Carbon capture, removal, and credits pose challenges for companies

 

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Authors
Terry Ellis | S&P Global Ratings, Climate Transition Specialist
Simon Redmond | S&P Global Ratings, Analytical Leader

Contributors
Azul Ornelas | S&P Global Ratings, Sustainable Finance Rating Analyst
Yogesh Balasubramanian | S&P Global Ratings, Sector Lead
Pierre Gautier | S&P Global Ratings, Senior Director
Lai Ly | S&P Global Ratings, Global Head of Sustainability Research

Editor
Julie Dillon | S&P Global Ratings, Editorial Manager
Rose-Marie Burke | S&P Global Ratings, Editorial Manager
Bernadette Stroeder | S&P Global Ratings, Editorial Manager

Digital Designers
Joe Carrick-Varty | S&P Global Ratings, Digital Content Producer
Cat VanVliet | S&P Global, Senior Design Manager

 

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This research paper was authored by members of the Sustainability Research and credit ratings teams within S&P Global Ratings.  It does not comment on current or future credit ratings or credit rating methodologies.

This report does not constitute a rating action.

Companies that have made ambitious decarbonization commitments may need to rely on technologies such as carbon capture and storage (CCS), carbon dioxide removal (CDR) and the use of carbon credits. Studies by global stakeholders generally recognize that these solutions have a role to play in decarbonizing the economy. Such solutions also carry technological, financial, policy and stakeholder perception risks.

In this research, we explore the risks of a variety of approaches for managing carbon emissions, including those that are more difficult to address — often referred to as hard to abate or residual. As part of this research, we include a case study on the oil and gas sector using publicly available information from a sample of 25 companies from across the globe with combined revenue of US$3.8 trillion and capital expenditure of US$279 billion in their latest fiscal year. We also examine a range of reports and guidance from industry stakeholders.

Decarbonization calls for a broad range of solutions

More companies are setting decarbonization targets, but not all emissions will be easy to tackle. To avoid the most severe effects of climate change — as most recently set out in the Intergovernmental Panel on Climate Change's (IPCC) Sixth Assessment Report — global economic actors will need to take significant mitigating action (IPCC, 2021; 2023).

Whether driven by policy, financial risks, reputation risks or stakeholders' concerns, more companies are taking steps to decarbonize each year. Those committing to the Science Based Targets initiative (SBTi) have roughly doubled in each of the past four years (SBTi, 2022). Companies looking to align with the Paris Agreement on climate change — to reduce the average global temperature rise to "well below" 2 degrees Celsius compared with pre-industrial levels — have set specific targets for decarbonization, and many are investing in new technologies and facilities and/or different business models to operate in a future net-zero environment. Some companies have aspirational net-zero-by-2050 targets.

Some companies that have set ambitious decarbonization targets, such as net-zero commitments, face significant challenges to reduce all their emissions. While parts of many companies' emission footprints might have an identifiable pathway to decarbonization — for example, switching to renewables or hydrogen from fossil fuel-based electricity — others face greater challenges, for example, emissions resulting from calcination during cement production. These are often referred to as hard-to-abate or residual emissions and will require their own solutions if such companies are to completely decarbonize.

CDR and CCS may play a role in efforts to reach decarbonization goals

A large body of research now shows ways to decarbonize. However, some climate scenarios suggest that CCS and CDR will be required to limit warming to 1.5 degrees C or 2 degrees C, including those of the IPCC (2021), the International Energy Agency (IEA, 2020; 2021; 2022), and the Network for Greening the Financial System (NGFS, 2022). These studies have differing views about the importance of each solution, but the message is consistent: Although significant emissions reductions come first, CDR and CCS are likely to play a role in efforts to achieve the most ambitious decarbonization scenarios, and the two approaches have some overlaps.

