Scaling Carbon Dioxide Removal: An Imperative to Ensure Sufficient Supply of Carbon Credits

Carbon Dioxide Removal (CDR) has been in the public eye for some time now. In April of 2022, the Intergovernmental Panel on Climate Change (IPCC) underlined the profound importance of CDR methods to achieve pathways limiting global warming to either 1.5 or 2 degrees. As a quick repetition, CDR methods – in contrast to emission reductions such as renewable energy rollout and avoided emissions from deforestation and forest degradation (REDD+) – remove carbon from the atmosphere instead of avoiding its (re-)release. As such, CDR plays a crucial role in compensating for hard-to-abate emissions and cooling the planet back down in case of a climate overshoot. That is, in case temperatures rise above 1.5 degrees and ought to be brought down. Figure 1 gives a short overview of different CDR methods (we recommend checking out the CDR Primer for more insights into the various methods).

The IPCC estimates the scale of the problem to be massive. To limit global warming to 1.5 degrees with no or slight overshoot, 6-10 Gt of CDR per year by 2050 and a cumulative 100-1000 Gt of CDR by 2100 are needed to remove residual emissions from hard-to-abate sectors (1, 2). Let’s try and put these numbers into context. If we assume that i) the cost of removing a ton of CO2 from the atmosphere reaches the technological CDR industry’s ‘holy grail’ of $100 and ii) we will want to remove an average of 8 Gt of CO2 annually, the total annual cost will be $800bn (3). That’s almost twice the total annual national budget of Germany and equal to the annual military spending of the US in 2021 (3,4). However, we’re far from reaching that goal yet.

When looking at the current supply of CDR credits, there is a significant gap between the total supply of technological and nature-based CDR methods. Nature-based methods – such as afforestation & reforestation, improved forest management (IFM), soil carbon, and blue carbon – are more cost-effective and common than technological CDR credits (5). According to the Berkeley Carbon Trading Project that maps over 7.100 offset projects globally, over 250m credits in the nature-based CDR space have been issued across the four largest registries (VCS, Gold Standard, American Carbon Registry, Climate Action Reserve) since the inception of voluntary carbon markets in 1997 (6). Excluding credits from IFM, a hybrid between emission reductions and CDR brings the total down to 63m nature-based CDR credits issued in the past 25 years (6). The numbers are even lower for technological CDR – comprising methods such as Biochar, BECCS, DACCS, enhanced weathering, ocean alkalinization, and fertilization. To date, merely 708.000 tons of technological CDR credits have been purchased, of which only roughly 8% have been delivered so far (7). These numbers alone should sound the alarm for the massive investment needed in the CDR space moving forward. Interestingly, a second string of arguments motivates CDR’s quick scale-up, which is related but often overlooked in current discussions: the potential of supply crunches in VCMs.

How potential supply crunches motivate more investment into the CDR space

In our previous article, we outlined the challenge and necessity of creating integrity both from a supply and demand perspective, especially by implementing clear guidelines for net zero claims and coherent crediting methodologies and credit ratings. We dived deeper into the issue of corporate greenwashing and the problematic claims associated with using cheap and less-effective emission reduction credits. As a consequence of advancements made over the past couple of years – such as Verra and Gold Standard restricting renewable energy generation in most middle- and high-income countries from accreditation – the make-up of credit inventories of major registries is due to shift.

Figure 2 displays carbon credit retirements by type and year across the four largest registries. ‘Retiring a credit’ means that the purchaser of the credit has claimed the reduction of one ton of CO2 from their overall carbon footprint. It can then no longer be sold or traded. What can be seen in Figure 2 is that purchasers have recently retired REDD+ and renewables-related credits at a massive pace. From the beginning of 2020 to November 2022, off-takers retired over 230m credits stemming from REDD+, hydro-, and wind power (combined in figure 2 as ‘renewable energy’) from the four major global registries. And yet, supply for these emission reduction credits is still outpacing demand. Over the same period, the four registries issued over 380m credits stemming from these emission reduction methods (6). This supply would be sufficient to offset all CO2 emitted in Switzerland for ten years straight (9).

The fact that such an immense volume of emission reduction credits is issued despite the recent adaptations to renewable energy crediting methodology initially seems confusing. However, this is primarily due to the specific program crediting periods of the respective registries. Take Verra for example; the Verified Carbon Standard (VCS) states that for non- “Agriculture, Forestry and Other Land Use” (AFOLU) projects, the project crediting period shall be either seven years, twice renewable to 21 years, or ten years fixed (10). Gold Standard’s period is fixed at 15 years (11).

