Why pricing carbon dioxide by source can create a new market for clean manufacturing

Carbon dioxide from non-fossil fuel sources has an emerging role in heavy industry’s energy transition as manufacturing low-carbon fuels and chemicals becomes a focus.

Heavy industries, such as those producing chemicals, fuels, cement, and concrete have traditionally relied on fossil fuels as building blocks and heat source for manufacturing, making them a major source of greenhouse gas emissions. In 2022 alone, heavy industry was responsible for 26 percent of global emissions.

To meet international climate goals and prevent the worst effects of climate change, the International Energy Agency (IEA) has projected that industrial emissions need to drop by 75 percent by 2030. This tight window for massive reductions calls for innovation in heavy industry, especially as traditional decarbonization pathways such as electrification aren’t readily applicable due to high operating temperature needs and the embedded nature of fossil fuel inputs in the manufacturing process.

One method stands out as a potential solution to this problem: carbon utilization. This is a process in which carbon dioxide (CO₂) is captured from industrial and atmospheric sources and reused as a building block to be converted into both durable and nondurable products.

In our recent article, we explored carbon utilization technologies, and the benefits and challenges in scaling it up as a commercial solution for reducing heavy industry’s emissions.

The true emissions reduction potential of carbon utilization is determined by the carbon dioxide source and type of end product created. Using CO₂ from non-fossil sources such as biogenic, atmospheric, and ocean can achieve negative lifecycle emissions or net carbon removal in carbon utilization products.

There are three areas across industry sectors where CO₂ utilization is increasingly viewed as a critical solution among emission reduction pathways.

• Fuels: CO₂ molecules can be combined with clean hydrogen molecules to produce carbon monoxide, which can be further upgraded into ‘e-fuels’ such as eSAF and e-methanol. The EU Fit for 55 initiative includes a mandate for SAF to form 70 percent of the fuel mix in flights from Europe, of which 35 percent will be eSAF. The emission footprint of e-methanol for maritime shipping could be as low as 1 percent of the fossil fuel alternative.
• Chemicals: By 2050, CO₂ utilization along with circularity solutions can represent an 89 percent reduction in the amount of virgin fossil carbon in chemicals.
• Building materials: CO₂-derived materials like carbonate aggregates and CO₂-cured concrete could form 15 percent of a 90 billion metric tons per year concrete and carbon aggregates market by 2030.

The construction & building materials sector mainly utilizes CO₂ captured from the cement and concrete manufacturing process. The inherent chemical reactions produce high-purity CO₂ which can be captured and converted to long-duration products like low-carbon concrete and aggregates. So, the primary demand sectors for non-fossil (biogenic or atmospheric) sources of CO₂ are e-fuels and synthetic chemical intermediates.

Supply & demand dynamics for CO₂ feedstock

We mapped the global demand of biogenic CO₂ against anticipated supply, accounting for market uncertainty driven by evolving costs, policies, and government incentives. Our analysis revealed that by 2050, the biogenic CO₂ market could face a potential supply-demand gap of 135 to 884 million tons annually if following a net-zero scenario (Exhibit 1).

The variability in demand is driven by uncertainty in the pace of e-SAF, chemicals, and e-methanol market expansion. Government initiatives, lower cost of hydrogen, and scarcity of substitutes are major demand drivers.

Our estimated biogenic CO₂ supply is optimistic, as it assumes full capture of solid/gaseous bioenergy emissions (not all emissions can be captured, notably small, highly dispersed streams). Capturing biogenic CO₂ is challenging and the cost differs widely among sources. Biomass for CO₂ utilization should be sustainably sourced to minimize land use impact. Additional CO₂ from other low-emissions sources (i.e., direct air capture) will be required to bridge the supply gap.

Developing a source-differentiated market for CO₂ utilization

Today, the market for CO₂ utilization primarily caters to enhanced oil recovery and the source of CO₂ is not distinguished. A robust market for source-differentiated CO₂ as a physically traded commodity for utilization does not exist. This market’s development will impact carbon abatement potential and economics, so it is important to ensure CO₂ is traded in a climate-aligned and cost-effective manner. We analyzed three market evolution scenarios using the example of CO₂ supply-demand in Europe by 2050 and the resulting competitiveness of biogenic CO₂ as a carbon utilization feedstock.¹

• Scenario #1 – No differentiation: An ‘all-blended’ market where CO₂ source differentiation is not factored into pricing.
• Scenario #2 – Partial differentiation: A market with price-based differentiation where fossil CO₂ has a high/low ‘carbon price or tax’ applied.
• Scenario #3 – Fully differentiated: In this case, we assume sufficient policy has developed to support a biogenic CO₂ market that is decoupled from fossil-based CO₂. We break this down further to highlight the role of policy when a market splits. In an optimistic policy scenario, we assume 80 percent or more of the carbon utilization demand is directed to biogenic CO₂ due to policy-backed differentiation for its higher emissions reduction potential. In the pessimistic policy scenario, we assume lack of policy leads to 40 percent of CO₂ demand going to CO₂ from fossil sources.

