Technology-based carbon removal credits crucial if net-zero targets are to be met

The vast majority of 1.5°C-aligned scenarios require at least some carbon removal.

For example, the 2018 IPCC 1.5°C report states that “all pathways that limit global warming to 1.5°C with limited or no overshoot project the use of carbon dioxide removal.” The IPCC report estimates that the world will need cumulative carbon removal on the order of 100–1,000 Gt CO2 over the 21st century. Other reviews suggest needing 10 Gt CO2 of removal per year by 2050, and perhaps more than 20 Gt if thermal coal burning doesn’t drop fast enough.

All told, that means plenty of demand for carbon offsets. But as corporates are starting to discover, not all carbon offsets are made equally.

The Net Zero Tracker, compiled by a group of four non-profit organisations and research firms, tracks the environmental commitments published by the largest 2,000 publicly-traded companies in the world by revenue. As of early 2022 the tracker shows that 683 of them, a little over one-third have technically committed to a net-zero strategy.

Many of these net zero pledge are unlikely to make any real difference to operations of the companies concerned. That’s partly because many organisations fail to account for Scope 2 emissions (those produced by their own supply chains, despite being a significant source of carbon) and Scope 3 emissions (all other indirect emissions such as by the end user).

Almost half of the companies plan to rely on the use of carbon credits to offset emissions included within the net zero pledge, but two-thirds fail to specify the conditions on their use.

Which carbon offset credits are net-zero aligned?

Not all carbon credits are created equal, with the type of carbon benefit claimed being the crucial distinction. Carbon credits typically represent one of two possible climate outcomes — avoided carbon emissions or carbon removal.¹

Avoided emissions: Nature based avoidance in which forests, grasslands, wetlands, peatlands, and other natural carbon sinks are protected. Meanwhile, examples of technology-based avoidance include capturing methane from landfills and dairy operations, deployment of efficient cookstoves in rural households, etc.

Carbon removal: Nature-based removal makes use of natural carbon sinks such as reforestation, regenerative agriculture, and mangrove restoration to capture carbon. Technology-based removal and sequestration occurs when carbon is stored in secure geologic formations or used in manufacture of durable materials.

In order to be sure of meeting net-zero targets, companies must use carbon removal carbon credits. The Oxford Offsetting Principles outlines 4 requirements to ensure offsetting helps achieve a net zero society:

1. Cut emissions, use high quality offsets, and regularly revise offsetting strategy as best practice evolves

2. Shift to carbon removal offsetting

3. Shift to long-lived storage

4. Support the development of net zero aligned offsetting

The crucial distinction between nature and technology based carbon removal offset projects is the degree of permanence, monitoring and the risk of knock-on impacts. For example, the benefits of nature based projects accrue over several decades or more and risk being undone due to fire or illegal logging, technology based removal projects accrue carbon immediately and with much less risk of subsequent release. Forest projects require robust baselines, careful monitoring of carbon capture based on the growth of trees within the forest (and their death), and that captured in the soil. Lastly, even if the above issues are covered adequately, there is always the risk that carbon is still released as human activity (everything from logging to agriculture) is simply shifted elsewhere.

For ESG minded investors seeking to build a portfolio of net-zero aligned companies it is essential to know whether carbon offsets are being used, whether those credits reflect carbon removal or avoided emissions (if the former, the permanence of the removal), and the vintage of those credits (carbon offsets should reflect the timescale of the emissions being offset, otherwise the credits fail on providing additionality benefits).²

According to non-profit organisation, Carbon Plan this is a real challenge since inadequate information on company-level approaches is published, “Carbon offset registries do not generally track the distinction between avoided emissions and carbon removal credits, likely because the offsets industry developed long before the scientific and policy communities converged on net-zero emission targets.”

What would a removal offset only scenario mean for carbon credit prices?

The price of carbon offsets could increase to over $200 per tonne by 2030, or as low as $11 per tonne, according to scenario analysis carried out by BNEF and published in their inaugural Long-Term Carbon Offset Outlook 2022. The quality of carbon credit eligible to meet corporate net-zero goals will be the most important factor influencing which of the two price scenarios materialises.

The voluntary market scenario 🟪 assumes that all types of carbon offset supply are permitted, including offsets that avoid emissions rather than removing them. Demand is driven by corporations. Low prices give companies flexibility to meet their sustainability goals, but subsequently undermine their ability to drive true additional decarbonisation.

