Reflections on the EU Commission’s recent Sustainable Carbon Cycle conference: What has been discussed, where do we stand, and what remains to be done?

Authors: Matthias Honegger, Hanna-Mari Ahonen, Sandra Dalfiume, Matthias Poralla

Date: 03.02.2022

 

Reflections on the EU Commission’s recent Sustainable Carbon Cycle conference: What has been discussed, where do we stand, and what remains to be done?

 

 

Takeaways:

 

• Europe’s approach to carbon removal is evolving, and new mechanisms hold great promise for supporting both industrial carbon removal and carbon farming.
• Carbon farming is a powerful but somewhat easily reversed approach to carbon reduction.
• Certification programmes for carbon farming must be clear, transparent, and non-redundant with existing accounting and certification protocols.
• They must also take into consideration the reversal risks inherent in carbon farming.

 

1. Introduction

Led by the European Commission, the European Parliament has adopted a net-zero greenhouse gas emissions target for 2050. The European Green Deal outlines a corresponding vision, outlines a range of possible scenarios, and describes a toolset to help EU member states achieve shared objectives.  The Commission’s recent Communication on sustainable carbon cycles highlights three key actions, including “upscale carbon removal solutions”. It recognizes different approaches to carbon capture and storage (CCS) in ecosystems and industrial processes, focusing on:

 

• Carbon farming as business model
• The industrial capture, use, and storage of carbon
• A regulatory framework for certification of carbon removal

 

However, the communication lacks specific guidance regarding implementation across economic sectors, and offers little information on the scale of CCS efforts required of each.

 

We currently have a patchwork of European provisions and instruments that, while not devised explicitly for carbon dioxide removal (CDR), will likely be revised to play a role in the regulation and incentivization of CDR. These include the EU ETS Directive, the CCS Directive, the Land Use, Land-Use Change, and Forestry (LULUCF) Regulation, the Effort-Sharing Regulation (ESR), the Innovation Fund, and the Sustainable Finance Taxonomy. On Monday, 31 January 2022, the EC held an online conference on the circular carbon economy that addressed many of these issues and indeed saw lively discussion with thousands of participants.

 

2. Supply: Industrial carbon removal

 

The Commission expects to create an internal market for industrial capture, use and storage of carbon, and to establish new support for relevant technologies such as direct-air carbon capture and underground storage (DACCS) and bioenergy with CCS (BECCS). These initiatives will be implemented by Horizon Europe and the Innovation Fund. For the first time, the Commission suggests a quantified target for industrial CDR processes: 5Mt CO2 removed annually by 2030. Industrial CDR appears to have earned particular attention in the EU’s CDR vision, given its high inherent permanence: underground storage in geological formation, when done correctly and per the EU CCS Directive, represents safe and near-permanent carbon storage.

 

Other forms of industrial CDR receiving new attention build on mineralization processes that essentially turn CO2 into inert rock. Enhanced weathering causes CO2 to react with either recycling cement or mineral dust spread onto land areas or the sea surface, sequestering it chemically. Another type of CDR is biochar, which can serve as a soil additive and as such has a medium-level of inherent permanence. Given the emerging sectoral separation of industrial and land-use activities, it will be interesting to see how provisions will acknowledge and embrace such hybrid approaches. One question that appears so far to be unaddressed is whether carbon removal is better managed by industry (e.g. through pyrolysis) or by LULUCF activities (either upstream with biomass-production or downstream with biochar-application to soils). Similarly, whether distribution of carbon-binding minerals on agricultural or forest soils would be considered a form of ‘carbon-farming’ and if so, whether its greater inherent permanence would elevate its status within the LULUCF sector.

 

3. Supply: Carbon farming

 

The commission’s Communication on sustainable carbon cycles states that “carbon farming initiatives should contribute to the increase by 42 Mt CO2eq of the land sink that is required to meet the objective of 310 Mt CO2eq net removals by 2030.” Carbon farming refers to storing carbon in soil, trees, shrubs, wet- and peatlands at farm level. In a carbon-farming scheme, land managers (e.g. farmers and forest managers) access an additional source of income in return for implementing measures that accumulate carbon in soils or biomass. Such measures can also contribute additional benefits such as biodiversity protection and improved soil health, but the Communication does not specify monitoring for such additional considerations. A range of activities are expected to be classified as carbon farming, including afforestation and reforestation, as well as mixed activities such as agroforestry and restoration of peatlands and wetlands. Peatlands are gaining attention for causing almost 5% of total EU GHG emissions.