CDR is a group of both nature-based and technological solutions that remove carbon dioxide from the atmosphere and permanently store it in terrestrial, geological or ocean reservoirs. The most prominent examples of nature-based solutions are afforestation and reforestation, but other approaches include improving soil quality, enhanced weathering, and the production of biochar (see table 1). Technological options include direct air carbon capture and storage (DACCS), which removes and stores carbon from ambient air, and bioenergy combined with CCS (BECCS). In most cases, CDR approaches are decoupled from actual emissions sources or industrial processes, meaning their potential benefits are net in nature and do not directly reduce emissions. For technological CDR options, CCS forms a key part of solutions. The vast majority of the 2 gigatons per year of CDR achieved today comes from land management, with only a small amount from technological solutions, according to the State of Carbon Dioxide Removal (2023). The IPCC, however, concludes that CDR use — both natural and technological — will need to increase significantly to support all scenarios that limit warming to 2 degrees C.

CCS is a group of technologies that separate carbon dioxide from other gases then capture and store it in a permanent facility. CCS can be deployed in power generation and industry to capture carbon dioxide directly from processes and transport the gas in pipelines to long-term geological storage sites. Captured and stored carbon can be used in the energy sector, for example for extracting oil and gas in depleted reservoirs. The Global CCS Institute (2022) reported that the operating capacity of CCS in 2021 was 37 million metric tons per annum with a pipeline of projects that could develop around 150 million metric tons per annum of capacity. This is a small fraction of the total that the IPCC, IEA and NGFS anticipate would be needed (between 3 gigatons and 8 gigatons per year) in more ambitious decarbonization scenarios. The IPCC (2022) notes that deployment is already behind where the panel would expect it to be to meet a 2 degree C scenario.

While CCS and CDR are expected to play a key role in decarbonization, the limitations of both have been documented in global studies. There are also technical, economic and political barriers to overcome. Approaches using CCS are seen as having stronger permanence characteristics than nature-based solutions (NbS), meaning they are considered less vulnerable to the accidental release of carbon dioxide, provided they are well managed. With a CCS-based approach, it can also be easier to monitor and determine the amount of carbon stored compared to NbS. The technological readiness of CCS is, however, generally behind that of afforestation or reforestation, and costs are less certain, although there are some facilities operating in certain sectors such as oil and gas. Storage capacity is a major consideration; studies estimate that there is enough total storage capacity for CCS to cope with decades of emissions, whereas NbS could be constrained by available land but also could deliver a wider range of benefits to stakeholders if well planned. Technological CDR solutions, especially DACCS, are at much earlier stages of development, with technical and economic challenges still to be overcome.

Table 1 - Overview of the most prominent CCS and CDR solutions

Solution	Description	Examples
CCS or carbon capture use and storage	Used in conjunction with industrial production to capture carbon dioxide emissions generated from a particular activity. The captured emissions can either be stored or used for another purpose.	Capture systems as part of power generation, cement production and other industrial processes, placed in geological storage locations. Capture systems that subsequently use carbon dioxide for enhanced oil recovery, chemical products or food production.
Carbon dioxide removal solutions
Nature-based CDR (or nature-based solutions)	Interventions that use natural processes to remove carbon dioxide directly from the atmosphere and store it as carbon in organic materials.	Afforestation (or reforestation) where new vegetation absorbs and stores carbon. Efforts that improve soil quality and increase organic carbon, including peatland and wetland restoration. Production of biochar, a charcoal-like product made from biomass, which can then be used to improve soil quality. Enhanced weathering, the spreading of finely ground silicate rocks, which promotes fast carbonation.
Technology-based CDR	Using a chemical and mechanical process to remove carbon dioxide from ambient air and geologically store it, commonly referred to as direct air capture.	Systems that use a chemical solution to cause a reaction with carbon dioxide. Systems that use filters to absorb carbon dioxide, then store carbon in geological storage locations.
Special case: bioenergy and CCS	Where crops are grown to produce bioenergy (thereby absorbing carbon dioxide from the atmosphere) and then, when combusted, the emissions are captured through CCS and geologically stored.	Biomass or biofueled thermal power generation with integrated CCS facilities.

Sources: S&P Global Ratings; IPCC (2021); S&P Commodity Insights. CCS = carbon capture and storage. CDR = carbon dioxide removal.

