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.

__________

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

__________

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.

__________

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.

Implementing climate finance commitments in 2022 will make-or-break climate policy

Policy Pulse – 26 January 2022 – George Anjaparidze

Key messages:

• Implementing climate finance commitments in 2022 and scaling-up flows from developed to developing countries will make-or-break international climate policy

• For future mitigation plans to be more ambitious, current climate finance flows from developed to developing countries need to scale-up

• Making good on developed countries’ climate finance commitment of $100 billion has the potential to crowd-in an additional $600 billion in financing per year from other sources

Photo by Visual Stories || Micheile on Unsplash

The upbeat tone in our last year’s 2021 outlook on international climate policy proved to be justified. The UK COP 26 presidency delivered a successful outcome at last year’s annual UN Climate Conference as part of both formal negotiations and momentum building initiatives organized on the side-lines. Crucially, COP 26 also agreed on rules on how countries can cooperate across borders to achieve Paris Agreement goals (also known as Article 6 negotiations). Having Egypt as the COP 27 incoming presidency bodes well for the negotiations process in the year ahead. Egypt has the trust and confidence from a broad range of countries combined with very strong capacity and excellent knowledge of climate negotiations, especially on climate finance issues.

We expect the focus of international climate policy in 2022 to be on implementation. There will of course continue to be calls by some to focus on policy development, for example to scale-up mitigation pledges as the gap between individual actions and collective ambition persists. However, given that the exercise of updating Nationally Determined Commitments (NDCs) was just completed at COP 26, we think a focus on further scaling-up of individual mitigation plans in 2022 is not productive. Instead, the focus will need to shift to implementation of climate policies at the national level but also on implementation of existing international commitments. Particularly pressing is the need to achieve the existing target on climate finance flows from developed to developing countries.

Climate finance is essential for enabling greater climate action in developing countries. Developed countries did not meet their existing commitment to provide $100 billion in climate finance by 2020 to address the needs of developing countries in the context of meaningful mitigation actions and transparency. The climate finance gap is much larger than officially reported by OECD because of flawed accounting methods used for reporting climate finance. The shortfall in reaching the $100 billion target is about $67.4 billion, meaning that in 2019 only $32.6 billion of climate finance has supported developing countries.

The $32.6 billion figure includes climate finance provided for adaptation. If we remove adaptation specific finance but retain mitigation and cross-cutting support, we estimate that only $27.2 billion of climate finance was provided by developed countries in the context of meaningful mitigation actions and transparency. (Technical note: the $27.2 billion estimate is generated by subtracting the proportion of finance provided specifically for adaptation from total climate finance, the calculation is performed based on the ratio of adaptation specific finance in principal climate finance activities reported under the bilateral channel for 2019.)

As demonstrated in the chart below, the shortfall in the ambition of NDCs mirrors the shortfall in climate finance. The chart presents the status of communicated NDCs as reflected in the latest UNFCCC synthesis report from 17 September 2021. Some additional abatement measures were announced at COP 26 that are not reflected in the figures presented in the chart and it is important to note that the abatement target corresponds to both developed and developing countries. Nevertheless, the analysis presented in the chart captures well the correlation between globally planned emission reductions and delivered climate finance from developed to developing countries.

To have a realistic chance for the next round of updated NDCs to be significantly more ambitious, current climate finance flows need to scale-up. While new and more ambitious climate finance targets will also be necessary, there is an urgent need for developed countries to meet existing commitments and scale-up delivery of climate finance.

Climate finance is also critically important for meeting Sustainable Development Goal (SDG) 7 which aims to ensure access to affordable, reliable, sustainable, and modern energy for all. The overall additional financing required to meet SDG 7 is estimated at $1.3 trillion to $1.4 trillion per year, but current financing is approximately $514 billion. However, much of this gap could have been filled if developed countries had met their climate finance commitments. Making good on their climate finance commitment of $100 billion per year has the potential to crowd-in an additional $600 billion in financing per year from other sources, assuming leverage ratios of existing channels for climate finance. However, some mitigation actions will not fall within the scope of SDG 7, and hence, additional financing will be needed for SDG 7.

Below is a list of events in 2022 that could potentially serve as opportunities for developed countries to announce how they intend to follow through on their existing climate finance commitments:

• 2-3 June 2022: Stockholm, Sweden Stockholm+50 https://www.stockholm50.global

• 26-28 June 2022: Elmau Castle, Germany G7 Heads of State https://www.g7germany

• 30-31 October 2022: Bali, Indonesia, G20 Summit https://g20.org

• 7-18 November 2022: Sharm El-Sheikh, Egypt UNFCCC COP 27 https://unfccc.int

Other key policy trends to watch in 2022:

• Carbon pricing initiatives are likely to continue to gain momentum in 2022. The best mechanisms will create fiscal space, support the post-pandemic recovery while simultaneously set long-term development incentives in a climate conscious way.

• Private sector financiers are increasingly mainstreaming climate change related considerations into business decision making. There is growing evidence that corporations that have adopted more environmentally conscious practices (particularly as it relates to corporate reporting) have been able to command a higher price for their stocks. Key developments to watch in 2022 relate to the regulatory interventions and voluntary actions that may be taken to make it attractive for capital providers to support climate friendly investments at sufficient scale.

• The EU proposed Carbon Border Adjustment Mechanism targets heavy industry importers and will continue to be a focus of attention in 2022. Sectoral approaches can play an important role in scaling-up climate action. However, appropriate representation of stakeholders from industry and government is critical for ensuring schemes have the needed buy-in and impact. In 2022, it will be important to see whether the World Trade Organization could potentially create the space for deliberation on sectoral initiatives, for example those launched through bilateral and plurilateral approaches, to feed back into the multilateral system.

• Due to travel restriction linked with the pandemic, the aviation industry had another difficult year in 2021. The year ahead is also filled with uncertainty. Despite the challenging business conditions, in 2021 the airline industry continued to show climate leadership by committing to net-zero CO2 emissions by 2050. For the target to be operationalized it will require development of a global scheme through building on the existing Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA). Moving from an existing net-carbon neutral growth target to a net-zero carbon emissions target will require technical recalibration of the scheme design, some of these aspects are highlighted in the concluding section of the Policy Brief from the Harvard Project on Climate Agreement. If the sector starts to recover to its pre-pandemic levels in 2022, it will become a target for environment taxes and climate change related restrictions. Therefore, elaborating on how the sector will operationalize its new climate targets is likely to become increasingly urgent.

• Important elements will also advance in 2022 under the UNFCCC, both through the inter-governmental process and the work program of the secretariat. In the context of the inter-governmental process the ministerial dialogue on climate finance, workshop of on loss and damage and activities related to fully operationalizing Article 6 will be some of the key developments to monitor in the year ahead. The work coordinated by the secretariat also promises to support greater transparency on how the convention is implemented.

___________________

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.