With the race to decarbonize intensifying, innovations and market solutions are emerging faster than ever to combat greenhouse gas emissions. In particular, innovations in engineered carbon dioxide removal (CDR) is piquing the attention of researchers, media and investors.
CDR encompasses various methods aimed at removing CO2 from the atmosphere and sequestering it for long periods. These methods include natural solutions like reforestation and soil carbon sequestration as well as technological approaches such as direct air capture (DAC), biochar and bioenergy with carbon capture and storage (BECCS). Each method varies in terms of scalability, cost and permanence, but all contribute to a reduction in atmospheric CO2 levels.
The voluntary carbon markets (VCM) currently facilitate much more conventional CDR than engineered (or “novel”) CDR, but demand for these types of carbon credits is growing rapidly. Novel CDR methods saw a significant increase in purchases during 2023, posting a sevenfold increase in sales (4,638,766 tons in 2023 versus 615,107 tons in 2022), while conventional CDR credits experienced a reduction in issued volumes, to 13.25 million tons from 20.36 million tons.
Several key factors are driving growth in the engineered CDR sector. Here, we explore the tailwinds — and one crosswind — now impacting the development and deployment of engineered CDR credits across the VCM.
The science is clear and recent studies continue to underscore the necessity of CDR in climate mitigation strategies. For instance, a 2019 study published in Nature Communications emphasizes that achieving the Paris Agreement goals is not possible without the deployment of CDR technologies and maintaining a 1.5C scenario will likely require at least 10 gigatons of engineered CDR annually. This scientific study is echoed by major institutional climate reports, including the Intergovernmental Panel on Climate Change (IPCC) Special Report on Global Warming of 1.5°C, which emphasizes the critical role of CDR in limiting global temperature rise.
By 2030, experts expect corporate demand for novel CDR to rise to 40 million to 200 million metric tons of CO2 (MtCO2), which will outstrip the expected supply of approximately 15 million to 32 million MtCO2, according to a report from Boston Consulting Group. This demand is driven largely by corporate voluntary climate targets, with major financial and tech players like Microsoft, Stripe and Shopify each making substantial investments in engineered CDR. For example, Microsoft's commitment to becoming carbon negative by 2030 includes a $1 billion fund to develop and deploy carbon reduction, capture and removal technologies.
Third-party verification is a major demand driver for novel CDR. By enhancing project credibility and lowering perceived risk, buyers and investors are more likely to trust CDR credits. Third-party verification also helps establish and enforce uniform standards for measuring, reporting and verifying CDR efforts, which makes it easier for buyers to compare and evaluate different credits. Notably, new Science Based Targets initiative (SBTi) guidelines for carbon credits mandate rigorous third-party verification and adherence to recognized standards designed to enhance the legitimacy and quality of carbon credits, increase investor confidence, and ultimately, scale the market.
The implementation of Article 6 of the Paris Agreement and the integration of carbon credits into compliance markets in countries like Colombia and South Africa are expected to drive demand for CDR. Currently, more than 70 carbon pricing schemes exist worldwide, covering approximately 25% of global emissions.
Other jurisdictions are starting to act. The U.S. has seen progress at the state level, with new schemes such as Washington state's new cap-and-trade system and others proposed in New York State, which could potentially link with those of California and 10 other existing markets. China, meanwhile, recently announced the relaunch of its own voluntary carbon market (China Certified Emission Reductions - CCER), allowing for a portion of emissions to be offset through verified projects like forestation and renewable energy.
The EU’s Carbon Border Adjustment Mechanism (CBAM), set to take effect in 2026, also has the potential to drive demand for CDR credits even higher. CBAM will tax the carbon content of imported goods, initially covering high-carbon products like cement, steel, aluminum, fertilizers, hydrogen and electricity. By 2030, CBAM is expected to expand to cover 31% of global trade.
