Policy push for carbon removal credits lures finance, aviation

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SAN FRANCISCO/LONDON (Reuters) – Demand for credits reflecting the engineered removal of carbon dioxide from the atmosphere is expected by some to surge as market-friendly incentives lure buyers from sectors as diverse as technology and finance, chemicals and aviation.

Many scientists believe extracting billions of tons of carbon dioxide (CO2) from the atmosphere annually, by using nature or technology, is the only way to meet goals set under the U.N. Paris climate agreement to curb climate change, as efforts to cut emissions are not happening fast enough.

To meet this challenge small startups are in the nascent stages of deploying new technologies to suck up the planet-warming gas and generate tradable carbon removal credits that companies can buy to offset their emissions. So far, widespread use is years away and costs are much higher compared to more traditional ways to generate credits, such as through projects that preserve forests or fund renewable power projects.

Despite sceptics’ arguments that carbon removal could encourage firms to keep polluting and is unlikely to reach huge scale quickly, the U.S. Inflation Reduction Act seeks to financially turbo-charge the market through tax incentives, helping to draw in buyers from a range of sectors. The European Commission has also proposed a framework to certify carbon removals generated in Europe.

Around 4.6 million tons of credits from a range of engineered removal projects were purchased in 2023, data from industry tracker CDR.fyi showed, of which around 118,000 tons were delivered, backstopped by confirmation from external certification companies that the carbon had been removed.

So far, a small group of firms are creating standards to assess the credits. The firms, including market leader Puro.earth owned by Nasdaq and Isometric hope to give buyers more confidence to invest.

“We need trustworthy monitoring, reporting, and verification systems that generate high-quality carbon removal credits… This is how we unlock private investment for speed and scale,” said Anu Khan, a carbon removal expert at Washington-based non-profit Carbon180.

The bulk of the delivered credits in 2023, around 93%, were for biochar, CDR.fyi said, a scientifically simpler process of locking carbon emissions away by turning agricultural waste into charcoal, with most of the certifications provided by Puro.

Puro now plans to set standards around more exotic engineered technologies, such as ‘advanced weathering’ of rocks to help them absorb carbon and the use of chemicals to suck carbon out of ambient air. Isometric, meanwhile, has done the same for ‘bio-oil’, which turns waste into a liquid that can be injected into the ground.

All in, Puro currently accounts for around 80% of the certified engineered removal credits. Retirements, where a credit is officially recorded as being used to offset a company’s emissions, almost doubled in 2023 to 65,026 tons.

Puro expects its certifications will hit 400,000 this year, CEO Antti Vihavainen said. “We are going to see, you know, 100% or nearly 100% compound average growth rates during the next three years,” he said.

Among companies to retire credits in 2023 include German chemical company Bayer (OTC:BAYRY), Finnish airports operator Finavia, Microsoft (NASDAQ:MSFT), Swedish telecom Telia (ST:TELIA) and U.S. lender JPMorgan, the Puro data showed.

HIGH COST

While large technology companies have paid a thousand dollars or more a ton to help grow the market, including for the more nascent technology of ‘direct air capture’ (DAC), that remains too high for many buyers.

Biochar credits are cheaper, at around $140 a ton, while bio-oil credits can cost around $600 a ton. All are more expensive than traditional carbon offsets which represent avoided emissions from projects such as renewable energy and can cost less than $10 a ton.

Some see regulatory involvement as a sign the market for carbon removal credits is viable.

“Given the structure of IRA and other regulatory proposals that are on the table, it’s a good indication that there’s going to be investment in carbon removal… which should help support the demand these companies need to grow,” said Taylor Wright, who heads up the carbon management team at JPMorgan Chase (NYSE:JPM), which has bought Puro-certified credits.

Peter Reinhardt, the CEO at Charm Industrial, which turns agricultural waste into bio-oil, said he had also seen more buyers join in.

“It definitely started in tech and then kind of moved into finance… We see a little bit of broadening into air  travel and a few other industries,” said Reinhardt, who is working with Isometric.

Germany-listed airline Lufthansa, for example, last month said it has entered a long-term strategic partnership with direct air capture project developer Climeworks but did not give details on the value of the deal.

Bill Goldie, senior carbon adviser at environmental markets group Redshaw Advisors, said airlines would only likely remain a small market for engineered removals for now.

“Typically, for compliance markets, large emitters are looking to comply at the cheapest cost so it’s unlikely airlines would seek to use engineered removals to meet all of their requirements,” he said.