Bold financing vs regulatory finesse – a comparison of US and EU DAC policy approaches

Great minds think alike. Carbonfuture just published its very helpful Buyer’s Guide to Carbon Dioxide Removal Policy We at Climeworks have also been thinking about the different political strategies of the US and EU on CDR, which I am happy to share as a complementary piece.?

Following a recent interview I gave in Economist Impact which was just published, I wanted to share points from a much longer conversation that took place in the run up to the interview. Namely to expand on the topic of policy approaches in the U.S. and the European Union, especially as it relates to the scale-up of carbon dioxide removal (CDR). These two regions are arguably the leaders in CDR policy, so a comparison between both may generate helpful insights.???

Governmental policy can be a powerful force in driving innovation, both in the short and long term. The public sector often supports the growth of a new industry via direct financial support, as well as defined regulatory frameworks. Financial incentives can come in forms such as direct grants, tax incentives, favorable financing options, and even government procurement of goods. A regulatory framework more typically involves clear guidelines, regulations, and standards that help streamline projects and define effective market conditions. In the case of carbon removal, such a framework would set up guidelines to monitor, verify and report on how carbon dioxide has been safely, permanently, additionally and quantifiably removed. This can be essential in helping to support the set-up a new market and industry.???

The differences between the EU and U.S.’s respective approaches towards direct air capture highlight this. Having worked on DAC policy for several years in both the US and Europe, I can see why the United States’ approach is often characterized as the “carrot” model, comprised largely of financial incentives, while the European Union is referred to as a “stick” – involving the set-up of a regulatory framework that will in turn, inform the market and drive innovation. This is generally true in how the two jurisdictions approach CDR/DAC policy in my experience.??

The U.S. has demonstrated ambitious spending in the past years, in legislation such as the Inflation Reduction Act (IRA) and the Bipartisan Infrastructure Law. As the article states , specific provisions within both provide direct funding for DAC’s scale-up. In the case of the IRA, the incentive in the 45Q tax credit provided for CO2 removed via direct air capture increases significantly to $180/t of CO2 captured from the air. In the case of the Bipartisan Infrastructure Law, $3.5bn is allocated for the creation of regional “DAC Hubs” projects, which aim to support the development of four 1 million-ton DAC industrial hubss in the United States. The U.S. Department of Energy recently also introduced a pilot purchasing program for CDR making it a pioneer in government procurement for CDR.??

The European Union currently focuses mainly on developing the right regulatory framework for CDR, centering on the ongoing work on the EU Carbon Removal Certification Framework (EU CRC-F).? Per the EU, this first of a kind framework will focus on defining criteria that can ultimately label “high-quality” carbon removals (CDR supply side) in conjunction with the green claims initiative (CDR demand side). Clear regulations at both ends will therefore help to ensure proper and scientific deployment and use of high-quality CDR from the beginning, and in turn, enable a high-quality CDR compliance market.??

Still, it would not be fair to characterize either the EU or the U.S. as being exclusively focused on one approach; any successful governmental approach will involve a mix of policies. The US has started to fund work on developing MRV standards, a necessary step towards CDR compliance markets. In the EU, the Innovation Fund, the EU’s main climate fund, could in principle fund DAC projects. However, it’s currently not fit for purpose to scale DAC. As a like future net-importer of CDR, funding the scale-up of DAC today would be in its best interest.? Alternatively this be achieved by securing access outside the borders of the EU, via bilateral agreements; similar the strategy Switzerland is pursuing here. ? ? Governments are also not limited to just investment and regulation. Impactful policies can also include transparent target-setting, such as having clearly articulated climate goals (e.g. the EU 2040 climate target, which is expected to include emission reduction targets and CDR targets), or a focus on promoting research and development, which are again provided by both jurisdictions (e.g. Horizon Europe or TA1 and TA2 streams under the US DAC Hubs program). They send powerful signals to domestic or global markets that a country is committed to being a climate leader.??

From a Climeworks perspective, we have undoubtedly benefited from our presence in both regions, and operate in somewhat of a “best of both worlds” situation right now. It’s no secret that we at Climeworks are excited about having received a notification of selection for three possible sites as part of DAC Hubs program, while the revised tax credit in the IRA can have a direct impact on boosting our revenues locally. Meanwhile,? we have shared our thoughts and support of the EU CRC-F – having clearly defined removals that are verified, quantifiable, additional and permanent – as direct capture is – will have a positive effect on shaping direct air capture as a viable climate mitigation solution.??

Still, I believe that a convergence of sorts could be helpful, as both continents could benefit from a combined effort of sorts. As carbon removal continues to scale via direct and indirect investment, we also want to make sure that growth is closely regulated, with clear standards serving as guiding forces alongside its development. Perhaps there’s even an adage there – financial incentives propel growth, while clear frameworks lay out a foundation that helps define it.???