Carbon credits carry their own risks but could provide flexibility

Carbon credits are certificates that represent the reduction, avoidance or removal of 1 metric ton of carbon by a specific activity. For example, a party develops an afforestation project that removes a ton of carbon from the atmosphere, generating a carbon credit, which the party can either use for itself to support a decarbonization claim or trade to another party like any other commodity.

Some stakeholders have expressed concerns about the role of carbon credits and whether they can deliver real reductions. Carbon credits are complex, with multiple actors involved (see "Voluntary carbon markets: how they work, how they’re priced and who’s involved," June 10, 2021). The World Resources Institute (2010) and the U.K. Climate Change Committee (2022) are among those that have identified specific considerations for companies when selecting projects that could offset emissions. The credibility of the underlying projects is crucial; potential issues can arise for carbon credits that are based on perceived benefits that can be difficult to substantiate or can simply lead to adverse effects elsewhere. For example, credits based on avoided deforestation in one area would need to show that deforestation did not simply occur somewhere else, which can be difficult to prove. Crediting schemes also require that the creation of carbon credits be limited to reduction or removal projects that would not otherwise be economically viable without the additional source of revenue the credits provide. Transparent and credible verification and data are therefore key for increasing stakeholders' confidence that any given carbon credit represents a real benefit. Meanwhile, some companies' interest in carbon credits might only be to trade them, not necessarily to use them to support their own decarbonization goals.

Despite this, momentum is growing for voluntary carbon markets (VCM), which could indicate some stakeholders believe that carbon credits can support decarbonization claims. For example, the IEA's net-zero scenario notes that offsetting mechanisms could provide cost-efficient support to mitigate emissions. There are several existing schemes that promote VCM, managing the creation, offering and retirement of carbon credits for buyers and sellers alike. Some sectors, such as the International Civil Aviation Organization’s Carbon Offsetting and Reduction Scheme for International Aviation, allow participating companies to use carbon credits as a key part of their decarbonization approach.

The voluntary market could also support the development of new technologies. For example, methodologies are being increasingly developed that would allow DACCS projects to generate carbon credits, potentially making those projects more financially viable. The World Bank (2023) reported on a significant increase in VCM activity in the last five years, with 275 million voluntary credits issued in 2022. Ecosystem Marketplace (2021) estimated the market value of VCM at US$2 billion. Although this represents only a fraction of current global emissions, demand is expected to increase substantially.

Companies face a complex set of challenges

While global studies recognize the potential role for CDR, CCS and carbon credits, not all companies have identified the potential risks that could limit their effectiveness. Here, we use the oil and gas sector as a case study to illustrate how companies are approaching the available solutions.

Oil and gas companies show a wide range of starting points and approaches to meeting emissions-reduction targets

Not all companies in our sample have set net-zero targets (see chart 1); this also applies to other sectors, but all have set targets to reduce emissions to some extent between 2030 and 2050. Of our sample, 76% are targeting net-zero for Scopes 1 and 2 emissions by 2050. Additionally, 64% of the companies have set a methane reduction target and 80% are signatories to the World Bank's Zero Routine Flaring by 2030 initiative. While 32% of companies have set targets to reach net-zero, including Scope 3 emissions, this only covers 20% of the Scope 3 emissions in our sample. To put these figures into context, the IPCC (2021) suggests that emissions from the combustion of fossil fuels — the main Scope 3 emissions of oil companies — would need to decline by around 85% by 2050, compared to today, to meet the below 2 degree C scenario.

All the companies in our sample plan to use at least one of either CCS, CDR or carbon credits to meet their decarbonization goals, although strategies vary in the level of detail. Current CCS capacity in our sample in 2022 represented only 7% of the companies' reported Scopes 1 and 2 emissions, with most activity from the US- and Europe-based global majors. Plans for future deployment reported by companies in our sample would see capacity increase substantially, to around 325 million metric tons by 2030 from 50 million metric tons today. These CCS and carbon capture use and storage (CCUS) capacities include plans for enhanced oil recovery and solutions to capture emissions from other companies. However, only 60% disclose their expected future capacity and only 56% identify the specific investment costs required, either explicitly or as part of a wider package of measures. When we looked at companies' aims, 24% mentioned they would use captured carbon for enhanced oil recovery, but often these aims are expressed in vague terms, which is important because emissions that result from the oil produced in this way could nullify the possible benefits of the captured carbon, potentially introducing reputation risks.

