Carbon “removal reconsidered”

One of the most gratifying things about our work at Kita is engaging with the wider climate change community. From support, to partnership, to information, it is encouraging to see the breadth of people and companies dedicated to fighting the climate crisis.

One of those companies is BeZero, and their recent report - “Removal reconsidered: Carbon Dioxide Removal in the Voluntary Carbon Market going forward” - falls squarely into the ‘useful information’ camp, highlighting data and analysis that are regular features in Kita’s team discussions.

So what is ‘removal reconsidered’, and why does it matter?

Avoidance vs removal credits

First the basics. There are two categories of credits on the voluntary carbon market (VCM): avoidance and removal. Avoidance = avoiding emissions being released, e.g. via protection from deforestation. Removal = removing excess emissions already released, e.g. via nature-based solutions (like afforestation) or engineered solutions (i.e. technology to remove carbon, ranging from biochar to advanced weathering to direct air capture).

BeZero gives some great stats here, noting the vast prevalence of avoidance credits on today’s VCM - 93% avoidance as compared to 7% removal. The majority of those 7% removal credits are nature-based solutions: 66.3% afforestation and reforestation; 24.5% improved forest management; 7.3% carbon sequestration in agriculture; and less than 1.5% ecosystem restoration.

The market is going to shift towards removals

Kita’s focus is removal-based credits.

We agree with the point made within this report - the market will shift towards removals, which will require a scale-up at an unprecedented rate. Insurance, in our view, will be essential to enable this rate of growth.

BeZero analysed data from the IPCC, BloombergNEF and the Taskforce for Scaling Voluntary Carbon Markets, and found that by 2030, with a projected market size of 1.5-2 billion tonnes per year, 44% of the VCM will be avoidance credits and 56% will be removals.

There are multiple reasons for this, as BeZero ably sets out, e.g.:

• “Many industries such as agriculture, shipping, and aviation will be difficult to abate in a climate-relevant time frame. These industries have residual emissions that will remain beyond 2050 and cannot be compensated by avoidance.”

• “Corporate net zero initiatives will further increase demand. The Science Based Targets Initiative (SBTi) does not allow companies to use carbon credits to account for emissions reductions in near term targets. However, the SBTi’s criteria for setting Net Zero targets allows companies to neutralise residual emissions once they have reduced their own emissions as close to zero as possible. This is going to create an increasingly high demand for carbon removal credits as companies approach their net zero target year, with this early corporate activity demonstrative of what will come.”

BeZero also quotes the Oxford Principles for Net Zero Aligned Offsetting, noting credit purchasers “should increase the portion of their offsets that come from carbon removals, rather than from emission reductions”.

At Kita, we speak to people across the market every day, and we see this happening now. Buyers of carbon credits are looking to build diversified portfolios to manage their risks. Portfolios are currently largely avoidance based out of necessity, but they are considering how to flip that proportion to favour removals over this coming decade.

Given the current shortage of supply, part of this consideration today is around future credits, which entails delivery risk. This is the key risk our 1st insurance product to market is tailored to cover.

Nature-based solutions / engineered solutions

The removals currently available on the market are 99% nature-based solutions, however this is expected to change.

In the future 2030 market described above, BeZero notes that engineered carbon removal will increase to 30-100 million credits by 2030. This is up from 0 credits (0!) in 2022, as engineered removal credits are not currently an available option through the VCM registries.

The point we made previously needs to be made again - this is a scale-up at unprecedented levels.

But why do we need more engineered solutions in the first place?

The BeZero report lays out key arguments: permanence; scalability; reduced land resource requirements.

At Kita, we see the need for both nature-based solutions, which have huge value in carbon removal as well as biodiversity gain and other co-benefits, as well as engineered solutions. We think it is important to stress that given where we are in the climate crisis, every form of carbon removal needs to be on the table and we need action to scale them all in a high-integrity way.

What is the current stage of engineered solutions?

The market for engineered solutions is growing, but is currently small. The report highlights:

• In 2020, 2021, and 2022 (Q1/Q2) the overall number of credits purchased from engineered CDR was over 525,000

• 96% of these engineered credits stem from bilateral purchases - directly between suppliers and buyers, with an estimated $53 million spent on CDR credits over the last two years

• 89% of these were future credits, aka forward selling/buying a commitment to remove carbon in the future.

Future credits are a necessity now given a lack of supply. This will change over time. However, we need action now, and thus our first insurance product to market will help de-risk these forward purchases to enable more companies to get involved, including those without the internal resources to run significant due diligence on each project and then pay high prices, with uncertain delivery, on top of that.

How do we move forward?

BeZero proposes that the VCM can help scale engineered carbon removal by providing a broader demand base, as well as “Competition, Resilience and Stability, Integration, and Accessibility”. They note three key things that need to happen first:

• New methodologies to measure and certify carbon tonnage removed

• Ratings to enable better quality comparisons

• Strong public finance and policy support

BeZero argues that to create a real market for engineered carbon removal, bilateral purchases need to reduce, and purchases from intermediaries and within the broader VCM structure needs to increase. BeZero makes a point here that we fully agree with - the importance of intermediaries and marketplaces:

• “This rise of CDR accreditation will likely propel the use of intermediaries and marketplaces. Since 2020, a number of key players such as CBL, AirCarbon Exchange (ACX), Cloverly, Patch and Puro.Earth have emerged with an emphasis on selling and exchanging engineered CDR credits. As engineered CDR projects become accredited these kinds of companies will be important parts of the ecosystem, opening up the CDR market, meaning more companies and individuals can become customers.”

We believe insurance could play a key role here as an embedded solution.

The role of insurance in scaling the market

Carbon removal solutions largely exist. It is now about scaling. For the engineered solutions in particular, the next stage is market mechanisms to lower costs.

BeZero notes an analogy we think about often - “These devices of the market, powered through the VCM, can replicate the success of former green technologies such as Solar PV and bring down the cost curve of CDR at the rate necessary.”

Insurance was a key enabler in helping de-risk and enable green technologies such as solar. At Kita, we are learning from those industries and the leading insurance innovators within them, and we think we can bring similar risk transfer mechanisms to the VCM to enable carbon removal - both nature-based and engineered - to scale at the rate the world needs.