The EU CRCF explained, with Asger Strange Olesen.

Hello Max, good today, great to be here.

Thanks Max. I'll try to do that. You said the stage for that very well, thanks. Yes, this is just this of the CRCF is really my favorite issue and what I've been geeking out for a number of years now, 15, 16 years. I am mainly here as a member of an independent member of the CRCF expert group from the forest subgroup, but I've been following this agenda ever since I was first doing a carbon forestry project back in 2010, I think, and spent some time at the European Commission on LULUCF, leading that, where some of the ideas that we now have in the CRCF framework first came up. then I've been in the biodiversity-created working groups, FSC working groups, LULUCF reviews and supporting new policymaking. I've been around. Let's put it like that.

Yeah, that's important to understand. The carbon removal and carbon farming framework is a standard of standards. It's a European EU policy embedded and aligned standard of what it takes, what it should take to have a carbon removal recognized. And it's interesting in the way that it builds on and links to a lot of other EU legislation, the EU taxonomy and the nature restoration law and so on. So if you are interested in carbon removals and you are possibly in the future already buying carbon credits, then this is sort of a way forward. It's way to make sure what you do will be recognized in the future by EU policies. Perfect.

What changed was that the actual methodologies or again sort of the standard for what a methodology in the given or given activity should cover was published. They entered into EU law as implementing in this case, delegated regulation, meaning now they are in force. We've been working on them in the expert group for a couple of years, and they're sort of the last step, taking the framework to life. There's a regulation on top, which was adopted two years ago. When it's supposed two years ago, there's other delegated acts in place that set out the verification set of registries, how to recognize schemes, and that's all good. That's market infrastructure. We need it. But now we have the methodologies. But it's important to see it for what it is. You cannot just do a project under the CRCF methodologies tomorrow, an issue of credit. You need to have a full scheme, an operating scheme by hosted by some other entity than the Commission to apply to be recognized as in CRCF methodology. And then that would be checked meets all the criteria, both methodology criteria and also the infrastructure criteria around having to support a registry having claims mechanisms, having all sorts of things around it. So it works. And if it is then recognized, then you can start issuing. If you're the developer or landowner, can start issuing carbon removal units with an EU stamp on it. So that's what changed.

Well, there's a long and a short answer to that. The short answer, which is not very encouraging is that, as of now, you can't claim a lot. But that you need to look into the bigger picture and see how the CRCF framework and methodologies fit into and are now referenced by, among other the European Sustainability Reporting Standard, the ESRS. So in there, it now refers to the CRCF framework. So that's sort of saying, ideally, you are using the CRCF methodologies and using CRCF units for whatever removal you are claiming in what you report as a corporate. So that's one way, one thing that you can use it for to substantiate your claims. But there are other demand types underway. None of them are carved in stone. So right now we're pretty meager on demand. But you could see it in different ways. The future demand, there are options around what would happen in the ETS after 2040. That's a long way out. But still, if you want to prepare and we have a great ETS exposure, emission trading scheme exposure, it might be worthwhile considering. If you're currently having a carbon compensation program as a corporate and you are in the CSRD scope, then you are future proofing that program by shifting it into the CRCF methodologies. And that can be just as simple as pushing for and hopefully seeing that the methodologies, the standards you're already using, could be vera, could be any other, make sure they get recognized under the CRCF. And then you can have your units issued as a CRCF using a recognized vera methodology. So it's basically making sure you embed yourself into EU policy making for the future.

No, in principle not. If you as a landowner issue a CSC unit and sell that off to someone within the EU, because it's in both on the supply and demand side, it's an EU-registered restricted scheme, then that landowner will have to deduct it from his scope one, which would be the scope three of the downstream company that would buy wood or agricultural produce from that particular land. and that needs to be settled, that needs to be cleared. But one of the things of the CRCF framework is that there is requirement all the way back up in the regulation that was set out, that these units need to be recognized by the government, the greenhouse gas inventory of the host country of that project, and also the host country of the company using the unit. So there's some infrastructure there that is not totally set out, and not sure all country inventories are ready to do that, but it would be reflected there.

Yeah, exactly. And for the time being, that means that a company that buy in this unit can make the same compensation or contribution claims and statements as you would do for any voluntary carbon credit. But there's a review coming up this summer of the CRCF or ready, was instated back in 2024, where other use cases of CRCF units and a new type of unit will be introduced, and that will open up more options for companies and more pathways to demand for project developers and project hosts. We can get back to that at another time.

