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Are voluntary carbon markets ready for a new type of credits?

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Image via Shutterstock/Bakhtiar Zein.

It is a well-documented fact that the price of engineered carbon removal projects is currently prohibitively high, with the eye-watering costs of building and operating direct air capture (DAC) and other projects that remove carbon dioxide directly from the air a major barrier to the nascent sector's development.

It is equally well understood that both engineered and nature-based carbon removals are likely to be critical to capping global temperature rises at 1.5 degrees Celsius. The UN's Intergovernmental Panel on Climate Change (IPCC) warned last year that greenhouse gas emissions have risen so quickly that large-scale carbon removal is "unavoidable" if the world is to stave off the worst impacts of climate change.

So how, then, to proceed? A major report out recently by BeZero Carbon, a ratings agency for the carbon offset market, argues the solutions lie in pulling engineered carbon removal solutions into the "voluntary carbon market ecosystem," through policies that incentivize innovation and bring costs down, alongside the introduction of accreditation and ratings standards that open up the market up to a broader cross-section of business.

Because at present, BeZero Carbon warns, engineered carbon removals make up just a slither of the rapidly growing carbon offset market that is increasingly being tapped by companies, NGOS and individuals to help achieve climate targets. The research states that just 19 percent of the voluntary carbon market today could be classified as "removals credits," with the market dominated by so-called "avoidance credits." That is to say credits that correspond to projects that aim to reduce emissions through avoided deforestation or renewables development far outnumber credits issued by projects that aim to actively remove carbon from the atmosphere through the expansion of natural carbon sinks or technical solutions such as DAC systems.

The research states that just 19% of the voluntary carbon market today could be classified as 'removals credits,' with the market dominated by so-called 'avoidance credits.'

And it notes that the overwhelming majority of engineered carbon removal credit sales — a huge 96 percent — are bilateral deals struck between suppliers and buyers, which take place outside of carbon markets. In these instances, the purchaser of credits is typically a large corporation — such as Microsoft, Airbus or Bank of Montreal, to name three recent examples — that has significant resources to throw at undertaking due diligence on each project and pay relatively high prices for the resulting credits. This approach, it warns, may help prove that such technologies can work, but is too expensive for most companies to emulate and as such will struggle to drive the economies of scale that can bring down the cost of crucial carbon removal technologies.

The good news is, according to BeZero, is that the market is poised for significant change. The headline finding of the report is that carbon removals could comprise as much as 56 percent of the voluntary carbon offset market by the end of this decade, driven in large part by the rapid growth of the engineered carbon removals market.

But there is major work to be done to ensure this shift happens at the lowest possible cost, the report notes, arguing that three major "shifts" are needed to stimulate innovation and galvanize the growth of the market.

First up, BeZero has argued that public finance and policy support is needed to help technical solutions move down the cost curve, arguing that governments have a major role to play in de-risking projects through direct subsidies, regulatory support or a mechanism similar to Contract for Difference (CfD) scheme that has driven cost reductions in the U.K.'s offshore wind market.

Three major 'shifts' are needed to stimulate innovation and galvanize the growth of the market.

Next, it has warned that the accreditation processes for carbon removals need to be finessed, standardized and finalized, so that engineered carbon removals ratings can be introduced to ensure participants in the market can compare and contrast the quality of credits.

Engineered carbon removals currently comprise less than 1 percent of all carbon removals on voluntary carbon markets today, with the market dominated by nature-based carbon removal credits, BeZero notes. As such, it has argued more robust market infrastructure is required to give investors' confidence in the decarbonization credentials of the newfangled technologies they are backing. 

"We need to drastically reduce the price of carbon removal over the next decade," said Ted Christie-Miller, head of carbon removal at BeZero. "The public sector cannot do this alone. We need to harness the power of the market to bring costs down and allow these new and emerging technologies to scale up."

BeZero has argued that this urgent reform is needed because the current financing mechanisms for the engineered carbon removals market are unsustainable and will fail to reduce costs to the levels needed to enable the market to deliver its critical mission of helping to curb global emissions.

Currently, 89 percent of engineered carbon removal credits are so-called "future credits" — meaning they do not represent carbon that has been removed, but rather a forward sale a commitment to remove carbon in the future, according to the research. "This system of donations from big purchasers sets the precedent but will not be enough to scale the market to the level necessary," the report notes.

More robust market infrastructure is required to give investors' confidence in the decarbonization credentials of the newfangled technologies they are backing.

It also argues that initiatives to provide forward financing to firms looking to scale carbon removal — for instance the Frontier fund backed by Stripe, Shopify, Alphabet, Meta and McKinsey and the NextGen CDR Purchase Facility backed by South Pole, Mitsui, Boston Consulting Group, LGT, UBS and Swiss Re — are unsustainable in the long run.

Overall, the report suggests the costs of direct air capture need to fall to $100 a tonne — from roughly $320-$2,050 per tonne today — if the sector is to deliver at the scale necessary to impact climate goals.

Chris Skidmore MP, chair of the Net Zero Support Group and the All-Party Parliamentary Group on Environment, welcomed the report and its call for the public and private sector to work together to scale the industry. "The challenge to scale carbon removal from basically zero to billions of tonnes a year is monumental," he said. "I welcome this report from BeZero which quite rightly points out that we need both the private and public sector to unite behind this emerging industry if we are to have any hope of hitting our climate targets."

The challenge ahead for those tasked with scaling voluntary carbon markets is by no means small, and it remains to be seen whether governments are set to match growing enthusiasm from corporates for direct air capture and other engineered removal technologies while their attention is focused on tackling the global energy crunch. Meanwhile, concerns remain widespread that the expansion of the carbon removal market could distract from the even more urgent need to cut emissions at the source.

BeZero may have an obvious interest in promoting the expansion of the market, but the IPCC's increasingly clear warnings that carbon removals are set to play a key role in delivering on net zero targets means there is a crucial debate to be had around how best to scale up the fledgling market. Today's report is clear that with no time to waste, it is in both governments' and businesses' interests to ensure the rapidly-growing voluntary carbon market is ready to accommodate an influx of carbon removal credits that could yet prove pivotal in staving off the worst impacts of climate change.

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