Staying power: the link between carbon credit value and store permanence

21st July 2022

Beatrice Mocci discusses the need to link the price of carbon removal methods to the permanence of the carbon store

Things are warming up – literally. The Met Office’s climate models estimate that there is an almost 50-50 chance that the world will briefly overshoot its crucial 1.5°C climate target within the next five years. Large-scale permanent carbon dioxide removal (CDR) is needed by 2050 and beyond, in addition to emissions reduction efforts. This presents opportunities and challenges for the voluntary carbon market.

CDR methods and permanence

Up to 10 gigatonnes of carbon dioxide (GtCO2) must be removed annually by 2050, increasing to 20GtCO2 by 2100. However, the supply of CDR methods that can viably remove and store carbon is small compared to what is needed. Techniques include natural strategies such as tree planting and agricultural soil management; high-tech strategies such as direct air capture and enhanced carbon mineralisation; and hybrid strategies such as bioenergy with carbon capture and storage, and ocean-based carbon removal.

To ensure the supply of high-integrity CDR credits, the market must deal with the issue of permanence. Carbon storage durability differs widely between methods, from short-to-medium-term or temporary (such as soil sequestration, afforestation/reforestation and biochar) to longer-term or effectively permanent (such as geological and mineralisation).

The issue is compounded by a lack of standardised methodologies and robust monitoring, reporting and verification (MRV) protocols, which would give buyers of CDR credits more certainty over performance. Instead, the market is responding. Ratings systems such as Sylvera or BeZero Carbon provide greater clarity and guidance on credit quality, including projected minimum permanence thresholds. Others, such as CarbonPlan, are building open-source research tools that estimate the long-term cost of temporary and permanent CDR, helping buyers understand the upfront and ongoing costs.

Some progressive corporates, such as Klarna and Stripe, are championing the potential of CDR methods. Although there is no regulatory requirement for corporate CDR activity, there is a tangible business case for it, which takes in the shifting regulatory landscape, consumer and shareholder pressure, the avoidance of reputational damage, and better alignment with corporate emissions targets. There is also a compelling reason to be part of the CDR story, in terms of supporting research, development and deployment, and scaling its use.

A key criterion for high-quality CDR credits is permanence, so most nature-based projects that sequester carbon for less than 100 years are not selected by these progressive corporates. Instead, they are ready to pay premium prices for methods that offer higher levels of permanence and have no obvious immediate financial return, other than locking in reduced future prices.

We need more knowledge and certainty around CDR methods, so we can ensure credits are valued accordingly. A limited set of data points does suggest a correlation in the current market between the price of CDR credits and their level of permanence, with higher certainty of permanence commanding higher prices – though it is not a linear relationship. However, we need more data and more precise durability measures. As the market scales, costs are expected to fall and the price of CDR credits associated with high permanence will become (relatively) more affordable.

“Progressive corporates are ready to pay premium prices for methods that offer higher levels of permanence”

For scaling to happen, we need governance (rules and institutions) to facilitate more consistent and thorough comparisons (particularly between temporary and permanent storage methods) – for example, regulation of accounting rules. This could become a central component in corporate decision-making, whereby CDR credits are valued based on permanence of storage and buyers are incentivised to adopt a portfolio approach in order to safeguard against risks.

This bottom-up development of the CDR market, supported by policy interventions, is expected to drive important technological and socio-environmental learnings, ultimately reducing uncertainties around CDR.

Improving the CDR landscape

Corporate decision-making plays a central role in CDR activity, so it must be driven by transparent and scientifically rigorous data. A lack of systematic oversight could pose a challenge.

Voluntary carbon market initiatives currently offer inconsistent and blurry guidance, separating permanence into two camps: one where the risk is much lower (for example geological storage and carbon mineralisation), meaning a net-zero claim can be deemed credible, and another in which temporary storage is less favourable but can achieve co-benefits. However, devaluing, say, forestry, because of issues related to non-permanence, potentially undervalues its ability to store carbon in a shorter amount of time and with reasonably high certainty – at a time when CDR is urgently needed to avoid ‘tipping points’.

The Taskforce for Scaling the Voluntary Carbon Market is expected to place increased emphasis on the integrity of carbon credits. Later this year, its Integrity Council is expected to outline standardised governance principles, including detailed rules around permanence. Interviews with project developers, verification bodies, ratings agencies and marketplace providers, as part of a research project carried out on behalf of the University of Edinburgh and Ecometrica, indicate consensus that the CDR landscape would benefit from a deeper focus on the following themes:

  1. The lack of governance in the market, and multiple methodologies for different methods, add extra complexity for corporate buyers. More standardisation would ensure consistency, certainty and credibility.
  2. To provide greater transparency, more robust monitoring, reporting and verification protocols are needed for each CDR method, in parallel with early demonstrations.
  3. Certification providers are failing to keep pace with the market, leaving project developers and corporates to trailblaze new CDR methods. Ratings systems have emerged to fill this governance gap and provide transparent CDR project comparisons, with permanence being a key criterion.
  4. There is demand for strict CDR regulations, as the current systems fail to provide global oversight. Monitoring ambition and performance, as well as risk and disclosure, could also ensure that innovation aligns with scientifically rigorous evidence and uncertainty analysis.

The European Commission is expected to deliver a CDR certification scheme by 2023, while the UK has proposed the creation of an independent MRV authority by 2024, operating between project developers and the government. The latter is expected to advise that, since CO2 storage durability is considered key, permanent CDR methods are more valuable than temporary methods.

“The Taskforce for Scaling the Voluntary Carbon Market is expected to place increased emphasis on the integrity of carbon credits”

Achieving net zero

Increased market attention on the integrity of carbon credits, coupled with efforts to scale the CDR sector, suggests it is set for growth. The challenge lies in convincing the wider market that there is value in buying credits from novel CDR methods that currently exceed average market prices. Disparities in the durability of different methods, plus a lack of robust MRV protocols, also complicate buyer decision-making. However, while ‘avoidance’ credits have so far outstripped ‘removal’ credits, this is likely to change as buyers become more sophisticated.

As the market develops and regulatory and governance requirements emerge alongside a growing number of ratings systems, it will be easier to carry out more thorough CDR method comparisons. The importance of permanent storage is likely to become a central feature of the climate policy agenda, highlighting the necessity of valuing CDR credits in line with store permanence. This will allow corporates to adopt a more credible long-term climate strategy that can achieve fair and effective climate mitigation.

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Beatrice Mocci is a research consultant in carbon innovation and Carbon Product Manager at UNDO, a≈carbon removals company.

Image credit | Shutterstock

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