Implications of the Carbon Border Adjustment Mechanism for the Iron & Steel sector

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On October 1st 2023, the Carbon Border Adjustment Mechanism (CBAM) became effective. As a measure to limit carbon leakage, the instrument complements the European Emission Trading System (EU ETS) by establishing a carbon price on imported goods that is equivalent to the carbon price on domestically produced goods. CBAM introduces a set of reporting and compliance obligations for importers of goods into the European Union.

Why is CBAM needed?

In a nutshell, CBAM is a policy instrument aiming to reduce the risk of carbon leakage under the EU ETS, the largest carbon pricing scheme worldwide that covers approximately 40% of the EU’s emissions. Carbon leakage refers to the phenomenon where climate policy restricts the competitiveness of domestic manufacturers compared to foreign producers that underly less stringent policies and can produce in a less expensive but environmentally more harmful way. The risk then arises that industry moves from the regulated jurisdiction to countries with lower environmental standards. Climate policy that does not manage carbon leakage could lead to the relocation of emission-intensive manufacturers abroad. Emissions would be exported instead of mitigated, and the domestic economy remains weakened.

Under the EU ETS, regulated entities, that are subject to the risk of carbon leakage, receive emission allowances free of charge conditional on their emission intensity in relation to a sectoral benchmark. This way, the competitive disadvantage of European climate policy is mitigated. The distribution of free allowances is phased out until 2034 and CBAM serves as a substitute to reduce the risk of carbon leakage for EU’s industry from there on.

What is the mechanism & scope of CBAM?

CBAM starts with a transitional period from October 2023 until end of 2025 with only reporting obligations for importers of certain goods. Importers or indirect customs representatives that transfer any CBAM goods into the EU, are obliged to calculate and report the embedded emissions that occur during the production process of CBAM goods and their precursors according to detailed rules.

The definitive period of CBAM starts in 2026. From then onwards, importers must purchase a proportional amount of CBAM certificates. The price of CBAM certificates is closely linked to the price of emission allowances in the EU ETS, momentarily around 85 Euro per ton of CO2e and expected to range between 100 and 150 Euro by 2030. Any carbon price due for the embedded emissions in countries of origin reduces the number of CBAM certificates to be surrendered (cf. figure 1). This mechanism assimilates the carbon price due for foreign and domestic goods that are sold on the EU market. Compared to the system of free allocations, CBAM not only increases the EU ETS revenues (free allocations of emission allowances are phased out), but also incentivizes ambitious carbon prices and industrial decarbonization abroad.

Figure 1 CBAM – basic principle. Source: carboneer.

CBAM currently covers six EU ETS sectors accounting for roughly 50% of emissions in the EU ETS: aluminium, cement, electricity, fertilisers, hydrogen, and iron & steel. For now, in the iron & steel sector, 478 CN goods are combined into 8 aggregated goods categories that share similar production routes, system boundaries and precursors. The CBAM covers mostly emissions of CO2 but includes perfluorocarbons for aluminium products and nitrous oxide for some fertilisers. For the iron & steel sector, only CO2 emissions are relevant.

The European Commission will designate additional products further along the value chain of CBAM goods for potential inclusion in the regulation no later than by the end of 2024. Starting in January 2028 and subsequently every two years, the Commission will evaluate the overall effectiveness of CBAM and deliberate on the potential inclusion of additional sectors within CBAM.

What are the CBAM obligations for importers?

To fulfil their CBAM obligations, importers or indirect customs representatives must register as authorised CBAM declarants prior to the import of CBAM goods into the EU. For each calendar year, regulated companies must calculate the emissions embedded in imports following the methodology set out below and report the results through the CBAM declaration by May 31st in the following year. Within these declarations, the importers may also claim a reduction of CBAM certificates to be surrendered when a carbon price has been effectively paid in the country of origin. The information contained in the CBAM declarations must be validated by third party verifiers that are accredited under the EU ETS regulation. Importers must get access to the CBAM registry, the platform where data on embedded emissions is communicated to authorities and where CBAM certificates are bought, surrendered, and excess certificates are sold back to the authorities.

The obligation to surrender CBAM certificates is phased in until 2034. For the transitional period, no CBAM certificates need to be purchased. Starting with the definitive period in 2026, importers need to surrender CBAM certificates. The number of CBAM certificates to be surrendered, increases proportionally to the phase-out of free allocations in the EU ETS: in 2026 regulated companies have to surrender CBAM certificates for 2.5% of their embedded emissions. This share gradually increases until it reaches 100% in 2034.

How to calculate embedded emissions

The EU defined detailed rules for the calculation of embedded emissions. Generally, CBAM declarants must consider direct emissions from the production process as well as indirect emissions from the generation of energy used in the production process. The CBAM Directive lists some goods (also from the iron & steel sector) for which only direct emissions are to be considered as the production facilities benefit from EU compensation for higher electricity prices due to carbon pricing. For the actual calculation of direct emissions, obliged entities can follow either of the methodologies:

  1. The calculation-based approach where raw materials and inputs used in production are combined with calculation factors such as net calorific values or emission factors.
  2. The measurement-based approach where emissions are determined through continuous measurement of flue gas flow and greenhouse gas concentrations in flue gases.

When CBAM declarants lack the required data to perform the calculations they can revert to default values to be used as emissions factors. Default values are to be published by the end of 2023, the EU has however published a first study indicating the differences in emission intensities among the EU and its trading partners for CBAM goods (cf. figure 2).

Figure 2 GHG emission intensity for CN code 7217 10 – Wires of non-alloy steel. Value for Belarus is based on the secondary production route. Source: Vidovic et al. (2023).

CBAM declarants can also ask their suppliers to register themselves as an operator located in a third country within the CBAM registry. They may apply above calculation methodology to their output and obtain verification according to EU ETS standards. Suppliers can then disclose the information on embedded emissions to CBAM declarants who in turn may use this information within their CBAM declarations.

Which rules apply in the transitional period?

Acknowledging the challenges posed by the CBAM for declarants, the EU gradually implements the mechanism with a transitional period which started October 1st 2023 and ends December 31st 2025. The transitional period aims to function as a trial and educational phase for all involved parties, including importers, producers, and authorities. Its purpose is to gather valuable data on embedded emissions in order to improve the methodology for the definitive period starting January 1st 2026. CBAM obligations are reduced to reporting during the transitional period (cf. figure 3).

To increase the learnings during the transitional phase, instead of annual CBAM declarations, declarants must submit CBAM reports on a quarterly basis. The first report, covering the embedded emissions from the fourth quarter 2023 is to be submitted by January 31st 2024. The calculation and general reporting requirements are however somewhat eased for the transitional phase: In addition to the calculation methodology described above (EU Method), for the transitional period, two additional methodologies are available:

  1. Until December 31st 2024, embedded emissions can be determined through third country national systems such as carbon pricing schemes or monitoring systems whose accuracy and coverage is similar to the EU ETS.
  2. Until July 31st 2024, embedded emissions can be determined using only default values from the EU or elsewhere if calculation methodologies align.

For the transitional phase, all entities must report on both direct and indirect emissions. The exemptions for indirect emissions in the iron & steel sector mentioned above are only valid for the definitive period. Penalties can be imposed in cases where the reporting declarant fails to submit a correct or complete CBAM report or doesn’t rectify errors when initiated, with penalties ranging from EUR 10 to EUR 50 per tonne of unreported emissions.

Figure 3 CBAM time schedule. Source: carboneer.

What are the immediate tasks for companies?

The definitive period is two years away, however, here are the preparations companies should conclude at once to comply with the legal obligations of the transitional period and to get a head start for the definitive period:

  • Identify which of your imports are subject to CBAM regulations. Engage with suppliers and manufacturers to gather emissions data for imported goods. Collect information on carbon pricing schemes in countries of origin for your CBAM goods.
  • Get registered as CBAM declarant or have your indirect customs representative getting registered.
  • Get access to the transitional CBAM registry. This is the interface for regulators and regulated entities for the transitional period.
  • Learn how to handle the CBAM reporting template published by the EU.
  • Establish processes to collect emissions data and set aside personnel capacities to handle CBAM duties.
  • Make use of EU ETS allowance price forecast and embedded carbon projections to assess the medium-term economic implications of CBAM regulations on your supply chain and business.
  • Understand the implications of CBAM on your supply chain and assess your price and regulatory risk in different countries.

