were so catalytic for renewable energy markets around the world.

The goal is simple: crowd in capital for durable CDR methods (DAC, BECCS, etc) by de-risking future cash flow and aggregating long-term demand. Furthermore, the promise of CfD contracts on the horizon would signify that carbon removal companies have staying power for the long term and thus encourage voluntary market buyers to purchase in the near term.

Project stakeholders would see benefits from the de-risking of durable CDR projects:

• Project developers want to be able to forecast price certainty going forward so that they can build out their revenue models and self-finance their expansion. For biochar developers, they would need this to purchase new pyrolysis equipment and expand their operations. For ERW, growing their feedstock and grinding operations would be needed, while DAC and BECCS players could use CfDs to achieve project financing to build new facilities.
• For governments, this achieves several purposes: a growing industry safeguarded by price through which they can expand their tax base. And it also enables them to hit a current (or future) carbon removal target on the pathway to achieving net zero emissions in their jurisdiction. To say nothing of the environmental or economic co-benefits from CDR projects.
• Investors especially would like to see this. To date, equity financing for carbon removal has been the majority of funding announced. As the industry matures, more stable carbon credit pricing and predictable revenue would be necessary to unlock debt and project financing.

How a CfD Auction could potentially work in CDR

In the UK, Contracts for Difference are awarded through competitive auctions:

Auction Administrator: the National Grid Electricity System Operator (ESO) is responsible for running the competitive auctions for Contracts for Difference (CfD). This includes pre-qualification, bid assessment, and notifying winners.

Contract Party: The Low Carbon Contracts Company (LCCC), a government-owned company, acts as the contractual party to the awarded contracts. It manages contract execution and makes (or receives) payments after projects become operational.

Policy Framework: The Department for Energy Security and Net Zero (DESNZ) sets the overall policy and parameters for the auctions, including budget for each allocation round.

The auction:

• • Renewable energy developers submit bids specifying the lowest price at which they are willing to supply electricity over the contract term.
  • The government awards CfD to developers who offer the most competitive (lowest) strike prices.
  • Payments Mechanism: once operational, projects:
    • Receive top-up payments when the wholesale market price of electricity (typically the UK day-ahead market price) is lower than the strike price; or
    • Pay back the difference if the market price is higher than the strike price.
    • This mechanism allows excess profits to be returned to the public

Integration with Emissions trading systems

Not many emissions trading systems offer pricing that would support durable CDR projects at the time of this writing. As mentioned in the Philip Lee primer on CDR integration with emissions trading systems, the critical point is to index at a strike price below the Emissions Trading System (ETS) price per ton. 

This mechanism provides incentive for project developers to lower costs, else reimburse the government for their price per ton. Governments would be incentivized to help with lowering the cost of financing for projects to achieve that lower price per ton as well – else the private financial backers may not enter into an agreement with the project developer to begin with and hence not provide any additional revenue to the government. The question becomes: at what credit price per ton would a financier find high enough in a strike price to ensure a sufficient Internal Rate of Return (IRR) for their own purposes.

What can CDR companies do today to advance the use of contracts for difference?

1. Work with a relevant governing body to create a CfD reverse auction, using industry best standards for quality (e.g. private registries, EU CRCF, ICVCM CCP, etc)
2. Get clear on what an acceptable carbon removal credit strike price would ensure profitability of operations, considering the CfD could be a long term contract backed by a government to unlock project development financing.
3. Start mapping CfD cost benchmarks by CDR method on to provide to potential auctioneers to execute an auction by different CDR method type.
4. Begin mapping for infrastructure – renewable energy, transportation, storage siting – that would support long term government contracting for large volumes of CDR tonnage.

Setting up these structures by 2030 would be crucial to unlock the promise of compliance markets to achieve carbon removal at high volume.

Isaac de Leon is a lawyer with over 15 years of experience negotiating energy and infrastructure deals across Latin America and Europe. After a career in oil & gas, he now helps shape the future of carbon removal, advising on legal structures, offtake agreements, and policies that unlock climate finance for the Global South. 

Jason Grillo is the Principal of Earthlight Enterprises marketing consultancy, Co-Founded AirMiners, and is a voluntary contributor to CDR.FYI. This post appeared on the Institute for Responsible Carbon Removal blog. 