Our analysis revealed that carbon abatement impact is most significant when carbon pricing is high, or a differentiated market exists. The abatement cost is most effective in a fully differentiated market.

This analysis emphasizes the role of policy in market differentiation — a lack of policy could mean only a relatively small share of biogenic CO₂ supply’s emissions reduction potential is realized given its higher capture cost relative to fossil sources. Strong policy incentives can remediate this and unlock decarbonization opportunities for sectors where emission reduction alternatives are scarce. Policy-backed market differentiation and carbon pricing mechanisms can double the profit pool accessible to biogenic CO₂ suppliers. This can incentivize investment in carbon capture technology in these need-to-abate sectors.

Increasing carbon price increases abatement impact from biogenic CO₂ utilization to a point, after which it could result in diminishing returns. Carbon pricing on fossil CO₂ can incentivize demand for biogenic CO₂ but supply must scale in parallel. If supply scarcity drives biogenic CO₂ prices too high, it creates the risk of market breakdown.

In a nutshell,

• Market differentiation backed by policy can aggregate demand for biogenic CO₂.
• Carbon pricing on fossil CO₂ can bring biogenic CO₂ suppliers down the cost curve. Market mechanisms can direct high-emission intensity CO₂ from fossil sources towards more climate-aligned use cases such as sequestration instead of utilization.

Policy and industry stakeholders can lead the creation of a differentiated market

Policy Landscape

The passing of the Inflation Reduction Act provided an important boost to tax credits related to the use of biogenic CO₂ as a feedstock to produce fuels and materials. The federal 45Q tax credit is a key policy incentivizing CO₂ capture and utilization, offering $60 per ton of CO₂ when labor requirements are met.

The credit includes various methods of CO₂ utilization such as its capture through photosynthesis or chemosynthesis, conversion into securely stored compounds, or utilization for commercial purposes. However, it does not distinguish between biogenic and fossil fuel sources to establish the amount of credit generated. The federal 45Z Clean Fuel Production Tax Credit provides $0.35 per gallon for aviation fuels with a lifecycle emissions rate below 50 kilograms of carbon dioxide equivalent per million BTU (CO2e/mmBtu), making biogenic CO₂ sources attractive. It applies to fuels produced after 2024 and sold on or before 2028.  Developers would need to decide on utilizing 45Z or 45Q every year since both tax credits are not stackable.

At the state level, California, Oregon, Washington, and New Mexico have implemented clean fuels standards, but none have a certified pathway for synthetic fuels that could incentivize sourcing biogenic CO₂. These standards also do not cover aviation and maritime fuels where fuels that would benefit from sourcing biogenic CO₂ are most likely to be needed for decarbonization.

Buy-clean policies also can play a pivotal role in incentivizing the use of biogenic CO₂ to produce low-carbon products.

In Europe, the EU’s delegated act on Renewable Fuel Non-Biological Origin (RFBNO) sets emissions caps for certifying synthetic fuels, encouraging the use of biogenic CO₂. The act further establishes a 2035 deadline for the eligibility of fossil CO₂ in industrial processes for synthetic fuel production.

Policy Action

Thoughtful policy design can help differentiate between the value of fossil and non-fossil CO₂ in the marketplace and incentivize sourcing of non-fossil CO₂ to maximize the benefits of transitioning to low-carbon fuels. At the federal level, the 45Q tax credit could offer tiers of incentives that award more credit for utilization of non-fossil CO₂ and the sequestration of fossil CO₂.

At the state level, states that are discussing the implementation or update of clean fuel standards and cap-and-trade programs establish compliance pathways that consider the carbon intensity (CI) of the production of synthetic fuels. For sectors that are not yet fully covered by clean fuel standards (e.g., aviation and shipping), phasing in requirements can give industry time to adapt while introducing certainty to synthetic fuel producers that there will be a future market for their products. States also could follow the leads of Illinois and Minnesota in providing incentives for SAF production with greater value for fuels with lower CI scores.

Industry Action

Non-fossil CO₂ as a feedstock presents a novel opportunity for industry stakeholders to participate in an emerging market with large climate impact. To activate a differentiated carbon feedstock market, we call on suppliers and buyers to strategize voluntary responsible sourcing principles that enable commitments for utilizing non-fossil CO₂. In tandem, policy action must be taken to ensure that CO₂ utilization has net neutral/negative emissions benefits. Equitable two-way community engagement is needed to accelerate the deployment of infrastructure for scaling access to carbon feedstock, renewable electricity, clean hydrogen, and creating localized carbon utilization hubs. Early movers like Stora Enso, Norsk e-Fuel, Covestro are exploring biogenic CO₂ utilization, transforming their business models to take advantage of this market and climate opportunity. The time is ripe for other first-movers to join in.

Footnotes:

¹ Publicly reported CO₂ emissions data from the European Environment Agency (EEA) by power and industry sectors was layered with 2050 price projections to capture and transport CO₂ using literature-based costs and empirical learning rates.