Blended portfolios can help scale carbon removal

This article is sponsored by Rubicon Carbon.

According to the United Nations’ Intergovernmental Panel on Climate Change, reaching our global net zero goals by 2050 requires removing and permanently storing around 10 gigatons of carbon dioxide equivalent from the atmosphere. While carbon removal credits are vital to achieving this success, the current carbon removal market is constrained by high prices, a low supply of durable storage options and a complex landscape that is difficult for corporate buyers to navigate.

According to cdr.fyi, since first emerging, the carbon removal market has seen 5 million tons purchased, 215,000 tons (3.9 percent) actually delivered, 250 suppliers, an average purchase size of about 20,000 tons, and about 80 percent of credits purchased by the top five buyers. These numbers reflect a market that is still figuring it out — most carbon removal purchases are early-adopter moonshots designed to support the emergence of new technologies and projects.

We must move past this awkward adolescence to scale the carbon removals market. To achieve this, it needs to be easier and more accessible for buyers to finance carbon removals, which requires new investment tools. Rubicon Carbon’s actively managed carbon removals portfolio can help unlock carbon removals at a meaningful scale. 

A portfolio approach to unlocking carbon removals at scale

Carbon removals involve drawing down ambient atmospheric carbon dioxide and storing it through nature-based methods such as forests and oceans or engineered methods such as direct air capture. Rather than simply reducing or avoiding carbon emissions, carbon removal credits represent a ton of carbon dioxide equivalent removed from the ambient atmosphere.

Carbon removal portfolios leverage tools and approaches that are widespread in other, more mature financial markets. These instruments help create more liquidity by actively managing risk, thus making them more accessible to a broader set of corporate buyers with different levels of risk tolerance. Let’s look at some specific examples of how the portfolio approach can address barriers to participation in carbon removal markets. 

1. Diversifying carbon removal portfolios creates a more accessible price point 

Removals comprise a small portion of the broader voluntary carbon market, accounting for just 3 percent of credits sold in 2022. Removal credits with durations of 100-plus years cost anywhere between $110 and $1,700 per tonne, making them inaccessible for many companies with limited sustainability budgets.

With price as the most significant barrier to entry for most companies, diversification across project types with a range of durability (nature-based on the low end, direct air capture on the high end) enables a blended price point far more accessible for the average corporation. With more companies able to buy in, the market can scale faster.

2. Active portfolio management means buyers aren’t locked into single technologies at current prices

As we’ve seen with renewable energy becoming ever cheaper over time, the track record of green technology suggests that many (although not all) carbon removal technologies will come down in cost to reach a competitive price point. But the market is currently dominated by future offtake agreements with delivery risk, putting early buyers in the position of locking themselves into deals with unproven providers testing new technologies and project types.

A portfolio of delivered credits that is actively managed can quickly shift toward the technologies that show the greatest scalability over time. In any emerging industry, it’s challenging to project which technologies will become the most cost-effective. Betting on a wide range of project types initially and then actively responding to changing trends means buyers can avoid getting locked into any one technology.

3. Continuous portfolio optimization allows buyers to transition climate-impact investments over time

Buyers of removals have two choices: skimp on durability or pay through the nose for it. Highly durable removals cost up to $1,700 a ton, while high-quality but less permanent nature-based removal credits typically sell for $20-50 per ton. The best way to manage this tradeoff is to transition investments over the long term, buying more temporary credits upfront and transitioning to higher durability removals over time. Yet, this approach is often too complex for most corporate sustainability teams.

Flexible and customizable portfolio management allows buyers to build portfolios aligned with the Oxford Offsetting Principles, a science-based approach to managing permanent and temporary removal projects. These principles encourage companies to invest in temporary carbon removals while planning to transition to more permanent carbon storage. Active, ongoing portfolio management allows more temporary removals to be superseded by permanent options as these more durable credits become increasingly cost-effective.

4. Assessing the risk associated with different carbon removal projects and technologies is challenging

Today, carbon removal credits are offered by hundreds of early-stage companies developing new projects and piloting new technologies. Predicting whether a particular project developer will defy the odds, overcome technological hurdles, avoid reversals and meet future commitments is challenging. It’s immensely time-consuming for corporate buyers to conduct adequate due diligence on these technologies and project developers, and many sustainability teams don’t have or don’t want to build such deep in-house scientific expertise. This combination of unknown levels of risk and a lack of internal tools and expertise keeps many would-be buyers on the sidelines.

Modern portfolio theory offers a solution to risk management for carbon removals. It provides a framework for identifying, quantifying and managing carbon credit risk. Carbon removal portfolios aim to maximize environmental benefit while mitigating individual project risk. Adequate due diligence, high integrity benchmarks, diversification across several technologies and projects, and risk quantification and mitigation give buyers peace of mind about their carbon investments.

Closing the net zero gap

Closing the net zero gap will require every tool in the toolkit — including high-integrity and durable carbon removals at scale. But buyers must be strategic about how they spend their limited sustainability resources. Given the many types of carbon removal projects available, the best way for companies to balance price, scalability and durability is with a risk-adjusted, actively managed carbon removals portfolio.

Ultimately, with the right portfolio options, private-sector investment in carbon removals will be vital to achieving global net zero.