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Jeddah - Yasmine El Tohamy - RIYADH: The global market for carbon removal credits could reach $100 billion annually between 2030 and 2035, up from just $2.7 billion last year, driven by increasing interest from corporate purchasers, an analysis showed.
According to the US-based consultancy firm Oliver Wyman, $32 billion is currently deployed in carbon dioxide removal projects, with approximately $21 billion invested in engineered solutions and $11 billion in nature-based ones.
Out of the $32 billion invested in carbon dioxide removal projects, $15 billion is from public spending, and $17 billion from private investors, with Oliver Wyman noting a need for carbon dioxide removal project demand to scale three to five times to match current investment levels.
A carbon credit, or offset credit, allows companies to emit a specific amount of carbon dioxide or other harmful gasses — with one credit the equivalent of 1 tonne of emissions.
They are seen as instrumental in facilitating a smooth energy transition and helping countries meet their Paris Agreement targets, contributing to global efforts to limit warming to 1.5 degrees Celsius.
“We are witnessing a significant increase in attention and investment toward CDR projects, highlighting the growing recognition of their role in the transition,” 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 removal projects is not yet sufficient to support even current levels of investment, let alone the level required to meet climate goals.”
The report noted that achieving significant growth hinges on addressing barriers to scaling the market, such as the lack of guidance on removals in decarbonization targets and the absence of universally agreed standards on quality.
It underscored that the carbon dioxide removal market will realize only 10 percent of its identified potential without targeted interventions.
However, countries like Saudi Arabia are contributing to the market's growth by launching initiatives such as the Regional Voluntary Carbon Market Co., funded with an initial capital of $133 million in 2022.
Since its inception, the firm has successfully conducted two auctions in 2023, selling 3.6 million tonnes of carbon credits to domestic companies, including Saudi Aramco, NEOM, SABIC, and others.
In October last year, Riham ElGizy, CEO of RVCMC, said that carbon trading is crucial for mitigating the risks associated with climate change.
“Carbon trading can become a very powerful tool to scale and finance the export of voluntary carbon credits from the Global South, to mitigate the impacts of climate change globally while 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 making use of this environmental instrument, with plastic and wax specialists Saudi Top for Trading Co. signing an agreement with the Voluntary Carbon Market – effectively a stock exchange for offset credits – to help expand the system across the Middle East.
Untapped potential
A carbon dioxide removal credit signifies the permanent removal of a tonne of CO2 equivalent from the atmosphere. These credits can be obtained through various removal techniques, typically categorized into nature-based solutions, such as afforestation, and engineered solutions, such as direct air capture.
“Carbon dioxide removal is attracting mounting interest from potential corporate purchasers in search of a solution for hard-to-abate residual greenhouse gas emissions, as well as investors and project developers looking to participate in a high-growth emerging industry,” said Oliver Wyman.
“It reflects a growing recognition that carbon removals must scale substantially to limit global warming to tolerable levels,” it added.
The report highlighted key actions to accelerate market growth, including providing guidance to companies on their roles, establishing clear monitoring thresholds, and supporting the development of the carbon dioxide removal financial market ecosystem.
Oliver Wyman also identified supply-side constraints, such as uncertainty regarding future demand for carbon dioxide removal credits and unclear public sector policies for scaling these projects.
“There is also ambiguity around the extent of removals in transition plans and whether high price points will hinder large-scale purchasing,” said the US-based consulting firm.
It added that there is currently no clear consensus among climate standard setters regarding the appropriate balance between carbon removals and emission reductions necessary to achieve net zero.
“But there’s no doubt carbon removal needs to be part of the equation, with all major scenarios that set out a path to successfully limiting global temperatures require a massive scaling of the market.”
Carbon removal insurance
The report highlighted that carbon removal insurance services are gaining momentum and are emerging as significant enablers for project financing in the sector.
“Insurance solutions are also emerging to address some of the risks inherent in VCM projects, with policies designed for both investors and credit purchasers that cover when projects fail to be delivered,” said Oliver Wyman.
The US-based firm further noted that well-designed insurance offerings would be a significant enabler of increased investment and purchasing.
“Insurers are looking to develop policies around the risk of reversal, although some fundamental challenges persist given potentially long time horizons for real permanence, extending to millennia in the case of geological storage,” the report added.
Oliver Wyman noted that dedicated sustainable investment funds have also started to emerge and focus on the carbon market.
“Most have focused on nature-based 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 return for high-impact carbon credits,” said the report.
In March, another report released by the International Energy Forum echoed similar views, noting that carbon markets are poised to play a pivotal role in achieving climate goals and facilitating the energy transition.
Joseph McMonigle, secretary-general of the IEF, emphasized that the growth of carbon markets will also contribute to funding clean energy projects, crucial for a sustainable future.
The IEF added that markets can effectively reduce costs associated with carbon removal by connecting local project owners capable of removing carbon, potentially at a lower cost, with international buyers seeking to offset their emissions.
“Carbon markets play an important role in aligning resources to achieve our global climate, energy security and affordability goals. The promotion of cross-border trade in carbon credits between nations will bolster net-zero carbon balances, consequently boosting both supply and demand,” said IEF at the time.
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