Carbon capture stocks have come into the limelight, as countries around the world plan to hit net zero emissions by 2050. It won’t be long before companies and economies feel the impact of climate change on GDP and corporate profits. A Swiss Re report estimates that climate change could have an 11-14% impact on global GDP by 2050. This could wipe away up to $23 trillion of global GDP. These warnings have captured the attention of major governments.
The United States, China, and Europe aim to halve CO2 emissions by 2030 and become carbon neutral by 2050. Carbon capture plays a key role in achieving this target. This technology traps CO2 at the source of emission and transports it to an underground storage location. It prevents carbon from being released into the atmosphere.
Why does the World Need Carbon Capture Technology?
The United Nations Intergovernmental Panel on Climate Change (IPCC) has developed a pathway to limit global warming to 1.5°C. To achieve this limit, the world needs to capture 7.38 Gt of CO2 per year. Carbon capture technology is a viable solution. It works in two ways:
- The first method reduces new CO2 emissions by capturing and storing carbon from large point emission sources like power plants.
- The second method is to capture existing CO2 emissions through direct air capture (DAC). The World Resources Institute believes DAC could remove ~1.5 billion tons of CO2 per year by 2050. This is equivalent to taking ~300 million cars off the road per year!
Challenges and Opportunities in Carbon Capture
Adopting the carbon capture process could take time as technology deployment needs significant capital. Moreover, this technology can only be profitable when it achieves a certain scale. A capital-intensive industry like carbon capture relies on government subsidies to grow. The industry needs a higher carbon price (of around $100/ton) to make carbon capture profitable.
Work has begun on addressing the above challenges. The US offers a carbon tax credit of $12-$50/ton. There are proposals in Congress to boost the credit to as high as $175/ton. Fortune Business Insights forecasts the global carbon capture and sequestration market to increase at a CAGR of 19.2% by 2027.
As the industry is at an initial stage and not yet profitable, most pure-play carbon capture companies are private. But major oil companies are also participating in carbon capture utilization and storage (CCUS) projects. Here are five stocks that will benefit from the upcoming CCS trend.
Aker Carbon Capture
In August 2020, Norway’s Aker Solutions spun off Aker Carbon Capture (ACC) and listed it on the Oslo stock exchange. It is one of the largest publicly-traded carbon capture companies, with a market cap of $1.3 billion. The company has over 20 years of technology development and operational experience.
ACC provides carbon capture installations for small and large facilities. It also offers Carbon Capture-as-a-Service where the customer pays per ton of CO2 captured. It is involved in the flagship Northern Lights CCS initiative and had a NOK 1.9 billion order backlog in 2021.
ACC is not yet profitable but is a beneficiary of the CCUS opportunity. Moreover, it has the backing of Aker Horizons, giving it the flexibility to operate at losses while expanding production. The company’s American Depository Receipt (ADR) started trading on the US over the counter (OTC) market in March 2021. The ADR has surged 35% since then.
Another carbon capture company, Canada’s Delta CleanTech, is a small-cap firm with a market cap of $6.14 million. It also offers solvent & glycol reclamation and hydrogen fuelling infrastructure. It is expanding into carbon credit origination, aggregation, tokenization, and streaming business.
Delta CleanTech has over 20 years-experience in CCS technology. It spun off from HTC Extraction Systems in January 2021 and started trading on Canadian Securities Exchange in August 2021. Since then, the stock has dipped 82.5%, underperforming other carbon capture stocks, as the company continues to make losses. As I said before, such new pure-play carbon capture companies are yet to achieve the scale where their operations become profitable.
Delta CleanTech has growth potential as the Canadian government plans to increase carbon price to C$170 per ton by 2030.
Equinor is a Norwegian oil and gas company that operates the world’s oldest CCS facility. The company has participated in 40 CCS projects in the last 20 years, including the Northern Lights CCS initiative. Equinor stock surged 34% year-to-date as oil and gas prices rose due to the supply crunch from the Russia-Ukraine war. This stock can give you the benefit of the energy industry’s transition to clean energy.
ExxonMobil is among the oil majors that invest in CCS facilities. It has CCS facilities in Wyoming, where it captures 7 million tons of CO2 a year; Qatar (2.1 million metric tons a year); and Australia (4 million metric tons a year). It plans to open a CCS hub in Texas. The hub is expected to have a capacity to store 100 million tons of CO2 annually by 2040. ExxonMobil can achieve the scale needed to profit from CCS projects.
KraneShares Global Carbon Strategy ETF (KRBN)
The above stocks will give you exposure to the operational efficiency of CCS projects. But the KRBN ETF will give you exposure to carbon prices by investing in carbon credit futures contracts. According to IHS Markit estimates, carbon prices of $147/ton is needed to meet a 1.5°C global warming limit. That is almost triple the current price of $51.45/ton in December 2021. Carbon prices would remain volatile in the short term, but increase in the long term to make CCS projects viable.
The next few years are crucial for the CCS industry as the energy sector accelerates its move to clean energy. The governments are firing all cylinders to achieve carbon neutrality and the above five stocks and ETFs can tap the CCS opportunity. The pure-play carbon capture stocks will continue to remain volatile in the short term as they are yet to show profitability. But this volatility could be partially offset by dividends from oil stocks. I would suggest investing in CCS stocks for long-term wealth creation.
Disclosure: The author holds no position mentioned in this article. Freedom Stocks has a disclosure policy.