Cutting emissions must remain the primary route to net zero by 2050.
To meet the 1.5°C goal of the Paris Agreement, the global energy system needs a structural transformation to reduce emissions to as close to zero as possible. The IEA Net Zero by 2050 (NZE) Scenario calls for marshalling all opportunities to decarbonise the energy sector, stressing that while all available clean energy technologies must be deployed this decade to put emissions into a structural decline, further innovation efforts are needed. Nearly half of the reductions in 2050 in the NZE Scenario come from technologies that today are only at the demonstration or prototype phase.
Even with new technologies, some residual emissions will remain because sectors such as heavy industry and aviation are harder to decarbonise, and therefore there is an unavoidable need for carbon removal. Carbon dioxide removal (CDR) includes technology-based solutions such as direct air capture with storage (DACS) and bioenergy with carbon capture and storage (BECCS); nature-based options such as afforestation and reforestation; and speeding up naturally occurring processes, such as enhanced weathering.
The NZE Scenario calls for a substantial scale-up of global CDR. The capacity of DAC‑based technologies (for both CO2 storage and CO2 utilisation) needs to increase from less than 0.01 million tonnes of CO2 a year (MtCO2/year) today to around 70 MtCO2/year in 2030, and to approximately 600 Mt CO2/year in 2050, which is equivalent the total energy-related CO2 emissions from Indonesia in 2021.
Carbon markets can help facilitate the scale-up of direct air capture
DACS applications are currently hindered by very high costs, ranging from USD 600 to USD 1 000 per tonne of CO2 captured from the atmosphere. While the number of announced DAC applications has been steadily growing for some years now, policy support is essential to guarantee that planned projects are implemented. These policy tools could include tax credits, public procurement, reverse auctions, advanced market commitments, loans and loan guarantees, and support to enable transport and storage infrastructure.
Carbon markets – including international crediting mechanisms and domestic compliance markets – can complement these policies and support accelerated DACS deployment by providing extra revenue streams to de-risk DACS investment and operations.
International crediting mechanisms – also called international carbon markets – allow countries and companies to issue and trade carbon credits, which are verified metric tonnes of CO2 reduced or removed from the atmosphere. Domestic compliance markets, also called emission trading systems (ETS), impose restrictions or caps on the total volume of greenhouse gas (GHG) emissions in specific sectors of a country’s economy, or in individual facilities. Participants can buy and sell emission allowances to fulfil their compliance obligations.
Voluntary carbon markets are fuelling most DACS projects
Strong private sector demand for DACS carbon credits, often used to meet corporate net zero commitments, fuelled most of the recent DACS project announcements. Credits are sold in so-called voluntary carbon markets, which are self-regulated by non-governmental entities. Among the biggest purchasers of DACS credits are companies such as Airbus, Shopify, Swiss Re, Microsoft and UBS, and demand aggregators such as Frontier (founded by Stripe, Alphabet, Shopify, Meta and McKinsey, among others), which committed to buy USD 1 billion of permanent carbon removals. NextGen, a South Pole-Mitsubishi Corporation joint venture, is another demand aggregator which recently announced the advance purchase of around 200 000 tonnes of CDRs from carbon removal projects. Such large-scale purchases and advance commitments of DACS credits have allowed for economies of scale, i.e. lower-than-average prices for certain transactions, down to around USD 600 per tCO2 captured. While this is 40% cheaper than what a single customer would pay for balancing their personal carbon footprint, it is approximately six times higher than the highest carbon price reached in domestic compliance carbon markets to date.
DACS carbon credits could also be generated and exchanged under Article 6 of the Paris Agreement, which allows countries to voluntarily co-operate to enhance the ambition of their Nationally Determined Contributions (NDCs). Although the rules for the full operationalisation of Article 6 are still under negotiation within the United Nations Framework Convention on Climate Change (UNFCCC), some early examples of co-operation are emerging, such as the bilateral agreement between Switzerland and Iceland on DACS. While co-operation under Article 6 on DACS has significant potential, there are also technical barriers to overcome. For example, the latest Intergovernmental Panel on Climate Change (IPCC) Guidelines for National Greenhouse Gas Inventories do not include an accounting methodology for DACS, meaning that it is unclear if and how countries can account the CO2 removed through DACS towards meeting their international mitigation targets under the UNFCCC.