With the introduction of CBAM, emission monitoring and reporting along with carbon pricing plays an ever more important role for non-EU producers and importers. While the emission reporting obligations during the transitional period of CBAM are new to many companies and require comprehensive preparation, regulations on CBAM will evolve during the coming years and should be closely monitored by third country and EU producers as well as traders and importers alike. Details on CBAM implementation rules will for example still be required on the treatment of green electricity procurement through power purchase agreements in third-countries or on updated product lists subject to CBAM obligations. Ultimately, companies require a strategic approach towards these new realities of global trade and decarbonization.  

Sources:
Vidovic, D., Marmier, A., Zore, L. and Moya, J., Greenhouse gas emission intensities of the steel, fertilisers, aluminium and cement industries in the EU and its main trading partners, Publications Office of the European Union, Luxembourg, 2023, doi:10.2760/359533, JRC134682.

Carbon management in Germany (II): emissions, potentials, and costs for CCUS

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In this second article of the series on carbon capture, use and storage (CCUS) in Germany, carboneer analyses the emission profiles of German industries and associated CCS potentials and costs. Review the first article on the developments around carbon management in Germany from a political and climate perspective here. Follow carboneer to access all articles, covering the general historical and political context of the topic, and highlighting developments and implications for the sectors steel, cement, lime, chemicals, and waste incineration.

Focus on industrial emissions

The energy sector, specifically electricity generation in coal and gas power plants, will most likely be excluded from any CCUS activities as the Carbon Management Strategy (CMS) of Germany is geared towards residual (hard-to-abate) and process-related emissions in the industrial sector. Still, the energy sector is the largest contributor to German CO2 emissions: In 2021 the energy sector emitted 238 Mt of CO2, accounting for 35% of total CO2 emissions. Most of the emissions from existing coal and gas power plants are however expected to be replaced by renewable sources or green hydrogen utilization, therefore limiting the scope for CCUS applications. Some potential however remains, mostly through CCUS applications in waste and biomass power plants.

The focus for CCUS activities will thus be on the industrial sector, the second largest contributor to CO2 emissions in Germany. In 2021, industrial facilities were responsible for 168 Mt of CO2 emissions, accounting for 25% of total CO2 emissions. The largest share of industrial emissions originates from large installations that are subject to the EU Emission Trading System as well as from waste incineration facilities. These installations emitted a total of 137.8 Mt CO2 in 2021 (cf. Figure 1), with largest contributions from steel production (31.5 Mt), waste incineration (23.3 Mt), cement production (20.1 Mt), the production of chemicals (16.9 Mt), and lime (6.4 Mt).

Figure 1: Sectoral shares of German industry (EU ETS facilities) and waste incineration CO2 emissions in 2021 (source: carboneer, data sources: DEHSt (2022), EEA (2022))

The CCS potential in the industrial sector in Germany

Three quarters of emissions in the industry are related to energy use and are to be abated using renewable energy. Approximately one quarter of the industrial emissions are process-related and originate from the utilization of carbon-containing materials in production. Process-related emissions are difficult to avoid and the five major climate neutrality studies for Germany (see part I) highlight the significant role of CCUS for emission mitigation or CO2-recycling in industry.

When calculating the CCS potential, it is important to notice that not all process-related emissions can be captured. Depending on industry and the dispersion of emission sources, the share of capturable emissions ranges from 45% in the chemical industry to 90% for waste incineration facilities. Following this methodology, the amount of technically capturable CO2 emissions from large industrial and waste incineration facilities in Germany amounts to 44.2 Mt (cf. Figure 2).

Figure 2: CCS potential in selected industrial sectors in Germany (source: carboneer)

Considering economic feasibility and alternative technological pathways for decarbonization, the ultimately relevant CCUS potential shrinks even further. While lime, cement, and waste incineration will need to capture CO2 due to a lack of technological alternatives, the use of green hydrogen may be the primary decarbonization route for steel production. The chemical industry will continue to depend on carbon-containing materials to produce basic chemicals, but might shift from fossil to biogenic and atmospheric sources, or build on recycled carbon from other industrial sectors. A more detailed analysis of the different sectors and their CCUS readiness will follow in future articles of this series.

Infrastructure and costs

To enable the transport of captured CO2 to potential storage sites or consumers, suitable infrastructure is necessary. The development of CO2 transport infrastructure is critical for the success of carbon management, and the pace of its development can significantly influence the entire progress of CCUS applications. By 2030, first large-scale CO2 transport infrastructures in Germany are necessary, where the mode of transport will depend on the scale and intended use of the CO2. Rail, trucks, ships, and pipelines can all be viable options. A pipeline connection is particularly useful for large industrial sites and CCUS clusters that generate significant amounts of CO2 to be transported over longer distances to storage facilities. However, for decentralized sites such as lime and cement plants, the most efficient handling of captured CO2 has yet to be identified. Local production of synthetic fuels is one of the possible options. A country-wide CO2 pipeline system connecting all major point sources is unlikely to develop, but pipelines for large industrial clusters will be necessary in the medium to long term. Furthermore, some oil and gas companies are already working on developing pipelines for exporting CO2 generated in Germany to storage sites in the North Sea.

While CCS costs (including capture, transportation, and storage) are relatively homogeneous across sectors, the current unavailability of storage capacity within Germany makes pure CCS implementation relatively expensive (cf. Figure 3) when compared to a country such as the United Kingdom, which has better access to storage sites (e.g. the North Sea). High costs of approximately 200 EUR/t CO2 for CCS applications in Germany already point at the need for incentive and support mechanisms to bring carbon management to an industrial scale.  

Figure 3: Average CCS cost in EUR/t CO2 in Germany and the UK (source: carboneer, data source: CATF, 2022)

Policymakers in Germany have to make the decision whether depleted natural gas reservoirs and saline aquifers in northern Germany and under the German North Sea are suitable CO2 storage sites, or if exporting CO2 through international collaborations and storing it in the North Sea and Norwegian Sea is a more politically acceptable option.

In the upcoming articles of this series, we investigate the attractiveness and readiness of the above industrial sectors for CCS applications based on indicators such as the regulatory framework, competing decarbonization options and other sector specific characteristics.

This article is based on a study by carboneer for the Trade Commissioner Service of the Canadian Embassy to Germany.

Sources

CATF (2022) The cost of carbon capture and storage in Europe. Available at: https://​www.catf.us​/​ccs-​cost-​tool/​ (Accessed: 27 March 2023).

DEHSt (2022) Treibhausgasemissionen 2021: Emissionshandelspflichtige stationäre Anlagen und Luftverkehr in Deutschland (VET-Bericht 2021). Available at: https://​www.dehst.de​/​SharedDocs/​downloads/​DE/​publikationen/​VET-​Bericht-​2021.pdf​?​__blob=​publicationFile&​v=​7 (Accessed: 27 March 2023).

EEA (2022) Industrial Reporting database, May 2022, 7 March. Available at: https://​www.eea.europa.eu​/​data-​and-​maps/​data/​industrial-​reporting-​under-​the-​industrial-​6 (Accessed: 27 March 2023).

Carbon management in Germany (I): from zero to climate and industrial necessity

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This is the first article of a series on the potential of carbon capture, use and storage in Germany that will be published by carboneer over the coming weeks.

In this article, we look at the implications of a climate neutral Germany in 2045 on the demand for carbon management and carbon capture use and storage (CCUS). The topic has long been neglected in public debates but experiences a recent revival. CCUS can serve the dual purpose of (i) supporting the decarbonization of industrial facilities, and (ii) supplying especially the chemical sectors with CO2 as a resource for the production of primary products.

A brief history of carbon capture policy in Germany

While research on large-scale underground CO2 storage started in 2004 at the Ketzin pilot site close to Berlin, industrial carbon management activities (carbon capture, utilization and storage – CCUS) are virtually absent in Germany to the present. The European Union’s Carbon Capture and Storage Directive from 2009 provided its Member States with a framework to implement corresponding national legislation. The German Carbon Dioxide Storage Act (Kohlendioxid-Speicherungsgesetz – KSpG) came into force in August 2012 (cf. figure 1) but failed to establish favourable conditions for CCUS applications.

