“If you build it, they will come.” This famous, but paraphrased, quote from the film “Field of Dreams” is apropos of the fledgling carbon removal industry.
The demand is there, but supply needs to be built. The carbon removal industry needs to scale up quickly to provide a vital tool to cut greenhouse gas emissions to net zero by 2050.
Insurers and reinsurers can play an essential role as institutional investors, as buyers of carbon removal certificates in their own pursuit of net zero and, of course, provide the traditional risk transfer protections. (See related article: Insurance Industry Support of Carbon Removal Needed in Drive to Net Zero.)
The carbon removal industry will have to scale up from some 10,000 tonnes of negative emissions today to around 10 billion tonnes each year by 2050, according to a Swiss Re Institute report titled “The insurance rationale for carbon removal solutions,” which was published in July 2021.
The good news is that awareness of the need for net-zero emissions is high and growing. Swiss Re said this is an acknowledgement in both public and private sectors of the need to double-down on emission reduction efforts and to build a carbon removal industry capable of quickly delivering negative emissions (within three decades) and scale (10-20 billion tonnes per year).
Climate scientists agree that emissions reduction won’t be enough. The world will also need carbon removal.
“There’s much more demand at the moment than there is supply when it comes to high-quality, permanent carbon removal,” according to Antti Vihavainen, CEO of Puro.earth, the carbon removal marketplace. He spoke during the 6th Puro.earth Carbon Removal Ecosystem Meeting held in April 2022.
The carbon removal market “is still pretty small and needs support to scale, to meet the challenges that we have in the future, if all companies are to meet [their] net-zero commitments,” said Chris Minter, sustainable sourcing lead, Zurich Insurance Group, who also spoke at the meeting.
“In the last year, we have seen huge corporate demand for carbon removal in the immediate term, but the market is still supply constrained, and many projects will only produce carbon removal in the 12-to-24-month time frame,” said Puro.earth in a statement. “The supply crunch will get worse as awareness keeps spreading exponentially for corporates and companies who have pledged to net zero in the coming years scramble to fulfill those commitments.”
Building a Fledging Industry
But there are ways to help build the fledging industry—for example, by providing offtake agreements, which Puro.earth has described “as a game-changer for the planet.” In essence, these offtake agreements are commitments to buying CO2 Removal Certificates (CORCs), or carbon credits, from existing or planned carbon removal facilities at set price points several years into the future. CORCs are sold on Puro.earth’s marketplace on behalf of carbon removal suppliers, each of whom are verified by Puro.earth’s third-party audit partners. Generically, throughout the industry, CORCs are known as carbon credits. (See sidebar below for more information on CORCs.)
The agreements provide funding, which helps carbon removal developers start new operations or expand existing ones, Puro.earth explained in an email. However, this type of contract recognizes the uncertainty for delivery from such early-stage operations.
Money typically comes to money, said Vihavainen during the meeting. As a result, if a corporate buyer enters an offtake agreement with a supplier, it is more likely that the same supplier will be able to access capital “to actually make the facility come true.”
Vihavainen described offtake agreements as a “crucial step” in developing the carbon removal industry. “We’re finally seeing that these long-term offtake agreements are materializing to new facilities—exactly what the market needs.”
Long-term offtake agreements for carbon removal projects provide predictable future cashflows for suppliers, which will enable more projects to raise equity and obtain loans to start or expand, said Puro.earth.
In August last year, Swiss Re signed a long-term offtake agreement with Climeworks, the direct air capture and storage (DACS) specialist in Iceland, which filters CO2 directly from air and stores it permanently in nearby rock layers. The purchase agreement is worth $10 million over 10 years.
“At a price point of several hundred dollars per tonne of CO2 removed, it is at present also one of the costliest options,” said Swiss Re in a statement announcing the deal. “Larger, more economical air-capture and storage facilities can only be realized if customers are committed to long-term purchasing agreements. They guarantee a future revenue stream to the developers, making new projects fundable.”
There are also the less risky carbon removal contracts called prepurchase agreements, a type of offset agreement. These are simple standard contracts where a commitment is made to buy future carbon removal credits from existing carbon removal facilities at set price points several years into the future. With these contracts, however, there is little uncertainty for the delivery of the so-called CORCs, Puro.earth said.
Zurich Insurance this year entered into several prepurchase agreements with three carbon capture companies—two for biochar production and one that uses woody biomass burial.
Vihavainen at Puro.earth said biochar is the most sought after type of CORC. Biochar is created from heating plant-based biomass in the absence of oxygen in a process called pyrolysis, which forms charcoal.
