Scaling Industrial Carbon Dioxide Removal: Policy Options for a Short-Term Strategy

CDR as a building block of ambitious climate policy

CDR encompasses a wide range of methods that are often categorised into conventional and novel approaches. These methods aim to remove carbon dioxide (CO₂) from the atmosphere and store it for periods ranging from decades to millennia, depending on the type of storage. In parallel to the efforts to drastically reduce emissions, it will not be possible to achieve net-zero targets at the international, national or regional level without scaling a broad portfolio that in­cludes both conventional and novel CDR methods.

An important criterion for distinguishing between the individual CDR methods is how long the CO₂ can be stored. Conventional CDR in the land use, land-use change and forestry (LULUCF) sector often stores the CO₂ for limited periods only. By contrast, novel methods based on CO₂ storage in geo­logical formations (carbon capture and storage, CCS) are particularly effective at permanently removing CO₂ from the atmos­phere. In order to distinguish these CCS-based methods from conventional ones as well as from other novel methods, we refer to them here as “industrial CDR”.

Figure 1 (p. 3) shows the expansion of CDR capacities in the EU by 2050 – as modelled for the European Commission’s impact assessment on the 2040 mitigation target – and makes clear how this expan­sion must take place in parallel with the drastic reduction in emissions (left panel of Figure 1). It also shows that a target of 310 million tonnes has been agreed for net CDR in the LULUCF sector by 2030 and that, under the various scenarios, removals in this sector will increase by another 7 per cent by 2050. At the same time, industrial CDR would have to be established as a new sector and would need to grow by 2,800 per cent between 2030 and 2050 (right panel). Both scale-ups are associated with significant, albeit different, political challenges.

Protracted reforms and short-term capacities

The process of drawing up and implementing an EU-wide policy design for CDR will take time because it is characterised to a large extent by path dependencies of exist­ing instruments at the various political levels. Indeed, the structural integration of CDR into the broader climate policy archi­tecture is not expected to take place until the EU instruments are updated for the next decade (from 2031). Moreover, it is unlikely that CDR policy implementation as an integrated component of the EU climate policy architecture will be so far advanced as to generate effective incentive structures before the early or mid-2030s. Until then, political alliances between EU member states and sectors will need to be formed and incentives and funding mechanisms created at the national and EU level that will accelerate the learning curve for inno­vation in CDR technologies and their scaling. Thus, the focus must be on those industrial CDR capacities that can be con­sidered low-hanging fruit.

Bearing this in mind, priorities must be set and individual applications selected in accordance with clear criteria. Only CDR methods that can be integrated into broader climate-policy developments in the short term and can compete on the market in the long term should receive short-term funding.

The criteria include the ability to store CO₂ permanently (more than 1,000 years), a reasonable cost range (in the lower three digits) per tonne of CO₂ and system-com­patible energy demand. In order to prior­itise applications worthy of funding, it should be examined whether there are synergies with carbon management activ­ities in industry and with the gradual development of CO₂ transport infra­structure.

In both the overarching governance framework and infrastructure planning and funding practice, the ramp-up of CDR should be considered alongside projects for the capture of fossil CO₂ as well as for its storage (CCS) or utilisation (Carbon Capture and Utilisation, CCU). The development processes for carbon management strategies of individual member states such as Germa­ny and at the EU level emphasise that going forward, it will not be possible to avoid CO₂ generation in certain hard-to-abate sectors (see SWP-Aktuell 30/2023). Therefore, waste incineration facilities, cement works and lime plants, in particular, will have to be equipped with CO₂ capture systems if CO₂-neutral production is to be achieved and carbon leakage pre­vented. At the same time, it is precisely those plants that offer the opportunity to achieve the urgently needed volumes of permanent CDR through the use of bio­genic residues as a share of their energy source.

Furthermore, the long investment cycles in industry must be taken into account. Installations that are planned, dimensioned and built in the coming years will remain in operation for decades. This means that the decisions made today to invest in CO₂ capture and transport infrastructure will determine CDR capacities in the 2040s – and thus whether the net-zero target is with­in reach.

Thus, all in all, the synergies between CDR and the capture of fossil CO₂ are im­portant for the successful implementation of CDR applications. For this reason, they should be considered as part of a “short-term strategy”.

Policy options: Examples of short-term CDR policy

In some countries, there are instruments currently being tried and tested that aim to close the gap until a long-term market framework is in place. These methods are already incentivising investment. Upcoming initiatives both at the level of the EU and that of member state governments can make use of this initial practical experience to determine the next steps.

The instruments are designed to create new incentives for CDR technologies and pro­mote those methods in a more targeted and effective way than on the voluntary carbon market (VCM). They can be divided into four broad categories: tax credits, direct public procurement, contracts for differ­ence, and competitive tenders or reverse auctions. What they have in common is that they involve state aid that come at a cost to the budget. Given the strained budgetary situation in the EU and many member states, it is imperative that these funds be used as efficiently as possible and not serve as a permanent solution.

