The Price is…Wrong?
The Price is…Wrong?
Carbon removal prices are moving to reflect value to the customer rather than cost of production. Here’s how.
“The purpose of a business is to create a customer … The customer never buys a product. By definition the customer buys the satisfaction of a want. He buys value. … But price is only part of value. There is a whole range of quality considerations which are not expressed in price”
- Peter Drucker, “Management: Tasks, Responsibilities, Practices”
One of the questions I hear (frequently!) is “what’s a good price per ton for carbon removal?” Or a variant “What price is carbon removal converging on?” While it sounds like a shrewd question to ask, this assumes that all carbon removal tons are equal - that this is a commoditized market in 2024. Nothing could be further from the case.
My argument in this post is not only that the attributes of projects and methods of carbon removal are highly variable, but that different customer segments perceive different benefits from carbon removal credits. I’m going to suggest a pricing analysis tool below which addresses these customer segment needs from a couple different angles - stay tuned!
But before addressing these customer segments, let’s level-set with some terminology points.
First, Cost vs Price: These are different terms. A ‘Cost’ usually refers to the internal expenses needed for a supplier of a good or service to produce a unit for sale - in this case a voluntary market credit representing one ton of CO2 removed. (Note: Not talking about methane or nitrous oxide equivalents). These take into account labor, cost of the physical resources for production, energy, transportation, and cost of capital.
A ‘Price’ refers to what a producer of a good or service charges to a customer at exchange. The difference between Price charged to the customer, and Cost to the supplier is the Profit margin.
To illustrate, here’s a chart from a conference presentation I recently gave:
Second, Price vs Value: What a supplier charges to a customer for one carbon removal ton is NOT the sum total of the entire value that the customer derives from the purchase. The buyer of a carbon removal ton realizes a value beyond what the market price is that the seller charged for that ton - otherwise they would not have purchased it to begin with.
State of pricing today: A wide variety of value propositions to a customer lead to a wide variation of prices, especially since customers are in 2024 starting to figure out what the value to their organization is of the durable CDR credits purchased.
Indeed, this is exactly what we are seeing in the 2023 State of CDR report (2nd Ed.) prices based on 2023 market conditions:
What price is the “right” price? They all are! Customers are not irrational, even though there is a high degree of variability in these CDR prices. For example, a customer believed that for Direct Ocean Capture CDR $1,402 per ton is a valuable ton to buy: they wanted to see the exchange happen. Another customer believed that for biochar a $131 ton of CDR is a valuable ton to buy. For each of these customers the price was justified by what they used the durable CDR ton to achieve.
Editing to add on 10/22/24: This suggests the purchasing rationale of some VCM customers is to seed the market with a high price per ton purchase of a VERY early stage tech - at low volume.
Conversely, the method with the highest volume of deliveries the past two years - biochar - is near the low end of the price per ton spectrum, and has a (relatively) low tech risk.
Different customers had different rationales underlying their purchasing decision, value propositions, and thus different price points. The reason for purchasing could have been to neutralize Scope 1, 2, or Scope 3 emissions directly, could have been for branding purposes of being perceived as good stewards of the earth, or perhaps to lock in relationships with suppliers for future credits, or simply to signal support for early stage innovation. SBTi’s Beyond Value Chain Mitigation work offers examples of these reasons.
My takeaway: the rationale for purchasing credits drives the perception of value, and thus the price a supplier is able to charge to cover their costs of supporting their business.
Evidence: These self-reported motivational customer segments are evident in the NASDAQ Global Net Zero Pulse report chart below (Sept 2024):
Granted these are for carbon credit markets writ large - i.e. traditional offsets and less durable nature-based solutions, not only for durable carbon removal - but I would offer that the structure stands, regardless o the type of carbon credit, be it avoidance, less durable CDR (<100 years), or higher durability CDR (>100 years). There is no monolithic rationale for buying durable carbon removal today. When a potential buyer reports that “prices of credits are too high”, the lesson should not be “you should find a way to lower your costs”, rather that “your price is too high for what you are offering to satisfy what the customer views as valuable now”. The options for a startup to take, therefore, are either:
A) figure out a way to improve the value of the durable CDR credit delivered to the type of customer you are trying to address or
B) Find a different customer who will find what you are delivering to be valuable at your preferred price
Which leaves carbon removal suppliers at a standstill: if all prices are valid, then what price should I charge?
One answer lies in a powerful survey tool that I may be helpful: a Van Westendorp model. This technique can yield an acceptable price range for a given set of potential customers.
The four very specific questions asked in Van Westendorp analysis are:
At what price would you consider the product to be so inexpensive that you would feel the quality couldn’t be very good?
At what price would you consider the product to be priced so low that you would feel it’s a bargain?
At what price would you say the product is starting to get expensive, but you still might consider it?