Essentially, Zurich has agreed to purchase and even pay in advance to secure carbon removal certificates that haven’t yet been produced. These prepurchase agreements provide advance funding that will help these suppliers “get up and running and/or scale up,” Zurich explained on its website.
The prepurchase agreements not only give the suppliers comfort that Zurich is happy to connect contractually, but they also give comfort to suppliers’ investors “so they can scale and support their businesses,” said Minter. In addition to signing fixed-price, long-term agreements, Zurich also made upfront payments as well and “will make further payments, subject to the providers meeting agreed milestones.”
Zurich invested in biochar and woody biomass burial solutions having decided to initially focus on nature-based solutions, said Minter, noting that these solutions currently have a much lower cost point than direct air capture. Zurich aimed to find a balance between supporting the projects and helping them to scale, “but also managing our own risk and making prudent investment and purchasing decisions.”
Zurich’s chosen carbon removal suppliers are InterEarth in Australia, Bio-Restorative Ideas in Puerto Rico and Oregon Biochar Solutions in the United States.
The InterEarth project removes CO2 using a method called woody biomass burial. The company grows a selection of woody plants on degraded, low rainfall and previously cleared farmland in Australia. Periodically, the plants are trimmed of their above-ground biomass and the harvested biomass is buried and sealed in dedicated subterranean chambers. The aim is to permanently store the carbon captured within the biomass.
The InterEarth solution is currently in field trials, which are partly funded from the advanced payments that Zurich made under the prepurchase agreements, Minter noted.
Bio Restorative Ideas plans to convert waste and invasive bamboo to high-quality biochar on the site of a former sugar cane factory in Puerto Rico, which will be used to improve soils ultimately benefiting food production and yield.
Oregon Biochar Solutions produces high-quality biochar, mainly sourced from forestry waste, including fire hazard biomass and burned wood from forest fires. Most of the company’s existing biochar product is sold to farms. The company has the capacity to scale up to produce more than 3,000 metric tons per year.
While Zurich has received immediate delivery of some of its biochar certificate purchases, the vast majority were prepurchase agreements that will support the startup of Bio Restorative Ideas in Puerto Rico and further expand the existing operations of Oregon Biochar.
Minter noted that biochar is a mature carbon removal solution with high durability, with a permanence of hundreds of years. While biochar was chosen for a number of reasons, he said, the main reason was that there currently are limited alternatives, “particularly to get us on the road map now with being able to have our first certificates in place.”
Zurich has made a commitment to reach net zero in its own operations by 2030. “To do that, our absolute priority is to reduce our operational emissions by 50 percent by 2025 and by 70 percent by 2029,” said Minter. As a buyer of carbon removal certificates, Zurich is aiming to balance its own operational footprint in pursuit of its net-zero emissions goals.
Zurich’s initial certificates were selected from the Puro.earth marketplace. “The carbon removal industry…lacks recognized standard and certification. We found it pretty difficult to navigate to begin with and to get our head around all of the different solutions and providers and the whole ecosystem at large,” Minter stressed. “But working with Puro gave us a real solid methodology and process for authentication and certification that gave us…confidence to sell this initiative and to sell this project to our stakeholders, both internally and externally.”
Minter advised corporate buyers of CORCs (or carbon credits) to be proactive and not wait for other companies to step up and make purchases to help scale up the carbon removal industry. “The urgency of the situation means that we all have to act now.”
The good news is that “increasing numbers of companies have pledged to achieve net-zero emissions from their own operations, even at times incorporating their supply [or] entire value chains,” according to Swiss Re’s report on carbon removal solutions. “Some have pledged to reverse historic emissions altogether.”
“[T]he first business cases for carbon removal services are being built on the sales of carbon removal certificates, and 2019 saw the first market trading of such certificates,” the reinsurer said, pointing to Puro.earth, which that year created the world’s first B2B marketplace, standard and registry focused solely on carbon removals.
This article is one of several in Carrier Management’s midyear 2022 digital magazine that is focused on climate change risks. (Carrier Management is Insurance Journal’s sister publication, focused on the C-suite.)
- Midyear Update 2022: Transitions
- Insurance Industry Support of Carbon Removal Needed in Drive to Net Zero
- Insurers Brace for SEC Climate Risk Disclosure Rules
- Chubb Not Declaring Itself Net Zero
All of the articles in the magazine are available on the magazine page of the Carrier Management website.
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