Direction of Government Support forCarbon Dioxide Removal (CDR)

October 4, 2023
Industrial Science, Technology andEnvironmental Policy Bureau, METI
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Importance of Negative Emissions
 To reach net-zero, carbon dioxide removal is needed to counterbalance residual emissions fromsectors that are unlikely to achieve full decarbonization.
 It is estimated that 2 to 10Gt CO2/yr must be removed globally by 2050.
Realization of Carbon Neutrality by 2050

Consumers
110 mil ton2050（46% reduction
compared to 2013, total
GHG emission)

Emission reduction +Removals = net zero（▲100%）

15Electrificat
ion

12.5

Non-electricity

Continuing strenuous efforts in its
challenge to 50% reduction.
 Electrification
 hydrogen, Promote energy

Industry
efficiency.
280 mil ton  Realize aConsumers

hydrogen society

Industry

Transport
200 mil ton

Electricity

Electricity
440 mil ton

ammonia,
CCUS/Carbon
Recycling Use carbon
removaltechnologies

Transport

HydrogenE-fuelmethanation

Electricity

107.5

Biomass52.5

 Renewabl

 Renewable energy Nuclear energy Hydrogen/ammon

ia power
generation(Estimated)

2030

2019
1.03 bil ton

Amount of CO2 removed from the aire energy Nuclear power Hydrogen,ammonia,
CCUS/Carbon
Recycling

Decarbonizedelectricsources

0IEA
IEA

McKinsey MGFS
NGFS
McKinsey
Needs

Carbonremoval

The values are the amounts of CO2 derived fromenergy

Plantation
DACCs,
etc.

2050, GtCO2/yr

IPCC
IPCC
Potential* Only DACCS and BECCS are included inthe IEA scenario

２Classification and Definition of NETs Negative Emission Technologies (NETs) are technologies that contribute to atmospheric CO2 removal(carbon dioxide removal (CDR)) by capturing, absorbing, storing, and immobilizing CO2 from theatmosphere.
Afforestation/Reforestation

Afforestation is the planting of trees of new areas. Reforestation is the planting of trees in forests thathave been reduced by natural or human activities.

Soil carbon
sequestration

Technology for storing biomass in soil (prevents CO2 emission through natural decomposition)

BiocharTechnology to produce charred biomass and sequester carbon

BECCS

Technology to capture and store CO2 generated by biomass combustion

DACCS

Technology for direct capture and storage of atmospheric CO2

Enhancedweathering

Technology to artificially accelerate weathering by crushing and spreading basalt and other rocks. CO2 isabsorbed in the weathering process (carbonation).

Ocean fertilization

Technology to artificially accelerate CO2 absorption and fixation by promoting biological production throughthe application of nutrients to the ocean or the use of superior biological varieties.

Ocean alkalinity
enhancement

Technology to add an alkaline substance to seawater to promote natural carbon absorption in theocean.

Blue carbon
management incoastal ecosystems

CDR through coastal blue carbon maintenance and regeneration such as mangroves, salt marshes,
seagrasses, etc. Other carbon sequestration possibilities in coastal areas such as large seaweeds (e.g., kelp)
are under discussion.

Other ocean-based
CDR approaches

There are few research cases, but some approaches are artificial upwelling, terrestrial biomass disposal
such as crop residues or logs, marine biomass CDR options such as large seaweed culture, and direct CO2
capture from seawater３

Trends in CDR Among Major Countries
 In the U.S., the Inflation Reduction Act (IRA) was passed in August 2022 and the existing CCS tax
credits were expanded. A special measure regarding DACs was added, with a tax credit of up to$180 per ton.
Start-ups with DAC technology have emerged, and purchase agreements have already been signedwith companies in finance, IT, and international aviation, among others. In addition, a voluntarycarbon credit market for NETs has been formed and transactions have begun.

U.S. DOE: 45Q credit expansion under theInflation Reduction Act (August 2022）＄/ton CO2180130

355070Utilization

Climeworks announces delivery of the world's first
third-party certified carbon dioxide removal (CDR) toMicrosoft, Shopify, Stripe, and others (Jan, 2023).

1PointFive announced the sale of 400,000 tons of carbon
removal credits from its planned first DAC facility using
Carbon Engineering’s DAC solution to Airbus (March, 2022).

