RIYADH: The global market for carbon dioxide removal credits could reach $100 billion a year between 2030 and 2035, up from just $2.7 billion last year, driven by growing interest from corporate buyers, an analysis has shown.
According to US consulting firm Oliver Wyman, $32 billion is currently allocated to carbon dioxide removal projects, of which approximately $21 billion is invested in engineering solutions and $11 billion in nature-based solutions.
Of the $32 billion invested in carbon dioxide removal projects, $15 billion comes from public spending and $17 billion from private investors, with Oliver Wyman noting the need to increase demand for carbon dioxide removal projects by a factor of three to five to match current levels of investment.
A carbon credit, or offset credit, allows companies to emit a certain amount of carbon dioxide or other harmful gases – with one credit being the equivalent of 1 tonne of emissions.
They are seen as playing a crucial role in facilitating a smooth energy transition and helping countries meet the goals of the Paris Agreement, contributing to global efforts to limit warming to 1.5 degrees Celsius.
“We are seeing a significant increase in attention and investment in CDR projects, underlining the growing recognition of their transformative role,” said James Davis, Partner and Co-Head of Climate and Sustainability Europe at Oliver Wyman.
He added: “The demand for carbon credits generated by these clean-up projects is not yet sufficient to cover even current levels of investment, let alone the level required to meet climate goals.”
The report notes that achieving significant growth depends on removing barriers to market scalability, such as the lack of guidance on removal rates for decarbonization targets and the lack of widely recognized quality standards.
It was emphasized that without targeted interventions, the carbon dioxide removal market will only use 10%. its identified potential.
However, countries such as Saudi Arabia are contributing to the market growth by launching initiatives such as the Regional Voluntary Carbon Market Co., funded with seed capital of $133 million in 2022.
Since its inception, the company has successfully conducted two auctions in 2023, selling 3.6 million tons of carbon allowances to domestic companies including Saudi Aramco, NEOM, SABIC and others.
Last October, Riham ElGizy, CEO of RVCMC, said emissions trading was key to reducing the risks of climate change.
“Emissions trading has the potential to be a very powerful tool to scale up and finance the export of voluntary carbon credits from the Global South to mitigate the effects of climate change around the world, while also providing the Global South with financial resources to support their development and address the impacts of climate change,” she said.
Other companies in the kingdom are also taking advantage of the environmental instrument. Saudi Top for Trading Co., a plastics and wax specialist, has signed a deal with the Voluntary Carbon Market – essentially a stock exchange for offsets – to help expand the system across the Middle East.
Untapped potential
A carbon dioxide removal credit represents the permanent removal of a ton of CO2 equivalent from the atmosphere. These credits can be earned through a variety of removal techniques, typically divided into nature-based solutions, such as reforestation, and engineered solutions, such as direct air capture.
“Carbon removal is of increasing interest from potential corporate buyers seeking a solution to difficult-to-abate residual greenhouse gas emissions, as well as from investors and project developers looking to participate in a rapidly growing, emerging industry,” said Oliver Wyman.
“This demonstrates the growing awareness that carbon dioxide removal must be significantly increased to limit global warming to an acceptable level,” it added.
The report highlights key actions to accelerate market growth, including providing guidance to enterprises on their roles, establishing clear monitoring thresholds, and supporting the development of the carbon removal financial market ecosystem.
Oliver Wyman also identified supply-side constraints, such as uncertainty about future demand for carbon credits and unclear public sector policies regarding scaling up these projects.
“There are also uncertainties about the scope of the deletions in the transition plans and whether high prices will be a barrier to large-scale purchases,” the US consultancy said.
He added that there is currently no clear consensus among climate standard-setters on the appropriate balance between carbon sequestration and emissions reductions needed to achieve net zero emissions.
“But there is no doubt that carbon dioxide removal must be part of the equation, because all the major scenarios leading the way to effectively reducing global temperatures require massive market scaling.”
Carbon Dioxide Removal Insurance
The report highlights that insurance services related to carbon removal are gaining momentum and are becoming important enablers of financing projects in this sector.
“Insurance solutions are also emerging to address some of the risks inherent in VCM projects, with policies designed for both investors and loan purchasers to cover situations where projects do not go ahead,” said Oliver Wyman.
The American company also noted that well-designed insurance offers would significantly enable increased investments and purchases.
“Insurers are working to develop policies that cover reversal risk, although some fundamental challenges remain given the potentially long time horizons of true persistence, extending into millennia for geological storage,” the report added.
Oliver Wyman noted that specialized sustainable investment funds that focus on the carbon market have also begun to emerge.
“Most have focused on nature-related investments, often combining income from sustainable forestry with income from carbon credits. “Other investment strategies offer clients access to investments in nature-based carbon projects in exchange for high-impact carbon credits,” the report says.
Similar views were reflected in another report by the International Energy Forum, published in March. The report shows that carbon markets are expected to play a key role in achieving climate goals and facilitating the energy transition.
Joseph McMonigle, Secretary General of the IEF, stressed that the development of carbon markets will also contribute to the financing of clean energy projects, which are key to a sustainable future.
The IEF added that markets can effectively reduce the costs associated with carbon removal by connecting local owners of projects capable of removing carbon dioxide, potentially at lower cost, with international buyers looking to offset their emissions.
“Carbon markets play an important role in aligning resources to achieve our global climate, energy security and affordability goals. Promoting cross-border carbon credit trading among nations will strengthen net-zero carbon balances, thereby increasing both supply and demand,” the IEF said at the time.