The opinions expressed in this writing are each author’s own and do not reflect the position of any employer or associated organization.

¹A contractual feature in two-way CfDs that requires the seller to return any revenues earned above the agreed strike price. When market prices exceed the strike, the generator repays the difference, this locks in predictable returns for investors while protecting public funds from overcompensating projects. This mechanism turns CfDs into symmetric risk-sharing tools rather than one-sided subsidies.

“Every creator painfully experiences the chasm between his inner vision and its ultimate expression”  –Isaac Bashevis Singer

Summary: Carbon removal is at a ‘chasm’ point between early customers who are interested in visionary new products and a more mainstream market who desire pragmatic, whole solutions. There is some evidence that this transition is happening already in a very limited fashion.

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Hi all, I’m writing today as a participant in and observer to the early stages of the Carbon Dioxide Removal market, which appears to be at a crucial point. The hallmark of CDR purchases so far has been characterized by early customers who are intent on ‘seeding the market’, leaving an open question as to who a customer would be beyond that.

CDR.FYI’s 2024 Year in Review¹  sums up CDR at the end of 2024 as a:

“picture of a market that has been seeded and nurtured by a few hard-core buyers who have continued to increase their commitment while struggling to “cross the chasm” to the next stage of buyers who will further scale the market.”

This post (Part 1 of 2) will be descriptive, talking about CDR’s early customer segments by drawing from Geoffrey Moore’s excellent Technology Lifecycle Adoption Curve, outlined in detail in his classic marketing book Crossing the Chasm. 

In Part 2 I will be more prescriptive, suggesting ways that CDR companies could cross the chasm to find new mainstream customer groups.

Here is a graphic of Moore’s adoption lifecycle curve that I’ll refer to:

From this, three segments are most relevant to the industry now: Innovators/Enthusiasts, Visionaries (AKA “Early Adopters”), and the Pragmatist Early Mainstream. In doing so I’ll provide examples of CDR customers that are roughly in each of those segments to illustrate the nature of the voluntary purchasers to date.

A general sweep of this lifecycle curve paints a picture familiar to those who have followed the start of new technologies over time: Enthusiasts and Visionaries in an early market, followed by a much larger mainstream market, separated by a gap in expectations – The Chasm – denoting a marked difference in customer expectations for a more standardized, robust solution. Note how much bigger the Pragmatist segment is relative to the Technology Enthusiasts and Visionaries! Getting to that segment of customer is key to technology startups survival in the long run, and carbon removal is no different.

Technology Enthusiasts:

Description: This group (sometimes called Innovators) are most interested in technology for technology’s sake. They take pride in being the first to get their hands on something so they can experiment with it, and are usually the most forgiving of quality issues – priorities are access to anything new New NEW! 

To connect with these customers:  Features and possibilities are most important. No need to sell the larger vision – the technical aspects and ‘cool’ factor of being the first are enough to convince.

CDR Example: The first greenhouse customers from the famous Climeworks ‘Capricorn’ site in Hinwil, Switzerland which started selling CO2 gas in 2017 are the nearest Enthusiast customers. At 900 tons per year, Capricorn was a demonstration project relative to the scale of later Climeworks DAC facilities – it closed down in 2022. Notably its first customers were for the physical gas rather than for the carbon removal credits. The voluntary market crediting standards had not been developed yet, and the main application of this demonstration site was to provide a feedstock.

Visionaries

Description: This class of customer has a dream to transform the way business is done as a means of achieving a long range goal. That vision is the foundational basis of why they are making their usually high profile purchase. Typically, they are not very price sensitive at all, in service to the vision that they have for where the technology could go, and are willing to accept the product itself as enough – they’ll figure out the details later once the supporting services get sorted out. 

To connect with these customers:  Talk about The Big Vision about how this could revolutionize businesses, industries, and markets. (How to define those markets coming in Part 2…) In effect, they provide that first client for a startup, enhancing visibility and ultimately credibility through a successful pilot project – so the customer can show the world that this thing works on a limited scale outside a laboratory.

CDR Examples: In CDR, examples of this might be the first Stripe purchases long, long, ago (described in a Zoom event far, far away…)

Also, when Shopify began purchasing CDR in 2020 through its Sustainability fund, this was  clearly a move to be in the Visionary position, epitomized by the words of CEO Tobi Lütke: “We need more demand to get better pricing, but we need better pricing to get more demand. How do we solve this puzzle? By intentionally overpaying for carbon sequestration to kickstart the demand.”