The storage discussion at that time in Germany was closely linked to the continuation of coal power generation and met strong public resistance. The expansion of renewable energy generation was at the center of potential mitigation pathways and CCUS applications were considered risky especially with regards to cost and safety criteria. Giving in to the general scepticism, the KSpG only allowed for applications with storage capacities below 1.3 million tons of CO2, and most states prohibited underground CO2 storage. No single storage project has been developed until the legal deadline for project submissions by the end of 2016. Currently it is therefore not possible to store CO2 underground in Germany and only a limited amount of capture and utilization projects are operative.

Carbon management has reemerged in the political arena in Germany only recently. The northwestern industrial state of North Rhine-Westphalia published its Carbon Management Strategy in 2021 and the National Carbon Management Strategy is currently being developed by the Federal Ministry for Economic Affairs and Climate Action (BMWK). We covered the national German Carbon Management Strategy in detail in this article.

Figure 1: Timeline and relevant events on carbon management in Germany (source: carboneer)

Carbon Management is a central component of climate neutrality

With tightening climate targets at EU and German level, it is becoming increasingly clear that climate neutrality by mid-century or even 2045 will not be achieved without large-scale capture, utilization and long-term storage of CO2. 

While CCUS experienced a slow uptake in German policymaking, academic research unanimously concludes that carbon management, including carbon capture, utilization and storage, as well as atmospheric carbon removal are necessary to reach climate targets. Since the electricity sector can be largely decarbonised through the expansion of renewables, the focus of carbon management in Germany lies on the industrial sector. Especially process-related emissions are hard to abate and might only be reduced through carbon capture solutions. Figure 2 shows the projections of five research projects on the sources of the CO2 that will be captured in 2045, at the time when Germany seeks to achieve climate neutrality.

Figure 2: CO2-capture according to application and source in 2045 (2050 for BMWK) (source: carboneer, data sources: Agora: Prognos, Öko-Institut, Wuppertal-Institut (2021), BDI: BCG (2021), dena: Deutsche Energie-Agentur (2021), BMWK: Fraunhofer ISI et al. (2022), Ariadne: Luderer, Kost and Sörgel (2021))

Building up the capacity to capture between 35 and 70 Mt of CO2 from different industries, or 5-10% of current German GHG emissions, requires targeted and substantial investments over the coming two decades. Investments will only materialize if determined policy making creates an enabling investment environment and delivers clear rules and guidelines on topics such as:

  • Incentive mechanisms for capture, utilization and storage
  • Transport and storage infrastructure provision and regulation
  • Regulation of CO2 imports and exports
  • GHG accounting (especially in utilization projects)

From waste to resource: how much storage is actually needed?

While we will take a deep dive into different industrial sector’s CCUS conditions and dynamics in upcoming articles of this series, we already want to draw your attention to some insights from our latest analysis. The technical potential across German industries predestined for CCS applications (steel, cement, lime, chemicals, waste incineration) amounts to 40-50 Mt CO2. Here we consider process-related emissions only, as other emission can and must be decarbonised through other solutions, such as renewable energy, electrification, or green hydrogen.

On the other side, the demand for carbon in the chemical industry in Germany in 2045 is estimated to be approximately 50 Mt CO2. This already points to a new paradigm and an industrial ecosystem, where CO2 will not necessarily be sequestered and stored underground in northern Germany, under the North Sea or even being exported to Norway, Denmark, or the Netherlands. Quite the opposite, CO2 might become a scarce a raw material in the industrial carbon cycle pushing the demand for CCU applications. Furthermore, the updated regulation on the EU Emission Trading System allows regulated entities to use CCUS instead of surrendering emission allowances. Undoubtedly, this option further increases the demand for CCUS applications.

Consideration of policy interactions and emerging new industrial paradigms are crucial for a successful carbon management at the national and EU level. Topics that require further analysis are amongst others:

  • Necessary CO2 transport capacity within Germany and Europe
  • Ultimate storage capacities needed across Europe
  • Quality criteria of CO2 for transport and utilization
  • Build-up of capture, transport and storage capacities in sync
  • Development of industrial carbon management clusters

The next article in this series on carbon management in Germany will deal with the current industrial emissions, the CCS potential in those industries and cost estimates for capture, transport, and storage. In the meantime, feel free to reach out with feedback and questions, which we are happy to discuss.

This article is based on a study by carboneer for the Trade Commissioner Service of the Canadian Embassy to Germany.

Sources:

BCG (2021) Klimapfade 2.0: Ein Wirtschaftsprogramm für Klima und Zukunft, Gutachten für den BDI. Available at: https://​web-assets.bcg.com​/​58/​57/​2042392542079ff8c9ee2cb74278/​klimapfade-​study-​german.pdf (Accessed: 25 March 2023).

Bundesregierung (2022) Evaluierungsbericht der Bundesregierung zum Kohlendioxid-Speicherungsgesetz: Drucksache 20/5145. Available at: https://​dserver.bundestag.de​/​btd/​20/​051/​2005145.pdf.

Deutsche Energie-Agentur (2021) dena-Leitstudie Aufbruch Klimaneutralität: Eine gesamtgesellschaftliche Aufgabe. Available at: https://​www.dena.de​/​fileadmin/​dena/​Publikationen/​PDFs/​2021/​Abschlussbericht_​dena-​Leitstudie_​Aufbruch_​Klimaneutralitaet.pdf (Accessed: 27 March 2023).

Fraunhofer ISI, Consentec and ifeu (2022) Langfristszenarien für die Transformation des Energiesystems in Deutschland: Modul 3: Referenzszenario und Basisszenario, Studie im Auftrag des Bundesministeriums für Wirtschaft und Energie. Available at: https://​www.langfristszenarien.de​/​enertile-​explorer-​en/​ (Accessed: 25 March 2023).

Luderer, G., Kost, C. and Sörgel, D. (2021) Deutschland auf dem Weg zur Klimaneutralität 2045 – Szenarien und Pfade im Modellvergleich: PIK: Potsdam-Institut fur Klimafolgenforschung. Available at: https://​policycommons.net​/​artifacts/​1860013/​deutschland-​auf-​dem-​weg-​zur-​klimaneutralitat-​2045/​2607518/​ (Accessed: 28 March 2023).

Prognos, Öko-Institut, Wuppertal-Institut (2021) Klimaneutrales Deutschland 2045. Wie Deutschland seine Klimaziele schon vor 2050 erreichen kann: Zusammenfassung im Auftrag von Stiftung Klimaneutralität, Agora Energiewende und Agora Verkehrswende. Available at: https://​www.agora-energiewende.de​/​veroeffentlichungen/​klimaneutrales-​deutschland-​2045 (Accessed: 25 March 2023).

Carbon Removal going mainstream? The EU carbon removal certification framework

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What is it and why is it needed?

In December 2021, the EU Commission published its Sustainable Carbon Cycles Communication in which it outlined the EU’s plan to capture and store carbon dioxide from different sources in order to reach climate neutrality by 2050. Core elements are:

  • Developing an industrial carbon usage registry;
  • Setting a carbon removal target through technological solutions;
  • Strengthening carbon farming to sequester CO2 in soils to contribute to the net removal target in the land sector of 310 million tonnes of CO2-eq by 2030.

To expand the implementation of carbon removal solutions, it is essential to establish a regulatory framework for the certification of carbon removals. Therefore, the European Commission has released additional information on the proposed voluntary and EU-wide framework in the end of 2022. It is known as the EU Carbon Removal Certification Framework (CRCF) and includes several outstanding issues to be addressed. The CRCF aims to promote carbon removal solutions, encourage carbon farming approaches, and to prevent greenwashing by establishing trust through the implementation of standards and certification procedures. Therefore the EU’s ability to measure, monitor and verify carbon removals needs to be ensured, while stimulating financing options from public and private sources.

Under the proposed framework, carbon removal projects may take a nature-based or technological approach. The certification of carbon storage in long-lasting products or materials is also possible. Figure 1 provides an overview of different carbon removal methods, their concrete implementation, and the final storage medium.

Figure 1: Taxonomy for carbon removal (source: IPCC)

Importantly, carbon removal projects under EU certification have to comply with the QU.A.L.ITY criteria and need to:

  • be QUantifiable and QUantified;
  • Additional to existing climate benefits;
  • strive for Long-term storage;
  • contribute to sustainabilITY.

