Google recently announced a landmark carbon offtake agreement with US-based direct air capture (DAC) company Holocene at USD 100 per ton, marking the lowest price ever for a DAC offtake deal. The 15-year contract involves purchasing 1.5M tons of tech-based removal credits starting in the early 2030s.
Holocene, a US-based startup specializing in DAC technology, captures carbon dioxide directly from the air for permanent storage. The company has previously received funding from the US Department of Energy (DOE) and was a finalist in the XPRIZE Carbon Removal competition.
DAC and other carbon dioxide removal (CDR) technologies are increasingly recognized as critical tools alongside traditional emissions reduction strategies to achieve net-zero targets. DAC’s ability to capture and remove atmospheric CO₂ addresses both current and legacy emissions, playing a unique role in tackling hard-to-abate sectors. However, DAC remains a nascent technology, with high costs and scalability challenges being significant barriers.
Despite the challenges in scaling the DAC market, credit prices have declined due to technological innovation, financial incentives, and investments that have helped scale the market in its early stages. Tax credits, such as those from Bill C-59 in Canada and Section 45Q in the US, are examples of how other governments may continue incentivizing DAC projects.
Carbon offtake agreements are also seen as a key driver for scaling the DAC market, which involves a buyer of DAC credits prepurchases credits. In return, the buyer receives the credits in the future. The upfront capital for DAC firms is essential, as they can invest in scaling and driving their costs down. However, there is a risk for buyers, as the majority of DAC credits have yet to be delivered, and there remains a possibility of non-delivery if a DAC company fails or shuts down.
DAC credits were estimated to cost between USD 600 and 1000 per ton as recently as January 2024. The credit price reached in the deal between Google and Holocene is a significant milestone in scaling DAC technology since the cost per credit is at a historic low. Policymakers and industry leaders have identified USD 100 as an ideal target for the costs per ton of DAC to become economically viable on a large scale. Holocene has described its technology as more efficient than other DAC companies, which is partly why they can price each credit at a historic low of USD 100 per ton. This price point reflects Google’s confidence in Holocene's ability to scale its operations and lower costs. The development may drive other DAC firms to invest in innovating their carbon dioxide removal methods, but the sentiment regarding this ideal outcome being reached is mixed.
Recent trends in the tech industry have demonstrated an increasing level of investment in prepurchasing CDR credits. Microsoft has invested significantly into CDR, which includes DAC, by purchasing 8.2M credits since 2020 through offtake deals, dwarfing the activity of other firms. Due to the competition across large tech firms, Microsoft’s decarbonization strategy could have likely contributed to the recent deal signed by Google. With the increasing energy demands from investment into AI investment, which has led to the emission of tech firms being scrutinized, other firms may follow Microsoft and Google by prepurchasing more CDR credits. This shift in demand may prompt other sectors to explore similar agreements, potentially broadening the market for DAC-based credits.
Overall, this update is expected to increase DAC credit supply while increasing the demand for pre-purchased credits through offtake agreements. The growth in this market, catalyzed by investments from companies seeking tech-based removals, is expected to help drive the cost of each credit down through economies of scale and investment into more efficient DAC methods. If the costs of these tech-based removal credits drop enough, combined with other carbon credits increasing in price, demand in the voluntary carbon market (VCM) could shift away from other credits to DAC projects.
Google's offtake agreement with Holocene at a record-low price represents a pivotal moment for the DAC sector and the broader VCM. It highlights the growing corporate interest in carbon removal technologies and sets a new benchmark for future deals. As the market adapts to these developments, participants should consider how these evolving dynamics may influence their strategies and positions within the VCM.
For further insights into how this could impact your role in the VCM, please reach out to the Market Analysis team.