In our sample, 92% of companies intend to use CDR, mainly through NbS, but implementation plans are not always clear. We have observed that the most common approach is to partner with others, although a high proportion of companies' disclosures lack details. Most companies in our sample described projects that contribute to biodiversity initiatives, but they do not identify CDR as a potential additional benefit. In our analysis, companies' strategies focused on afforestation or reforestation solutions; none disclosed any involvement with other types of NbS. Reference to the use of DACCS (40%) and BECCS (28%) in our sample was also limited. Our finding is supported by the Global CCS Institute (2022) status report that found limited developments and by an estimate by S&P Global Market Intelligence that DACCS and BECCS represent only 2% of planned CCS deployment to 2030.

Among the oil and gas companies in our sample, 64% are already participating in the voluntary carbon credit market, but 84% suggest this will be part of their future strategy. Current total purchases were disclosed as 3% of 2022 Scopes 1 and 2 emissions across our sample, including both removal- and reduction-based credits. From our sample, only five companies disclosed plans to limit the use of carbon credits to offset on average 10% of total greenhouse gas emissions by 2030. We note, however, an emphasis on coupling credits to sold fuel, for example marketing the fuel as carbon neutral or net-zero to emphasize relevance for Scope 3 emissions, as opposed to balancing Scopes 1 and 2 emissions. Meanwhile, some oil and gas companies treat trading carbon credits as a business line, not exclusively as a way to support their own decarbonization claims. From our sample, 40% of companies have disclosed that carbon credits are part of their low-carbon solutions for customers. Understanding how companies will use credits is difficult without a standardized reporting framework (Rosales et al., 2022).

All options will add to costs and carry considerable technical uncertainty

Some solutions are still evolving and are yet to be proven at commercial scale (see chart 2), making it difficult to gauge the potential impact on investment needs and costs. The IPCC (2021) notes that while afforestation and reforestation are well understood, technological approaches, such as DACCS and BECCS, are less mature.

 

In addition, some already-delivered CCS projects have not met their full potential, having experienced technical issues with both capture and storage as well as economic challenges in some geographies (Institute for Energy Economics and Financial Analysis, 2022). All options involve both capital and operating expenditure, where current estimates fall into wide ranges (see table 2).

The wide variation in estimates for life-cycle costs shows the state of technological readiness, the specific application and the uncertainty involved in all the solutions. For example, the cost of CCS is related to the concentration of the carbon dioxide being captured. Where concentrations are high, for instance in some industrial processes, costs are likely to be lower compared to DACCS, where the carbon dioxide in ambient air is very diluted. However, geographic considerations are also relevant, such as the distance to storage sites. This can make estimating the potential financial costs of hypothetical developments difficult. In our sample, disclosure about investment in CCS, CDR or carbon credits is mixed. In some cases, specific investment amounts are identified, but in many cases, they are not stated or set out clearly, or are expressed only as a future ambition. To illustrate the range of uncertainty, a company in our sample with median carbon emissions could expect costs of US$1.5 billion-US$2.5 billion per year to balance current Scopes 1 and 2 emissions of 21 million metric tons through CCS or afforestation, assuming a future policy requirement for oil and gas companies to operate with net-zero emissions, and CCS and afforestation or reforestation costs of US$72-US$118 per metric ton. In this illustrative example, these costs would likely represent at least 10% of operating profit. Using only DACCS, which is still in early development, would cost considerably more because of higher expected operating costs.

Table 2 - Estimated cost ranges for CCS and CDR solutions

Type	Solution	Cost range (US$/metric ton)
Technology-based solutions	Carbon capture and storage	15-130
	Direct air carbon capture and storage	100-345
	Bioenergy combined with carbon capture and storage	15-400
Nature-based solutions	Afforestation and reforestation	5-240
	Soil carbon sequestration	45-100
	Biochar	10-345
	Enhanced weathering	50-200

Costs are expressed as life-cycle costs. Source: Based on a range of estimates from IPCC (2021), IEA (2020, 2021).