Given the frequent criticisms leveled at the methodologies and practices of the voluntary carbon market, establishing a regulatory framework for carbon removal activities is crucial. The criticism relates to the lack of oversight, transparency, trustworthiness, and climate impact (additionality) of the projects and certificates on this market. All of these can create significant problems for entities relying on voluntary carbon credits to offset or neutralise their emissions as part of their climate strategy, as highlighted in a recent investigation. A regulated market can restore confidence and ensure that all projects conform to the same rules regarding accounting, monitoring, reporting, and verification.

How would the EU certification framework work?

The certification framework will be based on criteria and certification methodologies to be developed by the EU Commission with the support of an expert group. The Commission then recognises private or public certification schemes that register carbon removal activities, control audits and certificates, maintain public registries, and also issue the carbon removal units. The operators of carbon removal activities, such as farmers, biochar producers or BECCS power plant operators need to be audited against the certification methodologies by accredited private certification bodies. Only after a successful audit and recognition by the certification scheme, would the operator’s carbon removal activities be certified by the certification scheme (compare Figure 2).

Figure 2: Working principle of the certification system (adopted by author from EU Commission)

The current proposal allows the EU Commission to adopt secondary regulations, such as delegated acts, to establish the different technical certification methodologies and to harmonise rules for certification and recognition of certification schemes. Given that carbon removal is a new and evolving field, new certification methodologies certainly need to be developed over time.

Next steps for developing the methodologies

As mentioned above, the EU Commission has not developed detailed carbon removal methodologies or criteria yet. During the coming months the external expert group will develop tailored certification methodologies for different carbon removal activities. For reasons of transparency, related documents are being published and the first meeting took place on 7 March 2023, while carbon farming methodologies will be the topic of the next meeting on 21 and 22 June 2023. The timeline for the upcoming meetings of the expert group is depicted in Figure 3 (source: EU Commission).

Figure 3: Upcoming meetings of the expert group on carbon removal (source: EU Commission)

The Commission’s proposal also needs to be adopted by the European Parliament and the Council in a normal legislative procedure. At the end of April 2023, the responsible committee of the European Parliament published their first response with proposed changes to the Commission’s CRFC. Improving monitoring, liability and transparency mechanisms and a focus on long-term carbon removal are a priority for the Parliament to prevent low-quality removals. The report also calls for allowing permanent carbon storage outside of the EU Member states, if the carbon is captured in the EU and stored under similar rules to the EU. This would open the way to account for geological storage in countries such as Norway or Iceland.

Our assessment and issues to be solved

The proposal for the EU CRCF is commendable for being among the first globally to address the need for removals in climate policy and for stringent, transparent regulatory oversight on certification of removal activities. However, several issues still need to be resolved to ensure that the climate effect of the removal activities under the CRCF can become a reality: Removal activities through nature-based solutions could be short-lived and thus the climate impact could be reversed quickly. Furthermore, it is unclear how differing risks for reversals depending on the removal solutions will be dealt with and which actor will ultimately be (financially) responsible.

As there is currently a lack of details on the methodologies for the different removal activities and the certification schemes, the EU Commission, together with the expert group, needs to develop tailored rules for different removal activities. Especially the issues of reversal and liability mechanisms have to be addressed as well. It is essential that these rules are developed in a transparent and collaborative manner with input from stakeholders across the carbon removal industry to ensure that they are effective in promoting long-lasting carbon removal solutions while also providing clear guidelines on liability and risk management.

Reach out if you would like to learn more about the proposed regulation and understand how it impacts your business model or offsetting strategy.

Carbon Management and CCU/S in Germany

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The German government is currently developing a Carbon Management Strategy for CO2 storage and utilisation. Because, one thing is indisputable: Without the capture, use and storage of CO2 from industrial processes (CCU/S) and the atmosphere, Germany can hardly become climate neutral by 2045. The basis for the Carbon Management Strategy is the new evaluation report on the Carbon Dioxide Storage Act. In this article, we explain the key points and principles of such a strategy.  

The CCU/S nomenclature

For the purposes of consistent nomenclature, we use the term carbon management below as an umbrella term for carbon management that includes CO2 capture, transport, and use (CCU) or storage (CCS) from fossil as well as biological or atmospheric sources as negative emissions or carbon dioxide removal (BECCS and DACCS). Likewise, dealing with other nature-based solutions to remove and reduce greenhouse gas emissions from the atmosphere is part of carbon management (see Figure 1).

Diagram Description automatically generated
Figure 1: Sources and sinks of CO2 emissions of the different components of carbon management (source: carboneer).

The impact on the climate and the technical and economic details of the different technologies and options are complex and require detailed analysis. Feel free to contact us for more information.

Carbon management necessary for climate neutrality

In early January 2023, German Economics Minister Robert Habeck travelled to Norway to explore further cooperation in the field of energy and climate. Among other things, the topic of CO2 capture, transport and storage is to become an important part of the cooperation with Norway. With tightening climate targets at EU and German level, it is becoming increasingly clear that greenhouse gas or climate neutrality by mid-century will not be achieved without large-scale capture, utilisation and, above all, long-term storage of CO2. 

At the same time, the German Federal Ministry of Economics and Climate Protection (BMWK) published the German government’s evaluation report on the Carbon Dioxide Storage Act (KSpG) in December 2022. The KSpG came into force in August 2012 and was intended to test the first demonstration projects for the long-term storage of CO2 in the ground in Germany. Acceptance of CO2 storage in Germany has always been very low in the past, especially as the discourse was strongly linked to the use of CO2 capture at coal-fired power plants and the continued operation of coal power plants. However, by the end of the application deadline for approval of new underground CO2 storage facilities (end of 2016), only one demonstration project had been applied for and been built in Germany. Since no new applications can be submitted after the end of 2016, underground CO2 storage is de facto not possible throughout Germany.

CO2 capture for residual emissions in industry

In the future, the use of CCS at coal-fired power plants in Germany is not expected to play a role due to the planned phase-out of coal. Capture, utilisation or storage of CO2 will however be needed primarily for a climate-neutral industry. Even after the use of renewable energies or electrification, large quantities of process-related CO2 emissions will still be produced, for example in the lime and cement industries or in the steel industry. Carbon is also the starting point for many other important products in the chemical industry and is therefore also needed as a raw material. The long-term scenarios project assumes that around 30 million metric tons of CO2 will have to be captured, transported, reused or disposed of in final storage by industrial plants in Germany even after climate neutrality has been achieved in 2045. Possible locations of capture plants and transport pipelines for CO2 are shown in Figure 2. 

Figure 2: Possible CO2 sinks, sources and transport pipelines in Germany in 2045 (source: Langfristszenarien)

Here, it is noticeable that clusters of CCU/S sites are located in the core areas of German basic and heavy industry. This clustering is mainly due to economic economies of scale for infrastructures for capture, transport but also the potential reuse of CO2. Accordingly, the focus of the German Carbon Management Strategy will be primarily on the industrial sector and not on capture in coal-fired power generation.

In addition to the capture of CO2 at industrial sources, however, the use of carbon removal solutions, i.e., the physical removal of CO2 emissions from the atmosphere, must also be developed. Carbon removal is the only way to offset the greenhouse gas emissions that will continue to occur in 2045, for example from agriculture. At 45-80 million metric tons of CO2, the negative emissions required are actually at a higher level than CO2 emissions to be captured from industrial processes. We have presented the details here and here.

Key principles of the German carbon management strategy

The use of CCU/S in industry will play a role as a decarbonisation option, alongside energy and resource efficiency and the use of green energy sources and electrification of processes. Key findings from the latest climate neutrality studies for Germany (Klimaneutrales Deutschland 2045, Klimapfade 2.0, dena-Leitstudie Aufbruch Klimaneutralität, Langfristszenarien) allow the following assessments:

  • Increase in ambition level of climate targets leads to increased use of CCU/S
  • CO2 capture in the million metric ton range necessary as early as 2030
  • Use of CCS mainly in industry and waste sector
  • Negative emissions from carbon dioxide removal must be scaled up from 2030 at the latest
  • Permanence of CO2 removal and storage by nature-based methods is uncertain and therefore makes technical solutions necessary as well
  • Fossil CCU/S and technical carbon dioxide removal can use the same infrastructures and should be considered in an integrated way
  • Transparent and continuous dialogue needed to ensure societal acceptance for ramp-up of CCU/S
  • Significant amounts of CO2 capture at global level (6-12 Gt/year depending on scenario) also driven by CCS at fossil power plants 

The recently published evaluation report on the KSpG provides the following key recommendations to the German government for revision: Examination and adjustment of regulations of the (cross-border) transport of CO2 and regarding German final storage sites for CO2, the further integration of CCU/S into the European Emissions Trading System (EU ETS), and the development of a clear framework for accounting of negative emissions. The details are to be elaborated in a German Carbon Management Strategy (Figure 3) by the German government, which will be presented during 2023. 

