The strategy behind the Climeworks pivot
Why Climeworks will compete with Frontier and other carbon traders
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Two weeks ago I praised the Direct Air Capture (DAC) company Climeworks for their leading consumer strategy and brand. In a footnote to that article, I wrote:
Climeworks could become a buyer and seller of non-DAC offsets like Biochar. That would allow them to compete not just with DAC players, but carbon removal platforms like Frontier. This is not a recommendation, but it is a strategic option that Climeworks is surely considering…
So it was a pleasant surprise when, yesterday, Climeworks announced that it is pursuing this strategy. It’s calling the approach Climeworks Solutions. From the company’s most recent email update:
As of now, the following carbon removal approaches are included in our portfolio offering on top of our direct air capture technology:
Afforestation/reforestation, Biochar, Bioenergy with carbon capture and storage, Enhanced weathering
So now Climeworks is a DAC provider and a marketplace for buying other forms of carbon removal!
I know people at Climeworks, some of them quite well, but no one tipped me off that this was coming. And while the timing here might seem like a coincidence, it’s really not. This move had a clear strategic logic, and it was important to launch Climeworks Solutions right now — 2023 was too early and 2025 might be too late. Let me explain.
Climeworks’ core market changed a lot in 2023
In the latter half of 2023, things changed for Climeworks. Their core market — Direct Air Capture (DAC) — was disrupted in a few ways:
Oxy bought Carbon Engineering, creating a company that could credibly claim to be ‘ahead’ of Climeworks from an end-to-end capability perspective
The IRA flattened the competitive landscape by funding a lot of cash-starved DAC upstarts, allowing them build their own pilot plants to compete with Climeworks
More DAC technologies showed promise — Oxy’s liquid-based DAC, Heirloom’s Limestone-based DAC, and even electrochemical DAC players all made progress
Non-DAC carbon removal solutions made real strides — Biochar in particular is an up-and-coming star for many business buyers
Climeworks sold out DAC offsets through 2027
I’m not suggesting that any of this means Climeworks’ core business is in trouble. But it’s easy to see how Climeworks executives might feel less secure as a DAC market leader today relative to 9-12 months ago. The developments of the last year suggest a very dynamic and competitive market, with a potential Goliath (Oxy)1, and a bunch of Davids (ambitious startups). That means that Climeworks’ early-mover advantage might not be durable, especially when it comes to building out DAC facilities and delivering carbon credits to customers.
That said, there is one silver lining from the changes in the last year. Oxy, by acquiring Carbon Engineering, took an admired DAC brand and married it with a despised fossil fuel company. That leaves Climeworks with probably the best brand in Direct Air Capture, and one of the best brands in carbon removal writ large.
Leveraging that great brand now makes sense, before it gets degraded by a wave of new DAC competitors, and before Oxy or Heirloom (potentially) beat Climeworks to market with scaled-up DAC plants. This could happen as soon as early 2025 — it’s an execution footrace to see who can build the first >100,000 ton DAC plant.
The promise (and perils) of new business units
I hope folks at Climeworks are amped. Starting up a new business unit is exciting. The company has a chance to fundamentally change its positioning in the market, to bring in new revenue streams, and to expand carbon removal offerings to their industry-leading consumer marketing engine. As I wrote two weeks ago:
Climeworks claims to have 20,000+ individuals who are ‘Pioneers,’ meaning they buy on a monthly basis. Neither Charm nor Carboneers have published how many consumer buyers they have, which suggests that Climeworks has a significant lead here.
Having a larger buying pool does not just mean revenue in 2024. This distribution list will allow Climeworks to do more email marketing as the years go on. Email is the most affordable customer acquisition channel, and having a big email list of bought-in consumers will give Climeworks an advantage regardless of how their technology progresses. It allows them to experiment with different approaches to upsell and reach new consumers through their existing network.
So there’s a lot of opportunity here. But where Climeworks sees opportunity, some see a conflict of interest:
This take is overly cynical, and glosses over Climeworks’ incentives. Climeworks VP Adrian Siegrist claims that they will have a “very, very selective vetting process.” And we should believe him!
Leaders at Climeworks definitely understand that pumping volume at the expense of quality is a terrible idea. This whole project is built on the Climeworks brand. Any damage to that brand threatens not just this new business unit, but also the core DAC business unit.
A hypothetical article accusing one of Climeworks’ biochar suppliers of fudging the numbers would be extremely damaging to Climeworks, perhaps even more damaging than it would be to Frontier, a pure-play trading marketplace for carbon removal. Climeworks has a lot to lose, and so they have to be careful.
But James Temple’s ‘verification moral hazard’ is not the scariest part of this strategy. The biggest risk here is that the people at Climeworks are spread too thin. It’s very rare for a company to spin up a new business unit before the core business is humming along. The reason companies wait is because adjacency business units distract executives from the core business, especially when the two business lines are very different.
Indeed, building DAC facilities and verifying other carbon removal solutions involve different skill sets. DAC facilities are all about detailed process engineering, construction and fine-tuning. Verification is supplier quality control. That often means getting on a plane and visiting suppliers to make sure they are doing the right thing. The face-to-face nature of many supplier relations may create tough tradeoffs for executives at Climeworks, who are famously averse to air travel because of the emissions profile.
But — and I speak from painful experience here — the only way to truly verify that a supplier is doing a good job is to go see it for yourself. Often.
Climeworks has new competitors. How will it differentiate?
There are already good companies in the carbon removal trading market, including Frontier and Carboneers. Climeworks will have to get creative differentiating their offer. In the enterprise market (e.g. selling offsets to companies), this will be tough, since Frontier is truly great here. It will be what go-to-market people call a ‘ground game,’ with Climeworks defending their customers from other traders and expanding into new accounts, day by day, quarter by quarter.
Perhaps the consumer market will be easier to manage, as brand matters a bit more here. One way to differentiate would be to allow individuals to choose their preferred form of carbon removal, instead of giving a lump-sum dollar figure and trusting Climeworks to put it in the right solution, which is what Frontier and Carboneers do. Having the option to buy ‘hard to get’ solutions could be attractive to many individual buyers and small businesses.
Climeworks could then use this ‘funding signal’ from their network to prioritize what solutions it should be going after. I vote that Climeworks should prioritize Biochar, as it complements DAC well. I’ll be writing more about Biochar over the coming weeks, so look out for that.
In any case, Climeworks appears to be the only DAC player with the brand name to successfully pull this off. I’m excited to see how Climeworks Solutions evolves.
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I’m not all that convinced that Oxy is going to be a Goliath, but I do think they have enough capabilities that Climeworks should prepare for the possibility that Oxy can build plants faster than any startup DAC provider