The carbon removal crisis: Are companies doing enough?

This article has been co-authored by Climeworks and Bain & Company, an independent management consulting firm that recognizes the urgent need to scale carbon removal to reach net zero.

The importance of carbon removal to achieve the goals of the Paris Agreement

To meet international climate goals, such as those set by the Paris Agreement, achieving net-zero emissions by mid-century is crucial. This means balancing the amount of greenhouse gases emitted with the amount removed from the atmosphere. Carbon removal is necessary to offset residual emissions from sectors where it is challenging to eliminate emissions entirely, such as aviation, shipping, and certain industrial processes, and to reverse warming through net-negative emissions in the second half of the century.

The deployment of carbon removal technologies must grow exponentially over the next few decades to scale to the 10 gigatons of annual carbon removal expected to be needed by 2050, according to the median estimates of climate scenarios considered by the IPCC. This growth involves rapid technological advancements, substantial investments, supportive policies, and public acceptance.

The role of the private sector and risks for companies

Broad participation of the private sector will be critical to finance the scale-up of these crucial technologies and achieve our ambitious climate goals. However, an analysis of corporate participation in the carbon removal market in 2024 reveals that the world is not on track to achieve its ambition.

The carbon removal market is nascent. According to CDR.fyi, a data aggregator for carbon removal deals, 12 million tons of carbon removal credits have been purchased, and only around 420,000 tons of removal credits have been successfully delivered by suppliers. This compares to around 190 million retired carbon credits for avoided emissions in 2023 alone, according to AlliedOffsets.

Also on the buyer side, the carbon removal market is extremely concentrated, with the top five corporate buyers accounting for more than 80% of total removals purchased to date. Microsoft leads the pack, with more than 70% of total carbon removal credits purchased.

To achieve the global goals under the Paris Agreement, but also to meet corporate climate action targets, this market participation will have to ramp up significantly, and many companies have pledged to do that, for example, under the Science Based Targets initiative (SBTi). Yet, the dynamics of 2030 commitments and the broader developments in carbon markets create two significant risks for corporates.

Availability risk

At Climeworks, we estimate that the demand for carbon removals in 2030 will reach around 1.4 gigatons of CO₂, exceeding the expected supply by around 1 gigaton of CO₂. This demand is mostly driven by corporate commitments under SBTi, which recognizes carbon removal credits as a means for companies to achieve part of their net-zero ambition.

These SBTi commitments will result in a broadening of the buyer landscape. More companies will look to the market to procure the credits that they need to fulfill their targets. Due to the expected surge in demand, companies that rely on the open market for carbon removals in 2030 may struggle to get enough high-quality removals to meet their climate goals, especially since 2030 is a frequent net-zero milestone. While this does (currently) not have legal implications, it would imply walking back on climate commitments.

Price risk

In addition to the potential undersupply of durable removals, if companies do not act on long-term offtake agreements to scale supply, the market for carbon credits may undergo significant changes, which could result in price volatility that buyers should prepare for. The gradual roll-out of the Core Carbon Principles by the Integrity Council for the Voluntary Carbon Market (ICVCM) is expected to concentrate demand on a small, high-quality segment of the carbon market. According to AlliedOffsets, as of August 2024, the ICVCM has reviewed about ~40% of available credits in the market, and deemed less than ~5% compliant with its Core Carbon Principles. Many observers therefore expect a price increase of the higher quality credits in the near future.

A portfolio approach to carbon removal procurement

To manage these risks, companies must proactively plan to increase their carbon removal procurement and build the market over the next few years. A carbon removal portfolio that scales up procurement allows suppliers to invest and expand their solutions, which in turn grows the market and reduces delivery risks.

Four considerations for carbon removal portfolio managers

(1) Initiate early investments in carbon removal credits that not only rely on the procurement of carbon removal on the spot market in 2030 but are built with multi-year offtake agreements that allow suppliers to scale their operations.

(2) Taking a portfolio approach to carbon removal procurement early allows buyers to gain institutional knowledge of the market and forge direct relationships with suppliers and marketplaces, allowing them to test and secure long-term partners.

