Creating a market for negative emissions
As the curtain dropped on last year’s COP26 summit, many were heartened by the agreements made. Yet more needs to be done to fast-track the roll-out of negative emissions technologies that will be vital in addressing irreversible global damage from carbon emissions. Oxera research for Drax found a range of market design mechanisms through which these technologies could figure in the UK’s Emissions Trading Scheme. Angela Hepworth, Innovation Commercial Director at Drax Group, looks at the role of negative emissions technologies in reaching net zero targets.
Recent findings in a report by the UN Intergovernmental Panel on Climate Change (IPCC) paint a bleak picture.1 The climate crisis is accelerating, and urgent action must be taken. As discussed in this article, negative emissions technologies (NETs) can play a vital role in mitigating the climate crisis and progressing towards net zero targets.
Trailblazing new technologies
It is widely recognised by the leading climate scientists on the UK Climate Change Committee (CCC) and the UN’s IPCC that NETs will play a critical role in global efforts to combat the climate crisis. The latest climate science tells us that it is no longer sufficient simply to reduce emissions. Instead, we need to remove CO2 that is already in the atmosphere if we are to stand any chance of meeting the targets agreed in Paris in 2015.
In the UK, the CCC’s Sixth Carbon Budget found that around 58m tonnes of CO2 a year would need to be removed from the atmosphere by 2050 using NETs in order us to reach the government’s legally binding net zero target.2
A report for the Coalition for Negative Emissions,3 published last year, found that if action is not taken now to scale up carbon removal solutions, we will miss our climate targets within a decade. It found that globally, more than 1Gt of negative emissions per year would be needed by 2025 to avoid irreversible climate damage. For context, this is equivalent to removing more than twice the UK’s annual CO2 emissions each year for the next four years. We are far from achieving this target at present.
Utilising negative emissions solutions
While there is no silver bullet or single technology that will fix the climate problem, there are cost-effective solutions that are ready to be deployed now and which jointly will have a significant impact. Bioenergy with Carbon Capture and Storage (BECCS), Direct Air Capture and Storage (DACS), and natural climate solutions (such as afforestation) are each capable of removing significant amounts of CO2 from the atmosphere.
The Oxford Offsetting Principles,4 launched by the University of Oxford in 2020, call for a significant move towards permanent negative emissions solutions. The document highlights NETs’ vital role in enabling countries and businesses to reach net zero, helping difficult-to-decarbonise sectors such as agriculture and aviation to neutralise their residual emissions and deliver the results the climate requires. Therefore, it is imperative that these solutions be deployed before it is too late.
Creating a market that supports NET deployment
In order to get projects such as BECCS and DACS off the ground, investable commercial frameworks are required for these projects’ carbon removals, which will deliver an enduring negative emissions sector.
Currently there is no mechanism to support negative emissions in the UK energy or carbon markets. It is therefore crucial that the UK government confirms those market support mechanisms soon so as not to delay investment and stall the roll-out of these solutions.
Carbon removals in the UK Emissions Trading Scheme
There are two potential commercial frameworks for carbon removal in the UK, which can complement one another and stimulate the market for carbon removal technologies, enabling them to make the required contribution towards achieving the country’s net zero goals.
The first is the Emissions Trading Scheme (ETS), which requires certain large emitters to purchase allowances to cover their emissions. Currently the ETS covers the power, aviation, and heavy industry sectors. However, at present, it is not possible for NETs to participate in the ETS.
Research carried out by Oxera on behalf of Drax found a range of feasible market design mechanisms to accommodate NETs in the UK’s ETS, and that if these mechanisms were implemented by government, they could provide long-term support for the deployment of these technologies. Oxera considered options that would enable NETs to deliver additional decarbonisation benefits, above and beyond what would be achieved through the scheme without their inclusion. It is important that the use of NETs complements—and does not detract from—the direct efforts of emitters to decarbonise.
Oxera proposed that the UK government could establish greenhouse gas removal units (GGRs), where each GGR would represent a tonne of CO2 removed from the atmosphere by a negative emissions solution. Participants in the ETS could use these units instead of purchasing emissions allowances (EAs).
Oxera’s research identified four mechanisms that could be used to manage the proposed GGR market, requiring different levels of direct government involvement in facilitating GGRs to be used instead of EAs by market participants. In the first, the government would act as a broker, giving it full control over the number of EAs and GGRs in the market. The second could see a separate market for GGRs, which would link to the ETS through a price cap for GGRs. A third mechanism would see the creation of an integrated market, where GGRs would participate directly in the ETS. The fourth option identified by Oxera is the introduction of an obligation for emitters not only to purchase an emission allowance but also to ensure that the emissions will be removed from the atmosphere in the future, thereby sharpening the incentive for polluters to directly abate their current emissions.
The benefit of integrating the use of GGRs within the existing ETS market is that the costs of funding NETs could be shared between government and industry, with the proportions changing over time.
In the first three mechanisms the government could choose whether to fund NETs by substituting GGRs with free or auctioned EAs. Use of free EAs would result in industry funding, whereas the use of auctioned EAs would lead to funding from government. In the fourth mechanism the number of GGRs required to be purchased with each EA could rise from a small proportion initially to parity in the long term.