 

Financial incentives to facilitate the transition of farming processes and reward land managers for carbon-farming efforts could come from public and private sources. Public funding from the Common Agricultural Policy (CAP), the EU’s LIFE programme, and Horizon Europe, is expected to support these initiatives’ early phases by, for example, funding the roll-out of carbon-farming activities or covering additional MRV-related costs. Carbon farming credits have also been promoted as a complementary source of revenue for land managers. However, if the EU were indeed to rely on voluntary carbon markets to support carbon farming long-term, public perception—and by implication the quality and transparency of carbon-farming certificates—would be paramount to maintain stable funding flows.

 

The environmental integrity of carbon farming certificates will hinge on resolving fundamental challenges such as additionality, permanence, and MRV. Harmonized methodologies based on robust yet sufficiently low-cost monitoring systems will be key, and are expected to combine modelling with on-site measurements as well as independent validation. To be sufficiently and equitably accessible for farms of all sizes and in all of Europe, monitoring and reporting requirements would need to be both simple and robust. Otherwise, the mechanism would repeat the problems of the Clean Development Mechanism in its first years, when first movers were deterred by practical barriers to entry. The Commission appears conscious of this dilemma, as it emphasizes that “every land manager should have access to verified emission and removal data by 2028 to enable a wide uptake of carbon farming”.

 

The long-term financial perspective of carbon farming thus poses some questions. For example, will these activities rely solely on voluntary market revenue, or will the European Union issue LULUCF certificates demonstrating compliance? With the current focus on MRV, questions on what might constitute sufficient pricing-levels (and in what markets these might be attained) also do not yet get much political attention. If the commission intends truly to put farmers and land managers at the centre of the discussion, these questions will be vital. Providing farmers with the tools to steer the process, through access to information and training, will be a crucial step toward overcoming barriers to entry. The vision sounds great, as far as it goes: carbon farming should be an opportunity for farmers and land-managers to get paid fairly for ecosystem services they deliver. But beyond the MRV system offered by the CRCM, the question remains: How will this all be achieved? The emphasis on the need for more applied research into soil biology and chemistry, including highly local soil- and ecosystem studies, further confirms that Europe’s carbon-farming journey is just beginning.

 

4. Certification framework

 

The commission’s communication in December declared that a “regulatory framework for monitoring, reporting, and verification” – often referred to as the carbon-removal certification mechanism – is to be proposed by the end of 2022. However, key questions regarding its expected operation and role remain open.

 

Having a way to track results is a necessary condition to scaling nature-based and industrial removal capacities in a credible and sustained manner. To enable results-based incentives, such tracking must include monitoring, reporting and verification. The envisaged carbon-removal certification mechanism (CRCM) thus may serve as a key instrument in the medium term that enables several possible policies for mobilizing finance in a transparent and environmentally integrated way. It is intended not only to represent a set of MRV methodologies, but to provide the overarching regulatory framework at European level, and appears slated to span both industrial activities as well as land-use reliant nature-based approaches including carbon farming. At the current early stage of conceptualization, preliminary elements of the CRCM are slated for public deliberation shortly and discussion is increasingly turning toward two key questions on its design and use:

 

1. a) How should the mechanism be designed?

 

There are two fundamental ways in which the certification mechanism can be conceived: bottom-up or top-down. A fully bottom-up approach would simply identify voluntary initiatives by the private sector (such as by the Gold Standard, the CCS+ initiative and Verra, or the CDM) and rubber-stamp them as processes eligible to earn European carbon-removal certificates. If this were taken to the extreme, with no additional requirements imposed, the likely result would be a severe degradation of the certificates’ integrity – a risk that was rightly decried by many during Monday’s conference.

 

The other approach would see a top-down design, whereby the Commission would identify overarching principles and derive operating procedures and a completely new standard without drawing on existing approaches.

 

There is clearly a tension between these two extremes: On the one hand, a recognized need to draw on best practices and include already available environmentally sets of existing rules, procedures and methodologies developed by voluntary market standards. On the other, we urgent need to avoid a race to the bottom. Many conference participants strongly emphasized that there cannot be a direct copy-paste or unconditional adoption of existing frameworks, but that additional provisions need to be defined to ensure a sufficient quality standard.

