Low-Energy Fridays: Money in the Air: The Growth of the Carbon Dioxide Removal Market
In the words of famed philosopher Kermit the Frog, “It’s not easy being green.” Today’s companies want to boast of their environmental bonafides. An increasing number of companies have adopted self-imposed “sustainability goals,” pledging to reduce their environmental impact, and over 5,000 companies have pledged to become “carbon neutral” by midcentury. Tech companies, in particular, have been at the forefront of this trend.
The challenge is that many of these companies use a lot of energy. And despite the rise of wind and solar power in recent years, energy use still involves the emission of large amounts of carbon dioxide (CO2) and other greenhouse gases. To address this problem, a market has grown to provide “carbon offsets” or “carbon credits” that companies can buy to help meet their sustainability goals. Under this framework, companies pay third parties either to take actions that will reduce the amount of CO2 in the atmosphere (e.g., by planting a tree) or to refrain from actions that would have increased atmospheric CO2 levels (e.g., by agreeing not to cut down a currently existing tree). Offset credits can be generated by governments or private organizations, which certify the amount of the reduced or forgone CO2, and then can be sold and traded on the open market.
As with pretty much everything involving climate change, carbon offsets have their drawbacks.
Carbon offsets may seem simple, but they can get into thorny issues involving counterfactuals. If in theory I could turn my house into a coal mine but I choose not to, does that mean that I should get an offset for the potential maximum carbon output of the mine? Verification is also a problem. Offsets are typically based on a 100-year time period, but what’s to stop a landowner who agrees not to log his land from changing his mind after a few years and cutting down all the trees? These problems are exacerbated when, as is often the case, the offsets involve areas in developing countries without strong institutions or transparency. Several certification organizations have faced scandals when it turned out that offset sellers were not living up to their obligations. And prices for carbon offset credits have slumped in recent years, reflecting a growing lack of confidence in the mechanism among some companies.
As a result, some companies are turning to a different mechanism to achieve their carbon-neutral goals. Carbon dioxide removal (CDR) credits are broadly similar in concept to carbon offsets but are more directly focused on methods that remove CO2 from the atmosphere. That could mean planting a tree or using agricultural practices that sequester more CO2 in the ground, but it can also mean new direct air capture technologies that remove CO2 from the atmosphere and reduce it to a form that can be safely sequestered underground for long-term storage. Because CDR is focused on positive action rather than counterfactuals, it has measurement and verification advantages over traditional carbon offsets.
Direct air capture is a relatively new technology, and, like most new things, it is expensive. Currently, it costs around $600-$1,000 to capture and store a metric ton of CO2 through this technology. But nascent technologies typically become much less expensive as companies find ways to improve their products to reduce cost.
At the moment, the biggest purchasers of CDR credits are tech companies. In 2003, credits for around 5 million tons of CO2 equivalent were purchased, with the majority being bought by Microsoft. Amazon is also taking the lead on direct air capture. Last year, the company agreed to purchase credits for 250,000 tons worth of CO2 removal from a direct air capture facility currently under construction in Texas.
The CDR market is still nascent, and as it grows it will inevitably face issues regarding permitting and property rights that will have to be resolved. But what is clear is that there is a lot of potential demand for some sort of sustainability product. For now, the main unanswered question is whether companies will be willing to pay a premium for the additional confidence that CDR brings over other options.