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Swiss Re angles to de-risk Paris Agreement-critical carbon removal

07 September 2021 Cristina Brooks

Reinsurer Swiss Re entered a partnership it hopes will create a market for carbon removal technologies needed to keep global warming below 1.5 degrees Celsius compared with pre-industrial levels.

Direct Air Carbon Capture and Storage (DACCS), which captures CO2 from the air anywhere, is the carbon-negative cousin to carbon-neutral Carbon Capture, Utilization and Storage (CCUS) technology, which captures CO2 from industrial and power machinery.

Swiss Re signed a 10-year contract with Swiss-based carbon capture developer Climeworks, which is planning to build an experimental DACCS facility in Iceland to capture and store atmospheric emissions. The emission removals certificates generated will contribute to offsetting the emissions of Swiss Re's operations and the insurance products it sells.

While Swiss Re is using the certificates to meet its own net-zero emissions aims, it is collecting data on the technology, blazing a trail for a mutually beneficial tie-up between the insurance and carbon removal sectors to allow the scale-up of carbon removal IHS Markit says is needed for a Paris Agreement-compliant future. The reinsurer agreed to explore project finance opportunities, as well as develop risk management and transfer solutions, for the emerging technology.

Swiss Re sees carbon removal as a new kind of long-term investment it can use to offset other long-term liabilities and create additional insurance products.

Paris Agreement in peril

Carbon removal will be needed in a post-net-zero world requiring net-negative emissions, according to Swiss Re. "The world needs to get to net-zero by 2050, and for that, humanity needs both massive emission reductions and billions of tonnes of negative emissions," Swiss Re Senior Environmental Management Specialist Mischa Repmann told Net-Zero Business Daily.

The view was shared by the Intergovernmental Panel on Climate Change (IPCC). "If you want a 1.5-degree world, the IPCC shows that every scenario has very large volumes of CO2 removal," said Julio Friedmann, a senior research scholar and lead of the Carbon Management Research Initiative at Columbia University in a presentation last year.

But there is nothing close to the "massive" amount of carbon removal solutions required at the moment, with an increase "by a factor of one million" needed in the next 30 years, according to a July paper by Swiss Re called The insurance rationale for carbon removal solutions.

Once more carbon removal facilities are created or otherwise put in place, states could buy certificates to meet their Paris Agreement commitments, "a necessity for when states do not meet their carbon budgets, for … decarbonizing challenging sectors like aviation," said Friedmann.

Apart from aviation, several sectors face challenges in reaching full decarbonization. The Swiss Re paper found agriculture, energy, and transportation all face the challenge of meeting increased demand, including from a rising population.

States might use carbon removal to solve issues like these and companies like utilities could also use it for compliance with carbon budgets, Friedmann added.

Carbon removal rivals

A lack of incentives, high carbon prices for example, to spur buyers into shouldering the expense of carbon removal certificates has been a stumbling block.

Other hurdles include a lack of supply and demand at high enough volumes, a lack of regulation and standardization impairing international trading, and arguments that carbon removal might be used as an excuse not to phase out the use of fossil fuels. "In other words, carbon removal still lacks a business case," Swiss Re said in the paper.

The number of companies pursuing carbon removal has grown since 2019, after the IPCC (at the request of the parties to the Paris Agreement) published a special report assessing what it will take to limit global warming to 1.5 degrees, according to the Swiss Re paper. Also, 2019 saw the first trading of carbon removal certificates.

Several carbon removal solutions are ready for investors, but they raise eyebrows, too. These include nature-based solutions like forestation, habitat restoration, soil carbon sequestration, according to a 2018 report by two UK-based institutions, the Royal Academy of Engineering and the Royal Society.

Now nature-based solutions are in vogue and other technologies remain in the background, even though tree planting can be reversed by forest fires and competes with agriculture for land, potentially giving carbon removal an advantage, the Swiss Re paper said.

Swiss Re is not only demonstrating a business case for carbon removal services by buying certificates, it is considering insuring carbon removal services. "By entering long-term offtake agreements and guaranteeing future revenues, re/insurers can be strong partners for the carbon removal industry, while also gaining access to its new risk pools and asset classes," said Swiss Re in the paper.

