Carbon Credits and Trading: Incentivizing Carbon Capture and Storage
The concept of carbon credits and trading is essential to understanding the economic incentives behind implementing carbon capture and storage (CCS) technology. This mechanism allows for the monetization of reduced or avoided greenhouse gas emissions, which, in turn, drives investment in CCS projects. In this analysis, we investigate the role of carbon credits and trading in incentivizing CCS implementation and explore the current carbon credit markets.
Carbon credits and trading are based on the fundamental concept of assigning a financial value to carbon emissions reduction. Carbon credits are generated when a project or technology reduces, avoids or removes greenhouse gases from the atmosphere. Each credit typically represents a reduction or avoidance of one metric tonne of carbon dioxide equivalent (tCO2e). Carbon trading or emissions trading is a market-based approach for reducing greenhouse gas emissions, where a government or regulatory body sets a cap on total emissions and assigns allowances (or permits) for emitting a certain amount of greenhouse gas. Organizations and entities that emit less than their allowance can sell their excess credits to those that exceed their allowance, thus promoting cost-effective emissions reductions.
Carbon credits and trading provide incentives for CCS implementation by making it financially viable for organizations to invest in the technology. By capturing and storing CO2, companies can generate carbon credits that can be sold in the market, creating a revenue stream that helps offset the cost of the CCS project. Additionally, carbon pricing, such as a carbon tax or an emissions trading scheme, can make it more expensive for companies to emit carbon dioxide, further encouraging the adoption of CCS technologies as a means of reducing operational costs associated with emissions.
Carbon credit markets have developed on multiple levels: international, regional, and national. The international market was primarily driven by the Clean Development Mechanism (CDM) and the Joint Implementation (JI) under the Kyoto Protocol, which expired in 2020. The CDM allowed developed countries to invest in emissions reduction projects in developing countries and receive carbon credits, while the JI enabled developed countries to earn credits by financing projects in other developed countries. With the expiration of the Kyoto Protocol, the Paris Agreement provides a framework for international cooperation on climate change and introduces a new market mechanism called the Sustainable Development Mechanism (SDM). The SDM aims to contribute to the mitigation of greenhouse gas emissions and support sustainable development but is still under development.
On a regional level, the European Union Emissions Trading System (EU ETS) is the largest and most well-established carbon credit market. The EU ETS covers around 45% of the EU's greenhouse gas emissions from more than 11,000 power stations and industrial plants in over 30 countries. In North America, the Western Climate Initiative (WCI), a collaboration between California and the Canadian provinces of Québec and Nova Scotia, serves as a regional market. Similar initiatives also exist in China, South Korea, and several other countries.
As governments around the world continue to tighten their emission targets and implement stricter regulations, the demand for carbon credits and trading is expected to increase. In turn, this growing demand is likely to incentivize further investment in CCS technologies, contributing to a cleaner and more sustainable future.