Costly high-tech climate solutions can be partially funded with carbon credits: report

CARBON credits can be used to attract private investors to finance some frontier climate solutions, which are currently too costly to implement at scale, according to a report jointly authored by the International Energy Agency (IEA) and decarbonisation investment platform GenZero.

Investments into the development of low-carbon hydrogen, sustainable aviation fuel, and direct air capture and storage (DACS) need to increase to US$300 billion annually by the early 2030s and to US$700 billion by around 2050, for production and deployment to reach a level aligned with IEA’s emissions pathway that will limit global warming to 1.5 degrees Celsius.

Total investments into these three early-stage climate technologies stood at US$9 billion in 2023, read the report released on Tuesday (Apr 16).

IEA estimates that low-emissions hydrogen production needs to reach 70 million tonnes of hydrogen by 2030 from less than one million tonnes in 2022, while sustainable aviation fuel’s share of the aviation sector’s energy consumption needs to go up to 11 per cent from negligible levels over the same time period to align with its net-zero pathway.

In addition, close to 70 million tonnes of carbon emissions needs to be removed by DACS by 2030 from almost zero today.

“Without widespread adoption of these technologies, the world will fall short of its climate goals. Achieving the necessary scale-up depends on early deployment and investment,” read the report.

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It argues that high-quality carbon credits can complement other forms of financing through both public and private sources, such as blended finance, to bridge the investment gap, and channel funding to these technologies.

For carbon credits to be considered of high quality, they need to represent unclaimed carbon reductions or removals that would not have existed without revenue from the sale of the credits, and they also need to be permanent. The emission cuts should also not lead to an increase in emissions from another activity – known as leakage in industry terms.

In both low-emissions hydrogen and sustainable aviation fuel, the emission reductions can be quantified by calculating the difference in emissions in the baseline scenario where fossil fuels are used to generate electricity or as jet fuel, as compared to when the climate solution is implemented. Carbon credits can be issued from the difference in emissions.

As for DACS, carbon credits are issued by subtracting the emissions from a particular activity from the volume of carbon dioxide captured and permanently stored.

According to the report, the risk that carbon credits generated from these three solutions do not meet the additionality, permanence and leakage requirements is low.

However, it acknowledged that there is some risk when it comes to accurately measuring the emission reductions for low-emissions hydrogen and sustainable aviation fuel.

There are several barriers that need to be overcome first before carbon credits can play that role in catalysing finance towards these three solutions.

The report acknowledged that carbon credits alone are not enough to incentivise their large-scale deployment. The technologies’ high costs, as well as price volatility of carbon credits and uncertainties in carbon markets make it hard for project developers to rely on the sale of credits as a steady and reliable revenue source to scale.

Crucially, there is a lack in available methodologies to generate sustainable aviation fuel, low-emissions hydrogen or DACS credits.

“Such low availability of methodologies means that carbon finance cannot be used to enhance the deployment of these technologies. However, there is promise that carbon crediting programmes and practitioners can tackle this challenge in the near future as several new methodologies are currently under development,” read the report.

The difficulty in quantifying emission reductions accurately for low-emissions hydrogen and sustainable aviation fuel stems from how the reductions can occur across different parts of the supply chain which tends to span across several countries.

To overcome these problems, the report recommended that governments develop regulations that provide clarity and certainty for investors.

Carbon crediting programmes and project developers should accelerate efforts to develop methodologies that contain robust quality criteria, while a coalition of carbon market participants should develop clear guidance on emissions accounting.