Balancing demand incentives with climate integrity: Carbon Gap’s views on integrating carbon removals into the EU ETS

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Integrating Carbon Dioxide Removal (CDR) into the EU ETS creates the opportunity to drive much-needed demand for permanent carbon removals in Europe, whilst preserving its function to incentivise emissions reductions.

To achieve these two goals, the integration should follow some key rules:

1. 1. ensure the integration of CDRs does not undermine efforts on emissions abatement by maintaining reduction ambition through a robust cap;
   2. ensure environmental integrity by only allowing permanent CDR methods, with a priority to geological storage in the short term, potentially expanding to other CRCF-aligned permanent methods if underpinned by robust methodologies and MRV criteria, with additional sustainability criteria for methods relying on biomass use;
   3. to secure steady demand, establish a sub-mandate for CDR, requiring ETS entities to cover a growing percentage of their ETS obligations through CDR;
   4. introduce design features or complementary policies into the ETS that ensure demand for a portfolio of CDR methods, rather than an exclusive focus on the lowest-cost methods.

   In addition, we believe it is essential that the EU recognise the need for a sequenced approach to building a compliance market for CDR, to continue to create stable demand for CDR units even as ETS emissions decline.

   1. • To complement an ETS integration, in the near to medium term, setting up a dedicated Removal Compliance Scheme (RCS) could help drive growing demand, namely by targeting further emissions sources currently outside of the ETS (e.g. non-CO₂ emissions from the energy and waste sectors).
      • In the longer term, further policy interventions, including consideration of a CDR obligation based on companies’ financial capabilities, are likely needed to sustain large-scale demand for CDR to deliver net-zero and net negative.