Voluntary Carbon Market Needs Course Correction

Policy Pulse – 28 September 2022 – Veritas Global

Photo by AbsolutVision on Unsplash

The Integrity Council for the Voluntary Carbon Market (ICVCM) is an independent governance body for the voluntary carbon market. It recently launched a consultation on how the voluntary carbon market can accelerate climate action. In response to the public consultation, Veritas Global made a submission highlighting that the approach proposed by ICVCM needs a course correction. The substance of our submission is provided below.

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We are deeply concerned with the approach proposed by ICVCM as outlined in the draft for public consultation published in July 2022. The proposed ICVCM approach would effectively put the voluntary carbon market in a straitjacket. If implemented, it would result in subdued finance flows for climate action and would be bad for the planet.

Rather than limiting the types of climate actions that can be supported through the voluntary carbon market, we see ICVCM’s role as developing harmonized standards that support enhanced transparency and advancing efforts to promote greater clarity on accounting.

On transparency, the work of ICVCM could entail developing standards that help codify a set of classifications for carbon unit types and carbon target types. The carbon unit type classifications (supply side standardization) need not be mutually exclusive in nature, reflecting the ability of certain carbon unit types to fit within multiple classifications. For example, one classification type could be whether a carbon unit has been reviewed by a third party while another classification type could be whether the carbon unit was aligned with supporting a transition towards net-zero emissions. If a carbon unit fits both classification criteria, it would have both classifications. The purpose of these classifications would be to add greater transparency to the voluntary market. Such classifications should not be used to limit or disqualify voluntary climate actions taken but rather classifications should serve to codify actions taken. Adherence to the relevant classifications could be monitored at the program level (at the level of programs such as Verra, Gold Standard, etc.). Furthermore, the global classification standards should not impede the ability of voluntary programs to differentiate their product offerings in terms of the carbon units they develop. Similarly, development of standardized voluntary carbon target types (demand side standardization) can also greatly advance transparency.

On accounting, a harmonized approach is needed either in the form of a global registry or equivalent authentication mechanism to ensure avoidance of unintended double counting, crediting, and claiming in voluntary carbon markets. This is most urgently needed for international mitigation outcomes that will be issued without corresponding adjustments to national GHG inventories. For example, corporations may wish to be recognized for the international mitigation outcomes that they supported voluntarily even if such actions are part of the effort in achieving nationally determined contributions and have not undergone a corresponding adjustment. Ensuring globally harmonized methods that appropriately account for voluntary international mitigation outcomes is essential for scaling-up support to climate action and for ensuring the effective functioning of the voluntary carbon market.

Veritas Global submission on the future of the voluntary carbon market - ICVCM Consultation

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About Veritas Global: Our vision is to have a positive impact on the world through truthful advice informed by robust analysis. We are a premier provider of tailored solutions on climate change, international conflict economics and infrastructure.

Considerations for Net Zero Targets in Climate Change Policy: The Good, the Bad, and the Ugly

Policy Pulse – 6 July 2022 – Veritas Global

Photos by Gabor Koszegi, Chris LeBoutillier, and Dulana Kodithuwakku on Unsplash

Key points

Considerations for net zero emission targets in climate change policy:

• The good: targets are conceptually easy to grasp by policy makers, appropriate for technology modeling and suitable for signaling long-term policy intention

• The bad: sectoral targets risk being less cost-effective if they do not allow the use of carbon offsets from other sectors; when targets are narrowly applied, they can crowd-out investments that help reduce emissions

• The ugly: in the absence of scaled-up access to climate finance, targets risk condemning the poor to poverty for longer or at the other extreme poorer countries may pull out of climate protection programs leading to collapse of the global climate agenda

Context

Net zero emission targets have become an increasingly popular means through which to communicate climate policy ambition. According to the latest available global data, 134 countries covering 83% of emissions, 91% of economic activity, and 80% of the population have pledged to achieve net zero emissions this century. While private sector actors also actively use net zero targets as part of their climate strategies, the focus of this brief is on national and global emission targets.

The good

Net zero emission targets are conceptually easy to grasp by policy makers and the broader public. They offer a relatable benchmark against which to measure success and are a useful reference point for the scale of action required to achieve temperature goals. The Intergovernmental Panel on Climate Change (IPCC) has used net zero metrics to explain the link between greenhouse gas (GHG) emission trajectories and Paris Agreement temperature goals. In its 2018 Special Report on 1.5°C, the IPCC highlighted that limiting global warming to 1.5°C implied achieving net zero emissions globally by around 2050 whereas limiting global warming to 2°C implied achieving net zero emissions globally by around 2070.