Figure 3: Basic pillars for carbon management in Germany (source: German government, adjusted by carboneer).

Which issues need to be clarified?

The German Carbon Management Strategy first aims to spell out a prioritisation of CCU/S applications. Questions must be answered for which industries and which emissions CCU/S measures are most important in order to use available resources in an appropriate manner. This should go hand in hand with the adaptation of the relevant regulatory framework, for example for approval procedures and the development and financing of (transport) infrastructures. Measures and funding programs in special application areas are also to be developed.

Methodologies for monitoring, reporting and verification (MRV) for CCU/S need to be developed. For example, the accounting of CCU/S in the EU ETS and the accounting for the use of CO2 from different sources (fossil, industrial cycle, biogenic, from the atmosphere) in the chemical industry and in the production of synthetic fuels must be clarified.

In particular, the possibility of transboundary CO2 transport will play a major role across the EU. In this regard, the Norwegian government has already made offers to the EU industry for accommodating their CO2 in underground storages in Norway. The design of pipeline and ship capacities as well as questions of EU network regulation and financing are important issues. The synergy effects of CCU/S clusters between industries as sources and sinks of CO2 must be elicited to find the most efficient solutions when planning infrastructures.

For possible CO2 storage facilities to become a reality also on German territory (probably rather under the seabed than under the mainland), social acceptance for CO2 capture and final storage must be built up. This can only happen through clear and transparent communication regarding the necessity of CCU/S for a climate neutral Europe and Germany.  

We will keep you up to date on the latest developments regarding the German Carbon Management Strategy. Please feel free to contact us if you have any questions on this topic.

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Biggest update to EU emission trading rules in years, part II: EU ETS II, revenue distribution and take-aways

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Much of the climate ambition of the EU hinges on the bloc’s emission trading system (EU ETS). During December 2022, the Council and the European Parliament reached important agreements on the “Fit for 55” proposals. Specifically, new rules for the existing EU ETS, the implementation of a carbon border adjustment mechanism (CBAM) and the introduction of a new EU ETS for emissions from buildings and road transport are in sight. With these revisions implemented the EU would edge closer to its 2030 climate targets, but question marks remain. 

In the first part of this series, we looked at changes to the EU ETS I, free allocations and the new Carbon Border Adjustment Mechanism (CBAM). In this second article we shed light on the new EU ETS II on buildings and road transport and on the utilisation of revenues from auctioning emission allowances by governments.

The EU ETS II: Pricing CO2-emissions from buildings, road transport and fuels in other sectors  

A separate emission trading system will be introduced for emissions currently not priced across the entire EU. This EU ETS II will include emissions from the building sector as well as from road transport and the usage of fuels in other, as of now not defined, sectors. The EU ETS II will however only become operational from 2027 earliest, while high energy prices later this decade may even postpone the start until 2028. Not all details have been worked out yet, especially as member states are allowed to exempt fuel suppliers from the EU ETS II in case a national carbon price scheme with a price level equivalent or higher than the EU system exists (compare Figure 1 for the EU ETS II implementation timeline).

Figure 1: EU ETS II implementation timeline (source: carboneer)

This leads to another important not entirely finalised aspect: An emission reduction trajectory with a high annual linear reduction factor (LRF) of more than 5% should be in place from 2024 onwards to achieve a total emission reduction of compliant sectors of about 60% by 2030 compared to 2005. However, the EU ETS II will start pricing emissions only in 2027. Furthermore, once prices for allowances under the EU ETS II are higher than 45 EUR/ton over a certain period of time, additional allowances will be released to increase the supply on the market. 

Effectively, the EU ETS II in its currently discussed shape and form will be closer to a carbon tax with a maximum price level of 45 EUR/ton at least until 2030. From then onwards no price cap is foreseen as of now. A low price of 45 EUR/ton would be far below the actual CO2-avoidance costs ranging between 100-300 EUR/ton in the building and road transport sectors. Clearly, the price signal in the EU ETS II will not be high enough to incentivise the adoption of low-carbon technologies alone.

With all these higher ambitions and new pricing schemes, one very important question of course remains: Where will the money from EU ETS I, CBAM and EU ETS II go to and what will it be used for? 

Auction income for climate and social measures only

The allocation of income for the existing Innovation Fund, which supports industrial decarbonisation, will be stocked up from 450 million to 575 million emission allowances (EUA). At an average price of 90 EUR/ton this represents a monetary value of more than 50 billion EUR to be allocated to decarbonisation projects. In addition, earnings of EU member states from auction income must now be entirely used for climate measures. However, the Modernisation Fund for less wealthy member states still allows some investments into fossil infrastructures. 

One of the largest concerns of the European Parliament was that the introduction of the EU ETS II will predominantly hurt economically weaker states and citizens. Therefore, the current agreement allocates 50% of the income from the EU ETS II to the newly introduced Social Climate Fund. It should support vulnerable households and small businesses to cope with the price increase of fuels. The fund would start operation already in 2026, one year before the actual pricing scheme commences, and is set up to run until 2032 for now. It is supposed to have a budget of about 65 billion EUR for social climate measures such as renovation in social housing to direct income support. The remaining 50% of the income passes to the EU national states, which must use the money for social climate measures in the building and transport sector as well. An estimated total of 87 billion EUR will thus be allocated to reduce social hardships due to more comprehensive carbon pricing. This sounds like a huge amount of money but is actually being dwarfed by expenditures to alleviate the current fossil energy price crisis: Germany alone will make available up to 200 billion EUR for consumer price breaks if necessary.  

What to make of all the news?

The EU emission trading space will become more complex with additional sectors and phased-out free allocation, the pricing of imports through CBAM and the new EU ETS II for sectors currently not under a pricing scheme at all. Figure 2 provides an overview of the entire implementation timeline of the most important changes. 

Chart Description automatically generated with medium confidence
Figure 2: Implementation timeline of most important changes to the European emission trading systems and rules (source: carboneer)

Players from all sectors must act now to understand the extent to which they are exposed to regulatory and carbon pricing risks and how to prepare themselves. Our seven main take-aways are the following:

  1. If implemented, the increased ambition in the EU ETS I can have the potential to bring the EU towards is 2030 climate targets.
  1. Phasing out free allocations for industries means a much higher exposure to carbon price risks for industrials and “real” incentives to make progress on industrial decarbonisation.
  1. The implementation of CBAM incentivises climate action in non-EU countries while setting the stage for much confusion concerning greenhouse gas measurement, reporting and verification (MRV) along with the need for importers to understand the EU ETS and start hedging.
  1. Until 2026 supply of emission allowances in the EU ETS I will remain adequate while the full-scale implementation of several mechanisms from 2027 onwards will lead to higher prices and lower supply of EUA.
  1. Carbon prices of above 100 EUR/ton in the EU ETS I will be common during this decade, especially if the macro-economic situation normalises. 
  1. The implementation of the EU ETS II is less ambitious with a price cap of 45 EUR/ton and will likely not drive decarbonisation in the sectors under question until 2030. 
  1. The EU ETS II will however provide a common ground for pricing emissions in other sectors in the EU and bring about 75% of the bloc’s emissions under a pricing scheme. 

Feel free to get in touch if you want to learn more. We at carboneer are looking forward to supporting you in all questions on the existing and upcoming carbon pricing schemes in the EU. 

Biggest update to EU emission trading rules in years, part I: EU ETS and CBAM

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Much of the climate ambition of the EU hinges on the bloc’s emission trading system (EU ETS). During December 2022, the Council and the European Parliament reached important agreements on the “Fit for 55” proposals. Specifically, new rules for the existing EU ETS, the implementation of a carbon border adjustment mechanism (CBAM) and the introduction of a new EU ETS for emissions from buildings and road transport are in sight. With these revisions implemented the EU would edge closer to its 2030 climate targets, but question marks remain. In this article we unpack some of the most relevant points on changes and updates on the EU ETS I and CBAM.

