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Hi everyone, welcome back to Net Zero.

All the attention on climate from policymakers and financiers is good news for climate tech startups, which are poised to benefit from another year in which they buck broader tech fundraising trends and have access to plenty of cash. In our story today, we’ll hear from a few venture capitalists about why they’re bullish about the year ahead—but also about the risk of a potential shakeout.

We’re also serving up Norwegian snow crabs, baby nuclear reactors, a problematic mountain of lithium-ion batteries, and a Stanford economist’s take on how to get to net zero with existing technology.

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Sparks/Snags

Spark: The birth of baby nukes. US regulators for the first time approved the design specifications for a small modular nuclear reactor (SMR), an emergent technology that could provide zero-carbon power at a much lower cost than traditional large reactors. The world’s first SMR is under construction in China, and the Biden administration is keen to play catch-up with a plant in Idaho by 2030.

A rendering of the approved NuScale reactor design.
Courtesy of NuScale

Snag: Insulation frustration. Upgrading the energy efficiency of your home should be one of the best things an individual can do to curb their carbon footprint. But researchers in the UK reported this week that such upgrades often lead homeowners to turn up their heating or add extensions to their houses—and, after a few years, use just as much energy as they did before.

Semafor Stat

Share of lending and underwriting to energy companies by top 60 global banks from 2016-2022 that went to clean energy. Global climate goals require that number to rise to 80% by 2030 according to BloombergNEF.

Tim McDonnell

Climate is the bright spot in the tech funding downturn

Pexels/Kindel Media

THE NEWS

Climate tech investors in the U.S. are bullish on the year ahead, despite a potential looming recession and rising interest rates that could put a damper on fundraising for other startups.

Those backing ventures targeting climate change are bolstered by an avalanche of new state and federal funding, largely thanks to the Inflation Reduction Act passed by Congress last year. That money will help defray the costs of scaling up manufacturing and lock in demand for low-carbon products and services.

“Climate is definitely a bright spot in the tech VC world,” said Matt Petersen, president of the Los Angeles Cleantech Incubator. “All the right market signals are coming from policymakers, and we haven’t even seen the whole benefit of the Inflation Reduction Act on climate tech yet. Much of the opportunity is yet to be created.”

In 2022, climate tech venture funding reached $70.1 billion, according to market data firm Holon IQ, up 89% from the year before even as overall VC funding contracted. The first few weeks of the year have already seen several multi-million dollar fundraising rounds for U.S. startups working on everything from battery recycling to solar energy storage to software for trading clean energy tax credits. European startups are also drawing high-dollar investments, and have their own raft of public funding to look forward to as EU policymakers craft a response to the IRA.

TIM'S VIEW

Climate tech is well-positioned at the nexus of a couple of key economic tailwinds. First there’s the $750 billion in federal loans, grants, and tax breaks made available by the IRA, and other recent U.S. legislation for clean tech R&D and the buildout of manufacturing facilities. That money is especially promising for hard-tech startups working on charging stations, batteries, and other gear for electric vehicles, and those working on low-carbon cement and other industrial processes.

As for private funding, until the last few years, climate tech was the exclusive domain of a few narrowly-focused venture funds. Now the space is crowded. In addition to the growing number of traditional private equity and venture capital funds focused on climate, at least half a billion dollars have been channeled to climate tech from philanthropies since 2017. Mainstream banks and asset managers are putting together high-dollar climate tech investment funds, most recently a $1.6 billion fund announced by Goldman Sachs earlier this month and a $15 billion fund by Brookfield.

The investment arms of legacy high-carbon companies, including utilities, and oil and gas majors, are also attracted to climate startups as a cost-effective means of developing the technology they need to reach their own decarbonization targets. In some cases, they have later acquired those companies, in some cases for pennies on the dollar after the startups lost value after going public, like Shell’s purchase last week of EV charging company Volta.

As investors set ever-higher bars for traditional tech companies, there’s no shortage of appetite for potentially planet-saving technologies, even when profitability could be years away, said Albert Wenger, a partner at Union Square Ventures in New York: “There’s a rotation of capital away from software and into climate.”

But what all this investment means for the climate remains unclear: Some of the technologies with the biggest carbon benefit per dollar, including food waste reduction and next-gen solar, remain underfunded relative to electric mobility.

ROOM FOR DISAGREEMENT

Given the momentum behind the global energy transition, a repeat of the climate tech bubble that tanked many early adopters a decade ago seems unlikely. But since so much cash has been plowed into startups in the last few years, and with even more coming from the IRA, a shakeout is probably inevitable soon, said Dan Goldman, managing director of Boston-based Clean Energy Ventures.

“Some of these companies may not be performing,” he said. “So will they be supported by their existing investors, or are those going to say ‘We’re not throwing good money after bad.’ I think 2023 could be a year of reckoning.”

That’s especially true as climate tech startups funded a few years ago start to compete directly not against legacy tech rivals but against new startups with more cost-efficient versions of similar technology, said Po Bronson, a general partner at venture capitalist SOSV.

THE VIEW FROM DETROIT

The peccadilloes of high-carbon legacy companies will be decisive for which climate startups rise above the pack. U.S. automakers, for example, are carefully deliberating which battery and charging technologies to use in their expanding EV fleets — fateful decisions that could transform the fortunes of an emerging company overnight and ice rivals out of the market.

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One Good Text ...with Mark Jacobson

Watchdogs
Reine, Norway
Unsplash/ Vidar Nordli-Mathisen

Norway’s Supreme Court gets crabby. The court is hearing arguments this week about whether EU fishing ships have a right to catch snow crabs from waters in the country’s Arctic north. A Latvian company that was turned down for such a permit sued, pointing to a 1920 treaty it says makes the area available for commercial access by non-Norwegians. If the court sides with the Latvian company, the waters could also be tapped for offshore oil and gas drilling.

Before the war in Ukraine, Arctic oil exploration was falling out of favor with energy companies because of its high cost and onerous logistics. But with Russian fossil fuels out of the picture, Europe is desperate for new alternatives; even before any ruling on the crabs, this week Norway put a record number of offshore oil and gas exploration leases up for auction in other parts of the Arctic.

Evidence

The global market for lithium-ion batteries for electric vehicles will be worth more than $400 billion by 2030, according to McKinsey.

Reflections

More lithium, or fewer cars. Building up the supply chain for lithium is one of the most pressing energy challenges of the coming decade. By 2050, as EV adoption skyrockets, U.S. demand for lithium could be triple the amount produced globally today.

That growth comes with geopolitical challenges — most lithium is processed in China — as well as local environmental impacts and human rights abuses at mining sites. For clean vehicles to actually be “clean,” the argument usually goes, more oversight is needed over mining and technology for battery recycling needs to improve.

In a new paper, a group of U.S. political scientists challenges an underlying assumption of the lithium debate: That the U.S. will always need this many cars. Bringing average U.S. car ownership closer to the rates found in European cities, combined with smaller average battery size and improved recycling, could reduce lithium demand in 2050 by 90% compared to the business-as-usual case, they found.

Getting Americans to give up their cars may be a pipe dream. But producing enough lithium to power a nationwide conversion to EVs, assuming car ownership rates stay the same, will certainly be expensive and potentially physically impossible. So the most practical policy solution may be in the middle: Enforcement of higher standards for EVs, plus much more support for public transit, car sharing, or other ways of getting around.

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— Tim (with Jeronimo Gonzalez, Preeti Jha, Gina Chon, and Prashant Rao)