Hey there,

Today we’re stepping back from day-to-day events to look at the trends from the last quarter, and what they might mean for the future.

In this issue:

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VC funding for climate tech stabilized a bit more this quarter, deploying $352.7M across 20 deals. Total funding is down from Q2’s $587M but is more in line with a typical quarter (and far better than this year’s dismal Q1). Median deal size is climbing back up, and it was one of the most active quarters in the last few years.

Drivers: Hardware and software-enabled hardware dominated this quarter. We saw rounds for Cyclic Materials’ rare earth recycling, UgoWork’s electric forklift platform, Miru’s smart windows, and Svante’s carbon capture tech. Pure software plays were virtually non-existent.

Another bright spot was several new climate-focused funds. MKB closed a $145M growth fund, Pangaea Ventures raised a $115M impact fund, and Diagram Ventures closed their first, $80M climate tech fund. While there haven’t been a significant number of IPOs, investors still see an opportunity in the space. According to CTVC, climate tech funds have more than $41B in “dry powder” ready to be deployed.

Several carbon capture and storage (CCS) projects moved forward backed by new public financing tools:

Drivers: A combination of new tax credits for CCS and financial support from the Canada Growth Fund to de-risk projects. In Strathcona’s case, the CCUS tax credit and other government grants are expected to cover 100% of capital costs for the project.

What’s next: Alberta has more than 110 Mt worth of proposed storage projects alone. CCS tax credits and streamlined carbon contracts for difference from the CGF could unlock more of those projects. Most are in the oil & gas sector, and I hope we see more uptake in other high-emitting industries.

Despite this progress, there are open questions about how these projects will actually perform. It also requires threading the needle between near-term decarbonization and a long-term transition away from fossil energy. Particularly with public funds enabling these projects.

Clean hydrogen is gaining momentum in Canada even while the global hydrogen market struggles to take off. Notable moves in the past few months include:

Drivers: Germany is betting on green hydrogen to switch off of fossil fuels and stop relying on Russian imports. In the US, production tax credits are making green hydrogen more competitive with traditional methods. Canadian companies are tapping into these markets across production, fuel cells and storage.

What’s next: Globally, clean hydrogen projects are accelerating but the sector still has many roadblocks to overcome. High prices, low demand for clean hydrogen, and challenges with transportation and storage are persistent issues. Figuring out the economics and creating critical mass with production hubs or a focus on high-potential industries will key critical.

The transition to electric vehicles continues to go through a messy middle phase, buffeted by high interest rates, slower than expected consumer demand, volatile prices for critical minerals, intense competition from China, and new battery technology. 

Upstream minerals had a better quarter. Cyclic Materials raised a $71M Series B and the US Department of Defence invested ~$47M in Nano One Materials and Electra Battery Materials.

Drivers: The wider economic picture is having the biggest impact on EVs and batteries. Over the past year, inflation pushed EVs out of reach for consumers and hit companies like Li-Cycle that are trying to build capital-intensive manufacturing plants. North American car makers are still struggling to make EVs profitably, and wild price swings for key minerals are all making the sector hard to predict.

What’s next: While these challenges have shaken people’s confidence in the sector, the long-term trend to EVs remains clear. In ten years, every other car sold globally will be an EV. However, nailing the operations and financing side of things will be just as critical as the tech to make it through this period.

Political support is shifting away from consumer carbon pricing in Canada. Former allies like NDP Leader Jagmeet Singh and B.C. Premier David Eby both distanced themselves from it. And it was a major talking point in the B.C. election.

Drivers: Inflation and high cost of living make a “carbon tax” an easy target. If you’re facing financial pressure here and now, the future cost of climate change just isn’t as tangible. The exemption for home heating oil also hurt the perceived fairness of the policy. 

Politicians are jumping on this sentiment despite what the data says. Consumer carbon pricing delivers 8-14% of emissions reductions while contributing 0.6% of cost increases. The rebate also leaves most households (particularly low-income households) better off. 

What’s next: The big unknown right now is what could replace consumer carbon pricing. If politicians want to throw out a market-based approach that lets individuals make the best decisions for themselves, what’s the alternative?

The climate space changes so quickly that predictions are next to impossible. Before the end of this year alone, we’ll see some major shifts:

I’d love to hear from you: what trends stood out to you? What are you watching as we come up on the end of the year? Hit reply or send a note to [email protected] to let me know!

Justin

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