EU ETS I: new inclusion, rebasing and strong annual cap reduction

Currently, the existing EU ETS covers roughly 40% of the EU’s emissions. They stem from the energy sector, industrial installations and aviation. Maritime transport will be the newcomer and large vessels of 5000 gross tonnage and above must gradually surrender emission allowances (EUA) for an increasing share of their emissions: 40% in 2024, 70% in 2025 and 100% in 2026. The inclusion of smaller vessels and non-CO2-emissions such as methane and N2O will likely start from 2026 onwards.

Next to this new inclusion, the overall ambition of emission reductions until 2030 compared to 2005 under the EU ETS increased to 62% (Figure 1). The agreement reached on 18th of December 2022 would thus lead to about 23 million tons less CO2-emissions compared to the EU Commission’s proposal from 2021 and is much more aggressive than the minus 43% that has been the previous reduction target. While the target is politically ambitious, it still falls short of the necessary reductions in the EU to limit global warming to 1.5°C even without taking into account fair share considerations.

To achieve this stronger reduction of 62%, the legislators agreed on a rebasing of emissions: 90 million EUA are taken out of the market in 2024 with another 27 million EUA following in 2026. In addition, the entire emission cap will be reduced by 4.3% annually from 2024 to 2027. From 2028 onwards this linear reduction factor (LRF) will even rise to 4.4%. As expected, the market stability reserve (MSR) will continue to take out 24 % of surplus EUAs.

Figure 1: Emission reductions targets under the EU ETS I (source: European Union)

All these reductions will lead to significantly tighter supply of EUAs, drive prices and incentivise more decarbonisation especially in industrial sectors. This brings us to the changes for the industrial sector.

Fundamental change for the industrial sector

Most of the industrial sectors under the EU ETS are currently still eligible for free allocation of EUAs. Based on benchmarks on efficient and thus less emission-intensive production, different industrial facilities will still receive free allowances. However, the benchmark system will be overhauled in 2026: the basis for the free allocations will not be a production process, but the product. This facilitates a better comparison between industries. In addition, industrial companies must have energy audits in place and implement related decarbonisation measures. Otherwise, the free allocation volumes of a facility will be reduced by 20%. Similarly, industrial facilities that are among the worst 20% in terms of carbon-intensity in one sector have to design and implement decarbonisation plans, otherwise their free allocations will be cut by 20%.

However, the biggest change will be the phase-out of free allocations for industrial players as such. From 2026 onwards, the number of free allowances handed over to industries will be reduced gradually until 2034 when industries have to procure all of their needed allowances through the auctioning mechanism or on the market. Free allocation will be part of the history books. As becomes clear from Figure 2 below, the phase-out of free allocation for industry starts relatively slowly compared to the phase-out for aviation and picks up speed from the end of the decade. This approach postpones that necessary price signals kick in for industrial polluters while allowing the EU industry to prepare and decarbonise in earnest during the next five years.

Figure 2: Share of free EUA allocations over time in aviation and industry (source: carboneer)

The EU Commission expects that about 75 million more EUAs will be auctioned due to the phase-out of free allocations to industry, increasing the auction income. Half of that income should go into the EU Innovation Fund that supports these very industries with the implementation of decarbonisation projects. The other half will be available for the EU member states to support their exporting industries. Which leads us to the next large update as phasing out free allocations is tightly coupled with the introduction of the carbon border adjustment mechanism (CBAM).

CBAM: pricing imported emissions

At the same time and rate as European industries will not receive free allocations of EUA anymore, importers of certain goods into the EU will have to pay for the emissions of their products. This carbon border adjustment mechanism (CBAM) should on the one hand create a level-playing field between EU and non-EU industries for products in the EU (both paying a similar carbon price) and increase climate ambition in non-EU states (climate instruments and carbon pricing abroad can reduce necessary payments for importers).

Initially, CBAM will cover the most emission-intensive sectors: iron and steel, cement, fertilisers, aluminium, electricity. The new agreements from 13th of December 2022, however, also feature hydrogen, certain precursors and other downstream products such as screws and bolts as imports under CBAM. In addition, the EU Commission will assess the inclusion of other products that might be at risk of carbon leakages such as organic chemicals and polymers into CBAM from 2030 onwards. Indirect emissions at the production facility also might have to be part of the emissions to be reported and consequently paid for by importing companies. From October 2023 importers in the covered sectors must be ready for their monitoring, reporting and verification (MRV) obligations, which start 3 years ahead of the pricing mechanism. Figure 3 depicts the timeline of the CBAM implementation.

Figure 3: CBAM implementation timeline (source: carboneer)

Two main contentious issues remain for CBAM:

  • How will reporting and verification methods and schemes really look like and work for imported goods?
  • How to compensate or support companies that produce in the EU and must purchase EUAs but export to non-EU countries where no or less ambitious carbon pricing rules exist?

Next to those sectors that are already under the EU ETS, a lot of emissions from other activities in the EU are not part of an emission pricing scheme. After much uncertainty about its prospects, it is now clear: a new or second emission trading system (EU EHS II) will be implemented as well. This will be the topic of our second article.

Feel free to get in touch if you want to learn more. We at carboneer are looking forward to supporting you in all questions on the existing and upcoming carbon pricing schemes in the EU.

What is the potential for negative emission technologies in Germany?

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The updated German climate law requires negative emissions technologies (NETs) and carbon removal from the atmosphere (read all about that in our previous article). Here we want to answer the question, which of the solutions could be used in Germany and what their potential might be. The main take-away: Nature-based and technological carbon removal solutions will both be necessary at the Megatonne scale.

New studies confirm need for carbon removal

Two new reports that model pathways of how Germany can achieve climate neutrality by 2045 have been published in October 2021. The dena-Leitstudie “Towards Climate Neutrality” by the German Energy Agency and the Ariadne report as part of the Kopernikus Project funded by the German Ministry of Education and Research both make clear that substantial amounts of negative emissions are required to balance certain land use, agricultural or industrial emissions. Figure 1 extends our findings about how much annual negative emissions will be needed in Germany in 2045 including the data from the latest studies.

Figure 1: Required annual negative emissions in Mt CO2-eq in 2045 in Germany (source: cr.hub)

Generally, the latest numbers are similar to those from earlier studies. However the various studies still disagree on how much carbon Germany needs to remove from the atmosphere by a large margin. The resulting figures range between 40 and 100 Mt CO2-eq. The average between all studies points at annual carbon removal needs of a bit over 74 Mt CO2-eq at the point where Germany wants to be climate neutral.

Not only the scientific community alone is stressing the need of negative emissions, but increasingly industry groups and associations take the issue seriously. In a recent open letter to the new federal government a range of large corporations under the Stiftung 2 Grad stressed the need for developing a political framework for actively managing the carbon cycle and start developing solutions for capturing CO2 from industrial facilities and storing it underground (CCS).

Which negative emissions technologies are needed?

Broadly we can differentiate between nature-based carbon removal solutions and technological ones. The predominant nature-based solutions is re-, and afforestation, but also the renaturation of peatlands, the enhanced sequestration of carbon in soils through different agricultural practices or growing kelp in the sea fall into that category.

On the technological side, the main focus currently lies on DACCS (direct air capture and storage). Of course also hybrid solutions exist, such as BECCS (bioenergy with carbon capture and storage) or the production biochar which uses biomass and utilizes a technical process to sequester or bind the carbon in a non-reactive form.

We explain and compare a range of those NETs here. Figure 2 shows which of the various NETs are being foreseen to help Germany to achieve climate neutrality by 2045 based on selected studies. The answer to the question which NETs and carbon removal solutions are needed is simple: all of them!

Figure 2: Comparison of annual carbon removal capacity in MtCO2-eq of different NETs in recent reports for Germany in 2045 (source: cr.hub)

The different nature-based solutions are summarized into the land use, land use change and forestry (LULUCF) category in Figure 2, which takes up the largest share of necessary carbon removal in most studies and in many cases is not split up into more detailed removal pathways and sinks in the studies.

In addition, most studies foresee the need for substantial technical removals via BECCS and DACCS. Especially in case the nature-based solutions would not be able to deliver the large CO2-capturing capacities, technological solutions are required.

