3. Carbon Removal Offtake Agreements (Offtake Agreements)
As demand for high-quality CDR grows, Offtake Agreements are becoming increasingly central to the financing and deployment of durable CDR projects.
(a) Definition and Core Function
An Offtake Agreement is a legally binding contract in which a buyer commits to purchase CDR credits from a supplier over a defined period. Each credit represents the removal and durable storage of one metric ton of CO₂, verified according to an agreed protocol and issued by a recognized registry.
The primary function of an Offtake Agreement is to reduce uncertainty. For the supplier, it creates a predictable stream of income that can be used to attract investment or secure loans. For the buyer, it assures access to verified removals that can be retired to meet voluntary climate commitments or, eventually, compliance obligations.
(b) Benefits of Offtake Agreements
Offtake Agreements play a crucial role in advancing the CDR market for several reasons:
(i) Risk management: By defining delivery schedules, pricing, and remedies for shortfalls, Offtake Agreements allocate risk in a way that is transparent and enforceable.
(ii) Market certainty: Suppliers gain confidence that their credits will be purchased, enabling them to proceed with construction or scale-up. By locking in long-term Offtake Agreements, suppliers can better manage their financial risks and attract investors. In addition, lenders are more likely to provide funding when there is a reliable revenue stream.
(iii) Market development: Repetition of Offtake Agreement structures across transactions helps establish market norms and reduces negotiation time in subsequent deals. As more agreements are negotiated and executed, common contract provisions and best practices emerge, making it easier for parties to negotiate future agreements. This, in turn, helps to stimulate innovation and investment in CDR technologies and projects.
(iv) Regulatory readiness: Offtake Agreements often require adherence to protocols and registries that are aligned with emerging international standards, positioning buyers and suppliers for eventual compliance markets.