Additionaltax reduction
for DAC

856045Q

95

DAC company (Climeworks, Carbon Engineering)

IRA
Sequestration•Expand existing 45Q tax credit to include anadditional incentive for CO2 capture directlyfrom the atmosphere.

•130/ton for CO2 utilization, 180/ton forsequestration.

Source: U.S. DOE, Climeworks, Carbon Engineering

Picture: Climeworks

４Options of Policies for Market Creation and Expansion ①
In the early stages of the market, stimulation of demand and incentive by the government is important.

For example, the U.K. is considering a contract-based business model to provide stable price incentives
for engineering methods such as DACCS and BECCS in order to expand CDR.

Various methods are being considered and introduced mainly in Europe and the U.S. Below areexamples of these methods.

① Contract for Difference If the reference price is below thestrike price, the government
compensates the difference. Conversely,
if the reference price exceeds the rights
price, the difference is paid by theoperator to the government.

➁ Government Procurement
 The government purchases at acertain price for negative emissions
conducted by CDR operators. The
government converts the purchasedamount into credits and sells them tothe market.

Reference price

Price

MarketCompensationby the government

Strike price

Revenue from the market

Time

CDR credits③Purchase of Excess Credits
 The CDR provider first sells thecredits to the market. If there areexcess credits, the government
guarantees to purchase them at a fixedprice for a certain period of time.

CDR credits①MarketPurchase at a
fixed price

CDRProvider

Source: Based on Business Model Consultation for Engineered GGRs

CDR ProjectGovernment

CDR ProviderGovernment

CDR credits②（Surplus that could not be sold in ①）

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Options of Policies for Market Creation and Expansion ➁ Various methods are being considered and introduced mainly in Europe and the U.S. Below areexamples of these methods.
④ Tax Credits
I n t h e U . S ., t h e I n f l a t i o nReduction Act (IRA) expands theexisting 45Q tax credit for CCS andadds incentives for CO2 captured
directly from the atmosphere.
($130/ton for CO2 utilization,$180/ton for sequestration).

⑤ Capital Investment andDemonstration Support⑥ R&D Support

 In the U.S., up to 80% and 50% will be
subsidized for FS and FEED for theconstruction of DAC hubs, respectively. In
the future, support for project development,procurement, construction, etc. will also beprovided.

 The U.S. supports R&D for a wide range oftechnologies, including DACCS/DACCU, oceanbased CDR, and enhanced weathering toachieve the cost target of 100$/tCO2. InEurope, various funding programs, such as
the Horizon Program, are promoting thedevelopment of various NETs technologies.

 For technologies with relatively large
capital investment (e.g., DACCS), this may
be an effective way to increase thepredictability of revenue for businesses
in the early stages of commercialization.

 Note that while it can contributesignificantly to lower costs at the earlystage, it does not provide long-term revenue
certainty and do not directly support theexpansion of the negative emissions market.

⑦ Incorporation of Removals
into Emissions Trading I n t h e E U , the latest revision of the EU-ETS
Directive specifies that the Commission shall reportto the European Parliament and the Council by
July 2026 on the treatment of negative emissions
in the EU-ETS.
 The UK has also conducted a consultation on thepotential use of the UK-ETS as a negativeemissions market, and has started considering theinclusion of removals in the UK-ETS.

⑧ Obligation Quotas
 In California State, studies are underway to makethe removal of a certain percentage of emissions
mandatory for purchases, and in the mid- to long-term,
the introduction of such a regulatory approach could be aneffective means to expand private sector demand.

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Expanding Creation of NETs CreditsIn order to promote the social implementation of NETs, it is important to create a scheme for the use of carbon
credits as an incentive for negative emission suppliers. In addition, especially post-2050, it will be essential
for emitters to utilize removal credits as a means to offset their own residual emissions.

Currently, the supply of removal credits is limited, and it will be necessary to utilize and expand new credits suchas technology-based removal (DACCS, BECCS) and blue carbon in the future.

