After a relatively flat first half of 2023, the latter half of the year has witnessed a remarkable surge in venture capital interest and investment in carbon and emissions technologies. The third quarter of 2023 has set a record, boasting the highest VC investment in this sector to date.

This spike is primarily attributed to a series of substantial deals, with nine surpassing the $100 million mark, and three of those nine exceeding $500 million, according to the latest Q3 2023 Carbon & Emissions Tech Report. These significant investments have predominantly been directed towards expanding manufacturing capabilities within the industry.

In this article, we explore the reasons behind the growing emphasis on carbon and emissions technologies in the VC landscape, while also reviewing the large-scale deals driving growth in this sector in 2023.

Government Backing for Direct Air Capture (DAC) Projects

Governments around the world are implementing a range of policies and regulations to incentivise and accelerate the adoption of carbon-reducing technologies. This includes measures such as carbon pricing, emissions trading systems, and tax incentives for clean energy projects. The alignment of VC investments with supportive regulatory frameworks amplifies the impact and viability of startups in the carbon and emissions technology sector.

In addition to VC investments, government support has played a pivotal role in the sector’s growth. The US Department of Energy committed a substantial $1.2 billion for the development of two Direct Air Capture (DAC) hubs, in collaboration with key industry players like Climeworks, Heirloom, Carbon Engineering, and 1PointFive. This funding injection underscores the US government’s broader commitment to carbon capture initiatives, encompassing point source capture, DAC, and the requisite transport and storage infrastructure.

Technological Advancements and Innovation

Rapid advancements in technology have unlocked unprecedented potential for developing innovative solutions in the carbon and emissions technology space. Breakthroughs in areas such as carbon capture, renewable energy, sustainable transportation, and green manufacturing/mining processes are revolutionising the way we approach environmental challenges.

VC investors recognise the immense market potential of start-ups and companies at the forefront of these technological advancements, specifically those providing low-carbon mineral mining and direct air carbon capture, which is driven by a need for carbon removal and net-zero targets. Amazon and JP Morgan are among two of several blue chip companies who have invested hundreds of millions of dollars in carbon removal credits, driven by the growing need for mineral resources and carbon removal.

EU’s Carbon Border Adjustment Mechanism (CBAM)

The conclusion of Q3 2023 also marked the initiation of the first phase of the European Union’s Carbon Border Adjustment Mechanism (CBAM). This mechanism mandates the reporting of carbon emissions for specific imported goods, including iron and steel, cement, aluminium, electricity, fertilizers, and hydrogen. Looking ahead to 2026, the EU is set to introduce tariffs based on its carbon pricing, potentially levying charges on unmitigated carbon associated with imported goods. This development will compel companies exporting to the EU to either adopt decarbonisation strategies or face tariff payments.

Large-Scale Deals Drive Growth

The standout feature of Q3 2023 has been the occurrence of several monumental deals within the carbon and emissions technology space. With a total value of $1.8 billion more than the second-highest quarter, these deals have been instrumental in shaping the current landscape. Notably, many of these investments are earmarked for the deployment and scaling of manufacturing capabilities, indicating a strategic focus on the production aspect of the industry.

Q3 2023 was defined by several landmark deals that significantly contributed to the quarter’s record-breaking deal value. Notably, Sweden’s H2 Green Steel secured a substantial $1.6 billion in early-stage VC funding to build the world’s first large-scale green steel plant, Redwood Materials raised an impressive $997.2 million in Series D funding to expand the US batter supply chain, and French low-carbon batter manufacturer, Verkor garnered an impressive $918.6 million in Series C equity, along with $648.5 million in debt and over $650.0 million in grant funding for a new gigafactory in Dunkirk.

William Berrington, ESG M&A Advisor at Goldenhill International says:

This surge in funding, coupled with sector-specific achievements, signifies a promising trajectory for the industry. As the sector continues to mature, it is poised to deliver innovative solutions that address the pressing challenges of climate change on a global scale.

What’s Next?

The surge in VC interest and government funding in carbon and emissions technologies during Q3 2023 is indicative of the growing recognition of the urgent need for innovative solutions to combat climate change. Large-scale investments, coupled with strategic government initiatives, are poised to drive significant advancements in the sector. As the industry continues to evolve, it is expected that further breakthroughs and transformative technologies will emerge, bolstering efforts to mitigate carbon emissions on a global scale.

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Investors are recognising that the transition to a low-carbon economy is not only a moral imperative but also a sound long-term investment strategy. Companies and technologies focused on carbon and emissions reduction are poised for sustained growth as they align with the global imperative to combat climate change. If you are a ESG-technology focused business looking to explore a potential sales process, then book a consultation with one of our ESG M&A Advisors here.