As part of our sustainability work, we’ve been delving into the significance of evolving global arrangements for carbon pricing and taxation, and the implications for our clients. It has led us to a new perspective. Sooner than you might think, policy changes to hit new net zero goals will give product and service companies access to a new revenue stream from carbon sequestration. Global CO2 goals are long-term, but the business opportunities are unfolding now.
New tool to ensure the construction industry meets its climate change responsibilities.
Why is carbon sequestration, rather than emissions reduction, going to take centre stage? For a long time, it’s made engineering but not financial sense to sequester at least a hundred times more carbon than we do currently. The telling policy change that’s happening now is the shift from “carbon reduction” to “carbon neutrality”. Take the incoming European Commission Green Deal, which proposes to enshrine the 2050 carbon neutrality target into EU law. Putting her political weight behind it, new president Ursula von der Leyen says she wants “the European Green Deal to become Europe’s hallmark”. McKinsey predicts that the global sequestration industry that this approach implies will exceed $800 billion in 2030.
Beyond Europe, the CORSIA carbon scheme for global aviation naturally promotes neutrality measures via offsets because their reduction task is so tough. The proposed EU Border Carbon Adjustment – applying an import tax at a rate commensurate with the amount of CO2 emitted in production – is intended to drive neutrality outside EU borders.
This new carbon neutrality focus opens a new arena of business opportunities and disruption. Why? The economics will start to insist that it’s just as valid to sequester a tonne of carbon as to reduce a tonne of emissions. In fact, the definition of neutrality for human emissions, when measured in tonnes of carbon, is that half of humanity’s activities will sequester carbon and half will emit it (noting that this can potentially be done within a few percent of global GDP).
Demand side of the carbon equation
For the last 10 to 20 years, policy has focused almost exclusively on reducing the supply of carbon emissions into the atmosphere, missing the demand side of the equation that sinks carbon from the atmosphere. That’s changing. Because various pressures, not least national goals, make importing offsets to meet this demand difficult, domestic sequestration will become the only way to become carbon neutral in the shorter term. Later, regions that have built a strong sequestration industry will have opportunities to sell that capacity to other regions via mechanisms such as Article 6 of the Paris Agreement.
The glimmer of light in this policy shift is that if we sequester enough, we don’t actually need to change lifestyles – predominantly the Chinese and Indian ones of the future – by the inconceivable levels proposed in recent reduction plans. But we should still of course make the effort. When you look at the big numbers and the small amount consumers and companies will do whether voluntarily or under consumer pressure, sequestration is the only answer for achieving the real end goal.
The core policy framework from the UN for paying to sequester carbon – CER permits in the voluntary market – has so far been hampered by billions of permits in surplus and low prices. This is particularly due to Chinese hydro plants that qualified for CERs many years ago. These permits must clear before the CER price will rise, and it’s a slow process. In fact, the prices have been so low – while distorting the emissions market via cheap offsets – that the CER permit scheme is being removed from the flagship EU carbon trading scheme in its next phase from 2020, and China have created their own China CER scheme for their upcoming national offset market.
To hit the EU policy goal of neutrality, the CER mechanism will need to be replaced by something robust. The first step is a new €10Bn low carbon Innovation Fund inviting proposals from June 2020 and available for carbon capture, energy storage, low carbon, and carbon substitution projects.
There are also new voluntary marketplaces with higher prices than the CER such as Puro.earth in Finland that are settling at around €20 per tonne for a verified sequestration technology (including carbon sequestered directly into building products). These are even already marketed by ecosystem members to millennials as subscription services for personal offsets, while the regulatory world catches up.
Opportunities beyond energy and power
What does all this mean for our clients? Clearly there is a power market interest in capture, transport and storage schemes for the high concentrations of CO2 in flue gas, at varying levels of cost. But we believe the new sequestration opportunities will go well beyond energy and power. The cement market, responsible for seven per cent of global emissions, will be among the first to move. Under increasing carbon emissions cost pressure, and with limited reduction available, one of their only options will be to switch to high carbon concentration materials such as carbonated rock, and lobby to be paid for it.
This type of opportunity will reach higher up the chain into transport, homes, consumer goods and services, logistics… in fact anything that involves large quantities of physical goods. It will also include long-life systems like building estates, with emitting customers such as datacentres, aviation, and HVAC systems driving the demand for their sequestration capacity.
Emissions pricing is already affecting our product clients. An example is the hidden input price risk in the power market that makes a choice of manufacturer and the energy mix of its country increasingly important to reduce commercial risk. But alongside established emissions taxes, sequestration opportunities are driving change in a growing set of industrial processes that can be modified to embed more CO2 into materials. And a new wave of companies is adding carbon sequestration benefits to goods, and showing they’re viable, even in advance of a stable sequestration price.
Blue Planetis a concrete materials supplier running power plant and other waste through carbon dioxide to create carbonated rock with a carbon sequestering coating of 44% by mass CO2, replacing mined limestone rock in concrete production. Solidia is working along similar lines, producing building materials with high carbon density, while Derbigum has a line of roofing material that utilizes olivine to absorb CO2 when it rains.