 

1. b) How will the mechanism be used?

 

The second question concerns the practical use of the mechanism. While a decision is yet to be taken, several options and viewpoints became apparent at the conference. Some argue that any carbon-removal certificate generated or recognized through the mechanism would be usable as an offset and sold into the EU ETS as fully fungible with emissions allowances. This could imply an expansion of the scope of the ETS to cover all or most types of CDR activity. Alternatively, the CRCM could itself act as a stand-alone market generating units that can be sold into the ETS such that entities covered by the ETS can count these units toward their caps.

 

Critiques of such an offsetting approach raise concerns over the mixing of emissions reductions and carbon dioxide removals, with particular emphasis on different timescales and permanence. Participants also raised the possibility of a mismatch in pricing levels: ETS prices start at the current moderate levels and are expected to rise over time to levels that could also become relevant for more costly forms of CDR. Many forms of CDR, on the other hand, are expected to become less expensive as new technologies are designed to support them, thus lowering their currently very high cost toward levels competitive with other mitigation approaches. These two points speak to the possibility of using the CRCM for another role in CDR policies. A third critique aims to separate targets and policy into emissions reductions and carbon dioxide removal. This is motivated by a need for transparent tracking that allows the EC to address the risk of emissions-reductions displacement.

 

An alternative approach to trading removal credits like EUAs within the ETS would utilize ETS-proceeds to fund public procurement of carbon removal by member states (and thus achieving some of their obligations under the BSR). This use could be further constrained if, for example, not all certificates were created equal. A like-for-like approach would see certificates generated in the LULUCF sector (many of which would not be inherently permanent), only useable to counter emissions from the LULUCF sector; certificates generated through technological removals with permanent geological storage would be eligible to counter emissions including those from industrial activities and fossil fuel use.

 

Various other combinations of these elements are also possible (e.g. creating two separate offsetting markets: one in the LULUCF sector and another in industry and energy). Varying permanence can be addressed by forcing market actors to price reversal risks into certificates by imposing liability for later reversal.

 

5. Demand: Voluntary carbon markets

 

In the short term, the European Commission aims to promote carbon removal in the EU by upscaling carbon farming, fostering a new industrial value chain for CCUS, and developing a carbon-removal certification framework.  These short-term actions pave the way for integrating carbon removals into EU regulation after 2030. The LULUCF proposal includes a target to reach carbon neutrality—a balance between GHG emissions and carbon removals—across the entire land sector by 2035.

 

There seem to be high expectations that these short-term actions would, to a large extent, be financed and road-tested by voluntary carbon markets (VCM).

 

For example, the communication notes that:

 

• “Several food and biomass companies have set themselves climate neutrality targets for their value chains. This is where carbon farming becomes a very useful tool to contribute to the EU’s objectives of climate neutrality” (p. 3).
• ‘“Recently, an increasing number of private carbon farming initiatives have emerged where the land managers sell carbon credits on voluntary carbon markets. The potential for carbon farming is significant and it is the right moment to scale up high quality supply at EU level. Exploiting at best this potential requires removing barriers that could prevent a large scale lift off and ensuring adequate reward for the carbon credits generated.” (p. 4)
• The conference made multiple references to the VCM’s role.

 

At the Conference, two major issues relating to the role of VCM in scaling up carbon removals were raised, as well as a third major question specific to carbon farming and other removals with a high risk of reversal.

 

1. The need for a common robust and transparent standard to ensure the consistently high quality of carbon-removal certificates (ideally also globally, beyond EU). The lack of standardisation is a major barrier to expanding the VCM by the Commission’s communication. At the conference, lessons were shared from carbon-removal certificate trading as part of California’s cap-and-trade scheme. A representative of California’s programme noted that the existing certification standards differ significantly in terms of rigour, which can lead to “baseline-shopping” and race to the bottom. The EU’s carbon-removal certification framework aims to address this need. In our view it is important to draw on existing certification standards’ histories, including their mistakes, when developing the EU certification framework.