CBAM requires companies exporting to the EU to account for their carbon emissions and purchase carbon credits or allowances to comply with the regulations, meaning companies will be seeking credits that meet the stringent requirements of the mechanism. Experts believe this will likely lead to the proliferation of new carbon tax regimes globally and an even greater integration between voluntary and compliance carbon markets.
CDR financing is pathway-specific, with significant variations in capital expenditure (capex) and operational expenditure (opex) requirements depending on the technology used. For instance, DAC and BECCS require substantial capex, while Enhanced Rock Weathering (ERW) and Mineral Ocean Alkalinity Enhancement (MOAE) are more opex-intensive.
Compared to equity, debt financing generally commands a lower cost of capital. This reduces the overall financial burden on CDR projects, making them more financially viable and attractive to additional investors. Debt financing can support the expansion of operations, allowing projects to reach efficiencies of scale more quickly. For example, UNDO successfully secured debt financing to build and expand ERW facilities and Neustark secured debt financing for its mineralization technologies, demonstrating the viability of debt investment in the engineered CDR sector.
Certain novel CDR projects, such as DAC, require significant capex, making asset-based financing structures and equity from venture capitalists more common. Notably, too: New technologies are less proven, making them a difficult profile for debt financing. While DAC costs are projected to decrease from $600-$1,000 per ton to $150 by 2050 through economies of scale, DAC still faces risks from its high costs as well as risk from price volatility of carbon credits and potential undercutting by emerging technologies.
Several federal programs, from grants to tax incentives, are also helping to grow CDR. For example, the Department of Energy’s (DOE) Carbon Capture, Utilization, and Storage (CCUS) Program funds research, development and demonstration projects focused on capturing CO2 emissions from industrial sources and power plants and developing technologies for carbon storage and utilization through grants and technical assistance.
CDR project developers can also utilize tax benefits. Section 45Q of the Internal Revenue Code provides a tax credit for each metric ton of CO2 captured and sequestered. Depending on the type of storage and when the project began, the credit amount can be up to $50 per metric ton for CO2 permanently stored and up to $35 per metric ton for CO2 used for other purposes. Climeworks, for one, has leveraged the 45Q tax credit to enhance the financial viability of its DAC projects in the U.S.
CDR projects can stimulate local economies and create jobs — including roles in planning, building, monitoring and maintaining projects — and can offer educational opportunities and skill development in technological operations. Such co-benefits can enhance the appeal of carbon credits to consumers and contribute to higher price points, leading to more stable revenue streams while enhancing overall scalability. Certain carbon credit standards have developed frameworks to better evaluate a project’s contribution to overall sustainable development as well as recommendations for buyers to consider the broader impacts of carbon projects.
Current carbon credit pricing generally remains too low to drive significant emissions reductions, but there is movement toward higher prices in some regions. Different carbon pricing schemes offer a wide variance in pricing, averaging around $25 per metric ton of CO2 equivalent (MtCO2e), which is below the levels needed to effect significant reductions in emissions. According to the IMF, carbon taxes need to reach $75/MtCO2e by 2030 to meet global climate goals, because at that price point, the price of the carbon tax exceeds the production costs of carbon emissions and would prompt companies to reduce emissions. However, only three jurisdictions — Norway, Switzerland and the EU — report average prices above $75/MtCO2e in 2023, with only Switzerland exceeding $100/MtCO2e.
With so many tailwinds pushing it forward, novel CDR is poised for rapid growth. The demand for CDR credits is expected to reach between $10 billion and $40 billion dollars by 2030, with demand largely driven by the recognition that traditional carbon offsetting alone will not suffice to meet the ambitious targets set by the Paris Agreement.
With companies and governments increasingly aware that to achieve net-zero emissions, a combination of emission reductions and carbon removal is essential, the market is ready to respond. As external certification programs verify the viability of engineered CDR and corporate spending in CDR continues to grow, the novel CDR sector is scaling up to meet the needs of a planet on the path to decarbonization.
