When examined through different lenses, the more expensive, permanent carbon removal credits can actually prove to be cheaper than traditional, lower-priced carbon credits deriving from lower durability removal projects. The key of course is selecting the appropriate lens at the appropriate time.
As a quick clarifier, by ‘permanent’ carbon removal, we mean CO2 storage across 500+ and/or thousands of years (we may also use ‘durable’ and/or ‘durability’ in this post to describe the length of storage).
When we simply compare carbon credit prices at face value, we wouldn’t reach the above conclusion but there are important underlying factors of the removal and storage activities that, when considered, can significantly change the fundamental economics and therefore alter the carbon credit purchasing decision process. We’ll be covering two of these factors in this post: quality and time.
It’s especially important to take “time” into account (“quality” is arguably a derivative of “time” in this thought exercise), because when CO2 is released into the atmosphere, it can stay there for hundreds, if not thousands of years. Therefore, if we’re looking to truly balance out the books, then an equivalent time period must be considered for removing and storing that CO2 out of the atmosphere. If we’re removing and storing CO2 on a shorter time horizon, then we must factor in the CO2 being re-released, and therefore, we must plan and most likely pay for performing the removal and storage activity again for another short time horizon (sometimes referred to as “horizontal stacking”), and then perhaps several more times thereafter – enter a repetitive and potentially, cumulatively quite expensive endeavor.
Before we dive deeper into this topic, we should explicitly state the following – this isn’t a hit piece on traditional carbon offset projects. In the case of forestry projects, we would all agree that trees are wonderful and can do many things that, for instance, a Direct Air Capture unit cannot. The point of this post is to examine the carbon credit pricing and purchasing dynamics that are at play.
Taking a deeper dive
A carbon credit coming from a forestry project could cost, let’s say, $25 / tonne, while a credit stemming from an Enhanced Rock Weathering (ERW) project could cost $300 / tonne (Prices certainly vary but these figures fall well within industry ranges / averages – for more CDR market data, check out our data initiative).
Clearly, the ERW credit is more expensive, right? At face value, yes, but if we look at those prices through the lens of cost over storage time, then the answer isn’t so clear-cut:
Enhanced Rock Weathering involves spreading crushed rock (like basalt) across large surfaces (e.g. farmland), which speeds up natural chemical reactions between the rocks, water, and air. Through this process, natural rock weathering is accelerated, which leads to faster removal of carbon dioxide from the atmosphere and long-term storage of it in solid carbonate minerals.
|Project||Price / tonne||/ 40 yrs of storage||/ 60 yrs of storage||/ 80 yrs storage|
|Project||Price / tonne||/ 500 yrs of storage||/ 750 yrs of storage||/ 1,000 yrs of storage|
We can see from the above that through this ‘cost over storage time lens’, at 500 years or more of storage, the $300/tonne credit is actually the more economical option at each subsequent time interval.
Of course the key is deciding when it is appropriate to use such a lens, for whom it makes the most sense, and defining the actual storage lengths. It’s important to remember that at the time of this writing, this type of carbon removal activity still falls within a voluntary carbon market, and as a result, there is no legal or regulatory requirement that pushes for optimizing the durability of the removal/storage activity.
Moreover, it would be fair to ask if 1,000 years of storage is absolutely necessary or would 500 years of storage suffice. If we deem 500 years of storage to be enough, then under the same lens we used above, the $300 ERW credit is still more expensive than the $25 credit coupled with 80 years of storage.
Let’s pick at this from a different angle. What if instead of “storage time” we mapped pricing over “credit validity periods”? To understand what we mean by that, here’s a snippet from the EU Commission’s recent announcement and Proposal for a Regulation on an EU certification for carbon removals:
“Activities that store carbon in geological formations provide enough certainties on the very long-term duration of several centuries for the stored carbon and can be considered as providing permanent storage of carbon. Carbon farming or carbon storage in products are more exposed to the risk of voluntary or involuntary release of carbon into the atmosphere. To account for this risk, the validity of the certified carbon removals generated by carbon farming and carbon storage in products should be subject to an expiry date matching with the end of the relevant monitoring period. Thereafter, the carbon should be assumed to be released into the atmosphere, unless the economic operator proves the maintenance of the carbon storage through uninterrupted monitoring activities.”
The key terms in the text above are “validity” and “expiry date”, which together represent definitions of quality and time. It’s fair to say that the following language also draws the line between different removal activities: “Activities that store carbon in geological formations” and “Carbon farming or carbon storage in products are more exposed to the risk”. Perhaps the most important point in the language above is the idea that the carbon “should be assumed to be released”, which would lead to having the removal and storage activity be repeated and thus purchased again.
