Why investors are souring on this once red-hot climate tech

Japan Times

02-05-2025

As political winds shift in the U.S. and big corporations pull back on their climate ambition, investors, too, are giving the cold shoulder to a nascent technology that will be vital to tackling climate change.
U.S.-based startups developing direct air capture (DAC) — machines that suck planet-warming carbon dioxide straight out of the air — received about $58 million from venture capitalists in the first three months of 2025, a more than 60% decline from a year ago, according to market research firm Pitchbook. The dip stands in contrast to the overall U.S. climate tech sector, which saw a nearly 65% increase in investment during the same period.
The decline is a worrisome sign for the DAC industry, which needs every dollar it can get to scale. DAC and other technologies delivered less than 320,000 tons of carbon removal credits last year, according to industry tracker CDR.fyi. By mid-century, though, the world will almost certainly need to clean up billions of tons of CO2 in the atmosphere annually.
Nevertheless, investors are becoming increasingly cautious, says Rajesh Swaminathan, a partner at Khosla Ventures who has witnessed the shifting sentiment firsthand. Not long ago, "everybody had a check box on one direct air capture investment,' Swaminathan says. "Now, people are stepping back and saying, 'Why didn't I look at the economics there?''
'A grim patina'
There are many ways to permanently remove carbon from the atmosphere, ranging from scattering special rocks in fields to enabling oceans to absorb more CO2. DAC is one of the most expensive carbon cleanup solutions: Pulling CO2 from the air and storing it permanently underground can cost about $1,000 per ton or more, and companies are struggling to bring costs down. It is easily verifiable and more permanent than other methods.
Until recently, concerns about unproven economics were partly addressed by billions of dollars in tax credits in the Inflation Reduction Act. Former President Joe Biden's administration also launched a government-funded program to build DAC hubs in several U.S. states to help demonstrate the technology at commercial scale. Driven by government support, venture investment in U.S.-based DAC startups more than tripled last year from the 2023 levels to reach nearly $415 million, Pitchbook data shows. But with the administration changing hands this year, the tide is once again turning.
"The U.S. direct air capture landscape right now is enveloped in this very grim patina,' says Brenna Casey, an analyst specializing in carbon removal at global consultancy BloombergNEF. "Political instability is a huge factor.'
President Donald Trump and Congressional Republicans have threatened to revoke or roll back parts of the IRA incentives. The U.S. Energy Department is also considering shutting down its Office of Clean Energy Demonstrations, which oversees the DAC hubs program. Among those projects on the chopping block is a pilot in Texas that was selected for an award of as much as $1.2 billion by the Biden administration.
"From a federal perspective, the next four years are not looking so favorable for direct air capture,' Casey says.
Carbon removal credits
DAC startups are at risk of losing another important source of income: corporate purchases. To help create a new market, deep-pocketed corporations have agreed to pay for carbon removal services to offset their emissions. 1PointFive, the carbon capture arm of Occidental Petroleum, last year inked an agreement to sell 500,000 metric tons of carbon credits to Microsoft, for example. But a growing number of companies are starting to walk back their climate targets, raising an alarm about future demand.
While all carbon offset businesses could take a hit from a potential slowdown in voluntary trading, "DAC is disproportionately affected because it relies on a small set of premium buyers willing to pay a high price per ton,' says Sophie Bakalar, a partner at Collaborative Fund. Whereas standard forest offset credits can be sold under $10 per ton, buyers pay an estimated average of $715 per ton for DAC services, according to CDR.fyi.
"Without reliable government funding or robust voluntary markets, the capital stack for DAC projects looks shakier than it did even a year ago,' Bakalar says.
DAC advocates argue that the lackluster quarterly funding is not sufficient to conclude the industry's long-term outlook is dim.
"It's hard to project a trend from a single data point,' says Giana Amador, executive director of Carbon Removal Alliance, an industry association. In March, California-based Capture6 closed a funding round of $27.5 million from private investors, she pointed out.
"We're still pretty bullish on the potential for direct air capture to continue to operate and raise funding and scale these solutions,' she says.