More exotic carbon removal solutions such as enhanced weathering do not feature prominently. The usage of carbon dioxide from the atmosphere as feedstock for green naphtha or methanol production and in long-lived plastic products goes into the 10 MtCO2-eq range. It is worth noting that the different studies do not necessarily agree on the potential or capacity of the different NETs. This is also due to the fact that not all studies consider the entire range of possible NETs or focus on specific technologies or sinks.

And just as a reminder: In 2018 the LULUCF sector in Germany only delivered 18 MtCO2-eq of negative emissions (source: dena). That means within the next 23 years a doubling to tripling of the annual carbon removal capacity through forests, swamp renaturation and soil carbon sequestration needs to be achieved. Otherwise the reliance on technological solutions that are as of now not scaled-up will be even higher.  

Negative emission potential in Germany

As seen above, a silver bullet or one NET to take out the excess carbon to make Germany truly climate neutral by 2045 does not exist. Much more, all solutions and technologies will be needed. To give a better overview of how such a carbon removal portfolio on the country level can look like, we used the numbers from the Ariadne project report and compared the potentials across the different NETs. Figure 3 shows the shares of different NETs in Germany in 2045 according to the report of the Ariadne project with a total potential of almost 110 MtCO2-eq.

Figure 3: Potential share of different NETs in Germany by 2045 according to the Ariadne project, light green wedge represent LULUCF (source: cr.hub)

The light green wedge taking 46 per cent of the total carbon removal potential represents the LULUCF sector, which can then further be split into re-and afforestation, soil carbon sequestration and carbon storage through changed agricultural practices such as agroforestry. Technological solutions such as BECCS and DACCS make up 37 per cent of the entire carbon removal potential, whereas biochar and enhanced weathering add up 17 per cent in total.

The way forward

The most recent results from climate and energy system modeling from a variety of different research groups are clear: Carbon removal from the atmosphere will be important for Germany to reach its climate targets. In 2045 the capacity to remove 10 per cent of the greenhouse gas emissions Germany emitted in 2020 from the atmosphere has to be in place.

That is not an easy feat, especially considering that carbon removal from the LULUCF sector today only has the capacity of providing a fifth to a quarter of the required negative emission capacity. In addition, climate change might impede the carbon storage capacity of nature-based solutions further during the coming decades. If natural carbon sinks cannot deliver, then technical or hybrid carbon removal solutions such as BECCS, DACCS or biochar become more relevant.

The most recent studies under consideration in this article arrive at different carbon removal capacity and needs for different NETs, as figure 2 demonstrates. Starting a structured conversation about how the recent reports arrive at their negative emission capacity for different technologies would be important. In that way science can develop an understanding about assumptions and the potential for an integral negative emissions modeling framework.

At the political level, devising a framework for active carbon management alongside capacity building measures and restarting a public dialogue on carbon removal and CO2-storage as necessary and important parts towards climate neutrality are the most important steps. Furthermore, a process on revising current regulations on CO2-storage and -transport, possibly across borders in a European context has to start. German climate targets should accommodate the differences between genuine emission reduction and carbon removal (as already being started in the UK and Sweden).

The take-away for the private sector: A new industry is forming and it needs to be scaled rapidly. Forward-looking companies and industries can be on the forefront of that development if they seize the opportunity. This holds for technology providers, project developers and emitting industries that can provide and utilise NETs. However, also companies with climate targets can demonstrate more credible climate action by neutralizing part of their difficult-to-abate emissions via negative emissions or carbon removal credits instead using less permanent and less credible offsetting projects.

We can help you to develop strategies concerning your climate targets and the role of negative emissions and provide you with insights into this new sector and market. Feel free to reach out for further discussions.

New German climate goal only possible with negative emissions?

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Following the ruling of the Federal Constitutional Court in April 2021, the German government had to revise the Climate Protection Act. According to the revised law, Germany must be climate neutral as early as 2045 and greenhouse gas negative by 2050. These higher climate ambitions also mean earlier use of significant amounts of negative emissions. What changes have there been in climate legislation and what do the latest scenarios on carbon removal say for Germany?

As promised in our article on the global dimensions for negative emissions, this time around, we want to have a closer look at Germany. The country is touted for being one of the leaders in decarbonizing the energy system of an industrialised country both in terms of speed and scope. Renewable energies already make up 45 to 50 per cent of Germany’s electricity consumption with a goal to reach 65 per cent in 2030. 

Updated climate target requires climate neutrality by 2045

The German climate law has been revised in June 2021, after the Federal Constitutional Court required changes and more ambitious action. As a result the current government updated the country’s climate goals with an increased ambition towards climate or greenhouse gas neutrality by 2045. From 2050 onwards Germany is supposed to be greenhouse gas negative. Figure 1 depicts Germany’s historical emissions, the targets stipulated in the new law and potential negative emissions in 2050 according to the study Klimaneutrales Deutschland 2045 (Climate neutral Germany 2045) (data sources: BMU, UBA, Agora Energiewende).

Figure 1: Historic greenhouse gas emissions and targets for Germany in Mt CO2eq according to the new climate law and estimates for negative emissions by Agora Energiewende (source: cr.hub)

For 2021, Agora Energiewende expects the strongest annual increase in emissions since 1990, with a plus of almost 50 Mt (source: Agora Energiewende). This means that emissions this year could be back at the level of 2019 before Corona. The emission reduction of 40 per cent compared to 1990, which the country managed to achieve in 2020, would then be obsolete again.  

Are negative emissions part of the German climate strategy? 

A few years ago negative emissions or CCS were not part of the discussion concerning the climate and emissions reduction strategy in Germany, at least not on the policy level and only partially in the scientific context. This outlook changed:

  1. It is increasingly clear that emissions of greenhouse gases will remain in hard-to-abate sectors (such as industry and agriculture) even after strong emission reductions. 
  2. The current efforts of decarbonizing sectors other than the electricity sector, specifically buildings and transport is lagging behind and might not deliver the emissions reductions needed to even achieve the older and less ambitious climate targets. 
  3. Climate ambitions grew as the impact of a warming planet is already clearly visible and civil society demands more action. On the EU level the new target of 55 per cent emission reductions by 2030 compared to 1990 has been agreed on, and Germany followed suite with its new climate law.

Therefore negative emissions are more prominent in recent scenarios and studies on how Germany might be able to achieve its climate targets. On the policy level, they are only implicitly mentioned in the new climate law in terms of negative emissions in the Land Use, Land-Use Change and Forestry (LULUCF) sector. Concrete expansion targets for technologies that generate negative emissions are still lacking.

How much negative emissions does Germany need?

In this analysis we present and compare the results and implications of three detailed studies released during the past three months: the study Klimaneutrales Deutschland 2045 (Climate neutral Germany 2045) by Agora Energiewende, the outcomes of the Fraunhofer ISI project Langfristszenarien für die Transformation des Energiesystems in Deutschland (Long-term scenarios for the transformation of the energy system in Germany) commissioned by the German Ministry for Economic Affairs and the working paper Wissensstand zu CO2-Entnahmen (Knowledge base on CO2-removals) by the Mercator Research Institute on Global Commons and Climate Change (MCC). 

Based on those three publications, figure 2 depicts the projected needs for negative emissions in Germany. All of the studies agree that negative emissions in the order of several ten to hundred millions of tons CO2eq will be needed in Germany by 2050 to achieve the country’s climate targets.

Figure 2: Amount of negative emissions including LULUCF sector needed in Germany from 2030 onwards in Mt CO2eq (missing numbers in studies have been linearly interpolated) (source: cr.hub)

According to current estimates Germany emitted about 740 Mt of greenhouse gases in 2020. As figure 2 shows, the negative emissions necessary by the time Germany wants to reach climate neutrality (2045) range from 67 to 100 Mt CO2eq, so 9 to 13 per cent of 2020’s emissions. Scaling-up nature-based and technological solutions and technologies is already required starting today and in this decade. At present, the use of technologies to remove CO2 from the atmosphere is comparatively expensive. Reducing these costs requires massive investments in technical and organisational infrastructure, and comprehensive political and economic support.

To some extent the new German climate law takes into account negative emissions and aims at a contribution of LULUCF sector of 25, 35 and 40 Mt in 2030, 2040 and 2045, respectively. However, land-use and forestry related carbon removal suffer from low permanence, tricky accounting and potential reversibility through misaligned management practices or natural events such as wildfires.