So instead of price over storage time, let’s now compare our previous price tags over a hypothetical credit validity period of 1 year, meaning we’d need to repurchase the expired credit each year, given its ephemerality:
|Project||Price / tonne||YR 1||YR 2||YR 3||YR 4||YR 5||Total cost|
You may be thinking that a 1-year expiry date is a ridiculously short timeframe. If we continue using the forestry project example, a tree, on average, certainly lives longer than 1 year!
Generally speaking, yes, that’s true. Trees are typically more durable than 1 year in the physical world (in fact sometimes more than 100 years!) but this may actually not matter at all.
In fact, a tree could live for over 250 years but if the associated carbon credit is set to expire after 1 year due to the regulatory framework put in place (this could be due to associated project risks or monitoring requirements for example), then the tree, as a carbon removal option and for credit claiming purposes, technically would only be recognized to ‘live’ for 1 year. Here’s more language from the EU Commission’s Q&A page:
“In addition, certificates should transparently carry an expiry date that depends on the risk of release specific to each type of carbon removal.“
Let’s continue playing the 1-year scenario out a bit further:
|Project||Price / tonne||Total cost at YR 10||Total cost at YR 15||Total cost at YR 20|
Over a longer time horizon, the cheaper credit actually becomes more expensive than the $300 / tonne credit. Of course this is spread out over 20 years so we should consider the time value of money here and probably apply a discount rate to come up with a comparable NPV (CarbonPlan has a fantastic calculator with different parameters for this):
Here are different NPVs based on three discount rate calculations:
With a discount rate of 1.5%, $500 at year 20 has a NPV of $429.22.
With a discount rate of 5% – $311.56
With a discount rate of 10% – $212.84
We can see that up to a 5% discount rate, and over a 20-year horizon with a credit expiry date of 1 year, the otherwise ‘more expensive’ carbon credit coming from the long term storage activity is actually the cheaper or more economical option.
→ Choosing an appropriate discount rate is difficult on several levels (who’s to decide how we interpret and therefore discount climate-related costs and harm 20 years from now to describe and quantify them in today’s terms?). The point of the above isn’t to draw a conclusion on which rate is the correct one but rather to give a range for cost comparison purposes.
Let’s take a look at the same scenario with a 3-year credit validity period to see if that changes anything:
|Project||Price / tonne||YR 1 Total||YR 13 Total||YR 25 Total||YR 34 Total Costs|
Under a 3-year credit expiry model, and with the price assumptions above, we would reach an inflection point at YR 34. So after YR 34, the $25/tonne credit, due to its 3-year expiration date, would cumulatively become the more expensive purchase. Once again, it makes sense to discount these numbers for a fair NPV comparison. Using the same rates as above:
With a discount rate of 1.5%, $300 at year 34 has a NPV of $272.69.
With a discount rate of 5% – $221.58
With a discount rate of 10% – $170.34
We can see from these results that simply changing the expiry date of the credit from 1 year to 3 years can once again alter the purchasing decision, this time in the other direction.
Closing Thoughts & Open Questions
This thought exercise isn’t perfect but it’s meant to show different lenses through which we can see that simply comparing prices at face value is a limited approach to buying carbon removal.
The jury is still out on determining and setting actual, hard figures for variables such as storage lengths and/or credit validity periods, but it looks as though the world is heading in this direction and we will soon have better definitions. In fact, the EU Commission recently held its first expert group session of 2023, in part to get things moving to do just that. Nonetheless, it’s probably a good idea to list some remaining, open questions:
Q1: What will be the expiry date for different removal credits?
As we saw above, the answer to this question is quite consequential. We covered 1-year and 3-year examples in this post but what if the expiry date is set to 18 months, 5 years, or 10 years+? The financials and respective timelines would change significantly.
Q2: Do we always want or need to maximize storage potential? In other words, should we always shoot for thousands of years of storage or would 400 or 500 years of storage suffice? What about 250 years?
This is a complex question with perhaps an even more complex answer. It seems though that ‘curative activity’ (CDR) would be dependent upon the rate of change we see over the next few years in ‘preventative activities’ (emission reduction). Advancements in CDR tech & associated cost curve movements would certainly have an impact on the answer to this question as well.
Q3: How will other activity around CDR (e.g. Carbon insurance, MRV development, further regulation, public perception) impact all of this and in which direction?
Perhaps insurance will be a required add-on when purchasing removals that have a higher risk of release, which would change the overall costs of the purchase yet again?
While these items are being figured out and standards are being set in place, we’d argue it’d be prudent, in anticipation, to start dissecting carbon credit prices and implementing sound approaches to credit purchasing today. For example, as we’ve hopefully portrayed in this article, we should not simply compare different prices per tonne at face value as this is far too simplistic an approach for an otherwise complex purchase.
Considering storage time and/or price over potential credit validity periods in order to get a better picture of the true costs or value per tonne should be part of the purchasing equation. This will give a better sense and understanding of which tonne is “worth” buying and at which price, therefore leading to more sound and de-risked purchasing decisions.
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