Will history repeat itself on negative emissions?

Mar 31, 2021

 

Negative emissions are piquing the interest of the Government, as shown in its recent  announcement of innovation funding for new negative emission technologies (NETs). However, policies based on grants and innovation funding are short-term options – they act as the spark to get the kindling going, but the fire requires continuous government support until the flame catches.

Previous Government policy in this area has been plagued by U-turns. Two previous Government competitions for carbon, capture, and storage (CCS) infrastructure, which some NETs rely on to transport and store the carbon they capture, were pulled in 2011 and 2015, primarily due to concerns over upfront infrastructure costs and no clear pathway to cost reductions or commercialisation. In fairness, these policies were reversed during the Coalition Government’s drive for Austerity, but given this history of abandonment, it is understandable that investor confidence is low regarding NETs’ long-term ability to generate a return. 

A longer-term framework to create a market for negative emissions is needed to complement the Government’s current focus on shorter-term grants. Otherwise, the UK is unlikely to achieve the level of negative emissions needed to meet Net Zero, even in the long term, and history will end up repeating itself.

The current approach

The term ‘negative emissions’ refers to taking greenhouse gases out of the atmosphere, which is widely considered to be necessary to prevent catastrophic global warming. I outlined four technologies that could deliver negative emissions in another blogpost. Some sectors face technological barriers to reducing their emissions to zero, and their residual emissions need to be taken directly out of the atmosphere to achieve Net Zero.

In other words, the UK needs to take CO2 out of the atmosphere to make up for emissions that it can’t reduce to zero, due to either technical or cost limitations. Most models agree that the world will need to capture around six gigatons of CO2 a year by 2050 to hit Net Zero – roughly seventeen times the UK’s current annual emissions – while the Climate Change Committee suggests that the UK needs annually to capture around a fifth of its current emissions to achieve Net Zero by 2050.

So far, governments have focussed on short-term policies to encourage innovation to develop negative emission technologies, because many of these technologies are not mature enough to capture carbon at either a reasonable cost level or at the industrial scale required to meet the above goals.

Short-term policies like the Government’s recently announced innovation competition for NETs are hugely important to developing promising technologies in the early 2020s. However, history shows that pursuing short-term, innovation-focused policies alone is risky, because the end goal of these policies – to procure negative emissions at scale and at the lowest possible cost – is not actually part of the policy design. The previous competitions for CCS projects were pulled because the costs of supporting NETs in the short term appeared high, but this was in the absence of a strategy to develop a market for negative emissions that would reduce these costs over the long term.

The Government should move from this focus on early-stage innovation towards creating a market for negative emissions, because it is a market that will deploy NETs at scale, not innovation funding, although the two do complement each other. This would also lower the risk of a late-stage Government U-turn – which, in the past, has been based mostly on cost concerns – by creating options for future revenue recovery through a developed negative emissions market. 

What does a market for negative emissions look like?

The Government needs to send strong signals that there is at least some long-term vision for negative emissions policy (Table 1). This inspires confidence among two important constituencies. The first is taxpayers (and the Treasury), who need to be assured that their money is not just flowing into R&D but laying the foundations for the low-carbon industries and jobs of the future. The second is the interest of the private sector, who need to see the business case for investment forming.

Table 1: Example policies to develop a market for negative emission technologies.

Design

Description

Negative emissions obligation

The Government would place an obligation on certain ‘hard to abate’ industries to procure a specified annual volume of negative emissions, probably through buying negative emission ‘certificates’ or ‘credits’ from the owners of NETs. A regulatory framework would also be needed to establish the rules of the market, such as standard carbon accounting for each negative emission technology to abide by when generating certificates or credits.

Integrating negative emission credits with the UK’s ETS

This would allow existing NETs to generate credits that could be traded on the UK’s ETS. As with other policy options, these credits would need to be underpinned by valid verification systems. This option may also undermine the existing UK ETS, as it is difficult to estimate what the effect would be on the price of carbon. For instance, it could potentially lead to price volatility, generating uncertainty for market participants.  The EU is reportedly considering future scenarios for their ETS that would allow some NETs, such as BECCS and DACCS, to be included in the market.

Contracts for Difference (CfD) for negative emissions

The Government would procure negative emissions through auctioned long-term contracts, for which organisations would competitively bid. These contracts would likely oblige the bidder to procure a certain volume of negative emissions over time but in a technology-agnostic way. CfDs are the key subsidy mechanism for the renewables sector, though Policy Exchange has argued for some fundamental reforms to the way they work.

 

There are important issues in each of the market options in Table 1 that the Government needs to consider, such as how negative emissions are integrated with existing ‘positive’ carbon markets. Several countries use ‘cap and trade’ carbon markets to reduce their emissions over time, as the UK is now doing so following the end of the Brexit transition period. These depend on the price of carbon credits rising as supply is increasingly constrained by a cap on emissions that reduces every year. The rising price of carbon makes it more costly to emit greenhouse gases as time passes, so companies are incentivised turn to less polluting processes to lower their compliance costs.  

If ‘negative emissions credits’ (‘NE credits’) are introduced at a lower price than ‘positive emission credits’, then companies will buy these instead, putting downward pressure on the carbon price. This happened in New Zealand’s ETS, where the carbon price crashed after the Government allowed organisations to meet their emissions reduction obligations through cheaper international offsets, rather than actually reducing their emissions.

Further problems would be created if the price of NE credits is too low, so that more expensive NETs are still uneconomic. For instance, a low NE credit price would encourage investment many low-cost NETs, such as afforestation, but provide few incentives to invest in currently more expensive technologies. This would prevent them from moving down their cost curves, ensuring the costs of negative emissions remain high in the future.  

This throws up the question of scale; should negative emissions only be procured from within the UK to create a valid credit, or could they be procured internationally? This is how the current voluntary offset market operates, where private companies can buy carbon offsets generated anywhere in the world. However, this can make offsets hard to validate, which is why the voluntary offset market has been called a ‘wild west’, with pre-packaged carbon offsets often not avoiding the emissions they claim to. Any international negative emissions market will face similar verification issues to these.

Interestingly, the ‘Oxford Principles’ for credible carbon offsetting suggest that the carbon offset market should eventually move away from being based on avoided carbon towards being based on carbon removals, essentially turning it into a voluntary negative emissions market.

Regardless of how a future market for negative emissions is structured, the Government needs to expand its strategy from short-term innovation policies alone to a include longer term policies including market design. There are several upcoming opportunities for the Government to etch out this vision, particularly in the run-up to COP26 in November.

To avoid history repeating itself through changes in policy on carbon capture, a long-term strategy for a negative emissions market needs to be articulated. This will help to justify shorter-term policies by setting out an end goal for negative emissions, creating the added benefit of encouraging private-sector investment in NETs in the 2020s.  

 

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