Net zero emission targets can be used in modeling to identify climate-friendly technology roadmaps in specific sectors. Such roadmaps are particularly useful for design of technology innovation policy. For example, modeling done by the International Energy Agency (IEA) on roadmaps for the energy and heavy industry sectors can help identify specific research and development interventions to support technology innovation in these sectors.

More broadly, having net zero emission targets in place offers greater certainty on future intended trajectory of climate mitigation policy. There are many different policy options and means through which to achieve net zero emission targets. Therefore, to reduce uncertainty, a clear policy framework is needed that supports achievement of net zero emissions. Nevertheless, even in the absence of a detailed policy framework for implementation, net zero targets can offer some certainty on the overall intended policy trajectory.

The bad

Sectoral net zero emission targets risk focusing on measures that are less cost-effective if they do not allow the use of carbon offsets from other sectors. The cost of reducing one metric ton of carbon dioxide varies significantly from sector to sector. The midpoint estimate in the latest IPCC report indicates that agriculture, forestry, and other sectors, can generate about 40% of the global mitigation potential under $100 per metric ton of carbon dioxide in 2030 (see chart below), with carbon sequestration actions making-up a significant portion of these measures. Meaning that the midpoint expectation is that carbon sequestration activities offer significant cost-effective opportunities for neutralizing emissions from other sectors. Therefore, to be cost-effective, net zero emission targets for a sector (such as energy and heavy industry) should allow trading of mitigation actions with other sectors.

Some scenarios considered by the IPCC, expect that as much as 1221 Gt of CO2 (about 80% of all CO2 emitted by human activity since 1750), may be sequestered from the atmosphere in this century through carbon dioxide removal methods. However, these estimates are highly uncertain. Given the uncertainty, it is critical to use technology neutral policy instruments to incentivize desired investments. Carbon pricing policies can be designed in a technology neutral way and are generally more efficient instruments than engineered technology-based emission trajectories. Carbon pricing is not a panacea and is most effective when combined with a broader policy mix. Nevertheless, in general, a price signal on carbon ensures that the most cost-effective emission reductions are prioritized not only within a sector but also across sectors.

In this context, the net zero emission trajectories developed by the IEA for the energy and heavy industry sectors do not reflect the most cost-effective trajectories because they do not appropriately incorporate carbon trading opportunities for sourcing offsets from agriculture and forestry sectors and more broadly from carbon dioxide removal. Furthermore, it is unclear whether the IEA approach allocated the mitigation burden across developed and developing countries in a manner that is acceptable to the global community. For these reasons, IEA modeled scenarios should not be used in determining whether investments or activities are aligned with Paris Agreement temperature goals.

Requiring the use of IEA net zero emission trajectories in screening for Paris Agreement alignment as a condition for accessing international public finance will have adverse consequences. First, doing so risks mis-prioritizing investments and channeling resources to less cost-effective climate actions. Second, it could make it harder for project developers to access technologies that are climate-friendly, which help reduce emissions but might not eliminate them. Third, project developers could instead seek financing from non-OECD sources that are less aware of Paris Agreement alignment considerations. The increasing role of non-OECD countries serving as creditors makes this a real possibility. The share of external public debt held by non-OECD creditors grew from about 25% in 2006 to about 65% in 2020 in countries eligible for the Debt Service Suspension Initiative. Therefore, a common understanding, across diverse creditors and borrowers, on how to align investments with the Paris Agreement, needs to be developed in a transparent and inclusive manner. In this respect, the announcement by G7 leaders on 28 June 2022 to take a transparent and inclusive approach to creating a global climate club, for addressing GHG emissions from heavy industry, should be welcomed. Experience from designing the global scheme for addressing emissions from international aviation demonstrates the importance of taking a transparent and inclusive approach.

Narrowly applied net zero emission targets can crowd-out investments that reduce emissions and help fight climate change. Europe has already fallen victim to narrow application of net zero emission targets. For years, European policy makers postponed strategically important decisions to invest in diversifying natural gas supply, in large part because of misplaced climate concerns. For example, projects that would have brought pipeline natural gas from the Caspian to Europe were not sufficiently supported. In part because of this indecision, coal is making a strong comeback in Europe. In 2021 power generated from coal increased by about 20%. Generating electricity from unabated coal emits about twice the amount of carbon dioxide compared to conventional natural gas. European reliance on coal has intensified further in 2022, as the Russian invasion of Ukraine and its consequences uncloaked the pitfalls of having poorly diversified energy supply.