 

2. The need for clear guidance on avoiding double counting and making responsible claims that can be made by VCM actors related to the use of EU carbon-removal certificates.The big question in the Paris-era VCM is whether voluntary offsetting of emissions and related carbon neutrality claims should be based solely on emission reductions or removals that are not counted towards any country’s mitigation targets, thereby avoiding double counting, or if emission reductions or removals that are counted towards national targets should be included. The issue of avoiding double counting between the EU and its member states and the VCM actors ranked high on the conference participants’ question list, but was barely discussed by the speakers. To ensure the additionality of VCM activities, the European Parliament plans to propose that removals that are authorised and used for voluntary offsetting shall not be taken into account in the member state’s annual LULUCF target.

 

The need to ensure permanence in case permanent emissions are offset with carbon-removal certificates. Several speakers stressed that emission reductions and removals should not be conflated, since they are not equivalent. Some noted that emission reductions cannot achieve negative emissions, while removals can. Several conference participants questioned whether permanent emissions should be offset with removals that pose a high risk of reversal. Others pointed out that land-based emission reductions and removals have a significant risk of reversal. Some recommended that each tonne of such removals should be discounted to address this permanence risk, thus making it worth less for this purpose than a tonne of permanent emission reductions or removals. The VCM can also be used for non-offset-based claims, whereby the buyer does not use the certificate to offset emissions but rather to support the underlying activity on a results basis. Thus, in our opinion, carbon-removal certificates with high risk of reversal (e.g. carbon farming) could be better suited for non-offsetting use. The VCM could also cater to non-offsetting use. To enhance trust and consistency in the VCM, the Commission should provide clear guidance on claims that can be made by VCM actors when using carbon-removal certificates. This should be coordinated and consistent with EU’s ongoing work on green claims.

 

6. Demand: EU policies

 

The EU ETS is presently the key instrument for disincentivizing polluting actions and incentivizing mitigation efforts. Correspondingly, the ETS regulation is a prime target of reform proposals that might allow the introduction of CDR. Academics have proposed various adjustments to this instrument, most notably to recognize and incentivize pure biomass-based energy generation with CCS. The LULUCF Regulation is another increasingly important piece of legislation for which revisions are being considered in the European Parliament, including the possibility of including carbon-farming practices. Among several interesting proposals, the regulation could require member states to revise their national energy and climate plans NECP and long-term strategies if they fail to meet LULUCF removal targets. Another proposal seeks to limit the fungibility of carbon credits stemming from LULUCF against emissions in other sectors, which many will welcome in light of the limited inherent permanence of LULUCF removals.

 

The Effort Sharing Regulation (ESR) is another avenue potentially relevant to the regulation of removals. Recent proposals of revisions to the ESR have included a recognition of non-LULUCF removals towards member state ESR targets, limited to 5%. Such a revision would create an incentive for member states to advance removals in fields other than the land sector, since these might come with relatively lower mitigation costs.

 

However, we should consider whether LULUCF certification can truly remain a matter for the voluntary market in the long run. Not only would this seriously affect the stability and continuity of carbon-farming revenues given historical fluctuations and the generally rather limited volume of voluntary carbon markets, it would also undermine Europe’s ability to accelerate these types of activities by limiting public funding to catalytic pilot activities and some research and development.

 

The Innovation Fund’s potential role is also somewhat ambiguous. The fund has proven highly relevant, in the absence of a long-term market pull, as an enabler of development and pilot activities in carbon-capture-and-storage-reliant mitigation activities, including several types of industrial carbon dioxide removal. On the other hand, it does not represent the scale and continuity of funding required to operate CDR activities on a scale commensurate with European ambitions. While several voices support expanding the funds’ mandate to include results-based payment for CDR by way of public procurement, this clearly goes beyond the fund’s mandate and capacities. It is thus increasingly becoming apparent that another fund, drawing from ETS revenue, may be required, explicitly designed to purchase CDR services on a continuing basis.

 

7. Conclusions

 

Carbon dioxide removal is now unambiguously viewed as a mitigation policy field in urgent need of practical and robust policy instruments capable of nudging Europe closer towards climate neutrality. This view was endorsed by the discussions at the circular carbon economy conference—attended by well over a thousand participants worldwide—and by the lively discussion held by participants via chat while the meeting took place.

 

While the declared ambition and the prioritization of a credible MRV system is indeed laudable, we must wait for equally credible signals that this framework will be put to effective use in a European policy- and regulatory ensemble that credibly promises to mobilize long-term revenues for those pursuing mitigation action on the ground, be it through technological approaches typically requiring large upfront investments or through carbon farming requiring significant effort by farmers and forest managers to transform their production and land-use practices.