The aim is to provide investment incentives until a long-term EU market framework generates sufficient incentives of its own. The instruments discussed below can ensure that Europe plays a pioneering role over the next 10 to 15 years and the neces­sary investments in the area of CCS and CDR technologies as well as CO₂ infrastructure are triggered. The fact that industrial policy goals such as resilience and competitiveness are being pursued alongside climate policy goals was an important argument in those countries that have already developed such instruments. Now it can serve to justify sup­porting carbon management as a strategic technology in other countries.

A portfolio of instruments

Anyone planning new initiatives for indus­trial CDR should take into account the experiences of other countries and enter into a bilateral exchange. From the com­parative assessment in Table 1 (p. 7), it can be seen that the four instruments presented here have different strengths and weaknesses: there is no clear winner. In future deliberations, an important question – alongside political priorities and path dependencies – will be at which political level the selection of instruments would have to be decided.

Within the EU’s multi-level system, there are significant political and legal hurdles to tax credits in particular. However, the other instruments would have to be thoroughly examined, too. The fact that CfDs and com­petitive tenders and auctions are already being used in some EU member states should facilitate their transfer to other member states and allow them to be designed in a way that complies with state aid rules.

In any case, there is no single approach to designing a “short-term strategy”. Rather, there are several viable options for ramping up the CDR market, each of which carries its own risks and has its own priorities. A combination of approaches should be examined, as well as the extent to which they are compatible with existing instruments. For example, CfDs and competitive tenders or auctions can be used to trigger targeted investment in large-scale industrial facilities, which, in particular, would boost investment in industrial bio-CCS projects, especially in hard-to-abate sectors with pro­cess emissions. By contrast, DACCS would probably not do well in a price competition with bio-CCS as it currently entails smaller quantities that are implemented at a higher cost. Thus, other forms of funding – such as support for prototypes and further research and development projects – will be needed.

Building blocks of a short-term strategy

The EU and the German government should seize the opportunity to assume a pioneering role in CDR policy. Not least because of developments in the US – which over the past four years was an important driver of CDR policy – a leadership vacuum could arise. The upcoming legislative processes within EU climate policy, together with the momen­tum generated by the EU’s Clean Industrial Deal, open up the possibility of combining innovative short-term incentive structures for CDR with other political priorities (such as competitiveness) as well as maintaining and further developing existing climate policy.

What the new German government could do is supplement the process of draw­ing up a long-term strategy on negative emissions with a short-term strategy. The aim should not be to establish a permanent subsidy model. Rather, the top priority should be to steer already pending invest­ment decisions towards timely implemen­tation in order to expand CDR capacities competitively in the medium to long term. Innovations would thereby reach market maturity earlier and a new, promising busi­ness sector would be established in Ger­many and Europe. This would not only help offset the first-mover disadvantages, such as higher prices and additional costs for plan­ning and approval procedures; it would also make it easier to achieve integrated plan­ning and thus efficient operating costs for CO₂ transport and storage infrastructures.

Specifically, a short-term strategy should comprise the following five building blocks:

1) An integrated approach to carbon management – i.e., CDR and the use and storage of fossil CO₂ (CCU and CCS). Syn­ergies already exist in pending investment decisions; and with a view to securing the CO₂ capture and storage capacities needed in the long term, newly built infrastructures could be used initially for fossil CO₂ and then increasingly for biogenic CO₂ and CO₂ from DAC.

2) A structured mapping of CDR capacities that can be considered low-hanging fruit. Based on such an approach, decisions about incentive mechanisms and infrastruc­tures that might serve as a bridge to a long-term market framework for CDR could be made in a more targeted and effective way.

3) An incentive mechanism, either at the EU level or that of member state gov­ern­ments, that prioritises low-hanging indus­trial CDR capacities that can be im­plemented relatively easily and quickly.

4) The long-term vision of an integrated European market for all carbon management applications in which the national policies of the member states do not im­pede the integration of CDR into future climate policy. Cross-border projects – including, perhaps, third countries such as Norway or Switzerland – should be pro­moted, because the development of CDR capacities will benefit in the long term from the creation of cross-border infrastructure at an early stage.

5) The avoidance of the impression that CDR can make it easier to achieve emissions reduction targets. Even if CDR were to scale up to the extent modelled in the scenarios outlined in Figure 1 above, gross emissions would still need to be drastically reduced to achieve net-zero greenhouse gas emissions. Thus, it is crucial that CDR policy does not undermine conventional emissions reduc­tion.

A strategy comprising these five building blocks would help reduce costs in the long term and thereby enable a more rapid mar­ket ramp-up of CDR. This, in turn, would give important segments of European in­dus­try a locational advantage on the road to greenhouse gas neutrality. A short-term strategy would ensure that neither time, nor potential nor economic strength is squandered. Indeed, both a long-term and a short-term strategy are needed because in the long run there will be no progress without an EU market framework and binding targets for permanent CDR.