Shift in Carbon Credit Demand: From Conventional to Removal Credits

In 2023, despite the uncertain outlook for the voluntary carbon market, early-stage investments have remained relatively stable. Some participants in the market have noted a growing trend towards a ‘flight to primary’ approach, where investors aim to mitigate reputational risks associated with secondary and tertiary credit purchasing by directing their capital towards project development directly. However, this year, the voluntary carbon market (VCM) has faced criticism from certain quarters of the media. Outlets like The Guardian have published articles highlighting concerns about historical over-crediting of REDD projects and broader issues related to fraudulent practices. More recent critiques in The New Yorker focused on issues such as trophy hunting and financial misconduct linked to the extensive Kariba REDD+ project in Zimbabwe. As a result, there has been a significant decline in the price of standardized credits over the past 18 months, as buyers have become hesitant due to the reputational risks associated with credit acquisition.

Notably, specific corporate purchasers like Delta Airlines, EasyJet, and Shell have announced their intention to step back from historical credit acquisitions, despite being among the largest entities in retiring credits. This shift has had a ripple effect on sectors that typically procure large volumes of units, resulting in an overall reduction in retirement levels in 2023 compared to 2022.

Figure 1: YoY Credits Retiremmnets by Sectors (Source: Allied Offsets)

Transactions of durable carbon removals have increased by more than 10 times over the past few years, according to an annual report from a carbon credit ratings agency, supporting recent data from analysts that there is likely to be a strong future supply of nature-based credits from projects currently in the pipeline.

The chart below includes engineered removals such as Wooden Buildings, Biochar, Soil Ammendment, amongst other methodologies excluding Afforestation and Reforestation credits.

Figure 2: YoY Retirements of Removal Credits Split by Methodologies

Several countries were exploring or implementing policies to buy carbon dioxide removal (CDR) credits as part of their efforts to combat climate change. The demand for such credits is concentrated within European and American markets, the United States is the largest consumer of credits at almost 100k credits retired to date originating from the methodologies highlighted in the chart above.

In EU, the first draft of legislation defining a framework for certifying carbon removals was backed almost unanimously during a vote in the European Parliament’s cross-party environment committee on Tuesday. When passed as a law it will unlock tremendous opportunities for the developers, helping the CDR market to scale and bring down the costs of removal credits.

Figure 3: Removal Credits Consuming Countries

Recent Advances in Carbon Removal and Removal Credits  

  • The European Union achieved significant progress in its efforts to establish a regulatory framework for certifying carbon removals. The European Parliament’s cross-party environment committee almost unanimously supported the initial draft legislation, paving the way for the Carbon Removal Certification Framework (CRCF). This groundbreaking legislation is the first of its kind globally, aiming to define methodologies and standards for certifying carbon removals.
  • A carbon storage project in the Netherlands obtained its final investment decision on Wednesday, becoming the first in the EU to reach this stage. The infrastructure will provide transport and storage services to several EU ETS-covered industrial companies in the Port of Rotterdam, Europe’s biggest port, including Air Liquide, Air Products, ExxonMobil, and Shell. These companies will invest in their own capture installations to supply CO2 to Porthos, which will transport it to depleted gas fields in the North Sea, approximately 20 km off the coast. There, the CO2 will be permanently stored some 3-4 km under the seabed. Porthos plans to store about 2.5 million tonnes a year for 15 years, totalling around 37 Mt of emissions that would not be counted towards ETS obligations, substantially lowering costs for these companies and reducing their demand for carbon allowances.
  • Meanwhile, the US Department of Energy (DOE) recently provided clarification on submission guidelines for its upcoming procurement of $35 million worth of carbon removals. The government also disclosed the targeted price per tonne. This initiative, known as the Commercial Carbon Dioxide Removal (CDR) Purchase Pilot Price, represents the inaugural direct purchase of such credits from the private sector by the US government. The move is part of President Joe Biden’s administration’s broader efforts to bolster the industry. The prizes will be distributed across three phases, encompassing various projects like direct air capture (DAC) with storage, soil carbon sequestration, biomass carbon removal and storage, enhanced mineralization, ocean-based CDR, as well as afforestation or reforestation ventures.

If you are interested in learning more about the voluntary carbon market, we invite you to interact with Calculus IQ. This tool can help you explore different aspects of the market, including project types, retirement volumes, and more.

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