Criticism of VCM is very common. But what about CCM?! Compliance Carbon Markets face design and political economy issues as well. Could we replace them both with industrial policy? Maybe, but that has trade-offs too. For what is a climate-concerned person to root?
This show delves into the fluctuations in the European Union's Emissions Trading System (ETS) carbon price and the U.S. Department of Energy's (DoE) efforts to boost carbon dioxide removal (CDR) investments through a purchasing challenge. The discussion spans the voluntary versus compliance carbon markets, with a focus on how the EU employs regulatory measures whereas the U.S. leverages financial incentives to address carbon emissions.
The episode also addresses the impacts of these policies on multinational corporations, the potential effects on carbon credit pricing, and the interplay between public policy and private sector initiatives in driving innovation in carbon removal technologies.
On This Episode
Resources
"Carbon Removal Is Getting Gamified", Heatmap article from Emily Pontecorvo
Connect with Nori
Nori’s other podcast Reversing Climate Change
Nori’s CDR meme X account
Full Transcript
Announcer: You’re listening to Carbon Removal Newsroom, a weekly show about current events in the world of carbon removal, from technology and innovation to policymaking and job growth. Brought to you by Nori, the carbon removal marketplace.
Radhika Moolgavkar: Welcome to the March 26th policy episode of Carbon Removal Newsroom. Is the dramatic drop in the EU’s carbon price just a temporary blip? Will the US DOE be able to boost CDR investment through a purchasing challenge? Today, we will be talking about the pros and cons of the voluntary versus compliance carbon markets, particularly how the EU and the U. S. are approaching the market space. I kind of like to think of that as the EU throws words at the space and the U. S. throws money at the space. So which will win?
Who knows? Joining us to delve into the complexities of the EU’s compliance market and the U. S. ‘s voluntary markets are Holly Jean Buck, Assistant Professor of Environment and Sustainability at the University at Buffalo. Hi, Holly.
Holly Jean Buck: Hello, Radhika.
Radhika Moolgavkar: And Will Burns, Co-Executive Director of the Institute for Responsible Carbon Removal at American University and Visiting Professor in the Environmental Policy and Culture Program at Northwestern University. I think I got it.
Wil Burns: Hey, Radhika.
Radhika Moolgavkar: And I am Radhika Mlaghavkar, VP of Supply and Methodology at NORI. Um, before we dive into anything today, I wanted to give Will a chance to tell us about the name change to your institute and why you all decided to do it.
Wil Burns: Oh, yeah. Well, we had a logical reason and a somewhat silly reason. So the logical reason was we really wanted to emphasize that at this stage of carbon removal, we think we really need to start focusing on questions of ethics and justice and what responsible carbon removal looks like as we now have substantial commitments, substantial funding, and we want to be One of the organizations that tries to help, you know, make sure we get it right. The silly reason was everybody hated our acronym. And I don’t know if ERKER is any better than IKROPE, but there you go.
Radhika Moolgavkar: I think the nice part of that message, acronyms aside, is you think there’s enough traction that it warranted a change in a new approach. So I think that’s excellent news and congratulations on The new name and the new approach or maybe more obvious approach that you guys are going to be taking. Obvious in that you’ve been thinking about it for a while. Well, not that it’s obvious in other ways. All right, let’s get down to it. Voluntary versus compliance. We’ve talked about the policy challenges that face both the voluntary and compliance markets multiple times on this show.
And while oftentimes the voluntary markets are seen as the messier of the two, compliance markets have their own complications as well. So, Will, let’s start with you. And can you elaborate on the EO’s approach to climate proofing through carbon pricing via the ETS compliance market? And maybe tell us what you think of their success at doing that.
Wil Burns: So the EU ETS, or Emissions Trading System, went operational in 2005. All the countries in the EU, as well as Iceland, Liechtenstein, and Norway, and Northern Ireland, at least in the electricity sector, are subject to the EU ETS. Overall, it covers about 14,000 Installations, mostly manufacturing and power installations. In January, they brought on aviation, and it represents about 40% of the European Union’s And it’s a cap and trade system. So the cap is reduced annually in accordance with the EU’s climate targets, which currently are a 55% reduction in emissions by 2030 and then climate neutrality by 2050.