Only a handful of domestic carbon markets integrate carbon removal regulations, and none yet for DACS
Domestic compliance markets could also be important tools to incentivise emission reductions and potentially scale up DACS deployment. In theory, jurisdictions that impose carbon prices could allow compliance actors to purchase carbon removal certificates from DACS projects in place of, or in exchange for, ETS allowances.
In practice, however, only 5 of the 26 ETS in force in 2023 (the European Union [hereafter “European Union”], the United Kingdom [hereafter “United Kingdom”], Québec, New Zealand, and California) have regulations for use of carbon removals as a compliance option (as a broad category covering technology- and nature-based removals). While none of these include specific DACS regulations, New Zealand allows activities “storing carbon dioxide after capture” to issue carbon removal certificates to be used in its ETS. The European Commission has also tabled a proposal for a standardised Carbon Removal Certification to ensure consistency and transparency in the quantification of carbon removals including from DACS, but specifies that carbon removal certificates will not be allowed for compliance in the European Union’s ETS in the foreseeable future. The UK government has also issued a call for evidence on potentially integrating DACS removal certificates for compliance in its ETS.
Integrating DACS removals in an ETS raises some unresolved technical issues, such as the adjustment of ETS caps for GHG emissions. If carbon removal certificates are integrated in an ETS, there is a risk they may be used as substitutes for necessary emission reductions in other sectors. Different integration options are possible, with contrasting implications for the ETS cap. Price alignment presents another issue: there is currently a substantive difference between domestic compliance carbon price levels (with a maximum of around USD 140/tCO2 equivalent in 2022) and the cost of removing carbon dioxide through DACS (up to USD 1 000 tCO2-eq). If the price of DACS carbon removal certificates is not aligned with ETS allowances, they will not be attractive in the ETS market, resulting in little to no demand. In the EU ETS, if DACS certificates were to be included, the use of Carbon Contracts for Difference under the Innovation Fund could potentially address this price gap.
To encourage the adoption of DACS, one option for policy makers could be to allow DACS operators to voluntarily participate in ETS and receive an allowance for each tonne of CO2 removed, alongside other policy support toolkits.
Technical work to integrate DACS in carbon markets is progressing, but barriers remain
Strong private sector demand for DACS credits demonstrates that governments have an opportunity to align investment flows with their own net zero targets. Whenever possible, governments should facilitate high-quality CDRs, characterised by key criteria such as additionality, permanence, and carbon negativity (the net amount of CO₂ removed after accounting for life cycle emissions). Carbon markets currently allow for higher prices for high-quality CDR services such as DACS, and customers are willing to invest in this relatively expensive but attractive solution, thanks to its very high storage permanence when combined with geological storage.
Carbon removals certifications such as those recently proposed by the European Commission can help set out minimum acceptable criteria for high-quality CDRs. Other schemes, such as the CCS+ Initiative, focus on developing a robust accounting infrastructure that promotes environmental integrity for DACS credits, while the pilot J-Credit carbon trading scheme in Japan is planning to facilitate DACS credit trading.
Expansion of DACS through carbon markets is possible in theory, but more technical work is needed:
- One clear priority is the development of internationally agreed methodologies and accounting frameworks based on life cycle assessment for DACS approaches in order to support quantification of DACS credits, and to facilitate the recognition of DACS removals in countries’ GHG Inventories reporting.
- Another priority is the establishment of a DACS-specific additionality test for allowing crediting from DACS projects. Traditional additionality tests used in carbon markets consider non-additional projects that are mandated by existing laws and regulations, or those that would not have been implemented in the absence of the cost incentive from the sale of carbon credits. This is not the case for many DACS projects, and because DACS infrastructure is designed for the sole purpose of removing and storing CO2, DACS projects could be considered inherently additional, at least until they reach a competitive price point with other technologies.
- Finally, governments should assess the role of DACS (as well as other CDR approaches) in their net zero strategies in order to identify the technology, policy and market needs within countries and regions. In this context, a better understanding of the implications of integrating DACS removal certificates or credits for the ETS cap in domestic compliance carbon markets is needed.
