The Role of Carbon Credits in Scaling Up Low-Emission Technologies: A Critical Look

The world stands at a crossroads. Achieving net zero emissions by 2050, a goal crucial for limiting global warming to 1.5°C, necessitates a rapid and large-scale deployment of innovative technologies. This report, a collaborative effort by the International Energy Agency (IEA) and GenZero explores the potential of carbon credits in incentivizing the development and adoption of low-emissions hydrogen, sustainable aviation fuels (SAF), and direct air capture and storage (DACS).

The Urgent Need for Scaling Up

The current pace of progress falls far short of what's required for a successful transition to net zero. In the IEA's Net Zero Emissions by 2050 (NZE) pathway, low-emissions hydrogen production must skyrocket from practically zero today to a staggering 70 million tonnes by 2030. Similarly, SAF's share in aviation's final energy consumption needs to jump from near zero to around 11% within the same timeframe. DACS also requires significant scaling up, with annual CO? removal reaching almost 70 Mt CO? by 2030 and a staggering 700 Mt CO? by 2050.

Investment: The Engine of Change

Early and substantial investment holds the key to achieving the necessary scale-up of these critical technologies. However, the current investment levels, at USD 9 billion in 2023, fall woefully short. The NZE Scenario necessitates a dramatic increase, reaching nearly USD 300 billion annually by the early 2030s and peaking at around USD 700 billion yearly by mid-century. Low-emissions hydrogen and hydrogen-based fuels are projected to consume roughly 75% of these investments by 2050.

Unlocking Investment: A Multi-Pronged Approach

Governments have a crucial role to play in mobilizing the required level of investment. Employing a mix of complementary policies and innovative financing instruments is essential. A blended approach that combines public, private, and philanthropic funds can help manage different risks and reduce the overall cost of capital. Limited public funds can be strategically used to mitigate regulatory and country risks, thereby attracting private capital to early-stage projects. For developing economies, blended finance can leverage grants or guarantees to support market entry and project feasibility studies. Clear regulations and enabling policies from governments can further bridge the investment gap.

Carbon Credits: A Potential Catalyst

High-quality carbon credits emerge as a potentially valuable tool to incentivize investment and boost project revenue, particularly in jurisdictions lacking compliance with carbon pricing instruments. Carbon pricing encompasses both "compliance" instruments (carbon taxes, emissions trading systems, or hybrids of the two) and carbon credits, each offering distinct advantages. In regions with established compliance with carbon pricing, government revenue generated can be used to fund low-emissions technologies, especially during their "valley of death" – the high-risk phase where many emerging technologies struggle to gain traction before widespread adoption. High-quality carbon credits used towards compliance obligations or in the voluntary carbon market can also accelerate the deployment of these technologies.

Addressing Concerns in the Carbon Credit Market

Carbon credit markets have faced criticism on both the supply and demand sides. Concerns regarding over-crediting, lack of additionality (meaning projects wouldn't have happened without carbon credits), and human rights abuses have been raised on the supply side. On the demand side, some corporations have been accused of greenwashing – making misleading claims about carbon neutrality – by relying heavily on carbon credits to offset their emissions without genuinely striving to reduce them. Initiatives like the Integrity Council for the Voluntary Carbon Market (ICVCM) and the Voluntary Carbon Markets Integrity Initiative (VCMI) have been established to address these issues by setting stricter quality standards on the supply side and offering guidance for buyers to navigate these complex markets and perform proper due diligence.

Generating High-Quality Carbon Credits for Low-Emissions Technologies

Generating high-quality carbon credits from low-emissions hydrogen, SAF, and DACS is achievable with appropriate safeguards. Project developers and carbon credit programs must prioritize addressing potential risks, such as inaccurate quantification of emissions reductions from low-emissions hydrogen and SAF, and double counting of emissions reductions for SAF carbon credits. DACS project developers should be prepared to justify the need for carbon credits to cover the green premium (the additional cost compared to conventional options) even when other incentives are available.

Barriers and Recommendations: The Role of Carbon Credits in Scaling Up

While carbon credits offer promise, they cannot bridge the investment gap alone. Governments and the private sector must work together to create an enabling environment for investments. Low-emissions hydrogen, SAF, and DACS require more than just carbon credits to achieve large-scale adoption.