Europe has an immediate need to strengthen energy security by enhancing access to Caspian energy resources, in particular to diversify its natural gas supply. Natural gas can play an important role in enabling greater renewable energy deployment by offering a viable solution for balancing capacity to manage fluctuations in renewable energy supply. In addition to being an immediately deployable low-carbon alternative to coal, natural gas can be used in a way that has its emissions neutralized through carbon capture and storage, carbon offsets, or increasingly cost-competitive direct air carbon capture processes. Meaning that when a broader perspective is considered, use of natural gas can be fully compatible with EU’s 2050 net zero emission target.

The ugly

In the absence of scaled-up access to climate finance, net zero emission targets risk condemning socioeconomically vulnerable groups to poverty for longer. Net zero targets can lock-in more costly development trajectories and slow economic growth. In developing countries, especially where access to modern energy remains a challenge and poverty rates are high, access to scaled-up climate finance is critical to limit the adverse effects of more costly development.

However, even inflated estimates of climate finance, where systematic overestimation has been documented, confirm that developed countries have not provided the promised $100 billion per year. Realistic assessments suggest that less than half of the committed amount has materialized. There is an immediate need for developed countries to meet existing climate finance commitments. In the longer-term, further scaled-up access to climate finance will be critical for ensuring that the transition to net zero emissions does not slow the rate of poverty eradication and subdue economic growth in developing countries.

Developing countries with a significant proportion of population in poverty should not be faced with the choice of either taking climate mitigation action or reducing poverty. If faced with this choice, poorer countries are likely to pull out of climate protection programs, which may lead to a collapse of the global climate agenda.

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About Veritas Global: Our vision is to have a positive impact on the world through truthful advice informed by robust analysis. We are a premier provider of tailored solutions on climate change, international conflict economics and infrastructure.

Economics of Direct Air Carbon Capture

Policy Pulse – 14 June 2022 – George Anjaparidze

Photo by Chris Lutke on Unsplash

• Direct air carbon capture processes are effective and can be cost-competitive, the capture of a metric ton of CO2 can be achieved at a price range of $94 to $218

• Cost of capital is a key factor determining the cost-competitiveness of direct air carbon capture

• Carbon pricing mechanisms in 2022 across leading markets had a price range of $87 to $137 per metric ton of CO2

• Support for cost-effective direct air carbon capture technologies can have a transformational impact as these technologies could enable meeting Paris Agreement temperature goals while continuing to use significant parts of the existing energy system, thereby allowing adequate time for meaningful transition to sustainable energy use

Background

Carbon dioxide (CO2) removal refers to taking carbon out from the atmosphere either through natural or technological means. According to almost all scenarios considered by the latest IPCC climate mitigation report, carbon dioxide removal could help take out between 192 – 1221 Gt CO2 from the atmosphere in this century. The high-end of this range (1221 Gt CO2) represents a colossal amount. It is roughly 80% of all CO2 emitted by human activity since 1750 or about 20 times the current global annual greenhouse gas emissions in CO2 equivalent terms.

The most cost-effective forms of carbon removal from the atmosphere can be found in agriculture and forestry sectors, which include activities such as vegetation growth as well as sequestration of carbon in soil. Opportunities in agriculture and forestry sectors represent the next wave of cost-effective climate action. However, the full carbon sequestration potential of these sectors remains unrealized due in part to concerns related to permanence, meaning investments that support carbon sequestration activities in these sectors have been held back by concerns that the captured carbon will at some point be released back into the atmosphere. For example, because of forest fires and erosion. Permanence concerns in these sectors have been addressed through program design features such as buffer pools, where unexpected underperformance in any one particular year or project can be matched by accumulated emission reductions in the buffer pool, set aside from portfolios of projects. Nevertheless, not all countries have the available resources, especially land and water, to pursue opportunities in agriculture and forestry sectors.

Therefore, in countries where land and water resources are scarce, carbon sequestration through use of technology can have an important role in climate mitigation strategies. Carbon sequestration methods, including direct air carbon capture, that store the captured carbon in solid, compressed gas or solution form, can give more certainty on permanence with negligible risk of CO2 leakage into the atmosphere. However, technologies and processes such as direct air carbon capture are characterized by much higher costs. Nevertheless, several initiatives and companies, including Climateworks AG and Global Thermostat, are investing in bringing these technological solutions to market. One company, Carbon Engineering, developed an innovative direct air carbon capture process at an industrial scale using existing mature technologies. The result is a direct air carbon capture process that is cost-competitive with existing carbon prices in leading markets.

