COMMENT: The opaqueness of the engineered carbon removal market is stunting its growth

Published 13:59 on November 22, 2022  /  Last updated at 17:33 on November 28, 2022  /  Contributed Content, International, Other Content, Voluntary  /  No Comments

If the engineered carbon removal industry is to show all the naysayers and propel towards gigatonne scale, it needs to double down on trust and transparency, writes Ted Christie-Miller of BeZero Carbon and Ariel Hayward of Patch.

By Ted Christie-Miller, Head of Carbon Removal, BeZero Carbon, a global carbon ratings agency, and Ariel Hayward, Climate Strategy & Solutions Lead at carbon credit marketplace Patch

The current engineered carbon removal market is not match-fit for a meteoric scale up. If the industry is to show all the naysayers and propel towards gigatonne scale, it needs to double down on trust and transparency.

We need to scale the engineered carbon removal industry as a matter of climate urgency. The IPCC says this is now “unavoidable” if we want to avoid climate catastrophe. Even with rapid and scaled adoption of decarbonisation options such as renewable energy generation, global transportation system shifts and energy efficiency options, the world will need to remove 10 billion tonnes a year of carbon removal by 2050, up from the tens of thousands being sequestered today.

To achieve this, these engineered carbon removal methods need to become commercially viable and unlock the trillions of dollars currently flowing through global capital markets. At present the market is small and the demand is limited. Just $195 million has been spent on carbon dioxide removal so far. This number needs to expand into the trillions if we are to have any hope of meeting the scale necessary.

The market is also relatively illiquid, lacking the volume, price benchmarks and analysis characteristic of physical commodities and derivatives. So far, 96% of credits purchased have been transacted bilaterally – directly between suppliers and buyers. The low levels of market intermediary participation is indicative of an immature market. There remains a lack of understanding of the security used to commercialise carbon removal: the carbon credit.

A metric tonne of CO2e is not something that we can hold or take physical possession of. As such, demand for carbon removal is currently dependent on demand for carbon credits, which is dependent on buyers and investors trusting that the security they are purchasing is legitimate and will deliver on its climate promises.

Trust is foundational to demand. And transparency is foundational to trust. The current market for engineered carbon removal – functioning within the wider voluntary carbon market – is unregulated, with unstandardised reporting and disclosure requirements. Without transparency in an illiquid market, it is very difficult for buyers to develop trust in the projects they’re supporting. Too often credits are being sold which are untraceable and with low-levels of data to back them up.

In order to determine whether a carbon credit really does represent the climate impact it claims to along dimensions such as additionality, permanence and avoidance of leakage, the market needs to see detail on baseline assumptions, project emissions, issuances, retirements and more. Without this kind of transparency, the narrative of the “wild west” carbon market, a narrative that has prevented capital from flowing to carbon removal solutions at scale, will continue to be perpetuated.

Achieving the transparency that will activate global capital markets requires carbon markets to leverage and emulate existing systems and tools employed across the portfolios of capital allocators. For example, credit ratings agencies in financial markets play a crucial role by enabling market participants to understand risk in a fungible way. Alongside auditors and regulators, they have an essential role in improving market function and facilitating price discovery, risk management and buyer decision making for financial assets worldwide.

Similarly, carbon ratings in the voluntary carbon market can help bolster trust in carbon removal. As with credit rating agencies, BeZero Carbon Ratings are publicly available and all criteria and methodology papers are open source. This transparency allows buyers to assess and manage risk when evaluating their carbon removal purchasing, helping them to build confidence in their decision making.

This transition to a ratings-centred, transparent market will improve understanding of not only carbon credit legitimacy, but also carbon credit pricing. Engineered carbon removals are currently expensive. The price per tonne in the engineered carbon removal market can be as high as $2,050 per tonne of carbon – more than forty times the average cost in the wider voluntary carbon market. For most buyers, this price is prohibitively expensive and they pick lower cost alternatives.

Over the coming years, ratings will build the correlation between carbon credit price and quality and allow buyers to successfully assess and manage the risk in their carbon removal portfolios. Many carbon removal methods – but by no means all – have strong additionality and permanence and low over-crediting risk, meaning they may fare well on the BeZero Carbon Ratings framework. At present, no engineered carbon removal methods have the level of transparency necessary to obtain a rating.

A strong, scaled market needs to be able to assess and price risk. To do this, it needs publicly available data and robust ratings. The carbon removal market will fall at the first hurdle if it fails to get its transparency in order.

Further reading in Carbon Pulse: