Special feature: Locking it up ‒ carbon removal and insurance

Carbon removal is taking carbon dioxide out of the atmosphere and storing it permanently.

According to most climate models, decisive carbon removal together with lower greenhouse gas (GHG) emissions are needed to limit global warming to below 2°C from pre-industrial levels. To reach that target, it is forecast that the carbon removal industry will grow to the size of today’s oil & gas industry by 2050.1 However, the industry is still in its infancy and scalability has yet to be proven. The said growth would bring a wealth of opportunities for insurance and investments, but also many challenges. The risks attached to different removal approaches still have to be evaluated. There are also secondary effects as stakeholders could potentially seek to delay emission reduction efforts in light of the promise of largescale carbon removal.

Carbon removal solutions – also known as Negative Emission Technologies (NETs) and practices – broadly fall into three categories:

  • nature-based processes that use natural plants to capture carbon dioxide from the air
  • technological processes that use engineering tools
  • hybrid approaches, using both natural and technological processes (see SONAR 2020 report)

Companies developing carbon removal solutions are growing in number. Their scale-up plans are impressive, from a few kilo-tonnes today to mega- and giga-tonnes by 2030. The frontrunners are attracting considerable investor interest (in triple-digit USD millions), including the more expensive solutions such as Direct Air Capture and Storage (DACS).

Recently, more and more businesses have expressed willingness to pay for carbon removal services.

Buyers favour the cheaper and more readily available nature-based solutions. Tree planting initiatives are popular, and carbon sequestration in soils through changes in agricultural practices is gaining momentum and policy support, particularly in the US. Most other NET are still at low level of technological readiness.

The business case for carbon removal services is built on sales of carbon removal certificates. First market initiatives to facilitate the trade of such certificates took shape in 2019. Buyers want attestation for having captured and stored a certain amount of carbon permanently. However, both natural and technological NETs have storage reversal risks. For example, carbon removal certificates from afforestation are annulled should newly-planted trees burn in a wildfire at a later date. The risk of storage reversal is lower for technological solutions. For instance, geological formations used in some hybrid and technological solutions to store carbon have proven very effective in containing volatile substances such as oil and gas over millions of years. Current best practice is to set aside up to 20% of the carbon removal certificates from soil carbon sequestration or afforestation projects as a buffer, independent of the actual performance of such projects.

Innovative insurance could facilitate continued growth of the carbon removal industry.

In general, insurers may increase their understanding of the new carbon removal risk pools by designing pilot offerings for property and engineering covers and investing at small scale, to gradually build up the necessary risk knowledge for profitable business in the future. By 2050, billions of tons of CO2 will need to be stored: the front-runners among insurers will profit from the experience gathered over the next decade.

Potential impacts

  • Technological and hybrid solutions (eg, DACS and Bio-Energy with Carbon Capture and Storage) will rely on the construction of plants, pipelines and facilities. These will generate demand for traditional engineering and property insurance covers, which would include new types of risks.
  • There will also be demand for insurance for related services, such as marine transport.
  • Some carbon removal solutions come with significant trade-offs and sideeffects. Certain technologies are still in a prototype stage (see SONAR 2020 report). Engaging in solutions – be it through insurance offerings, investments, or buying certificates – which turn out to have negative impacts or are flawed may lead to reputational damage and financial losses.

Carbon removal 101

Nature-based solutions capture carbon dioxide through plants that use it to build up their biomass. The storage is in the form of the biomass itself (wood, peat, roots) or converted to humus in the top soil. Examples include afforestation on previously woodless land or soil carbon sequestration through regenerative agriculture practices. Blue carbon refers to fostering the build-up of carbon stock in wetlands such as mangroves or peatlands. Nature-based solutions are relatively well established but not widely deployed. If done right, for instance by avoiding monoculture tree plantations, they come with ecological and social co-benefits beyond drawing down carbon dioxide (CO2) from the atmosphere. These might include biodiversity, flood protection and drought resilience. Nature-based solutions, however, require resources such as land and water that are in direct competition with food and fodder production, and other human activities. Moreover, nature-based solutions do not produce negative emissions instantly: it takes decades to grow a forest or build up peat and humus.

Technological solutions use engineering tools to capture carbon dioxide directly from ambient air, to provide a suitable storage medium, or both. Direct Air Capture and Storage (DACS) uses air filter machines and sends the concentrated CO2 to deep geological formations, similar to oil or gas reservoirs. The air captured CO2 can also be converted to stable carbonate minerals or other long-lived products such as carbon fibres. Other technical solutions seek to accelerate the natural carbon cycle, either by spreading fine-ground minerals on land (so-called enhanced weathering) or by modifying the oceans’ chemistry to increase their CO2 uptake rate (ocean fertilisation and ocean alkalinisation - ideas mostly abandoned given the significant risk of ecological side effects). Technological solutions come with the benefit of low land requirements and permanence of storage. However, they require large amounts of renewable energy and are therefore more capital and operating expenditure intensive than nature-based solutions. Consequently, most technological carbon removal solutions need to be further developed and tested before upscaling is possible.

Hybrid solutions use natural plants to capture carbon dioxide from air like in the nature-based solutions, but then deploy engineering tools to exploit the more reliable storage options as in the technological solutions. In Bioenergy and Carbon Capture and Storage (BECCS), biomass is burned for power generation and the resulting CO2 is stripped from the flue gas and stored in geologic formations like in the DACS solution. Another prominent hybrid approach is the production of biochar from plant biomass. Biochar retains carbon for centuries and if mixed with soil, it improves soil quality by retaining moisture and nutrients.

References

1. S. Khagram, Global Climate Restoration for People, Prosperity and Planet, Arizona State University, January 2020.

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