Forming Markets for Carbon Dioxide Removal Technologies: The Role and Influence of Voluntary and Compliance Carbon Markets

Abstract

Limiting global temperature rise requires carbon dioxide removal (CDR) at large scales. Yet, commercial deployment of CDR technologies is limited, and establishing a global CDR market is vital to secure funding for scaling the industry. The Technological Innovation Systems (TIS) framework is a theoretical approach to understand socio-technical change, highlighting the importance of technological innovation and the interactions between actors and their networks within an institutional context. This research maps the structure of the TIS at an EU level and analyses the performance of seven TIS functions, with a particular emphasis on market formation [F5] for CDR; an intangible product. This function is expanded by examining two existing carbon market mechanisms, the voluntary and compliance carbon markets, to understand their impact on the development of a market for intangible products. Various CDR actors, including CDR companies, policymakers, networks, experts, journalists, niche market actors, and municipalities, were interviewed and a separate survey was conducted. The results showed that the CDR TIS is currently in a formative phase, where start-ups are focused on R&D and technology demonstrations, scientific uncertainties exist, and private funding and voluntary demand play a significant role. The TIS is influenced by both soft institutions and hard institutions. While soft institutions are crucial in driving private governance and voluntary demand in the early phase, there is a strong desire for market formation mechanisms governed by hard institutions. Different opinions exist on how to establish compliance carbon markets, indicating a lack of consensus and common understanding in the CDR space. The application of the TIS framework to assess the diffusion CDR technologies in this research emphasises the need to understand the dynamics of market formation for intangible products. The study incorporates the concept of private governance alongside the TIS framework, recognizing its role in the formation of a voluntary market for CDR. Moreover, it emphasizes the importance of fast-moving soft institutions in early market development and the need to synergize different strands of theory for effective industry creation. In conclusion, the voluntary carbon market, governed by soft institutions, has played a significant role in the early development of the CDR industry. However, compliance market formation mechanisms, governed by hard institutions, are necessary for long-term growth. Overall, a combination of soft and hard institutions is crucial for market formation and diffusion of CDR technologies.