(3) Build a portfolio that diversifies delivery and reputational risks and impacts across three dimensions:

• Technology: Many of the available carbon removal approaches are still nascent and have low technology readiness levels. While some will gain traction and eventually contribute to significant carbon removals in the future, others may face technical difficulties or legal barriers that render them unviable. A portfolio approach can diversify the risk for buyers to manage exposure with a variety of different technologies.

• Business proximity: Companies with relevant value-chain exposure to some of the carbon removal technologies could, in addition, opt to leverage their expertise or assets to advance the technology development. For example, companies in the construction sector could explore the use of carbon removal technologies that store carbon in concrete or asphalt. Chemical companies with expertise in solvents could benefit from growth in Direct Air Capture technologies.

• Durability: Companies should aim to match the durability of their procured carbon removals like-for-like to their emission profiles. This means that emissions from fossil fuels should only be neutralized with highly durable carbon removals. And although carbon removals with long durability are not yet available at scale, corporates should aim to increase the share of long-lived storage in their removals procurement in line with the Oxford Principles for Net-Zero Aligned Offsetting.

(4) Lastly, portfolio managers should strive to partner with carbon removal suppliers that are committed to high-quality standards and have a robust monitoring, reporting, and verification process in place. It will help to safeguard companies from potential reputational risks but also incentivizes the broader market to move towards greater transparency.

How to get started

Today, corporate net-zero targets are voluntary. Companies that have committed to net zero, be it by 2030, 2050, or any other year, should be applauded for their ambition. But they need to understand that these commitments put them on the hook for investing now – both to decarbonize their value chains to an absolute minimum and to build the capacity for carbon removals. Companies simply can’t focus on one side of the equation and expect the market to deliver the removals in the net-zero target year.

Steadily increase your carbon removal procurement

A critical element of any net-zero pathway is the increasing procurement of carbon removals that follows a series of milestones from now until the net-zero target year. This helps carbon removal suppliers to come down the experience curve and build the needed capacity to remove gigatons of CO₂ every year.

Build internal capabilities

Carbon removal portfolio management will become an important capability for companies that are serious about their climate commitment and that acknowledge that not all emissions can be reduced to zero. However, managing a carbon removal portfolio requires several different corporate functions. From the sustainability team that monitors CO₂ emissions and projects demand for carbon removal to meet climate commitments, over finance to incorporate carbon removal as a cost in the budget, to procurement for vendor selection, legal to structure offtake agreements, and marketing to make the right claims. Given the variety of corporate functions that need to be aligned to finalize carbon removal purchases, the early involvement of senior management is often useful to accelerate progress and drive urgency.

Proficient buyers will have to assemble cross-functional teams to give the key stakeholders the right voice and avoid costly mistakes early on. Companies that manage their carbon removal procurement with the same rigor they apply to their supply chains will be the ones that deliver on their climate commitments and minimize the business risk at the same time.

Learn from pioneering buyers

Given the nascency of the market and the new technologies and approaches, building a portfolio of carbon removal solutions can be difficult for any new entrant. Besides partnering with experienced advisors, or joining one of the advanced market commitment coalitions, some of the public portfolios of the experienced buyers can be helpful.

The below case studies show portfolios that some of the most experienced buyers have compiled. These are not directly transferrable, and should not be simply replicated by other companies, yet they offer insights into how companies are diversifying risks across different approaches.

Case study 1: telecommunications

A telecom provider has a net-zero target in 2035, which requires a shift away from avoidance offsets and towards high-quality carbon removal. They have developed a strategy that follows a phased approach – starting with removing residual CO₂ emissions from operations by 2030 and building up to net-zero carbon removal volumes by 2035 in a second step. The portfolio for the first wave gradually shifts from Biochar to Enhanced Rock Weathering and Direct Air Capture to optimize for durability, compliance, and price. The shift to long-term storage carbon removal, such as Enhanced Rock Weathering and Direct Air Capture, is necessary to comply with standards and increasingly stringent emerging policies that require like-for-like removal of emissions to achieve net zero, meaning that fossil fuel emissions need to be compensated with long-term storage carbon removal. Biochar is included in the early stages to strike a balance between this ambition and the available budget. Securing supply and pricing today sets the company up for long-term success by creating a competitive advantage.