Insuring against risks to open up investment market

DACCS requires storage of CO2. This can be carried out by capturing and dissolving the CO2 in water and then injecting it into a type of rock that reacts with the CO2 to turn it into minerals. Injecting CO2 is already practiced in oil and natural gas extraction, so CO2 might also be permanently injected into depleted fossil fuel fields.

But the unknown cost of managing risks at storage facilities—such as well blowouts, leaks of CO2 in the natural geology, and potential legal or government responses to them in many years' time—remains a risk burden private companies are not able to handle.

Norway's Mongstad Carbon Capture and Storage (CCS) project, which stored emissions from a refinery and gas-fired power plant, was halted by the government in 2013, which cited the risks. Years beforehand, Statoil requested more certainty on government rules surrounding CCS.

Niall Mac Dowell, professor of future energy systems at Imperial College London, told IHS Markit that although carbon prices have risen, the risk of a well blowout or natural geological leak remains a disincentive to investors. "If you do have a well blowout, we know about how long you will have that leak for, and you will therefore know what volume of CO2 might come out well. So that's your liability," said Mac Dowell.

"When I put the carbon into the ground, the carbon price was $50/mt or some number, but when this blowout happens sometime in the future, the carbon price might be $300/mt, for argument's sake, so which price am I liable for? I'm hedging for all of these. This is where the insurance part comes in," he said.

The liability for accidental carbon emissions alone could reach a $250 million, he said. "So, if you think about that, you know, you could be talking about several hundred thousand tonnes, maybe a million tonnes of CO2 that could come out of a well over a 100-day period."

The carbon removal sector has not been insured for these risks, but companies still want to buy the removals.

"The train is certainly rolling. We hear from our clients, we hear from public sector players, that there is a wish to strengthen the quality of carbon removals through insurance," said Repmann, adding: "We want to be a first mover and thereby become a trusted insurer and investor of choice."

Swiss Re is also seeking to use its buying power as a client and investor to strengthen the market. "Our partnership with Climeworks is not only a vendor-buyer relationship; it has three key objectives: it's a 10-year commitment to buying their services, which guarantees Climeworks' revenue and thus the bankability of their scale-up roadmap. Secondly, we have started to discuss their insurance needs. And thirdly, our asset management [unit] is looking into investment and project finance opportunities," Repmann said.

There is no time to waste in getting carbon removal markets off the ground, he said. "The reason we view 'carbon removal' as a new risk pool or asset class is because of the sheer size of the negative emissions task that is ahead of us: that is 10 to 20 billion mt of CO2 removed every year, throughout the second half of the century. This is comparable to the size of operations of oil and gas today. We therefore argue that this is not a niche activity as is commonly thought," he explained.

Swiss Re aims to send a strong market signal through the partnership. "Our operational emissions are not substantial compared with other industries, and they make up only a small share of our company emissions when considering the emissions related to our insurance products and investments. Nevertheless, we want to walk the walk and clean up our own house first, so that others are encouraged to do the same," said Repmann.

Carbon removal certificate trading?

Building trust in the viability of carbon removal could have far-reaching implications for carbon trading, for example in Europe.

While carbon removal certificates are already traded in voluntary markets, they could also be traded in mandatory carbon markets like the EU Emissions Trading System (ETS), according to Mac Dowell. "Probably the biggest carbon market in the world is the European ETS, and now that does not allow for carbon removal [trading]. I understand that people are trying to figure out how to how to modify that so carbon removal can be included, but we're in the early days of a conversation," he said.

The carbon removal allowances could be offered in a separate market to carbon emissions allowances within the ETS, continued Mac Dowell. "It makes a lot of sense to have carbon removal be part of an ETS and 1 mt of removed carbon can compensate for 1 mt of emitted carbon. Therefore, if I emit some CO2 or if I have a carbon liability, I can either directly mitigate it [or pay] at one price, or I can remove it another price," he said.

Mac Dowell explained that it is almost always cheaper to directly mitigate CO2 emissions than to remove them.

Posted 07 September 2021 by Cristina Brooks, Senior Journalist, Climate & Sustainability, IHS Markit

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