And it has something called a linear reduction factor, which means that every year, The permitted emissions ratchet down by a certain percentage. Right now it’s 2. 2%. It’s about to go up to 4. 3%. It will be at 4. 4% by the end of the century. And as a cap and trade system, it establishes allowances for the regulated entities. They’re called EUAs, European Union Allowances. And every regulated entity has An amount of allowances that are commensurate with its emissions or it’s subject to a heavy penalty. And it purchases these allowances primarily in an auction system run by the European Union.
And then there’s also some allowances that are allocated for free. I think it’s done a good job. It has reduced emissions by 37% in the sectors that are regulated from 2005 to 2024, which is pretty dramatic. And I think it’s also provided, I think, about $150 billion in funding primarily for climate change. And energy programs, including energy transition, renewable programs. And those have been allocated both in the EU and to member states.
Radhika Moolgavkar: You mentioned aviation is being included in it now.
Wil Burns: Yeah, well, I mean, they’re setting hard mandates, right? And they’re subject to the same linear reduction factors as everybody else is, right? So they’re going to be scrambling. Now, it only applies... And so I’m sure they’re going to be scrambling to try to figure out how they’re going to effectuate that.
Radhika Moolgavkar: So Holly, let’s turn to the U. S. side. We obviously don’t have a federal compliance market, although states like California have their own regional regulations. So what is your take on the Department of Energy’s CDR purchasing challenge? I think it was announced last week. And how do you think this policy approach compares to that of the EU?
Holly Jean Buck: So I don’t know if I’m going to assume that people know what a CDR purchasing challenge is, because frankly, I didn’t know what that meant until recently. But to refresh our memories, so the DOE last fall set up this carbon dioxide removal purchase pilot prize to purchase $35 million worth of carbon removal credits across four different CDR pathways. And that closed in December and they’re going to announce up to 25 semifinalists this spring. I don’t know if that’s happened yet. I think that, so this purchasing challenge is a different thing, but it builds on that initial round.
So this is a voluntary activity. There’s not new funding associated with it. If you read their press release, the title is DOE is helping you, capital letters, buy good carbon dioxide removal credits. Basically, the question they’re working with is how do they get more net zero committed organizations to start buying small but growing amounts of voluntary carbon removal credits? They want to kickstart this. They’re not putting another round of new funding in it themselves with this challenge. What they’re doing is creating this, what they call a public leaderboard to track voluntary carbon removal purchases.
And it sounds like they’re also going to Evaluate respective purchases, which is a kind of cool and interesting thing. I’m not sure how it’ll work. Like what if a company says they want to, you know, buy this amount from this company and DOE finds that it’s not scientifically rigorous. How will that go down? I don’t know. But I think it’s an interesting experiment and I could say more about it, but maybe I’ll pause there.
Radhika Moolgavkar: No, I mean, I would love to hear more of your thoughts on it, Holly, because to me, it seems like one of the more innovative things I’ve seen coming out of the government, this idea of a leaderboard and competition that, and I also think it’s interesting that maybe it helps them develop their own scientific expertise around these areas in a way that may help future either growth of the industry or different regulations, so. Yeah. What do you think of all those things?
Holly Jean Buck: I guess I wonder about the theory of change and the problem analysis. So people should read their notice of intent because you can comment on that until May sometime, May 15th, I think. And it does lay out how they see the problem. So they point out Four things. They think there’s insufficient incentives so companies don’t have a requirement to purchase CDR credits. There’s high prices. CDR credits are more expensive than emission reduction credits. Third, procurement is complicated. And fourth, there’s challenges with the voluntary carbon markets and transparency and credit integrity like we’ve talked about so many times on this show.
So that’s their analysis of the problem. I guess it’s assuming that we’re still in this environment where companies are competing to be, you know, well recognized for their activities. And I hope that’s still the case, but I do wonder if that’s still the case with some companies because of the whole ESG backlash. And if buyers motivations have changed, maybe we need a different theory of change about what we do to address these problems that they’ve laid out in the notice of intent.
