91̽»¨

The project shall increase the understanding of the development of voluntary carbon markets and what is required for them to become a reality. The focus is on the design of carbon dioxide removals (CDRs) and how these can be integrated with existing trading systems such as the EU ETS. Unlike commodity contracts, where valuation is based on product characteristics, process characteristics are central to CDRs. This makes the contracts harder to define, requiring transparency and legitimacy to create a credible and liquid market for CDRs. Previous attempts with nature-based CDRs have failed, highlighting the need to understand how other trading systems can influence and be influenced by a voluntary market for CDRs.

Currently, the guiding principle is that companies trade with companies and countries trade with countries to avoid issues such as double counting and additionality. Since the underlying commodity is fundamentally the same, combined with the genuine difficulty of establishing well-founded principles for implementing Article 6 of the Paris Agreement, one can anticipate that the boundaries between companies and countries may become more fluid over time. In fact, this is already happening, as COP29 opened for countries to include voluntary carbon markets as part of their international emissions reduction trade. The consequences of this in terms of pricing and credibility of CDRs need to be better understood.

CDRs can be compared to commodity contracts, and in such contracts standardization of the commodity is of central importance. A standardized commodity is a product that is uniform in quality and specifications, making it comparable with other goods of the same kind. Standardized commodities play a crucial role in promoting efficiency and transparency in global trade. By facilitating trade, standardization increases market liquidity and reduces price distortions. This leads to improved price discovery, one of the key functions of financial markets, not only for spot prices of the underlying commodity but also for possible futures trading that can be used for forecasting. A developed futures market would therefore also provide market participants with greater opportunities to hedge against price fluctuations.

For an effective carbon credit market to develop, some form of standardization is needed. A voluntary carbon market shares similarities with commodity markets in the sense that standardization drives liquidity, price discovery, and can serve as a foundation for a futures market. Increased liquidity facilitates the trade of produced CDRs, and improved price discovery in the spot and futures markets facilitates cost-/benefit analysis and risk management. However, there are also differences. For example, instead of differences in physical properties, as in the case of oil products, it may be more important to establish process-related specifications—such as requirements for forest management and final storage.

When designing CDRs, it is crucial to consider existing trading systems and identify ongoing trends and their potential consequences for pricing and credibility. Within the framework of this study, we therefore intend to investigate how CDRs can be standardized. We will analyze initiatives that have already been launched to design CDRs and conduct interviews with market participants and researchers. By analyzing these initiatives, we will identify common and distinguishing factors between standards and examine how the design of CDRs can affect credibility and liquidity in the market. The project will also explore how carbon credit trading may be influenced by the EU ETS and how different policy instruments can stimulate the market.

The project begins with the vision that by 2030, a credible and appealing Nordic CDR market will be established, drawing in relevant stakeholders.

Purpose and aims

The purpose of this project is to create knowledge and conditions for establishing a CDR market and has as its point of departure a vision that a credible and attractive CDR market should be established by 2030. The goal is to make it simple and attractive to both enter and use the CDR market. A special focus is placed on enabling BECCS actors to benefit from this market. The ambition is for such a market to contribute to efficient pricing, lower transaction costs, and create a foundation for future futures trading. This will facilitate investments, financing, and risk management for all stakeholders.

The project aims to identify, but not necessarily solve, the obstacles to realizing the vision. This includes analyzing what characterizes a standardized and functional contract, a solution for record-keeping, and a credible verification mechanism. The project shall also contribute to anchoring the vision among relevant Nordic actors and international opinion leaders.

Research Questions

RQ1: What conclusions can be drawn from the failure of nature-based carbon credits that are relevant to a proposed voluntary market for CDRs with permanent storage?

RQ2: What are the main initiatives in the voluntary carbon market (VCM) for CDRs at present, and what similarities and differences do they exhibit—particularly in terms of contract design and verification mechanisms?

RQ3: Based on the findings of the previous research question, how do relevant stakeholders view existing CDR contracts and a desirable future CDR market?

RQ4: Based on the findings of the previous research questions, what are the key obstacles and opportunities for establishing a CDR market attractive to relevant stakeholders by 2030, and what potential approaches to overcoming these obstacles can be identified as particularly interesting for further exploration?

Project members

Conny Overland (University 91̽»¨)

Karolina Unger (KLIMPO)

Malin Fredriksson (KLIMPO)