 

Those that choose to rely on carbon credits could also face cost risks, particularly for higher-quality removal-based projects. There is considerable uncertainty about how the voluntary market for carbon credits will evolve. While prices appear lower for now on average across all carbon credit types — and therefore potentially more attractive than other options — Trove (2021) estimated that carbon credit prices could be between US$25/metric ton CO₂ and US$100/t CO₂ by 2030. There could also be variations in cost between credit types. For example, in 2022, nature-based removal credits traded at a daily average price that was more than twice as high as that of avoidance-based credits, according to S&P Global Commodity Insights data. This wide range of costs introduces uncertainty for companies that might plan to use carbon credits as part of a long-term decarbonization strategy.

The total cost and return for companies can vary. Assessments of potential future carbon pricing obligations, regulatory incentives, and whether there is an ability to pass on costs to customers may be used as tools to estimate cost scenarios. For example, in the US, where there is no federal carbon tax, there is a current tax incentive of US$85 per metric ton from

the Inflation Reduction Act that would partially offset costs associated with construction and operation for CSS. But that could change in the future. In regions with carbon taxes or emissions trading schemes, for example in the EU, companies may have more of an incentive to consider CCS or CDR to minimize regulatory costs, albeit costs and returns may again be uncertain and highly variable. For example, the price for allowances under the EU Emissions Trading System could reach €128/tCO₂ by 2030 (see "Carbon Pricing, In Various Forms, Is Likely to Spread In The Move To Net Zero," Aug. 9, 2022).

CCS and CDR could have other environmental consequences

NbS and the deployment of carbon capture technologies could add pressure to ecosystems. The IPCC (2020) and UNEP/ICUN (2021) have assessed the potential wider effects, both positive and negative, of NbS. For example, low-diversity tree plantations on naturally low-cover habitats, such as savannas, can increase water demand and nutrients, which in turn can put pressure on other forms of life that inhabit the ecosystem. NbS might also be susceptible to permanence risks such as climate hazards, like wildfires or drought, in the long term (Badgley et al., 2022). Meanwhile, CCS assets typically have high water requirements and could add pressure to water-scarce areas. In our sample, companies that plan to deploy NbS were generally better at disclosing environmental risks but lacked detail about how they would manage permanence risk, for example.

Aside from the potential cost of implementing NbS, companies face obstacles to securing enough land to manage it successfully. Given the scale of some companies' emissions, such as those in our sample, the requirements for land could be significant. Although we have found good examples that provided specific locations and timelines for such projects, details are broadly lacking. As an example of the potential scale, if we assume the median company in our sample (current Scopes 1 and 2 emissions of 21 million metric tons of carbon dioxide equivalent in 2022) chooses to use NbS alone to balance its emissions, around 18,000 square kilometers of land could be required. The amount of land required would depend on the type of solution, and over time, this area would need to be increased as habitats reach maturity and to protect them from potential damage. While this is just an illustration, it highlights the challenges of implementing such a solution, implying that companies would either need to use a mix of options or go further in their actual emissions reductions if they were to meet such a target.

Table 3 - Potential impact of CCS and CDR on other environmental factors

Approach	Land use competition	Increase in energy use	Air pollution	Water use	Water quality	Biodiversity	Vulnerability to climate hazards	High risk of reversibility
CCS and DACCS		•		•				•
BECCS	•		•	•		•
Afforestation/ reforestation	•			•		•	•	•
Biochar	•		•			•
Soil carbon sequestration					•		•	•
Enhanced weathering	•		•			•
Peatland restoration	•						•	•

The actual impact will depend on factors such as implementation and location. Reversibility refers to the potential re-emission of carbon that has previously been captured. In the case of situations where captured carbon is used to make new products, such as hydrogen, rather than being stored, the risk of reversibility is considerably greater. Some risks may be upstream, for example enhanced weathering being potentially dependent on mining. In some cases, benefits could also be delivered where carefully managed, for example those related to biodiversity. DACCS = Direct air carbon capture and storage. BECCS = Bioenergy combined with carbon capture and storage. Sources: IPCC AR6 (2021); Royal Society (2018).