New direct air carbon capture processes can be cost-competitive

The cost of capturing one metric ton of carbon dioxide using new direct air carbon capture processes developed by Carbon Engineering is estimated to be between $94 and $134, depending on the operating conditions and when the cost of capital is zero. However, when the cost of capital is high, for example 12.5% per year, the cost range becomes $145 to $218 per metric ton of carbon dioxide captured. These ranges are broadly consistent with estimates of the International Energy Agency, which reviewed a larger set of processes and technologies for direct air carbon capture.

In comparison, direct carbon pricing mechanisms in 2022 across leading markets had a price range of $87 to $137 per metric ton of carbon dioxide. Therefore, under certain conditions direct air carbon capture can offer a cost-competitive alternative compared to existing carbon pricing practices.

The three types of direct air carbon capture plants presented in the chart are the same as plant configurations A, B, and C contained in the Joule Journal 2018 paper “A Process for Capturing CO2 from the Atmosphere” and have the following characteristics:

• Early plant – represents expected costs of constructing and operating early plants where locations have geological storage and comparatively low natural gas prices.

• “N-th” plant – reflects improvements in construction costs, better supply chain relationships, and other learning that are expected to be realized after the construction of early plants.

• “N-th” plant with cheap power – incorporates the learnings associated with “N-th” plants and in addition is deployed in locations with low-carbon electricity that is available at low-cost.

Policy implications of cost-effective direct air carbon capture processes

Direct air carbon capture has the potential to offer near endless opportunities for sequestering carbon at the same carbon price, when required conditions are met. In effect, the availability of this technology at cost-competitive rates and at scale can put a price ceiling on reducing carbon emissions. Meaning emitters would in effect have the option to pay for direct air carbon capture instead of implementing more costly emission reductions. In addition, in countries that are phasing-out nuclear power, direct air carbon capture technology can allow the continued pursuit of ambitious climate goals while using fossil fuels to balance intermittency of renewable power. In Europe, availability of direct air carbon capture technology has the potential to reduce opposition of radical climate activists to urgently needed projects that strengthen energy security by enhancing access to Caspian energy resources.

Technologies and processes, such as direct air carbon capture, have the potential to remove greenhouse gases from the atmosphere at a rate that would enable the world to continue to use significant parts of the existing energy system while meeting Paris Agreement temperature goals, thereby allowing adequate time for meaningful transition to sustainable energy use. Despite this potential, there are risks associated with these technologies as it could turn out to be more costly in practice to deploy or could have unforeseen adverse consequences that hinder implementation. Nevertheless, the availability of these technology options points to the need to keep an open mind about how to solve the climate mitigation challenge and the importance of using technology neutral policy instruments to incentivize desired investments.

Carbon pricing policies can be designed in a technology neutral way and are generally more efficient instruments than the use of bans or blacklists of certain technologies or fuels. Therefore, using carbon pricing metrics to measure alignment with temperature goals is more appropriate than trying to engineer alignment with some predetermined technology-based policy trajectory. Carbon pricing is not a panacea and is most effective when combined with a broader policy mix. Nevertheless, in general, a price signal on carbon ensures that the most cost-effective emission reductions are prioritized not only within a sector but also across sectors. Ensuring appropriate accounting and equal treatment between emitting and capturing carbon are among the key issues to resolve for using carbon pricing to support carbon capture and sequestration actions. An added benefit in the current economic context is that carbon pricing can create fiscal space to foster green recovery and growth.

In the context of direct air carbon capture processes developed by Carbon Engineering, public policy intervention and support may be appropriate to accelerate the learning from early plant development to “N-th” plant deployment. While individual projects using Carbon Engineering technology have received support, including grants, tax credits, and promise of future carbon credits, there is a need for a more systematic approach that targets lowering the cost of capital. An enabling framework that reduces the cost of capital, without dulling the appetite of equity investors, may be an appropriate option to consider (for example through availability of more attractive debt financing). In the US context this may imply the need for a federal debt support facility, whereas internationally it may be fitting to incorporate these considerations in policies of export credit agencies and providers of international concessional finance.

Crucially, governments should not restrict their focus only on processes developed by Carbon Engineering, which were inherently limiting as the designed carbon capture approaches used only mature technologies. In parallel, governments should also support research and development of more novel approaches to carbon capture because in the longer-term they may prove to be even more cost-effective. Commitments by governments to support technology-based direct air carbon capture processes will motivate further research and breakthrough solutions.

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About Veritas Global: Our vision is to have a positive impact on the world through truthful advice informed by robust analysis. We are a premier provider of tailored solutions on climate change, international conflict economics and infrastructure.