Climate tech funding saw explosive growth in 2021, yet the startups garnering the most investment are not necessarily the ones that go the furthest in reducing greenhouse gas emissions.

A recent report by PwC found that just in the first half of 2021, more than 600 climate tech startups raised over $60 billion, a 210% increase from the prior year. Venture capital firms are now spending on average 14 cents out of every dollar on climate tech.

"We're seeing a huge boom in the space," Leo Johnson, PwC UK partner and disruption lead, said on Yahoo Finance Live (video above). "It's bigger deals, it's more deals, it's more investors — like 1,600 as opposed to 900 before. But the question is: Is it going to the right stuff, the stuff that's really got the potential to take out the carbon that we need to take out and take it out fast?"

PwC's research drew attention to the "so-called ‘carbon [US]$5 notes lying on the ground.'" These are the technologies that would punch above their weight in terms of drawing down carbon emissions but are receiving comparatively scant investment.

"Of the 15 technology areas analyzed, the top five that represent over 80% of future emissions reduction potential by 2050 received just 25% of recent climate tech investment between 2013 and H1 2021," the report stated. "This tells us that an opportunity is being missed, as capital is not being deployed in line with climate impact potential, with a handful of mature technology areas instead attracting the majority of investment."

Mobility and transport sector is 'eating all the pies'

The sector seeing the lion's share of funding has been mobility and transport, largely driven by a swath of electric vehicle megadeals by startups like Lucid Motors (LCID) and Rivian (RIVN).

Sixty percent of all climate tech investment has flowed into this area to the tune of $58 billion in the second half of 2020 and the first half of 2021.

However, climate tech has a narrowly defined mandate to better understand, adapt to, and mitigate against the effects of climate change. In this sense, mobility and transport represents the "low-hanging fruit" of decarbonization, according to Johnson, as it accounts for just 18% of greenhouse gas emissions despite its sizable share of VC funding.

"The first thing to say is that this market is huge, and all of these sectors are underfunded, and they need more funding," Johnson said. "But mobility and transport, as we say over here in the UK, it's eating all the pies."

"But what you're seeing is that there's a lot of sectors that have got a huge abatement potential, which just aren't getting the capital that some of the commercially viable technologies which are really high-impact abatement look like they're making possible," he added.

Between the second half of 2020 and the first half of 2021, climate tech startups in the energy sector received $8.2 billion in funding.

More effective investment in terms of carbon emission reduction could help kick-start a transition in sectors that are harder to decarbonize, such as the energy sector. Given that the production, transport, and use of energy comprise three-quarters of global greenhouse gas emissions, PwC pointed to improved efficiency of energy-intensive electronics (like data centers) and developments in alternative fuels and renewable energy generation as key levers climate tech firms could pull.

Other sectors with large carbon footprints that have been comparatively neglected by venture capital are food, agriculture, and land use; industry, manufacturing, and resource management; and the built environment.

'Innovation is leading' climate regulation

The disparity in investment among sectors raises the question: What's holding investors back from investing in other climate solutions?

"A lot of it is about risk aversion," Johnson said, along with the regulatory incentives in the U.S, where most climate tech startups and investors are located.

"This is stuff where, if you're going to be making a really big ticket investment, you want to make sure that the market and the regulatory environment is really baked in and solid," he explained. "And the reality is, innovation is leading the regulatory framework. And we don't yet have the carbon taxes, the full incentive structure, the full worked-out subsidy structure to really help drive a stable regulatory environment where these types of scale-ups can flourish and therefore attract that seed C capital."

President Biden's Build Back Better deal, which revolves around the notion of a green economic recovery, was set to invest billions in climate infrastructure and the development of still-nascent low carbon technologies before comments by Sen. Joe Manchin (D-WV), a key vote for the bill, struck a blow to the legislation.

The bill's future is far more uncertain, as is the world's ability to keep climate change contained to 1.5 degrees Celsius.

Nevertheless, Johnson's optimism in the ability for climate solutions to get off the ground remains undeterred.

"I think if there are setbacks around government financing, there's got to be tailwinds behind a proposition that this is stuff that is an investment, where the return on this type of state underwriting and investment into this infrastructure is going to be positive," Johnson said.

"This isn't 'bailing out the banks' material," he added. "This is targeted investment that's going to be generating economic returns, as well as the environmental returns, as well as the job returns. So I kind of put my money on just the sheer logic of it."

Grace is an assistant editor for Yahoo Finance.

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