Increased transparency from companies could help communicate risks

The policy landscape for CDR, CCS and carbon credits will likely keep evolving

The economics of some solutions have given rise to incentives from governments to support companies' research and development or offer financial help to deploy technologies such as CSS and CDR. Some authorities have already implemented policies supporting CCS and CDR research and development. For example, the US Inflation Reduction Act of 2022 provides further incentives to develop CCS projects, which could strengthen deployment rates in the medium term. In the UK, government support has been given to developers of new industrial hubs that have CCS as an integrated element. Similarly, the European Green Deal, the EU Innovation Fund, and Net Zero Industry Act increase support for CCS. We found examples in our sample of oil and gas companies of investments that are looking to take advantage of such financial support. Given that these solutions always represent some additional cost to the business activity involved, incentives are likely to drive deployment faster than in jurisdictions with more limited or different policy objectives.

The role of policy is a common theme in the energy transition, and there are still some complex stakeholder issues to resolve. Article 6 of the Paris Agreement paves the way for potential international trading of mitigating actions to support national commitments, but the relationship between national budgets and companies is less clear. As of COP27, there are still many methodological and technical issues to resolve about the treatment of removals and who owns the right to use them to support their decarbonization claims, avoiding double-counting issues. Monitoring frameworks are also likely to develop. For example, in 2022, the European Commission published its draft regulation for the establishment of a centralized EU-wide CDR certification framework to support the EU in meeting its 2030 targets. The regulation aims to build trust in CDR and encourage finance by introducing a set of harmonized criteria covering quantification, additionality, permanence, and impact on other sustainability factors. Zhang et al. (2022) has also noted the need for more consistency in how CCS capacities are reported.  Increased consistency as to how CDR, CCS and carbon credits are measured and reported by companies will likely increase stakeholder confidence. Notwithstanding this, there may be some short-term risk as companies develop their strategies within evolving regulatory frameworks.

Guidance is varied and voluntary about the use of CDR, CCS and carbon credits to support companies' decarbonization plans

Few specific regulations govern what requirements companies should or should not meet in order to make decarbonization claims. As a result, a wide range of voluntary guidance has emerged. It is not always aligned, however, and can be fragmented or complex to navigate (see table 4). Some of the guidance and frameworks have made efforts to define the role of CDR, CCS and carbon credits in decarbonization to drive consistency (for example, the UN [2022], SBTi [2021]), and investors and other stakeholders often refer to some of these as standards.

Concerns about quality have led to the development of third-party review services that aim to assure the veracity of carbon credits. Separately, sector initiatives, such as the Integrity Council for the Voluntary Carbon Market, aim to harmonize rules for voluntary carbon credits by providing assurance about the veracity of carbon credits in response to criticisms of some standards, methodologies and projects. There is growing consensus — such as by SBTi (2021) and The Oxford Principles for Net Zero Aligned Carbon Offsetting (2020) — that generally views removal-based carbon credits as more robust than reduction or avoided-emission credits. 

However, claims about climate performance are increasingly attracting the attention of advertising regulators on the back of stakeholder concerns. Specific attention has been given to the use of carbon credits; for example, the US Federal Trade Commission's Guides for the Use of Environmental Marketing Claims includes a section specifically on carbon offsets. The UK's Advertising Standards Agency also provides guidance on how companies should describe the role carbon credits might play in environmental claims and provides guidance on the broader use of terms such as carbon neutral or net-zero.

Disclosure proposals are likely to increase the onus on companies to provide more comprehensive information about their decarbonization strategies. The International Sustainability Standards Board and the EU's Corporate Sustainability Reporting Directive are among those developing reporting standards on climate-related issues, which could go some way to increasing visibility on how companies plan to deliver on their commitments.