The transition to global net zero emissions requires the rapid development and deployment of innovative technologies that are critical for decarbonising hard-to-abate sectors, such as industry, aviation and long-haul transportation. This report, prepared jointly by the IEA and GenZero, explores how carbon credits could help scale up low-emissions hydrogen, sustainable aviation fuels (SAF) and direct air capture and storage (DACS).
To align with the IEA Net Zero Emissions by 2050 (NZE) pathway that limits the rise in global average temperatures to 1.5°C, all these technologies need a massive and urgent scale-up in deployment. Low-emissions hydrogen production reaches 70 million tonnes (Mt) of hydrogen (H2) by 2030 in this pathway, from less than 1 Mt H2 in 2022. SAF’s share of final energy consumption in aviation rises from close to zero today to around 11% by 2030. Annual removals of CO2 via DACS reach almost 70 Mt CO2 in 2030, and some 700 Mt CO2 by 2050, again from almost zero today.
Achieving the necessary scale-up of these technologies will depend on early deployment and investment. In 2023, the level of investment in low-emissions hydrogen, SAF and DACS was USD 9 billion. In the NZE Scenario, this needs to increase to nearly USD 300 billion annually by the early 2030s and reaches around USD 700 billion yearly by mid-century. Around 75% of these investments in 2050 would be required for low-emissions hydrogen and hydrogen-based fuels.
To mobilise this level of investment, governments need to deploy a mix of complementary policies and innovative financing instruments. A blended approach of public, private and philanthropic funds could help manage different risks and lower the overall cost of capital. Limited public funds could contribute to manage regulatory and country risks to help bring in private capital in early projects. In developing economies, blended finance can use grants or guarantees to support market entry and project feasibility. Governments could help to bridge the investment gap by providing clear regulations and enabling policies. High-quality carbon credits are a potentially important tool to further incentivise investment and increase project revenues.
High-quality carbon credits can be helpful in attracting private capital to fund low-emissions hydrogen, SAF and DACS, especially in jurisdictions where no compliance carbon pricing instruments are in place. Carbon pricing instruments, which include “compliance” instruments (i.e. carbon taxes, emissions trading systems or hybrids of the two) and carbon credits, could help in different ways. In jurisdictions where compliance carbon pricing instruments are well established, governments could use the revenues to fund low-emissions technologies, especially for early-stage technologies facing the “valley of death”, which is the high-risk phase where many emerging technologies falter before reaching widespread adoption. High-quality carbon credits used towards a compliance obligation or in the voluntary carbon market could also accelerate the deployment of these technologies.
Carbon credit markets have faced serious concerns on both the supply and demand sides, but several initiatives have been set up to tackle these issues. On the supply side, concerns often revolve around over‑crediting, a lack of additionality or human rights abuses. On the demand side, some corporations have used carbon credits to make misleading claims about reaching carbon neutrality without making genuine efforts to reduce their own emissions. In response, initiatives such as the Integrity Council for the Voluntary Carbon Market (ICVCM) and the Voluntary Carbon Markets Integrity Initiative (VCMI) have set stricter quality standards on the supply side and created guidance to help buyers navigate these complex markets and perform due diligence.
Generating high-quality carbon credits from low-emissions hydrogen, SAF and DACS is possible with appropriate safeguards. Project developers and carbon credit programmes should prioritise addressing potential risks of an inaccurate quantification of emissions reductions from low-emissions hydrogen and SAF, and potential risks of double counting of the emissions reductions from SAF carbon credits. DACS developers should be ready to justify why they need carbon credits to cover the green premium even when other incentives are in place.
