Economic Potential of DACCS and Global CCS Progress
5.1 CARBON MARKETS
Carbon markets refer to the trade of carbon credits between parties and are either
compliance or voluntary. By leveraging market forces, carbon markets enable least-
cost pathways toward emissions reductions targets and incentivise investment in CCS
infrastructure and networks. Carbon markets have grown considerably over recent
years, and with such rapid growth, there is a current need for collective understanding
of how CCS can work in current and future markets.
COMPLIANCE CARBON MARKETS
Compliance carbon markets (CCMs) are implemented and regulated by national or
regional authorities. Compliance markets typically utilise cap-and-trade schemes,
whereby the cap represents a limit of how many tonnes of CO2 can be emitted by the
industries covered in the scheme. This leads to a specific number of tradeable carbon
allowances given to each company over a fixed period of time, giving them the legal right
to emit an equivalent amount of CO2. In principle, a company reduces its emissions
below the limit, unused allowances can be traded with other companies that require
additional allowances.
The price of allowances is determined by the market, so emitters can choose the most
cost-effective approach between purchasing allowances and investing in technologies
to reduce their emissions. Over time, governments may reduce allowances given to
emitters to meet more ambitious emissions targets. This increases the scarcity of
allowances, thereby increasing their price. As the price of allowances increases,
investing in technologies such as CCS becomes economically more viable for emitters.
Compliance markets, known as emissions trading systems (ETS), are increasing in
number and distribution. Based on data from the International Carbon Action Partnership,
an estimated 25 national and sub-national ETSs are in force, nine are in development
and 14 are under consideration (1).
Currently, there are two large jurisdictions for compliance markets that include CCS
protocols - the EU ETS and the California Low-Carbon Fuel Standard (2,3). Cap-and-
trade systems in Tokyo and Quebec do not have CCS protocols, but since they operate
in countries with CCS activity, CCS could potentially be included in the future (4,5).
This was seen in California, which instituted a CCS protocol under the Low-Carbon
Fuel Standard years after it launched its ETS (3). Similarly, the EU ETS adopted a CCS
directive some years after it was launched.
VOLUNTARY CARBON MARKETS
Voluntary carbon markets (VCM) are created by private organisations and are self-
regulated. VCMs underwent record growth last year, and the market could reach
US$50-100 billion per year by 2030, driven by net-zero commitments from the private
sector (6). VCMs enable investors, governments, non-government organisations and
businesses to purchase carbon offsets, called verified emissions reductions (VERS),
from project developers and other third parties. VERS are generated by projects that
are assessed using greenhouse gas (GHG) reduction methodologies. Projects are
then registered in a VCM registry, which tracks the generation of and trade in VERS.
As organisations make increasingly ambitious climate pledges, many of them have few
cost-effective options to reduce their emissions. Carbon offsets provide companies with
a practical and scalable means through which they can achieve emissions reductions. In
practice, a company's carbon offset strategy operates in tandem with efforts to reduce
emissions directly.
THE ROLE OF ARTICLE 6
CCMs and VCMs use different standards and systems, meaning that project developers
must satisfy the requirements of multiple methodologies for different systems. This
diminishes the potential impact of carbon markets, increasing the cost of decarbonising
the world's economy. Article 6 of the Paris Agreement has the potential to overcome
this challenge by increasing coordination between governments and the private sector
to harmonise project methodologies. Specifically, Article 6 enables countries to trade
with one another to achieve their nationally determined contributions (NDC). It has been
estimated that US$250 billion per year in savings can be attained by 2030 as a result
of Article 6, although this will be much determined by how well it functions (7). In July
2022, the supervisory body responsible for implementing the mechanism for trade
under Article 6 was operationalised.
Precedents exist for some market linkages, such as between Switzerland's ETS and
the EU ETS, and between Quebec's and California's systems. Other types of overlaps
found in markets today see emission allowances traded alongside carbon offsets.
For example, California's Cap-and-Trade Compliance Offsets Program allows entities
covered by the cap to satisfy a percentage of their regulatory obligations through the
trade of VERS under the Verra registry.
1 Verra is one of the leading VCM registries with almost 1,600 registered projects.
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GLOBAL CCS
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