As new EU carbon pricing legislation and other global programs take effect, the line between voluntary and compliance carbon markets is blurring. Projects once exclusive to voluntary markets are now finding their credits attractive to compliance carbon markets, raising the question: What types of credits are attracting these new buyers?
Increasingly, say experts, the answer is engineered carbon dioxide removal (CDR).
That’s because high-quality engineered CDR projects like direct air capture (DAC), biochar and bioenergy with carbon capture and storage (BECCS) can generate carbon credits that are both verifiable and traceable through rigorous monitoring, reporting and verification (MRV) processes, while also ensuring long-term storage.
It’s a combination that makes these credits attractive to buyers in the compliance carbon markets (CCMs). CCMs are regulated by governments and international bodies and require entities to adhere to legally binding emission reduction targets. By contrast, the voluntary carbon markets, or VCM, are marketplaces where companies and individuals can voluntarily purchase carbon credits to offset their greenhouse gas emissions, supporting projects that reduce emissions or remove carbon dioxide from the atmosphere.
More jurisdictions are beginning to adopt regulations that allow the use of qualified VCM credits towards their compliance requirements. Examples include:
According to AlliedOffsets, there are some 450 million compliance-eligible credits available in the VCM, comprising more than 4,300 different VCM/CCM eligible projects. (In 2024 Q1 alone, 80.8 million compliance-eligible credits were issued.)
In the meantime, ongoing discussions about Article 6 of the Paris Agreement are focused on creating mechanisms that will allow for the integration of VCM credits into global compliance markets. Additionally, Gold Standard has launched a Public Carbon Regulations Tracker, a tool aimed at monitoring and reporting on evolving carbon regulations around the world and supporting global transitions from voluntary carbon markets to compliance landscapes.
But even as momentum grows, buying engineered — or “novel” — CDR credits is still easier said than done, as demand continues to outstrip supply. Here is what buyers need to know about tapping engineered CDR credits for use towards compliance requirements.
First, it’s important to note what makes a carbon credit eligible for use in a CCM. CCMs are generally governed by national or regional regulations that dictate which types of carbon credits can be used within that market. While these regulations vary significantly between jurisdictions, some compliance markets allow the use of VCM credits if they meet certain criteria.
Typically, these requirements include:
Additionally, to qualify for California’s Cap-and-Trade program, credits also have to come from projects that comply with methodologies approved by the California Air Resources Board, along with its protocols for MRV. They also have to show that they have environmental and social safeguards in place to protect local communities and ecosystems from potential negative impacts.
The flexibility found in certain CCMs has helped spur growth in novel technologies. For example, because airlines are allowed to use carbon credits for Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) compliance, Delta has grown to be the global leader in buying compliance-eligible carbon credits and investing in novel DAC technologies. In 2020, the airline pledged $1 billion over ten years in carbon reductions and removals.
Even without interest from CCM buyers, engineered CDR credits are already in high demand from buyers shopping solely in the voluntary carbon markets. While conventional CDR from afforestation saw a decline in issuances and retirements in 2023, future delivery purchase agreements for novel CDR methods increased sevenfold, surging last year to 4.6 million credits from 600,000.
And yet, engineered CDR constitutes only a small fraction of all CDR credits traded on the VCM. The growth and demand for novel CDR are fueled by several factors: These carbon projects have seen an increase in grant funding, research, technological innovations and, most notably, investment. In the last ten years, investment in CDR startups has grown more quickly than the entire climate-tech sector as a whole, likely driven by corporate net-zero announcements and the growing understanding that CDR is necessary to meet Paris-aligned temperature goals.
Not surprisingly, the price per carbon credit remains considerably higher for CDR than for other types of credits. In 2023, credits from conventional CDR methods, costing between $12 and $16, were three times more expensive than those from emission reduction or avoidance projects. Novel CDR is even more costly: The average weighted price for engineered CDR credits, ranging from $111 to $1,608, was up to 100 times higher than the price for credits from emission reduction or avoidance projects.
Integrating high quality carbon credits — in particular, engineered CDR credits — into CCMs has the potential to combine the innovative potential of voluntary markets with the accountability and rigor of regulatory frameworks.
The result will likely be continued and growing demand for engineered CDR credits as well as robust and credible MRV standards that ensure the credits represent real, additional and permanent emissions reductions.
As the world grapples with the urgent need to address climate change, leveraging engineered CDR technologies through integrated market mechanisms offers a pathway to a more sustainable and resilient future.