This means that renewable energy projects that received credits since the early 2010s – when most renewable energy projects in these registries were greenlit – are soon to expire or up for renewal (12). Over time, carbon credits stemming from renewable energy from upper-middle-income countries (according to the World Bank) such as Turkey, China, and India will thus likely disappear. We expect i) the depletion of the renewable energy carbon credit stock (which accounts for roughly ⅓ of all outstanding carbon credits) due to large demand for these credits and ii) the decrease of renewable energy credit supply (accounting for over 35% of annual credit issuances between 2020-2022) to significantly shift the overall market dynamics of VCMs (6). In the long term, renewable energy projects in low- to low-middle-income countries might fill this void as renewable energy development in these countries increases (13). However, both the roll-out of renewable energy and the generation of new carbon credits takes time. For a credit to be certified, it takes an average of two to three years (14).

Keeping in mind that the demand for carbon credits could increase by up to 15x by 2030, an imminent supply crunch is starting to become a topic of discussion (see further contributions by Nori and NCX) (15). For CDR, this has two potential implications:

• Scale-up of CDR supply is necessary to satisfy demand: With increasing demand for carbon credits and a reclining supply of renewables-related emission reduction credits, both nature-based and technological CDR needs to be scaled in order to ensure sufficient supply and balanced voluntary carbon markets.
• Scale-up of CDR supply is necessary to satisfy demand: With increasing demand for carbon credits and a reclining supply of renewables-related emission reduction credits, both nature-based and technological CDR needs to be scaled in order to ensure sufficient supply and balanced voluntary carbon markets.

What’s the way forward for CDR?

We see several promising developments at the moment that suggest the CDR space might be on the right track to cope with increasing demand. Specifically, we want to highlight these three developments:

1. Ramp-up of low-cost technological CDR methods: Whereas technological CDR such as DACCS has been long regarded as a technology that will only become viable in the medium term, new approaches promise a quick increase in competitiveness of DACCS: new methods relying on existing airflows to reduce capital expenditures of DACCS, which has the potential to significantly lower overall system costs (as energy for airflow generation is a large cost component). Additionally, low-cost technological CDR methods such as enhanced weathering and ocean alkalinization are on the rise and stand to benefit from increased investment into the CDR space. Both technologies exhibit storage durations of 1,000+ years and are highly scalable once technology readiness is reached.
2. Enablement of smallholders and independent forest owners: Next to technological CDR, nature-based CDR will play a pivotal role in supplying sufficient carbon credits in the near term. Enabling smallholders and forest owners to market carbon sinks has the potential to significantly increase the pool of nature-based carbon removal credits and provide a financial benefit to these small-scale project developers.
3. Up-front financing of nature-based and technological CDR: High up-front capital requirements often present a barrier to creating new nature-based and especially technological CDR projects. Solutions funneling capital towards creating new projects – through advanced market commitments, Emissions Reduction Purchase Agreements (ERPAs), or facilitation of financing processes – tackle this problem while also ensuring the future supply of CDR credits.

All three developments are largely driven by early-stage companies, some of which we mapped out in our previous article. Having spent some time discussing the integrity of VCMs and the CDR space, we will turn our heads toward the certification of renewable energy for our last article.

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Read our latest to articles about Carbon Capture:
1. Carbon Credits and Energy Attribute Certificates: Essential Tools for a Net Zero Future
2. Advancing the Integrity of Voluntary Carbon Markets and the Use of High-Quality Carbon Credits

Sources:

1. IPCC (2022). Summary for Policymakers. Link to source.
2. Emma Gibbs, Peter Mannion, Giulia Siccardo, Mark Patel (2022). Now the IPCC has recognized that carbon removals are critical to addressing climate change, it’s time to act. McKinsey & Company. Link to source.
3. Neil Hacker (2022). Scaling Carbon Removal. Link to source.
4. German Federal Government (2021). Investing to address the consequences of the pandemic. Link to source.
5. European Parliament (2021). Carbon dioxide removal: nature-based and technological solutions. Link to source.
6. Ivy So, Barbara K. Haya, Micah Elias. (2022, November). Voluntary Registry Offsets Database, Berkeley Carbon Trading Project, University of California, Berkeley. Link to source.
7. cdr.fyi (2022). Overview of Carbon Dioxide Removals. Link to source.
8. Carbon Gap (2022). Carbon dioxide removal and certification: What it is and why it matters. Link to source.
9. Global Carbon Project (2023). Global Carbon Atlas: Territorial Fossil Fuel Emissions per Country. Link to source.
10. Verra (2022). VCS Standard v4.3. Link to source.
11. Gold Standard (2021). GHG Emissions Reduction & Sequestration Product Requirements. Link to source.
12. Kanchan Yadav (2022). Reckoning with renewables: As carbon certifiers tighten rules, renewable energy may re-evaluate options. S&P Global Commodity Insights. Link to source.
13. Trove Research & UCL (2022). Future Demand, Supply and Prices for Voluntary Carbon Credits – Keeping the Balance. Link to source.
14. Sylvera (2022). 2022 Carbon Credit Crunch Report. Link to source.
15. Christopher Blaufelder, Cindy Levy, Peter Mannion, Dickon Pinner (2021). A blueprint for scaling voluntary carbon markets. McKinsey & Company. Link to source.