The Carbon Credit Report released in June 2022 indicates that the creation and expansion of carbon removal
credits is one of the directions in which efforts should be made.
The Importance of Carbon Removal Carbon
Credits to achieve net zero

Direction of efforts and concrete
Measures for appropriate use of carbon
credits(Efforts on the supply side)
Emission
Emission
Reduction

Emission

RemovalRemovalEmissions andabsorption/removal minuszero

Image of CN achievement in Japanby 2050

 Japan's goal of carbon neutrality
by 2050 means a state in whichanthropogenic GHG emissions andanthropogenic GHG removals are inbalance. In order to achieve thisstate, the amount of removals must
be expanded. As a contribution tothis, a trading mechanism throughcarbon credits between entities thatemit GHGs and those that absorb
and remove carbon could beutilized.

Source: Based on the Carbon Credit Report Expand creation of carbon credits to help

achieve NDC• J-credit, JCM● Expand creation of carbon removal credits notunder the J-Credit System• Promote the creation of domestic voluntary
credits of natural origin• Promote development of NETs (Negative EmissionTechnologies) and creation of NET credits• Facilitate investment and procurement
commitments of carbon removal credits for future
generations

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Expand Initial Demand Toward Early Market ExpansionIn recent years, a mechanism for joint purchase and long-term off-take agreements for carbon
removal projects that meet certain criteria has begun to be formed, and initial demand is being
generated by the private sector.

By creating demand signals for carbon removal at an early stage and increasing the predictability of thesupply side, it is possible to accelerate investment in technology development and lower costs, thereby
increasing supply. Expanding such early demand signals is important for early market expansion.
NextGen CDR FacilityFrontier

 An initiative to jointly purchase CO2 removal derived fromthird-party certified technology-based CDRs* by companies
participating as buyers, with the aim of promoting andspreading the use of technology-based CDRs
 Plan to purchase a total of more than 1 million tons oftechnology-based CO2 removal value by 2025 and provide
verified technology-based CO2 removal value toparticipating companies by 2030

 Launched in April 2022 by Stripe and others to leverage the Advanced Market
Commitment (AMC) concept, which promotes the development of carbon removal
technologies by guaranteeing future demand. They have committed 1 billion dollars
worth of permanent carbon removal technology between 2022 and 2030. Currently
committed to purchase$5.6 million (equivalent to approximately 9,000 tCO2) for 15 carbon removalrelated startups.

* DACCS, BECCS, enhanced mineralization, biochar,product mineralization
Certification bodies(VCS, ACR, etc.)

Development of carbon credits (Methodology
development, various procedures <application,verification, reporting>, etc.)

Buyer 1
Buyer 2
Buyer nSeller 1

NextGen CDR Facility（South Pole, Mitsubishi
Corporation etc.）

Listing net zero, etc.
Sales of carbon credits
Carbon credit consumers(Creation of trading opportunities, contract⇒ Realization of carbon
negotiation <price and term>, etc.)
offsets⇒Creation and expansion of carbon credit market

Seller 2
Seller n
Businesses with CCUS
technology, etc.
⇒Secure a stable revenue
source through credit salesSource: (Left) Based on press releases by Mitsubishi Corporation and MOL (Right) Frontier Homepage, CNBC

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How CDR Rules Should be Formed

It is important to implement consensus building on the necessary rules and share knowledge in an
appropriate forum, taking into account the development status of each technology, the difficulty level of dataacquisition, and other conditions. It is also necessary to have a framework to consider what we should workon for each technology.

Working Groups will be established to formulate MRV methods necessary for creating carbon credit and discuss
other rules. The establishment of MRV methods will be coordinated with the compliance carbon markets.

Table: Policies for each category of rulemaking related to CDRClassification①Role of CDR inclimate change
countermeasures②Definition of CDR(scope andtechnology)③MRV method,etc., focusing on
ways to calculate
the removal effectof CDR④Rule formation
specific to eachtechnology

Image of working groups (WGs)

PolicyBuild consensus on the need for CDR through activities ofinternational organizations such as the IPCC and IEA,
outcome documents of multi-negotiations such as the G7,and multilateral initiatives.
Clarify the requirements for CDR (permanence, timerequired for removal, etc.) and the technology categories tobe included in CDR, both domestically and internationally.

Promote research on methods for measuring the effects ofremoval and develop MRV methods necessary for crediting,etc.
Consider ‘consultative bodies' to study standardization
strategies, such as establishing a forum for interested
parties to gather and discuss rule formation policies.

CDR Study Group

DACWG

Technology XWG

Technology YWG

Technology ZWG※Ocean based CDR and Enhanced weatheringare other candidates.

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