At what price would you consider the product to be so expensive that you would not consider buying it?
The result, a chart that looks something like this example, with one line tracking each of the four questions, price points on the X-axis, and % of respondents who accept the price for that question on the Y-axis (e.g. 80% of respondents consider $20 ‘Acceptably cheap’):
Note the Acceptable Price Range for the product. And there are several ways of segmenting the data, assuming a large enough set of respondents. For instance, a survey team could segment by industry and see the different ranges represented there. Or ask intake questions (like in the NASDAQ survey example above) to divide up the respondent pool by motivations. Or conduct two sets of questions and change the delivery to be in 2025 vs 2030.
Additionally, you can ask these sets of questions twice, once for lower durability carbon removal, and another time for high durability carbon removal. Charts like the one above would have different price ranges for different purchase types.
This would yield price ranges that offer a quantitative look at how much the value that a customer feels derives into a specific price that a supplier would charge. Then, suppliers would be able to focus on cost targets to become profitable and support their growth - and ability to satisfy the wants of new customers for their products.
The move from cost-based pricing to value-based pricing for CDR credits is just in its infancy, as many early stage technologies are just now starting to move down the internal cost curve. As internal costs decline in future years, startups can drive value by discovering a price point in line with what the customer's willingness to pay will be, rather than purely to break even on operational costs.
Even in the current market, CDR credit supply companies can learn a wealth of knowledge about building a value proposition story that unlocks a customer through offering additional benefits or driving home the message about the quality of carbon removal credits. And in doing so build sustainable businesses that use voluntary carbon markets to drive impact for the customers they serve as well as for the climate.
What do you think? Let me know here:
Jason Grillo is a Co-Founder of AirMiners. The opinions expressed in this writing are the author’s own and do not reflect the position of any employer.
This post appeared originally on the blog for Institute for Responsible Carbon Removal at American University
Thanks for this post!
As a buyer I would challenge this a bit. Many CDR are more like donations where price is just a datapoint that perhaps could tell you something about how efficient the company is, but it could also just be an indicator about how early the tech is. What we do in the Milkywire Climate Transformation Fund is pay the cost of removal plus some reasonable profit margin, buying from companies that we think will be cost-efficient in the future.
Compliance market CDR will be a commodity, but there may be some room in the CDR VCM for different prices from different projects also in the future.
Joe, Thank YOU!!! The relationship between the supply, demand, price, and value of CO2 is contorted and overwhelmed by incredibly well lobbied policy that virtually obliterates any chance for CCS to take hold in the US marketplace.
We can consider the categories for getting paid for CO2 to be a) EOR (enhanced oil recovery), b) 45Q tax credits, or c) all other applications.
45Q subsidizes the first $60/ton for CO2 supplied to the oil industry for the express use of oil production and an additional $25/ton to cover transportation and storage if CO2 can’t be transported to an oil well for $25/ton. This policy eclipses the equilibrium of market supply and demand.
The second category of EOR requires more scrutiny for the marks of politics. In broad terms only 1/3 of oil reserves can be recovered without CO2. This means the value of CO2 for EOR is almost exactly the value of the incremental oil recovered from mature, paid-up wells. The value of oil has averaged $75/barrel for the last 10 years, and the DOE variously reports averages of 1.9 to 3.5 barrels of oil per ton of CO2. This fixes the value of CO2 to the oil industry at $140-260/ton. Why does the oil industry pay only 10% of its value? That’s where it gets political. Whereas the IRS pays out tax dollars for CO2 sequestration, it does not collect taxes for the undoing of sequestration.
Myriad calculations inform us that transportation of captured CO2 by pipeline would cost about what the oil industry happens to pay to transport tax exempt CO2 released at virtually no variable cost. Although unsequestered CO2 does not enter the atmosphere, it competes with CCS, lowering the value of carbon capture expenses to one tenth of their value to oil producers. Again, CO2 has high value to the oil industry, but policy protects its low price for the exclusive use of the industry that has by far the greatest need for it. It could be argued that the tax exemption for the release of fossil CO2 not only foils CCS and COP but is a $6-12 billion per year subsidy supporting oil consumption.
The third category of CO2 revenue, all other applications, tellingly pays more than $300/ton for CO2. Why so much? Two things. Policy denies them access to tax exempt CO2 released at no cost from geological reserves, and they do not have approved pipelines to their doors.
We should remember that although the oil industry is served by hundreds of miles of CO2 pipelines without incident, hypothetical safety concerns preclude permitting of CO2 pipelines for GHG abatement.
What does all this portend? Until either the demand for oil outstrips the supply of fossil CO2 or policy favors carbon capture over carbon release, there can be no market for CCS.
What policy would logically support GHG policy? Simply tax the release of fossil CO2 at the marginal rate for DAC, say $1000/ton for now.