Radhika Moolgavkar: Sounds like an interesting study, Holly. I think there’s a sociologist in the room. So, Will, let’s turn back and think about kind of the EU. So the U. S. and the EU approaches, do you think of them just as a carrot versus stick policy framework? I know in the past you are the biggest fan of called voluntary markets.
Wil Burns: Yeah, I think that a stick has to be part of it. EU is kind of carrot and stick. Obviously, the EU ETS is primarily stick, but it also has plenty of funding that looks a lot like U. S. funding for driving things like energy efficiency and fuel switching and so forth. So even though the Europeans are certainly fonder of command and control than the U. S. , it’s Yes, is is in pretty good shape. And I’m not I’m not alarmed by the price drops. I mean, one thing that should be emphasized is the prices were really high last year, right?
It was about 180 dollars and it’s projected in 2025 to go to about. $90 per allowance, right? And if at $50 we were seeing what we believe was innovation and fuel switching, then certainly at the $80 to $90 level, You’re still going to see plenty. Some of the reasons for the price drops are transitory also. They have something called a market stability reserve, which holds a bunch of EUAs that could be released or taken off the market to create some price stability. They released a huge amount of them To try to deal with the crisis in Ukraine and the impact on energy prices in Europe.
So that’s a one-off, right? And that’s one thing. A second thing is economic downturn has reduced demand. And then the third thing is a good news story, but it is one of the bedeviling things about the system. The EU ETS and other European programs have actually Result in a lot more adoption of renewables that have decreased emissions and hence decreased demand for EUAs, which brings down prices, right? And so it’s always an uneven, uneasy dance in the EU between other directives that may But at the end of the day, the real bottom line is no matter what price those EUAs are, there is a linear reduction in emissions that you can emit each year.
And it heads towards zero by the time we get to 2040 or 2050. And in my opinion, the EUA price helps to spur some fuel switching and energy innovation independent of that linear reduction factor, but it’s not critical. And it has provided, as I said, a huge amount of money. For energy and climate programs, which have assuredly also helped the EU in terms of reducing its emissions.
Radhika Moolgavkar: A follow-up question, which, Will, you may not know, and maybe, Holly, you know. I’m wondering, since so many companies are multinational, and you often hear right in the U. S. when California does something, the whole country kind of follows because companies are multinational. Are you seeing these EU policies impacting US-based corporations in the way they act in the US? Or is it pretty limited to just the EU?
Wil Burns: I don’t know. You would think intuitively that those kind of requirements would have some impact in terms of multinational companies, but I haven’t seen any research in that context. Maybe Holly has.
Radhika Moolgavkar: All right. Another research question for somebody. So anybody who’s listening, please answer that question. That’d be great. Holly, I want to turn back to the Department of Energy’s purchasing challenge because Google immediately came out with an announcement that they’re going to buy carbon removal credits. I’m wondering if you see any significance in the, you know, in the context of scaling the voluntary market and creating, gamifying this in any way, or, you know, Google’s been doing this for a while, so it’s just Google doing Google.
Holly Jean Buck: Yeah, I mean, people should look at Emily Poncecorvo’s article in Heatmap about carbon removal is getting gamified about this topic, but You know, it’s good, I think, that they supported the DOE’s I think it could have been awkward if, you know, nobody stepped up. So good for Google. As a reminder, they have both a net zero by 2030 target and a 100% carbon-free energy target. I actually think what they’ve been doing with clean firm energy procurement is much more interesting and significant. So they’d already partnered with Fervo, the geothermal company.
And you may have seen yesterday’s announcement that they’re partnering with Microsoft and Nucor to aggregate demand for first of a kind and early commercial projects like advanced nuclear, geothermal, clean hydrogen, long duration, energy storage, and so on. I think that’s interesting for people in carbon removal for a couple of reasons. I think that it’s good that a company like Google is moving towards clean energy and not just compensating residual emission. And we’re going to need all of this clean, firm power to help power direct air capture and other types of carbon removal.
