In or Out: What’s best for carbon removals and the EU ETS?

Dec 17, 2024 | Carbon Dioxide Removal (CDR), ETS, Publications

What will the future of the EU Emissions Trading System (ETS) look like as the emissions cap heads towards zero? Is integrating carbon dioxide removals (CDRs) into the ETS a solution to help the EU achieve its climate goals? 

These questions are at the forefront of the Commission’s mind as they review different options for the future of the ETS ahead of the 2026 revision.

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About the report

The EU ETS is on a trajectory to reach near-zero emissions allowances by 2039. Meanwhile, debates are intensifying over whether, and to what extent, CDRs should interact with existing emissions abatement policies like the ETS.

The European Commission is tasked with delivering a report to the Parliament and Council by July 2026, exploring how negative emissions could be accounted for and covered by emissions trading.

This policy brief explores:

  • How to deal with the ETS ‘endgame’,
  • Whether there could be a place for CDR,
  • If not, what an appropriate policy framework for developing permanent carbon removals might look like.

Key findings

Permanent CDR is not ready for the EU ETS

  • Methods of CDR which could deliver permanent removals (e.g. DACCS, BioCCS) still need to mature.
  • Their ability to deliver real ‘net’ removals has yet to be demonstrated at scale, and monitoring, reporting and verification (MRV) methodologies are still very incomplete.
  • The CO2 transport and storage infrastructure they require is also not yet in place.

Integrating CDR is also not needed for the ETS until 2040

  • The ETS will have a surplus of allowances sufficient to meet demand under the Commission’s base policy scenario until 2040.
  • Including permanent removals prematurely could exacerbate longstanding oversupply issues, and undermine market efficiency.
  • Allowing removals into the ETS risks abatement deterrence.

Controlling the supply of removal units would be difficult to implement in practice

  • The flow of issued removal units would be hard to estimate before projects are invested in.
  • Maintaining a “gross cap” (emissions cap + removal units supply) could have unintended consequences.
  • Carbon Contracts for Difference (CCfDs) to balance cost differences between removal units and emissions allowances might exacerbate this issue and further weaken the incentive for covered entities to reduce their emissions.

Investment (rather than a market) is needed to develop permanent carbon removals

  • Market mechanisms alone cannot drive investment in early-stage development or shared infrastructure under uncertain regulatory conditions.
  • Existing funding programs, such as Horizon Europe and the Innovation Fund, are helpful but inadequate on their own.
  • A dedicated public investment vehicle is needed to help fund the development of permanent removals.

The immaturity of permanent CDR technologies makes talk of their integration into the EU ETS premature.

While permanent removals will play an important role in achieving climate neutrality and reversing emissions in the long term, the EU should focus on investment to address key challenges—technological maturity, MRV standards, and infrastructure. Only once these are resolved should permanent removals be considered for integration into the EU ETS to help achieve the EU’s climate goals.

Read the full brief and executive summary to learn more. 

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