Thus, in addition to negative emission from the LULUCF sector as part of nature-based carbon removal solutions, technological removals will be needed as well according to all of the three studies. In a coming article we will dive deeper into the proposed kinds of negative emissions solutions for achieving Germany’s climate targets and the potential of some of those solutions. 

To learn more about carbon removal and how it can play a role for your company’s climate strategy, follow us on Twitter or LinkedIn, subscribe to our newsletter or directly get in touch with us.

How much carbon do we need to take out of the atmosphere? Current global scenarios

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Net zero targets are taking centre stage in climate policy and action. Depending on the speed of emissions reductions in the coming years and the ambition level of climate goals, negative emissions and thus carbon removal from the atmosphere will be instrumental for achieving those targets. To get a better picture of the scale required we dig into the latest global reports on Net Zero scenarios. 

Net Zero terminology

Even after aggressive emission reduction have taken place, residual emissions might still occur. Greenhouse gases must then be actively removed from the atmosphere in order to further reduce emissions on balance. A country or organisation achieves net zero emissions or climate neutrality when the amount of emissions removed reaches that of the residual emissions, i.e. when no more greenhouse gases are released into the atmosphere on balance. Emissions removed from the atmosphere are also called negative emissions. Various negative emissions technologies exist, which today mainly focus on the removal of CO2 as the most important greenhouse gas from the atmosphere, hence the focus on carbon removal.

Here it is necessary to differentiate between carbon removal, carbon capture and storage (CCS) and carbon capture and use or utilisation (CCU). CCS prevents emission from fossil fuels from entering the atmosphere in the first place, but does not remove any emissions from the atmosphere. In that respect it is not a negative emissions technology or solution. CCU refers to the use of captured CO2 in the production of fuels or other products. If a particular CCU process and product actually leads to negative emissions or not depends on where the captured CO2 comes from and on the life-time of the product in question. Figure 1 explains the difference between carbon removal, CCU and CCS.

Figure 1: Differences between Carbon Removal, CCU and CCS (source: cr.hub)

Clearly, terminology is important when it comes to setting and specifically achieving credible Net Zero targets or climate strategies as well as when evaluating Net Zero claims or scenarios.

Assessing global scenarios

Given the vast amount of global climate scenarios and modeling exercises we only focus on a few of them in the following. Figure 2 shows an exemplary emission pathway for achieving 1.5°C, while at the same time showing traditional mitigation technologies, such as renewables and energy efficiency and carbon removal separately. The figure is based on data from the Network for Greening the Financial System (NGFS) climate scenarios for central banks and supervisory authorities.

Figure 2: Necessary order of magnitude for carbon removal for emission paths of 1.5 °C (source: cr.hub)

In order to widen the scope of the analysis and to reduce the risk of looking in only one direction, we included scenarios of five different organisations:

The International Energy Agency’s (IEA) Net Zero by 2050 Roadmap, the Consultation Paper Reaching climate objectives: the role of carbon dioxide removals by the Energy Transitions Commission (ETC), the Special report: Global warming of 1.5°C of the Intergovernmental Panel on Climate Change (IPCC), McKinsey’s Climate math: What a 1.5-degree pathway would take and NGFS’s Climate scenarios. A few numbers on the relevant amount of negative emissions has been distilled from the report The case for Negative Emissions by the Coalition for Negative Emissions. We are aware that this selection only captures part of the available literature.

All scenarios considered aim to keep the temperature increase below 1.5 °C compared to pre-industrial levels. Still, comparing scenarios and studies is difficult due to different assumptions on which part of the economy and thus which emissions are included in the scenario or what exactly qualifies as carbon removal and what does not. In addition, the probabilities in keeping below a certain temperature threshold differ between scenarios and studies.

All of the above shows that increasing attention needs to be paid to making modeling and scenario assumptions for Net Zero as clear as possible in order to understand the implications of the scenario outcomes. 

Rapid scale-up of carbon removal needed

What do the scenarios have in common?

Emission reductions from large-scale deployment of renewables and electrification of large parts of the industrial and transport sectors are included in all scenarios. Yet, all scenarios agree that there is a significant need for negative emissions in the gigatonnes (Gt CO2eq) range to achieve the 1.5°C climate target, as Figure 3 shows (data sources: Coalition for Negative Emissions, IEA).

Also, carbon removal technologies have to be available on a large-scale basis already during this decade and reach the Gt level by about 2030 from a very low level today. Given today’s greenhouse gas emissions of almost 50 Gt per year, the removals needed according to the five scenarios in 2050 amount to about 5 to 20 per cent of current global emissions. This is a stark reminder that negative emission technologies are not marginal implementations and potential fixes on the race to Net Zero, but important requirements to deal with residual emissions in laggard and hard-to-abate sectors.

Where do the numbers disagree and why?

On the upper end are the high range numbers of the ETC and the IPCC with up to 10 GtCO2eq of carbon removal by mid-century, while the IEA’s Net Zero Roadmap features on the lower end with an expected need of 2.4 Gt of negative emissions by 2050. The IEA foresees a total capture of 7.6 Gt including CCS and CCU. However, removals from the atmosphere make up only about 30 per cent of those. Also, the scenario assumption of the IEA include no new investments into unabated coal power plants and new oil and gas fields or coal mines from 2021 onwards, as well as the phase-out of unabated coal power globally by 2030. The level of ambition for classical mitigation strategies is very high here compared to the other four scenarios.

Figure 3: Required negative emissions for 1.5°C climate targets according to different scenarios in Gt CO2eq/year (source: cr.hub)

If a medium pathway such as in the NGFS or McKinsey scenarios is taken seriously, that means that negative emission technologies (NETs) need to be scaled up rapidly within the coming decades to achieve a removal potential in the Gt scale. A scale-up of at least 50 times from the present days is needed for that according to The case for Negative Emissions report. Especially as the current pipeline for carbon removal projects including Natural Climate Solutions, Bioenergy with CCS and Direct-Air-Capture until 2025 only stands at about 0.15 Gt (source: Coalition for Negative Emissions).

Implications for policy

To achieve net zero by 2050 while keeping global temperature below 1.5°C will require unprecedented efforts and are seemingly not plausible any longer without large-scale utilisation of carbon removal. Indeed, even many 2-degree pathways hinge on negative emissions although on a lower level, especially if international climate action falls short of more ambitious action (source: Minx, et. al., Fuss et. al.).

This leaves policy makers with many questions, such as:

  • Which ways exist to integrate carbon removal in climate policy?
  • What is the interaction between emission reduction and removal policy?
  • How to scale-up NETs and innovation in the sector?
  • Where to focus investments and resources?
  • How to implement carbon removal credits and how to integrate them into the emission trading systems such as the EU ETS?

On the EU-level the first initiatives are on their way to support carbon removal, such as the Negative Emissions Platform and the European Commission wants to propose a robust carbon removal certification system by 2023. In addition, research and innovation on carbon removal are being funded by Horizon 2020 and the follow-up program Horizon Europe. The Innovation Fund, which receives 10 billion EUR from the income of the EU Emission Trading System, includes the commercial demonstration of low-carbon technologies, such as carbon removal and CCS into its framework. 

As an example of how increased climate ambition leads to negative emissions is the case of the German new climate law. In a forthcoming article, we will have a closer look at the need for carbon removal in Germany’s road to greenhouse gas neutrality.

How is the industry preparing?

For the private sector, especially for corporations and companies that set climate targets and aim to go for their own net zero goals, the complexity of the discussion rises. Internationally acknowledged standards of setting climate targets and the role removals and reduction play within those such as the Net Zero Standard by the Science Based Targets initiative will be of great importance (source: SBTi).

Industry-led initiatives on voluntary carbon markets such as the Taskforce for Scaling Voluntary Carbon Markets (TSVCM), where cr.hub is part of the consultation group are needed as well to drive the demand and market. The TSVCM just launched their report of Phase II of implementing an industry-wide carbon market. However it is important that only high-quality removals feature in those industry-led initiatives in order to achieve real climate benefits. The discussion of what a high-quality removal actually entails, is a story for another time. We will come back to that in further articles.

In conclusion it becomes clear thatmany players and organisations are taking carbon removal and negative emissions now much more seriously in their climate and energy modelling scenarios and as a potential tool for reaching net zero targets. In addition, NETs have to be scaled dramatically in order to achieve the required removal potential.

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