The European Union is quietly setting the direction for the future of the carbon markets, with two pieces of regulation clearing big hurdles in recent weeks. Watch closely, because these initiatives will reshape the industry.
On Tuesday , the European Commission and the European Parliament struck a provisional deal to compile rules for certifying carbon-removal credits — the Carbon Removal Certification Framework (CRCF). “This is the first time in history that we have a policy which clearly defines quality carbon removal and seeks to quantify it,” Sebastian Manhart, senior policy advisor at removals marketplace Carbonfuture GmbH, told me. “Other nations will probably copy it.”
Carbon offsets are typically categorised either as avoidance credits — buy this, we won’t cut down this forest — or reduction credits — buy this, we’ll install some solar panels. In recent years, scandals ranging from human rights abuses to overstated climate benefits have raised questions over whether offsets are useful in the climate fight, or whether they just provide cover for corporations and individuals alike to continue their polluting behaviour. The market has shrunk as investors shy away from schemes of dubious quality.
Carbon removals seek to suck carbon dioxide out of the atmosphere and store it – ideally permanently underground or in the ocean. While we currently rely on nature to perform that service, nascent technologies ranging from from direct air capture (essentially big vacuums) to biochar (a carbon-rich material made from heating biomass at high temperatures in low oxygen, which can then be added to soil or used in concrete) have the potential to assist. Removals currently make up only about 3 percent of the total carbon market.
These processes won’t be able to deliver without deep emissions cuts, which must come first. But they could help mop up the last dregs of greenhouse gases from so-called hard-to-abate sectors such as cement and aviation. Plus, if we make it to net zero, removals offer the potential of reversing some of the damage we’ve done to the atmosphere.
The industry has been crying out for regulation, which stakeholders hope will distinguish future credits from existing poor-quality products and help the market to grow by creating trust. These latest European developments mark a big step in setting the standards needed.
The CRCF splits carbon removals into distinct categories, as shown in the table below. While it includes soil-emission reductions, which many say is a mistake, it excludes activities such as clean-energy projects and avoided deforestation.
Manhart told me he sees the framework shaping climate policy at both EU and national levels. For example, if carbon removals were to be included in Europe’s Emissions Trading Scheme, the world’s largest compliance market, they would likely need to be certified under the framework. The most immediate effect will be on purchasing behavior; buyers will probably start to align acquisitions with the CRCF now to get ahead of the changes.
How the new rules would be used was previously unknown, which is where the other big piece of regulation comes into play. The Green Claims Directive seeks to stop greenwashing; under the draft law, companies must get approval for any environmental marketing claims before using them. Organizations that break the rules may face fines of at least at 4 percent of their annual turnover.
The directive says companies can only make claims using offsets if they’ve already reduced their carbon footprints as much as possible, and can only use such schemes for so-called residual emissions (greenhouse gases that continue to pollute the atmosphere once reduction possibilities have been exhausted). Carbon credits must be certified under the CRCF. Crucially, it includes a reference to the like-for-like principle, which means that companies can’t claim fossil-fuel CO2 emissions – which remain in the atmosphere for centuries — have been offset by short-term removals such as planting trees. Only permanent carbon removal would be valid.
There are niggles: The Green Claims Directive doesn’t specify what count as residual emissions, opening the term up to potential misuse. Moreover, only removal projects within the EU can be certified under the CRCF as it currently stands, which is limiting when the continent isn’t blessed with a lot of land and geological storage capacity.
There’s an optional element to these regulations, but ignoring them will come with disadvantages. Companies can still buy avoided deforestation credits, as long as they don’t use them to make claims about their environmental virtues; carbon removal projects don’t have to get certified, but it would make their credits less valuable to purchasers.
There’s still work to do to get the CRCF up and running, and the Green Claims Directive still needs to go through several more steps before it’s implemented. But the tone has been set — and the voluntary carbon markets should be expected to match it.
Lara Williams is a Bloomberg Opinion columnist. Views do not represent the stand of this publication.
Credit: Bloomberg
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
