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27 April 2022

How carbon markets can help deliver CO2 removals for net zero

Including technology-based carbon dioxide removal in domestic and international carbon markets could spur the investment needed for the world to reach net-zero emissions by 2050.

By Luca Lo Re, Sara Budinis and Tom Howes

The year 2021 saw considerable momentum behind increased climate ambition, but there remains a large gap between targets and actions. In the last few years, many countries have put forward new or updated medium and long-term climate targets. Their ambition was unimaginable even a few years ago. If met in full and on time, recent analysis from the International Energy Agency (IEA) suggests these climate pledges could limit the rise in global temperature to 1.8°C by 2100.

Setting an ambitious goal is a necessary starting point, but devising workable strategies and implementing effective policies is more important. Many countries are now turning to the task of translating their net-zero targets into near-term policies and plans, including by assessing the role of emission removals and the use of markets.

Emission removals will play a critical role in reaching global net-zero emissions. All of the IEA scenarios that limit global warming to 1.5°C include the use of carbon dioxide removal (CDR). CDR refers to capturing CO2 from the atmosphere and permanently storing it. The balance between emission reductions and removals, and the level of reliance on CDR, varies by scenario. However, removals are never an alternative to deep mitigation, but a means of achieving net-zero emissions.

direct air capture plant wit mountain backdrop
The Carbon Engineering direct air capture carbon capture plant in Squamish, British Columbia, Canada, August 2021. (Photo by David Buzzard / Shutterstock.com)

A portfolio of CDR approaches will likely be needed. This can encompass technology-based CDR, including direct air carbon capture and storage (DACCS) and bioenergy with carbon capture and storage (BECCS). Another option is nature-based solutions, which depend on ecosystems to capture carbon, such as afforestation, reforestation and other forms of ecosystem restoration. A third category of approaches involve enhancing natural processes, from enhanced weathering – artificially accelerating the natural process whereby acid rain dissolves minerals that then react with CO2 to form carbonates – to ocean fertilisation.

Nature-based solutions are considerably less expensive today but more prone to the risk of non-permanence of stored emissions; their vulnerability to fires, pests, diseases and forestry policy could lead to reversals of CO2 stored. Furthermore, their dependence on land can create complex challenges at scale, with carbon storage potentially conflicting with food production, biodiversity and local development objectives. Technology-based CDR options are currently costly but could bypass many of these challenges, potentially retaining CO2 for centuries in appropriately selected and managed geological storage sites. Enhanced weathering and ocean-based approaches require further research to understand their potential as well as their costs, risks and trade-offs.

A rapid scale-up of technology-based CDR approaches is needed to reach net zero by 2050. Although the IEA Net Zero by 2050 Roadmap deploys a limited amount of technology-based CDR compared with IPCC 1.5 scenarios, this still entails a significant scale-up of BECCS and DACCS relative to today, reaching 1.9 gigatonnes of CO2 in 2050. Currently, around 2.5 million tonnes of CO2 is captured annually from the 13 bioenergy plants (for CO2 use and storage) and 18 DAC plants in operation globally. Achieving the level of deployment in the Net Zero Scenario will require further large-scale demonstrations to refine technologies, reduce capture costs, and better understand the scale and removal potential of these approaches.

Resource constraints and social acceptance, including of geological CO2 storage, could limit the scale-up of technology-based CDR approaches. Addressing high upfront investment costs (for BECCS) and energy needs (for DACCS) would require new business models and policy support to allow large-scale deployment for certain regions, while any potential environmental impacts of CDR would need to be carefully managed. Moreover, carbon accounting frameworks for CDR will need to consider potential CO2 storage reversal. Relying on geological CO2 storage provides high confidence in both the permanence of the storage and quantification of CO2 removed.

With new certification and methodologies, carbon markets could support the scale up of technology-based CDR. Allowing the use of emission removal units in domestic and international carbon markets could generate financial flows and create demand for carbon removal, spurring investment in CDR. In domestic markets, experience with removals is so far limited to nature-based solutions, most typically forest-based offsets generated under strict methodologies. This is the case in existing markets, such as China’s greenhouse gas voluntary emission reduction programme, California’s compliance offsets programme, and New Zealand’s unique coverage of the forestry sector under the country’s emissions trading system (ETS).

The inclusion of technology-based CDR approaches and removal units in domestic carbon markets is not trivial – it is both untested and faces considerable economic, legal and policy design challenges. These include how technology-based CDRs can be integrated into an ETS, how they relate to an ETS cap, to the allocation of free allowances and to a possible carbon border adjustment mechanism, and how to import or export CDR credits in linked ETSs.

For instance, currently the EU ETS considers the combustion of biomass to be “carbon neutral". As such, there is no incentive or recognition for the emitted CO2 to be stored through BECCS. Moreover, in the context of net zero, ETS caps might fall to zero emissions or even become negative, which would entail an obligation for covered entities to purchase and surrender removal units. The implications of this in terms of carbon leakage and competitiveness concerns require further exploration.

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Experience in crediting technology-based CDR approaches in international carbon markets, including through Article 6 of the Paris Agreement, is still limited and new crediting methodologies are needed. For example, IPCC emissions reporting guidelines for national inventories cover BECCS but not yet DAC. The crediting from DAC could benefit from simplified baseline methodologies since the monitoring, reporting and verification of removed emissions is more straightforward and transparent than the counterfactual baselines used for emission reduction projects.

In sum, carbon markets could provide incentives, but additional policies are needed to scale up technology-based CDR. While some recent developments, such as an EU proposal on carbon removal certification, are a good first step towards possible voluntary markets for CDR credits, carbon markets alone are likely not sufficient to provide the incentives needed to deliver CDR at scale. Markets need to be complemented by other forms of policy support, especially if the long-term carbon price signal is unclear. This support could be framework policies and targeted support that aims to: foster innovation, push early deployment and inspire international cooperation. Some recently launched initiatives aim to address these issues, including Mission Innovation’s CDR Mission, the US Carbon Negative Shot and support for DAC hubs in the US.

Editor's note: The article also appears, alongside other articles and ETS-related information, in the latest ICAP Emissions Trading Status Report.

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