LONDON, September 19 2024 – Carbon removals, the removal and durable storage of carbon dioxide (CO2) that has already been emitted, are starting to emerge as a viable investment opportunity, but not at a pace that will enable the world to get to net zero according to the latest research by data and analytics company Wood Mackenzie.
The report, ‘Carbon removals: The ‘net' in net zero' states that technical constraints make eliminating CO2 emissions exceptionally difficult, which means that carbon removals will play a vital role in the energy transition. This means that projects in this area will need to start ramping up on a massive scale.
“Only a global effort will be able to deliver removals at scale” says Mhairidh Evans, Global Head of CCUS Research. “However, trade-off with other social needs is still inevitable, given the volume of projects required.”
The report states that to achieve this goal, three key things must happen. Carbon removals must be monetised, governments must set national carbon removal targets and provide sufficient incentives and stimulate demand and developers need to deliver projects at cost levels that make removals an attractive option based on expected future carbon prices.
The report adds that nature-based solutions such as afforestation and soil carbon offer the greatest potential for scale at a lower cost per tonne than engineered solutions with many deployment opportunities available below US$100/tonne of CO2. This compares favourably with engineered solutions that currently range between US$100 and US$1,000/tonne.
Furthermore, some of the world's highest emissions emitting countries such as the US, Brazil, China, Indonesia and India have land resources available to accommodate huge removals projects on a gigatonne scale.
However, the carbon removals project sector remains too risky for many investors because of inconsistent policy support from governments worldwide.
“Government policy and incentives are the driving force behind the sharp rise in planned engineered projects across North America and Europe, which host over 95% of capacity announced to date,” says Evans. “To deliver on the required scale, nature-based solutions will require greater support from governments around the globe.”
The report also states that the investing in carbon removals can be difficult because, unlike renewable energy or clean fuels, there is usually no “product” produced. This can make the value of a project hard to define and financial value often comes from stacking different sources of income. These include voluntary and compliance carbon markets, direct corporate buyers, government incentives and by-product sales - but values vary greatly around the world.
Carbon markets are the primary mechanism for translating emissions mitigation from removals into a monetisable commodity.
“With a carbon price, governments and companies would be able to put a monetary value on having less CO2 in the atmosphere.” Says Evans. “Companies need to be willing to pay for this in the voluntary market, while governments could create a regulated mandatory market, where companies can trade removal credits. We see an increasing role for removals in compliance markets”
Wood Mackenzie forecasts show that currently committed voluntary carbon market participants will demand more than 1.7 billion tonnes of CO2 equivalent (BtCO2e) a year of avoidance and removal carbon offsets by 2050. Demand could more than triple if the controversial issues of market integrity, trustworthiness of monitoring, reporting and verification, and offset quality are resolved quickly.
The report also states that governments should also use their purchasing power to stimulate demand. Other initiatives along these lines also includes government-to-government trading which would achieve better global equity and encourage investment in removals projects in developing countries.
The report adds that while strong governmental support is essential to kick-start projects, developers also have to work hard to deliver the right cost levels to attract potential investors. For Direct Air Capture, one of the most promising removals technologies, this will require supply-chain optimisation, a step-change in energy consumption, larger project sizes and the application of next-generation capture technologies.
The report concludes that nature-based solutions will deliver 90% of carbon removals in Wood Mackenzie's base case. Engineered removals come at a higher cost but will be essential at gigatonne scale to help the world reach net zero.
“The promise of carbon removals is clear. What's less clear is their pathway to becoming a major lever to help meet the Paris goals and help companies to achieve their net zero targets,” Evans concludes. “Nevertheless, there are no-regrets actions that can – and should – happen now.”
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