EU agrees carbon removals certification framework

The European Council and Parliament negotiators have reached a provisional political agreement on a regulation to establish the first EU-level certification framework for permanent carbon removals, carbon farming and carbon storage in products.

The voluntary framework is intended to facilitate and speed up the deployment of high-quality carbon removal and soil emission reduction activities in the EU. The EU specifically called for the wider use of insurance to help foster growth in the carbon removal market, which some experts predict could be a massive growth area for insurers.

The regulation sets out clear monitoring obligations and liability rules for operators. The negotiators agreed to distinguish between the activity period and the monitoring period, and clarified that operators will be liable to address any cases of reversal – the release of CO2 back into the atmosphere – stemming from a carbon removal activity during the monitoring period.

The agreement calls on the EC to include clear liability mechanisms when developing certification methodologies.

“The liability mechanisms should address cases of reversal and the consequences of incomplete or interrupted monitoring and non-compliance by the operators during the monitoring period. They may include collective buffers or accounts of carbon removal units, and up-front insurance mechanisms,” said the EU.

Once implemented, the regulation will be the first step towards introducing a comprehensive carbon removal and soil emission reduction framework in EU legislation. It will contribute to the EU’s ambitious goal of reaching climate neutrality by 2050, as set out in the European climate law.

The regulation will include an open definition of carbon removals, in line with the UN Intergovernmental Panel on Climate Change (IPCC).

It will cover the following carbon removal and emission reduction activities and differentiate between four corresponding types of units:

• Permanent carbon removal (storing atmospheric or biogenic carbon for several centuries).
• Temporary carbon storage in long-lasting products (such as wood-based construction products) of a duration of at least 35 years, and that can be monitored on-site during the entire monitoring period.
• Temporary carbon storage from carbon farming such as restoring forests and soil, wetland management, seagrass meadows.
• Soil emission reduction (from carbon farming) that includes carbon and nitrous oxide reductions from soil management, and which must overall reduce the carbon emissions of soils or increase carbon removals in biological matter.

Compared to the EC’s proposal, this means extending the scope of the regulation on soil emission reductions. “Temporary carbon storage from carbon farming and soil emission reduction activities must last at least five years to be certified and must not lead to land being acquired for speculative purposes negatively affecting rural communities,” said the EU.

The new rules will apply to activities taking place in the EU. However, the EC has been asked to consider the possibility of allowing geological carbon storage in neighbouring third countries, provided that those countries align with EU environmental and safety standards.

The Taskforce on Scaling Voluntary Carbon Markets (TSVCM), sponsored by the Institute of International Finance (IIF) with support from McKinsey, estimates that demand for carbon credits could increase by a factor of 15 or more by 2030 and by a factor of up to 100 by 2050. Overall, the market for carbon credits could be worth upward of $50bn in 2030, said Mckinsey.

London-based insurance consultant Oxbow Partners and Lloyd’s coverholder Kita Earth Insurance published a joint report in February that points out demand for risk transfer within the carbon markets has grown in recent times, revealing a significant opportunity for the insurance industry in a new market worth potentially $10bn to $30bn in annual gross written premiums by 2050.