FEATURE: Inconsistent policy makes CDR sector still 'too risky' for investors says WoodMac

Quantum Commodity Intelligence – The carbon dioxide removals (CDR) sector is still too risky for many investors due to inconsistent policy support by governments around the world, limiting widespread private-sector investment needed if CDR is to help deliver net zero greenhouse gas (GHG) emissions by 2050, according to a new report.

The report – 'Carbon removals: the 'net' in net zero' – released by research consultancy Wood Mackenzie (WoodMac) on September 19, said governments could help improve the investment picture by setting national CDR goals in addition to existing GHG emissions reduction targets.

"Governments must back up those targets with direct financial support for removal projects … (such as) tax credits, development grants, project financing, contracts for difference and feed-in tariffs," WoodMac said.

In addition, governments should use their own purchasing power to stimulate demand, such as the US Department of Energy buying $35 million of CDRs. "Government-to-government trading could equally be a win-win in meeting climate targets, while also achieving better global equity – for example, Global North governments buying high-quality removals from the Global South," the report said.

CDR is going to be "crucial" to meet 2050 net zero emissions goals, as "technological constraints make eliminating all emissions exceptionally difficult." The paper estimates that removals of about 8 billion tonnes of carbon dioxide equivalent (tCO2e) will be needed by mid-century. It added that monetisation of CDRs and more cost-effective projects will also be needed to stimulate growth.

VCM

In the short term, the voluntary carbon market (VCM) is "critical" to scaling up the CDR market, but the VCM is "unlikely to deliver on the gigatonne scale needed." Therefore, there will need to be an increasing role for CDR in compliance carbon markets, WoodMac said.

It said the company's forecasts show that currently commitments by VCM participants will demand more than 1.7 billion tCO2e a year of avoidance and removal credits 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 said.

The third key deliverable for the CDR sector's growth is cost. Current costs across various technologies – $80 to $1,200/tCO2e – "are too high for the market to bear," the report said. "Without significant cost reductions, the voluntary market for engineered removals will not expand beyond a handful of deep-pocketed buyers," the authors said.

They added that at the moment there is no a "clear pathway" to CDRs from direct air capture with carbon storage (DACCS), for example, to a $100/tCO2e – the price many companies in the CDR sector cite as a goal. Instead, WoodMac said it thinks a more realistic cost for projects in the 2030s is between $250/tCO2e and $350/tCO2e.

"This is still a big improvement from current levels and one that will require a combination of impacts: supply-chain optimisation, a step-change in energy consumption, larger project sizes and the application of next-generation capture technologies," the paper said.

Nature-based CDR solutions (NbS) offer greater potential for scale at a lower cost per tonne, with many below $100/tCO2e, But in contrast to engineered solutions, such as DACCS, nature-based CDRs may face cost increases.

"Factors such as land access, the increasing value of nature, and increased reporting and regulatory requirements could all drive up costs in some regions," it said. Demand will therefore "depend on developers ensuring removals are high quality and buyers placing warranted value on the broader sustainability and environmental benefits" of NbS.

The report concluded that the "promise" of CDRs is clear, but what is less clear is how they become a "major lever to help meet the Paris goals and help companies to achieve their net zero targets". It said investment is needed now in the 2020s and warned that the "consequences of not investing in carbon removals now will be a greater and more urgent need for removals in the future at higher cost". In addition "investors would also miss first-mover opportunities to get in on the ground floor of a growing market".