Unlocking the carbon removal market in 2025
by
Carbon capture, whilst not a silver bullet, is an essential tool in the arsenal for combatting climate change. 2024 was the hottest year on record, seeing temperatures rise above 1.5° C. Whilst this does not mean the international target of limiting warming to 1.5° C has been broken, it is a major warning signal that we need to expedite action. Whilst reducing our emissions and transforming industry to restrict future emissions is essential to tackling dangerous levels of greenhouse gases in the atmosphere, this alone is not enough.
Globally, the burgeoning Carbon Dioxide Removal (CDR) industry needs to remove 7-9 billion tonnes of CO2 every year by 2050, according to the Oxford Smith School’s State of CDR Report 2024[1]. This means that we need to rapidly scale Carbon Capture, Utilisation and Storage’s (CCUS) sister industry, carbon removal, proactively taking carbon out of the atmosphere to achieve our climate goals as fast as possible.
Nature is our greatest asset in carbon removal, not least due to the multiple positive impacts of nature-based projects ranging from soil enhancement to improved flood resilience. Recent World Economic Forum (WEF) research ranked biodiversity loss and ecosystem collapse as the second highest risk in the next ten years behind extreme weather events[2]. Analysis from the Green Finance Institute (GFI) identified that nature degradation could lead to a potential 12% GDP reduction in the UK alone[3]. Nature needs to be an immediate priority, but we also need engineered projects that will lock up carbon for hundreds and thousands of years. Combining carbon capture and storage infrastructure with enhanced carbon removal capacity is central to maximising certain removal technologies, but there are other pathways that have quite different requirements to scale.
The market’s coming of age
The Voluntary Carbon Market (VCM) is the hub of both nature-based and engineered carbon credits. A series of project failures brought into question the quality of the market and its meaningful impact on emissions reduction and removal, driving a change in shape of the VCM over the last two years. Concern around the integrity of projects has moved demand away from lower priced nature-based credits towards higher rated, more expensive nature-based removal projects, and engineered credits which can range from $100/tonne to $500/tonne plus.
Appetite has shifted towards a portfolio approach, purchasing credits from a range of projects at quite different price points. A recognition that spot purchases do not provide clear, long term demand signals to early-stage developers, and a desire for price visibility and future access to removal capacity, has led to greater number of offtake agreements which lock in purchase agreements for up to ten years. Demand for high quality nature based and engineered removals remains dominated, however, by a handful of individual large-scale buyers such as Microsoft, and Advanced Market Commitments from groups of corporates such as Frontier Climate’s $1 billion commitment to purchase removals.
Rigour in the monitoring, reporting and verification of project impact, driven by climate scientists, registries, and buyers wanting higher levels of confidence in what they purchase, is building trust amongst experienced participants in the VCM. Standards such as the Core Carbon Principles developed by the Integrity Council for Voluntary Carbon Markets (for which the GFI acted as secretariat in its early days), and the European Union’s Carbon Removal and Carbon Farming Framework, have set minimum quality thresholds for what good looks like.
The voluntary carbon market is, however, only one lever for channelling funding into climate projects. We are seeing increasing state level support for carbon removal, including direct funding committed by governments such as the United States, Denmark, Singapore, Canada, Indonesia and the European Union. The United Kingdom could be one of the first countries to include removals in its emissions trading system, alongside Japan, and establish a Contract for Difference for carbon to ensure price certainty for developers. High level statements of support for investment in carbon removal, underscoring the critical role it will play in climate action, are also hugely valuable in providing corporates with the social licence to channel funds towards these projects and technologies.
A stabler, more mature market
Despite increasing numbers of positive policy commitments, policy cannot be relied upon to dramatically drive demand for carbon removal in the next 12-24 months. We need the private sector to lead in this space, and for more corporates to include funding for carbon removal in their commitment to tackling climate change, whether through the purchase of carbon credits or by direct investment in the technologies themselves. The mandate from the scientific community is clear, and it is our job to identify financing mechanisms that reduce risk for investors, and tools to reduce friction and enhance transparency for buyers of carbon credits.
2024 was the year of rigorous scrutiny of carbon removal pathways and projects. 2025 needs to be about mobilising capital for innovative technologies and projects to ensure they can advance beyond the early stage, and for us to have a chance of keeping the 1.5warming target alive.
The Carbon Capture Summit, Economist Impact’s inaugural event in Amsterdam, will explore critical topics including, financing CCUS projects, emissions reduction vs removal, innovation, engineering and technology, and more on February 6th, 2025. Join us to network with peers and learn about the latest technologies and best practices in the CCUS market. Register today: Registration link