New Light meanwhile, has used greenhouse gas to create its long chain carbon-based plastic and synthetic fibre alternative AirCarbon. It is now being used to manufacture furniture, packaging and fashion textiles. Graphenstone will supply a paint for your home that absorbs CO2 into walls. Some of these new technologies are also supported by targeted policy initiatives such as the Carbon Inclusion Mechanism for the cement sector initiated by France.
Worthwhile net sink effect
The biochar and paper industries have obvious opportunities, with many companies engaging closely with carbon measurement schemes and a good proportion already aligned with Paris pledges. In Sweden, the harvested wood industry is currently estimated to be sequestering nine per cent of the nation’s total emissions. Even though this sequestration is non-permanent – the buildings eventually emit – there is a worthwhile persistent net sink effect here because of the time lag between the harvesting regrowth and the decomposition emissions.
Rewarding shorter-term sequestration as opposed to “permanent” sequestration is different from a certificate perspective. Rather than buying a single $50 certificate for a 50 year or “permanently” sequestered tonne, an emitter buys 50 “tonne year” certificates for $1 each. Accounting in this way recognises that owning a high carbon concentration resource like some carbon rich soil or a building brings a future revenue stream, but only if you keep the carbon sequestered. And it’s also an important detail to enable the suite of short-term sequestration (5-10 year) technologies that are needed to meet the goals, due to a shortfall in the capacity of the “saviour” technologies of direct air capture with permanent storage (which needs too much energy) and bio-energy with carbon capture (which needs too much land).
This pricing mechanism also has two other benefits – it builds more trust in permits, which have always been beset by concerns over whether sequestration is really permanent in areas like afforestation, and it also distributes the financial rewards of action over time, rather than waiting for a 50 year “proof” that something happened before money changes hands. This lines up better with the commercial world’s short-term horizons, allowing industry to take action sooner.
Looking further ahead, we see a “sequestration price” as an evolution of existing voluntary schemes, followed by compliance. Businesses will find secondary opportunities in the same spirit as logistics companies that collect valuable road data for autonomous vehicle algorithms during their day-to-day operations. A cement company might spot a way to counter higher emissions pricing by being paid to supply carbonate rock, or a coastal hotel sitting in a large estate might be paid to maintain some wetland or soil with a high carbon concentration.
The new sequestration industry stretches into surprising places. In FMCG, there’s already sure to be an increasing focus on what happens to physical products and packaging at the end of their life driven by policy and consumer demand – with credits kicking in on proven recycling, reuse, carbon storage or successful waste to energy conversion. But if you make soap, you might find that switching your potassium carbonate to a soda ash mix generated from waste CO2 that benefits from sequestration credits will save you money, as Lush Cosmetics are finding by working with start-up CleanO2.
So if you’re the owner of a high-volume product and making raw material choices, or a lower volume product that involves chemical inputs and processes, you’ll have a new commercial incentive to consider inputs and engage closely with your consumers and recycling chains to influence and control where your product ends up, and what happens to the materials in it. When it comes to longer term commodities – a building for instance, or textiles – extending product lifetime will bring a flow of credits to compensate for the loss of a repeat sale.
And what if you’re the kingpin of a service company without the wherewithal to load carbon into something physical? Your decision-making power affects sequestration, which also increasingly affects your input prices. Even the emissions of your datacentre will boost offset demand. Take finance. If the “invisible hand’ of a self-regulating economy does its job, it will be more profitable for a fund or VC firm to invest in companies or geographies that sequester more than those that sequester less. Those who spot and realise the opportunities first will prosper.
New demand for sequestration
To meet the new demand for sequestration, target customers of many commercial organisations will change. If your business is producing charcoal, for instance, you might find that customers who want biochar to add to soil can afford much higher prices than others. That route will be awarded credits from locking up carbon for decades, while the customers wanting to use it for fuel will be paying emission taxes somewhere along the line.
Construction, and its certification, will be a different world. An industry currently seen as a problem will be part of the solution, with huge carbon-storing potential for every building standing. Materials like timber and bamboo for structures, hempcrete and cellulose fibre for insulation, hemp lime for walling, wood fibre for sheathing and olivine for exteriors will all become much more viable. Measurement and monitoring systems will need to evolve, with an increased focus on half-life modelling to capture the important time lag between the vegetation sequestration, which starts straight after harvest, and the emissions from harvested products, decades on.
So much for the future, but what to do now? Here at Cambridge Consultants, we’re investing in modelling to reveal how sequestration pricing will affect product design, considering the sensor and data requirements for the new monitoring systems that will be required in order to validate carbon related payments, applying sustainability principles in our product designs, and working with synthetic biology companies that are already designing the new input materials required.
We’re building in external economic forecasts and research and consulting from the likes of CDP (Carbon Disclosure Project), Carbon Footprint, The Carbon Trust, Carbon Pulse, Redshaw, and Puro on policy developments. Look out for our upcoming online tool to model the carbon sequestration in your product, as well as more commentary from us on how to succeed in the circular carbon world. And whether you are a start-up or a blue-chip, start reviewing your product or service sequestration opportunities. There’s still time to incorporate them into your business and product strategies before your competitors do!