So I think that’s pretty exciting from Google as well.
Radhika Moolgavkar: Yeah, I agree. Love that they’re investing in hydrogen and long duration storage. I come from a world of battery electric buses and those are bedeviling and very important details that people often don’t talk about. Battery longevity is an issue and long-term storage is an issue and I’m glad that they’re taking those seriously and hopefully solving those problems. Yes, Holly, more to say.
Holly Jean Buck: I also want to caveat, maybe you’ve seen two articles in the last week or two, both from the Washington Post, a new surge in power is threatening U. S. climate goals. That one was in the New York Times. So, you know, that it’s pretty amazing that Over the past year, electric utilities have doubled their forecasts of how much additional power they’ll need in the next five years as they confront this unexpected explosion in the number of data centers due to, you know, not properly anticipating generative AI and its demand. When we talk about Google and Microsoft, I do want to caveat that context.
I think it’s an important part of the story and probably intersects with carbon removal in some ways, TBD.
Radhika Moolgavkar: Yeah, I mean, I know we’re a carbon removal show, but we could go down a long and interesting path about utility grids and usage and the unexpected that should be expected. But we’ll go back to carbon removal because, Will, I have a question for you about the recent proposed EU certification for carbon removal, which I discussed on the show a couple of weeks ago. Do you think credit pricing fluctuations? Too far out to know. What are you thinking about that?
Wil Burns: Yeah, I’m skeptical. I think, first of all, given the pretty modest Mandates or permissions that are being granted to CDR under the certification framework and other European policy that it may have a modest impact at most. And in terms of price fluctuations, I’m just not certain that there’s any mechanism within that certification framework that will really have an impact on that, at least in the short term.
Radhika Moolgavkar: All right. And then, so I’m going to now turn back basically to the US, I think, to just ask a few questions about, more questions about the DOE initiative and how it might interact with private companies. So, you know, Holly, we’ve seen the role that Frontier’s initiative plays in accelerating the development of carbon removal. They have an outsized, I think, impact in how companies, at least startups, I think, think about their approach to carbon removal. Do you think Google working with the DOE will show the same sort of outsized impact?
And can these like private sector, public policy partnerships drive innovation?
Holly Jean Buck: I mean... I guess what I’ll say about Frontier’s initiative, and I can’t speak to Google’s role vis-a-vis the other companies involved with that, but I’m concerned that it’s not properly situated in the public imagination or popular context in that I don’t think people are distinguishing between purchasing for innovation and learning versus purchasing for compensating for residual emissions. Because the way I see these activities, the aim is to just get a bunch of companies trying different stuff to figure out something that can work at scale and to bring down the costs.
And I think that’s a good goal, but people don’t read that necessarily as the goal when they see these announcements of this company bought this many thousand tonnes or whatever. They read that as, oh, these companies are compensating for their emissions or trying to meet their corporate sustainability targets. I think it’s a bit confused, maybe not for the people who work in this space, but just for people who might Only be reading about this in the news occasionally or whatever. And I think there could be room to better articulate the innovation and learning aims of this.
And can the private sector drive policy innovations? I don’t know about policy innovations, but I think the policy innovations here are probably coming from Some of the people who are working in the Office of Carbon Management right now. But I’m glad that, you know, Google’s going along with their creative ideas.
Radhika Moolgavkar: Yeah, you know, I know you worked, Holly, for some time in the federal government. And I’m curious, I mean, it does seem like they’re trying to be innovative. And what do you think drives that? You don’t always see it in all forms of government, for sure. So why do you think they are Being so open to these technological challenges and wanting to drive this in a different way.
Holly Jean Buck: Again, I think it’s the function of the people on their team who are younger and coming from business backgrounds and the recognition that I mean, maybe nobody would say this explicitly, but I think people do understand that the private sector probably can’t do this alone. And the federal government has to play some role, even if they might disagree about what that role is. So I think there’s a recognition that there’s a need for creativity in this domain.
