Baku, 11 November 2024
With the pace of CO₂ emissions reductions too slow to limit global warming to 1.5°C, significant CO₂ removal from the atmosphere is now essential. Depending on the scenario, this will cost up to 2% of global annual GDP by 2050. However, the effort is economically justified, as the climate damage from each ton of CO₂ is far higher than the cost of removing it. Funding this, however, would overwhelm national budgets, necessitating a financial framework that mobilizes substantial private capital. The Potsdam Institute for Climate Impact Research (PIK) and Germany’s KfW, a leading global development bank, are contributing to this discussion at the World Climate Summit.
A new discussion paper by PIK and KfW highlights the escalating economic toll of the climate crisis. PIK Director and climate economist Ottmar Edenhofer and KfW CEO Stefan Wintels will present the document on November 14 at a joint event on the sidelines of COP29 in Baku.
Research shows that global climate damage could amount to trillions by 2050 compared to a scenario without climate change. The economic damage from emitting one ton of CO₂ is estimated at over €1,000, while the current price for CO₂ emission permits in European trading—covering emissions from coal plants and cement factories—is around €65.
The discussion paper by PIK and KfW Research proposes incorporating CO₂ removals into the existing emissions trading system, requiring rapid market development. Development banks, such as KfW, could accelerate this through early purchase programs and risk guarantees. To incentivize early private demand, “removal certificates” could be introduced. Instead of purchasing a conventional emission permit, companies would commit to removing CO₂ from the atmosphere in the future, using advanced technologies like air filtration systems or accelerated rock weathering.
To ensure climate benefits, robust regulation, effective oversight, and high-quality assurance systems are essential. A European institution, yet to be founded, would help ensure market liquidity and stability.
CO₂ Removal and Storage as the Third Pillar of Climate Policy
“Time is running out for this scale-up,” stresses PIK Director Ottmar Edenhofer. “By stimulating demand for CO₂ removals now, we can bridge the dangerous gap between innovation and market readiness in this emerging industry, which will need to operate on a gigaton scale by mid-century. This approach is time-limited under the current EU emissions trading system for the power and heavy industries, as emission permits are set to phase out by 2039.”
The discussion paper frames CO₂ recovery and storage as the third pillar of climate policy, alongside rapid emissions reduction and adaptation to climate impacts. It emphasizes the need to strengthen CO₂ pricing incentives for removal activities with targeted public support. For example, the public sector could provide grants, bonuses, or tax incentives to foster research and development. It could also improve conditions for private venture capital and support pilot projects through concessional loans to encourage market adoption of removal technologies.
“The market is in a discovery race, with high uncertainty about the technological and economic viability of projects,” says KfW CEO Stefan Wintels. “In this environment, we need innovation and creative financing and governance structures to engage private capital and establish markets.”
At the World Climate Summit, PIK and KfW are also spotlighting the potential of CO₂ removal as a transformative tool in international climate policy. The Global South, with natural advantages for various removal methods, is well-positioned to be a significant provider of CO₂ removal, while demand primarily originates from industrialized nations. This aligns with a top agenda item at this year’s summit: Article 6 of the 2015 Paris Agreement, which enables voluntary cross-border climate cooperation with crediting mechanisms.
Let it sink in: New governance and finance structures are needed to scale up carbon dioxide removals
Executive Summary
- The world is most probably going to overshoot the available carbon budget for 1.5°C. Given the continued rise in global CO2 emissions, the inertia of social and political systems and the lock-in effects caused by previous investment decisions, global efforts to phase-out fossil fuels and reduce emissions in line with the Paris Accord remain insufficient.
- Climate change comes at a substantial cost. Greenhouse gases emitted to date will reduce global income by an estimated 19% until 2050 compared to a scenario without climate impacts. If emissions continue to rise, climate damages will further escalate in the second half of the century, potentially causing social costs to the order of USD 1,000/t CO2 and higher.
- Carbon dioxide removal (CDR) is emerging as a crucial new pillar of climate policy. It is essential for achieving net-negative emissions and effectively managing temperature overshoot. Traditional strategies focused solely on emission reductions and adaptation are insufficient to address the scale of the climate crisis.
- The financial requirements for scaling CDR technologies are enormous, with estimates suggesting that global expenditures could reach annually up to 2% of projected global GDP by 2050. This financial burden is likely to overstretch public budgets, especially for countries with limited fiscal flexibility, and thus calls for involvement of private sources of capital. Yet, such costs pale in comparison to the financial burden imposed by climate damage.
- Extending carbon markets for net-negative emissions is a promising option for leveraging private finance. One way to create demand for removals is to introduce a new type of carbon market certificate: so-called “clean-up certificates”, which represent an obligation to remove a ton of carbon in the future. To manage associated risks of impermanence and liability and to ensure quality standards, market ramp-up needs to be paralleled by an adequate institutional setting, which in the EU could include a European Carbon Central Bank and a certification authority.
- Many novel CDR solutions are currently still under development or in the demonstration phase. While cost reductions due to technological progress and economies of scale are likely to be realised, complementary instruments such as support for R&D and investment incentives can help to bring novel CDR technologies to market maturity in a timely manner.
- In light of the COP29 thematic backdrop, this article outlines five priority fields of action: (1) Adapt carbon markets to support net-negative emissions, (2) Expand market coverage to include more countries, (3) Support innovation and investment in CDR technologies, (4) Establish a CDR buyers’ club to ensure demand, and (5) Operationalise Article 6 of the Paris Agreement to enable the international transfer of carbon credits, while ensuring robust environmental and social safeguards.
Read the report:
Further information
Report: Ottmar Edenhofer, Cecilia Kiliman, Christopher Leisinger, Sabine Fuss, Matthias Kalkuhl, Michael Pahle, Fritzi Köhler-Gelb, Matthias Börner, Karsten Kohn, Hannah Levinger, Daniel Römer (2024): Let it sink in: New governance and finance structures are needed to scale up carbon dioxide removals. [DOI: 10.5281/zenodo.14056019]
Link to this discussion paper: https://zenodo.org/records/14056020
PIK experts at the COP29: https://www.pik-potsdam.de/en/news/latest-news/pik-expertise-at-cop29-in-azerbaijan