Given the cost to industry of meeting the funding obligations, additional mechanisms may need to be put in place to avoid companies moving production to other countries with less stringent climate policies.
Carbon removals in the voluntary carbon market
The second potential route to market for carbon removals is the voluntary carbon market. More and more companies are making net zero commitments and recognising that, alongside their own efforts to decarbonise, they will also need to purchase carbon removals to achieve their goals. There is growing recognition of the importance of supporting the development of high-integrity carbon removal projects, such as BECCS and DACS, that can take CO2 from the atmosphere and store it permanently underground. This market is at an early stage of development, but with the right frameworks in place it can provide a valuable route to supporting the development of carbon removal technologies.
Ensuring market oversight
For any mechanism to work successfully, it is essential that a robust monitoring, reporting, and verification (MRV) process is introduced and followed to ensure that GGRs are of a sufficiently high quality to participate in both the ETS and the voluntary carbon market.
In doing so, government can ensure that GGRs are genuinely removing emissions and that those companies that do not meet the standards set out would not be permitted to take part in the market. Creating a strong MRV process will provide confidence in the negative emissions market, as well as the potential to allow GGRs to participate in the voluntary carbon market.
Creating a sustainable future
Creating a market for negative emissions within both the ETS and voluntary carbon markets is the most sustainable and cost-effective strategy for the long-term roll-out of NETs.
Over the last ten years the introduction of similar policies has incentivised investment in renewables and transformed the UK’s energy system. Supportive UK government policies for technologies such as offshore wind saw the UK lead the world in creating a whole new industry, attracted significant investment, created thousands of jobs, and decarbonised the UK’s electricity system faster than any other country’s.5
Negative emissions solutions are still in their infancy, but with similar support from government over the coming decade the country could replicate the same success while supporting the UK’s carbon targets, clean growth and jobs, as well as creating export opportunities.
BECCS at Drax
We at Drax plan to use BECCS at our North Yorkshire power station to create the world’s largest carbon capture in power project. When it is up and running, it is predicted to capture 8m tonnes of CO2 every year, permanently locking CO2 away deep under the North Sea, while also generating renewable electricity for millions of homes across the UK.
In the initial stages of the deployment of BECCS, early government support through either a contracts for difference (CfD) or carbon payment model would be needed to allow Drax to invest in the deployment of the technology. However, as BECCS matures and the market develops, market-based mechanisms such as the ETS could be used to support it.
BECCS will not just deliver for the climate—it can also deliver for the UK economy. Estimates suggest that deploying BECCS at Drax could save the UK more than £13bn in reaching its climate targets over the coming decade.
Not only that, but it would support around 17,000 jobs during the peak of construction in 2028,6 including roles in construction, local supply chains and the wider economy. It would also act as an anchor project for the Zero Carbon Humber initiative,7 which aims to decarbonise the UK’s most carbon-intensive industrial cluster. Developing a carbon capture, usage and storage (CCUS) and hydrogen cluster would have a significant impact on the UK’s efforts to reduce carbon while spearheading the generation of around 100,000 jobs—helping to ‘level up’ the North.
Seizing the opportunity
NETs such as BECCS are available now and have the potential to become a cornerstone of the global green economy. The National Infrastructure Commission reported last year that NETs could kick-start a whole new industrial revolution in the UK, creating and protecting thousands of jobs and placing the country at the forefront of the development and deployment of groundbreaking environmentally friendly technologies.8
If we are to build on the successes of the last decade, the government must use this opportunity to show global leadership in support of these new green technologies, and also to demonstrate what can be achieved when businesses, communities and governments come together to make this a decade of delivery.
1 See IPCC (2022), ‘Climate Change 2022: Impacts, Adaptation and Vulnerability’, 27 February.
2 Climate Change Committee (2020), ‘Sixth Carbon Budget’, 9 December.
3 Coalition for Negative Emissions (2021), ‘The case for Negative Emissions: A call for immediate action’, June.
4 University of Oxford (2020), ‘The Oxford Principles for Net Zero Aligned Carbon Offsetting’, September.
5 See Drax Group plc (2020), ‘Drax Electric Insights Quarterly – Q3 2020’.
6 Drax (2020), ‘Capturing carbon at Drax: Delivering jobs, clean growth and levelling up the Humber’, 18 November.
7 See https://www.zerocarbonhumber.co.uk/.
8 See National Infrastructure Commission (2021), ‘Greenhouse gas removal technologies report’, 29 July.
Sahar Shamsi, CFAPartner
Innovation Commercial Director at Drax Group
Episode two: The contribution of good corporate governance to the market valuation of European companies
Brussels was the ideal setting for our most recent two-part Agenda podcast, where the European Contact Group brought together different stakeholders to discuss the results of Oxera’s report, An analysis of the EU governance framework for corporate reporting. In episode two of the podcast, the discussion addresses how, in practice,… Read More
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Brussels was the ideal setting for our most recent two-part Agenda podcast, where the European Contact Group brought together different stakeholders to discuss the results of Oxera’s report, An analysis of the EU governance framework for corporate reporting. In episode one of the podcast, we present and discuss the conclusions… Read More