CO2 removal markets for the 1.5 degree target

By Wilfried Rickels and Christine Merk
Wilfried Rickels heads the Global Commons and Climate Policy Research Centre at the Kiel Institute for the World Economy (IfW Kiel), Christine Merk is Deputy Director

CO2-neutral has become a popular label for many companies. More and more companies are advertising their products with this label – whether to attract customers or to be classified as sustainable – also with a view to the financial markets. They can usually achieve this by offsetting their emissions with voluntary certificates from so-called offset markets. Elsewhere, for example, renewable energies are promoted to avoid additional emissions, or trees are planted to absorb and store CO2 already emitted from the atmosphere in the long term.

Currently, the global demand for such CO2 credits is increasing. However, the offset markets came into being under the Kyoto Protocol, when many countries did not yet have national savings targets. An adaptation to current circumstances and technical possibilities is urgently needed. At the current COP26, clear rules should be formulated for crediting in the context of international trade in certificates, as provided for in Article 6 of the Paris Climate Agreement.

Prevent double counting

Unlike under the Kyoto Protocol, virtually all countries have now committed to reducing emissions. Therefore, the question arises as to how internationally traded certificates are counted. If project-financed emission reductions are counted towards national savings targets, they should not simultaneously count as reductions in another country. This means that rules must be formulated that prevent the double counting of avoided emissions.

As long as the offsets are voluntary, the problem of crediting is less critical because these CO2 certificates do not take effect for the savings targets in the country of the recipient. This means that a European company cannot count voluntary CO2 offsets in European emissions trading, and it is the company’s responsibility to credibly communicate to its customers that CO2 has been avoided elsewhere through these projects.

However, this restriction only applies for a limited time – because nationally accounted emissions must fall to zero as quickly as possible. For example, the proposals in the EU’s Fit for 55 package called for the linear reduction factor to be raised and for the EU ETS to become net-zero and then even net negative as early as the end of the next decade.

However, there are industries – such as cement production – in which CO2 emissions cannot be reduced to zero. A continuation of European emissions trading then presupposes that creditable CO2 certificates continue to be available, which cannot additionally be counted as emission reductions outside the EU ETS in another country.

Technical solutions for CO2 extraction

Therefore, in addition to CO2 offsets through additional avoidance, there is an increasing need for CO2 certificates from the removal of CO2 from the atmosphere. In the case of such CO2 removal certificates, there has so far been a strong focus on nature-based solutions such as the reforestation of forests or the renaturation of peatlands. However, it is unclear whether these measures could or should create a sufficient supply of CO2 certificates. Here, the focus should initially be on the preservation of threatened areas and the avoidance of emissions that would result from the destruction of the areas.

To meet the demand for CO2 removal, technical solutions are therefore also needed, i.e. CO2 removed from the atmosphere is stored geologically or in building materials, or used as part of a circular CO2 economy. Methods such as the direct air capture process are already being operated on a small scale in Iceland.

Markets for CO2 removal would enable the decentralized development of different technologies and approaches. There, the (still) few suppliers could come together with the demanders for CO2 removal and reduce the relatively high transaction costs of bilateral, project-based CO2 trading. Through standardization and a uniform price signal, decentralized market power can develop here, so that technical CO2 removal can develop sufficiently to still come close to the 1.5-degree target.

At the same time, CO2 removal markets are steps towards comprehensive emissions trading. Allowances that can be used in different national CO2 price systems make it possible to link them. Such a linking appears to be simpler in regulatory terms than a complete linking of national markets. With such an indirect linking, different special features such as the European market stability reserve can be maintained. Moreover, with uniform CO2 removal allowances, it would be easier to prove their additionality and to track offsetting in different countries.

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