One could argue that the Frontier Offtake purchases (and also its earlier Pre-purchases) also constitute this type of buying cycle. The large technology and consulting companies who constitute the Frontier buying group are doing so to seed the market for future purchases. 

To that end they have entered into long term agreements with several CDR companies who have the tech proven out enough to deliver over several years. This is a crucial step to help these firms enter the mainstream. The first production runs have an offtaker – and that’s crucial. The next step is to demonstrate they are less risky to more pragmatic customers outside of the Visionary customer segment.

The Chasm

While there are differences between Enthusiasts and Visionaries, the contrast in customer demand and size of market opportunity between them is not as great as between Visionaries and Pragmatists. 

A company selling the same technology to the same company might constitute a different customer on either side due to the rationale behind the purchase, price expectations, and sales style. Some companies are able to make this transition to meet Pragmatists customer needs at higher volume; some do not and do not make the crossing. I’ll talk about the definition of Pragmatists, and then provide some examples where we may be seeing some limited Chasm crossing already in CDR markets.

Pragmatists

This customer segment is interested in a whole solution that they can use for a defined business purpose. They expect progress to be incremental, rather than revolutionary, and have much higher standards of quality and are much more sensitive to price. They are not as interested in being the first to lead and demonstrate how business practices could change, and instead are more inclined to listen to other voices in their own industry and ask what standards exist for a new line of products on offer, which come with their own set of pre-prepared support tools. They also expect a selection of competitor options to choose from – which to them is a signal of a more robust, less risky set of solutions – and a rubric to evaluate these competitors so that their purchase might achieve the pragmatic business solution they seek.

It’s the rationale and expectations of the purchaser which are so different on either side of this Chasm. 

To connect with this type of customer: The large-scale purchasing Pragmatist is less likely to take a risk. They don’t want the pilot facility’s or ‘beta’ version of a product. Even with a First of a Kind (FOAK) facility, they would prefer not to have the first batch – more likely the second or subsequent batch runs. Showing them a ‘whole product’ (again, more details in Part 2) that produces results is more important than the core product alone.

CDR Examples: In Carbon Removal, the most pragmatic customer today arguably is Microsoft, especially in their 2023 and 2024 RFP purchases. The defining purpose of Microsoft’s behavior is in line with its 2020 pledge to by 2050 “remove from the environment all the carbon the company has emitted either directly or by electrical consumption since it was founded in 1975”. In short, they want the sheer tonnage that their portfolio of suppliers can provide to them through a rigorous RFP process.

Microsoft’s biggest project selections are the: the largest volume is Bioenergy with Carbon Capture and Sequestration – which has been around for longer than many other CDR technologies, so it is more of a proven method. The chief project developers to date are large Scandinavian energy companies, who themselves are more risk averse than a small venture funded startup, and in general can count on large levels of national government support.

Notably Meta left the Frontier group of companies and initiated Symbiosis in partnership with Microsoft, Google, and Salesforce to focus on less technically risky Nature Based Solutions to achieve a different type of carbon removal at a typically much lower price than durable CDR is able to offer.

Conclusions

CDR has drawn customers from all three of Moore’s Enthusiast, Visionary, and Pragmatist groups – some have found Pragmatist customers, others are striving – and at times struggling – to do so. Not all will be successful at making the transition to a more mainstream market.

Nat Bullard in slide 71 of his 2025 annual presentation indicated that there are over 500 CDR startups in the world – that’s a lot! And the early adopter market is not big enough to support them all. Hard prediction: many will likely go out of business or consolidate at distressed valuations in the coming years.

To forestall a significant decline of the industry, early stage carbon removal companies are going to need to find ways to create more mainstream, larger numbers of customers who will be needed to sustain industry growth – and remove more atmospheric CO2. 

What specific tactics could CDR suppliers employ to grapple with the Chasm? Read on in Part 2 – coming soon!

 

¹Disclosing I was a voluntary contributor to that effort

 

Jason Grillo is the Principal of Earthlight Enterprises marketing consultancy, Co-Founded AirMiners, and is a voluntary contributor to CDR.FYI. The opinions expressed in this writing are the author’s own and do not reflect the position of any employer or associated organization.