if we look at it very much top down from policy architecture point of view and what's already in law, then there is no demand right now that sort of is regulated. As mentioned before, then in the ETS review that just came out, there is a mentioning of nature based carbon removals, not as part of the access to permanent removals that is going to come up in the next couple of years and not as part of the international credits, this 5% that can flow into the ETS, but it does say in the amendment of article 10 and the amendment of article 9, I think it is in the ETS, that there should be an assessment of the role of nature-based removals into the ETS and whether there could be an opening up of ETS installations or companies buying removal, nature based removal units sometime around 10 years from now. Nobody wants to create uncertainty around supply and demand in the ETS, so they are out in good time, but that's something major out there, how it will take shape and exactly when it will kick in remains to be seen, but in the meantime, there is also in the ETS review proposal that there is a recommendation from member states to also use auctioning revenues from nature-based removal measures, which is another way of saying maybe when you need to meet some of your targets for 2040 as they are negotiating right now, you should look into this option if that's meaningful in your country and you could use some of those money from the ETS auctioning to do that. How that plays out is really country by country, but what we are expecting both relating to discussions and we're having on and off topic in the expert group is that the proposal that will be out on national targets and flexibilities in December this year, it's in the commission work plan for 2040 targets will have elements that will clarify how that should look like and one thing we expect as well is that the land sector will finally become something because right now we have ETS that will expand. We have the effort sharing decision covering remaining sectors, buildings and farmers and transport and so on that might shrink or change, but agriculture and what's called LULUCF could become an entity and that's where I think I would keep my eyes out over the next couple of months in terms of demand, but that's from a policy point of view and you just stop me Max because I can continue on this topic, but if we look at it more from a corporate demand driver point of view then I would go back again to corporate greenhouse gas inventory, corporate targets and how they are reflected in both in the CSRD with transition plans and how you set it out there what you report in the ESRS templates where there are lines for all of this so it's recognized that you can do the carbon removals. If you have a target set outside of the EU framework let's say SBTi, SBTi flag and you do have a component there or if you're looking into doing the OES under the new carbon standard or the version 2 under SBTi then you are already sourcing carbon credits and if you're sourcing carbon credits within the EU and you are in scope of the CSRD then I would seriously consider switching to or pushing the current standards you're using into the CSRD frame because again then you're future proof. This is only moving towards a more and more complete structure that will allow policy makers to set targets that will come your way not far into the future. So demand is very much driven by some of those standards some of those policy developments and by the merging of the voluntary market into an EU policy frame.

Well I apologize for the time but that's a debate on fire right now. I think this summer has only proved it even more that we do have as you were saying a lot of landscapes in Europe that will need to adapt to a new climate build resilience and that that transformation which is stay within the forest space will entail changing species composition managing practices management practices that probably also at places retiring productive land and all of that some of the early signs of that have already played out over the last 10 15 years together with a sort of high level trend in the EU that you've seen demand for sustainable wood going up. So we've also seen harvest rates going up and we've seen that sort of the more and more of the annual increment has been harvested in some countries in some places due to legacies around planting times and rotations and all of that but adding all of that up we see that the EU forest sink is under pressure but and the CRCF framework is a policy initiative in part aiming at addressing that and in part aiming at creating new business models and income streams for land managers, farmers and forest owners alike in Europe but on that first part of addressing that sink then there's something we haven't solved for yet there's something that still needs to be figured out and that is that some of those high risk landscapes they are high risk also because of the forest systems that have been taken shape there or due to management practices and market pressures and all sorts of things over a couple of generations and they need change but that change undertaking change in a let's say fire risk forest system doesn't go very well hand in hand with permanence does it? It didn't go very well hand in hand with in some places regulatory additionality if there's always pressures already pressures on that and it doesn't go very well with having a baseline use case or baseline and business as usual for a forest where you can prove additionality because some of those systems will have to change in a way where for some time when you change species composition and planting density and other stuff may have lower carbon stock than what they have had over the last couple of years last couple of decades last rotations and that means the CRCF credits probably not gonna it's just my guess not gonna be very attractive for many of these areas for many of the forest owners in these regions and that's not a specific fault built into the CRCF it's just because the mechanics of carbon credits just doesn't deal well with these uncertainties then we get quickly get into a debate we also had in the expert group and we'll have in a wider context around how to factor in actual disturbances into your baseline and some default one could argue that we just need to for investors bias these credits to just know the risk and then price it accordingly but I think the way we ended up with the methodologies means that it's gonna be it's gonna be tight creating a good accountable and additional carbon amount for issue and as a credit in some of these projects because of the way we set baselines so what to do then I think the the review of the CRCF regulation soon to come out will give us some clues so let's do a cliffhanger and come back to that in the next session

since july 9th then yes then the methodologies are in place so if you haven't approved standards which is not the case yet but you could plan around that then you could start a project but we also need to be be mindful here that what was the methodologies that were approved and adopted in july that was around soil carbon wetlands and afforestation with natives and a number of good criteria around the quality there but it's not improved forest management and there's a lot of other activities that still does not have a methodology so that's what we are talking about and that goes a bit back to the discussion before around the little CRCF sync that we haven't seen the methodology that would target existing forest just yet so if you are as a company then and you have whatever reason to support increasing the forest area of Europe so afforestation then you're it's ready set go and you could start a project and start figuring out your regulatory and financial additionality and all of that and find the place where you want to plant trees together with a project developer because I think that's the other side of this whole thing in terms of being future proof that is that we do not have in the intensively managed European landscape that many places where you can create new forests at a scale that makes applying the fairly heavy admin carbon credit schemes not just the CRCF but any other you don't have that much land that you could readily plant up where land sowning approvals stakeholders and some support all lineups I'm sure you know that part well not better than I do when that you have places to take people but if if that's a part of your strategy as a buyer as a company I would I would get going now

for the first time ever there is now a European sanctioned European policy aligned option to do carbon credits relating to forestry and agriculture and wetlands and if you have a program in that space get it into this framework then your future proof that would be the thing to remember for me because so far until now for the last 15 years when I've had these conversations the question has always been does the U.S. based standard really apply in Europe and how do I do that and can I account it and what's the regulatory risk concerned about a lot of that has now been if not handled then reduced significantly so it's a whole new opportunity space opening so I would get going