Radhika Moolgavkar: All right. So, Will, I’m going to ask you about pricing a little bit again. Do you think the DOE’s initiative will have any impact on the voluntary carbon market? And might it influence other companies to follow suit so that you see actually a lowering of these carbon removal prices because more companies are participating?
Wil Burns: Yeah, I don’t know. It’s a difficult question for me. I’m not sure that other companies necessarily jump because I’m not quite sure what the incentive is. Right now, we still have a very small number of companies engaged in carbon removal purchases. And when you get past number one and number two, right, I think Microsoft said like three and a half million or something. By the time you get down to number eight, nine, and 10, you’re talking about like 65,000 tonnes of purchases, right? It’s extremely modest. We’re on track right now for about 40 million tonnes of purchase in 2030, and we’re projected to need about 240 to stay on track to get to the levels that we really should have in the U.
S. So there’s a huge gap, right? And yet the Boston Consulting Group did a study recently where they said that in 2030, they anticipate that there will be More demand than there is supply, right? And so, and if you look at the CDR FYI site, only about 5% of the purchased CDR has actually been delivered, right? The jury is really out in terms of whether we’re going to get what we need from the supply side. I think it definitely argues on more funding of R&D to ensure that these things are viable, that we get new technologies and that we bring down price.
It may be That if you stimulate the demand side, it will help in terms of economies of scale and innovation and ultimately start bringing down price, which will loop into increasing demand. So I think it’s certainly worth doing, but I think it’s uncertain whether that’ll actually happen.
Radhika Moolgavkar: All right, so this final question is for you both. Looking ahead, you both mentioned these unexpected things that influence carbon pricing from the Ukrainian war to a surge in data centers for AI. How do you see carbon credit pricing changing in both the US and the EU and kind of in what timeframe do you expect that to maybe stabilize a little bit? Will, I’ll start with you and Holly, I’ll end with you.
Wil Burns: Yeah. Well, do you mean carbon prices in general or carbon removal prices?
Radhika Moolgavkar: Good clarification. I’m doing my own pet peeve, carbon removal prices.
Wil Burns: Yeah. I don’t know. It’s really difficult to say. I mean, If you look at direct air capture, for example, it’s just interesting to see the wide divergence in estimates in terms pricing, right? Or cost between some folks in industry and some of the recent studies, right? So, you know, you have companies that claim that, you know, they’re ultimately going to get themselves down to $100 and maybe they’ll do that by 2030. Maybe 90 according to some of them. And then you have this new study, right, that I think you discussed on the show recently, right, that said Well, maybe when we look at 2035, we’re still in the $340, $800 price, right?
It’s radically divergent, right? And so I think it’s extremely difficult, at least on the durable side, to be able to predict ultimately what What economies of scale will be effectuated? What innovations will be effectuated that’ll bring down prices or not bring down prices? How much demands of MRV will ultimately impact costs? Because I think that could be a big part of the cost factors. How much will litigation impact? Ultimately impact these prices, right? All this resistance currently to pipelines, CO2 pipelines, and the announcements of the scrapping of some very large pipeline projects, right, is ultimately going to have an impact in terms of the ultimate cost of these projects and when these projects ensue.
So I hate to hedge, but I just, I don’t know.
Radhika Moolgavkar: Holly?
Holly Jean Buck: I don’t know either. I mean, even just look at trying to predict the costs of something like offshore wind and the way materials impacted that. And there’s just so many different variables, the cost of the energy, you know, commodities, I don’t know, way, way above my pay grade to predict all of those factors and how they’ll work out. Sorry.
Radhika Moolgavkar: That’s okay. I didn’t expect an answer necessarily, but I love to hear how you guys are thinking about it. Well, Will, Holly, as always, thank you so much for your time. And Will, I’ve had a couple requests for some more legalistic shows. So maybe at some point we can dive more into the litigation piece of this. I thought I was only interested in it as a lawyer, but apparently there are others who might be too.
Wil Burns: Who could not?
Radhika Moolgavkar: And Holly, and thank you so much.
Unknown speaker: Yeah, thank you.
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