The removal scenario 🟦 limits supply to removal offsets like reforestation and nascent technologies such as direct air capture to achieve net-zero goals. Activity is still driven by corporations, but only for offsets that store or sequester carbon, rather than avoiding emissions that would otherwise happen. High prices would alleviate concerns around offset quality and could even push companies to focus more on reducing their own gross emissions rather than rely on carbon credits.

The hybrid scenario 🟩 assumes a gradual evolution from the current voluntary market to a removal-only market for corporations and finally to a removal-only market primarily for countries, rather than companies, by 2050.

The current state of carbon removal technologies

There are a number of different technologies involved with capturing carbon. However, it can only be described as carbon removal if it guarantees the capture and permanent removal of carbon from the atmosphere. If the technology merely captures carbon when it is being emitted (i.e. when fuel is burnt or released as part of an industrial process) then it is described as carbon mitigation.

Carbon removal technology

• Direct Air Carbon Capture and Storage (DACCS): Extracting carbon dioxide out of ambient air before permanently storing it in underground geological formations. The carbon dioxide is typically mixed with water and then pumped deep underground, where it reacts with the basaltic rock formations and mineralises. This process is also known as Direct Air Capture and Storage (DACS).

Carbon mitigation / removal technology

• Bioenergy with Carbon Capture and Storage (BECCS): This involves capturing emissions released from bioenergy when it is burnt. If the carbon sequestered in the biomass is greater than the emissions from production and transport then BECCS can result in carbon dioxide removal, otherwise it is a form of carbon mitigation.

• Carbon Capture and Utilisation (CCU): This involves using captured carbon dioxide (from any source) in a product (e.g. concrete or fertiliser). It only counts as carbon removal when the carbon is stored for long periods of time (such as concrete), otherwise it is carbon mitigation (as would be the case with fertiliser and other products).

Carbon mitigation technology

• Carbon Capture and Storage (CCS) refers to the capture of carbon dioxide, such as from a fossil fuel power plant. CCS avoids emissions, it does not reduce the amount of carbon dioxide in the atmosphere.

All technology-based carbon removal options are relatively niche at the moment, are very expensive relative to forest offsets and pose challenges in scaling. DAC in particular is significantly more expensive, costing around $600-800 per tonne to capture and store one tonne of carbon dioxide. In comparison, forest offsets typically cost around $15 per tonne; although credits have tripled in price since mid-2021 as demand has surged relative to the available supply.

In September 2021 Climeworks commissioned the worlds largest DAC facility, located in Iceland. The facility, known as Orca and powered by a nearby geothermal power station, captures almost 4,000 metric tons of CO2 per year and will expand to 1 million tons of CO2 per annum by the second half of the decade. This pales into comparison as to what the potential demand for DAC will be in the future if climate targets are to be met.

What would a future of technology-based carbon removal mean for prices?

Early adopters have been those companies willing to pay a premium and accelerate its growth - technology firms like Stripe and Microsoft and pension providers such as Swiss Re and Rothesay Life. When Stripe agreed to pay Climeworks to remove carbon it also created a program aimed at helping to scale up carbon removal and generate economies of scale.

A recent paper by RMI and Third Derivative examined the potential cost evolution and contribution through to 2050 of low, medium and high permanence carbon removal options. For technology-based removal this is based on their potential learning curve as capacity expands (Wright’s Law), while for nature based solutions the available supply (land constraints) is the limiting factor.

Other carbon removal technologies considered in the analysis include mineralisation, macroalgae and biochar. Although varying in cost these technologies involve significant geospatial constraints and potentially have considerable but unknown knock-on ecological impacts.

The analysis projects that nature based carbon removal is likely to increase in cost from ~$50 per tonne by 2030 towards $100 per tonne by 2050. In contrast, the cost of DACSS and BECCS in 2030 is likely to fall from $175 and almost $250 per tonne respectively, to close to $100 per tonne by 2050 (consistent with BNEF cost estimates). This brings both solutions into line with nature based removal, while also ensuring the carbon storage is permanent.

The voluntary carbon market (VCM): At the edge of the carbon market risk curve

1. Most offset projects fit neatly into avoided emissions and carbon removal categories. However, forest sector projects may produce a mix of avoided emissions benefits (e.g. protection from timber harvests) and carbon removal benefits (e.g. allowing forests to grow larger).

2. According to analysis carried out by the Japanese newspaper Nikkei, 38% of carbon credits purchased by businesses and organisations are more than five years old.