Voluntary Carbon Markets Accelerating Climate Action

The following is an article published in Issue 2, 2023 of Carbon Capture Magazine.

CCS and the VCM: Voluntary Carbon Markets Accelerating Climate Action

By David LaGreca, Voluntary Carbon Markets Services Director

While the Inflation Reduction Act (IRA) has paved the way for a dramatic increase in investment in carbon capture and sequestration (CCS) solutions for heavy-emitting industries, the funding from these incentives frequently falls below the total cost to deploy these systems. At the same time, the entire raison d’être for the voluntary carbon markets (VCM) is to make CCS projects financially viable. The marriage of financial incentives from public sector financing and the VCM is an important, if not imperative union in getting many CCS installations off the ground and fully realizing the potential of these technologies in the near term. Often, companies are so focused on the regulated markets and tax incentives, that these funding streams are overlooked and underutilized in the financial stack to get to the final investment decision (FID).

According to the U.S. Department of Energy (DOE), capture costs for industrial-scale CCS projects range from $140/metric ton for ethanol, gas processing, and hydrogen steam methane reforming (SMR), up to $1,700/metric ton for coal power plants.¹ Section 45Q of the IRA provides for a maximum of $85/metric ton, leaving an obvious hole in the justification for investors and companies in nearly every sector endeavoring to reduce their emissions through carbon management. Though much less certain in terms of willingness to pay for a metric ton of carbon sequestration, the international marketplace is currently starved of industrially sourced, readily quantifiable carbon credits to be used for environmental, social, and governance (ESG) reporting and carbon footprint reductions. The Carbon Neutral Buyers Alliance, Mitsui, and others have incorporated CO₂ credits generated from CCS into claims of “carbon neutral liquified natural gas (LNG)”. Similarly, UK-based energy utility, Drax, inked a memorandum of understanding (MOU) with Respira for the sale of upwards of two million of their bioenergy carbon capture and storage (BECCS) credits to be issued this decade. While under scrutiny, this is a clear signal that there is a demand for such credits generated from CCS, be it biogenic or fossil in origin.

A McKinsey & Company analysis from 2022 states that carbon capture, utilization and storage (CCUS) uptake needs to grow 120 times over by 2050 for countries to achieve their net-zero commitments.² Whereas their analysis somewhat downplays the relevance of voluntary markets in driving financing to these new projects outside of more niche, carbon dioxide removal (CDR) categories such as BECCS and direct air capture (DAC), they are presently attracting bids for credits (ex-ante in many cases) in the range of $300/metric ton and $1,200/metric ton, respectively. These prices are leading to a rapid entry into this space by registries, project developers and investors alike. Though likely not a mainstay for funding throughout the lifespan of these projects, agreements for the offtake of voluntary carbon credits may be a key factor in going from design to implementation in many cases.

Unlike commodity markets (i.e., crude oil or corn) and regulated credit markets (i.e., Low-Carbon Fuel Standard or EU’s Emissions Trading Scheme), VCMs have wide-ranging prices for credits emanating from similar project types. As many transactions are inherently bilateral, taking place over the counter between a developer and an end-user (think Microsoft offsetting their historical emissions), projects are frequently valued on their nuances as much as their atmospheric benefit. In the case of CCS activities, the most apparent distinction is between carbon avoidance (point source capture) and carbon removal (CCS from biogenic feedstock). Though capturing CO₂ from any operation is, in essence, preventing emissions from entering the atmosphere, capturing emissions from combusted organic material has, due to photosynthesis, the indirect impact of reducing net carbon in the atmosphere. This biogenic differentiator propels these projects into a higher echelon of pricing in the current market as they are being treated as “carbon removals.” Other project characteristics come into play as well in the VCM, such as general sentiments towards fossil fuels and whether credits purchased from projects are effectively subsidizing their continued profitability.

In contrast and in addition to CCS projects that register their activities for harvesting 45Q and other tax incentives under the IRA, projects registering in the VCM must go through a rigorous process involving disclosure and proof of project activities to independent assessment bodies. This process requires the development of traceable data systems to be audited by both a third-party verification body and an independent registry for credits to be issued and legitimized. At present, few CCS crediting pathways exist, including under the Puro.earth standard and the California Air Resources Board (CARB), with the former for crediting CO₂ removals and the latter for fuel carbon intensity (CI) reductions. On the horizon are comprehensive protocols to be released by the American Carbon Registry, the Verified Carbon Standard, and numerous jurisdictions globally. Because VCM crediting is an incentive mechanism, project proponents must show that they require the funds from credit sales, or that they have overcome other substantial, non-financial hurdles, to qualify. Whereas the U.S. Environmental Protection Agency (USEPA) Class VI well permit places a strong, primary focus on water quality along with other components, VCM protocols also emphasize the notions of additionality, permanence, life cycle emissions, co-benefits and environmental harm. These differences illustrate how federal incentives are complementary to voluntary incentives and allow for many of them to be at times “stackable” rather than exclusive to one another.

Entities involved in renewable fuel production can leverage federal, state, and voluntary incentives to establish a differentiated profile of revenue streams. A U.S. ethanol plant with carbon capture installed may, for example, apply for multiple outlets for their low-carbon intensity (CI) fuels, as well as the carbon attributes. Double counting of attributes is not the intention here, but rather a doubling of available sales outlets for fuel and its climate benefits. In these installations, the fuel may be sold, with or without the CI reduction from CCS, into Canada’s Clean Fuel Regulation (CFR), Clean Fuel Programs into Washington and Oregon, California’s LCFS or to voluntary markets. When the CO₂ value is sold separately, it provides for the opportunity to garner the absurdly high CDR credit prices on the VCM as is the case in the market today. This approach of maintaining multiple outlets for revenue, selected by the winds of market prices across all the pathways available, is what we call “optionality.” This is a key and underutilized financial benefits for many companies.

CCS is an environmental imperative, according to the Intergovernmental Panel on Climate Change (IPCC). Between 300-600 gigatons (Gt) (or 1 billion metric tons) of CO₂ must be cumulatively captured and stored between now and 2100, in conjunction with a massive drawdown of emissions, to maintain our climate within the 1.5°C threshold for heating established in the Paris Agreement. For this level of activity to transpire across the energy and industrial sectors, both governments and the private sector will need to drive substantial finance using multiple methods of incentives. Where governments fall short in terms of ambition and regulation, it is up to the VCM to step in to fill gaps, as it has done for more than 30 years.

¹US Department of Energy. 2023. Pathways to Commercial Liftoff: Carbon Management.
²McKinsey & Company. 2022. Scaling the CCUS industry to achieve net-zero emissions. October 28, 2022.