Integrating GGRs in the UK Emissions Trading Scheme: Carbon Gap’s response

Note: Greenhouse gas removal (GGR) is the terminology often used in the UK for carbon dioxide removal (CDR), but including a wider array of greenhouse gases

Carbon Gap welcomes the detailed proposal on options for integrating greenhouse gas removals (GGRs) into the UK Emissions Trading Scheme (ETS). The detailed thinking presented by the UK government is a valuable contribution to the policy discussion on GGR/CDR integration into ETSs, which will undoubtedly inform a richer discussion of policy options internationally.

Carbon Gap sees a critical need for a compliance mechanism(s) to support the scale-up of, and establish rules for, GGR. Carbon Gap is still undertaking research to examine if ETS integration, or an alternative mechanism such as a dedicated Removals Trading System (RTS), would be most appropriate for meeting these goals. In general, Carbon Gap finds that a compliance mechanism alone is unlikely to deliver sufficient volumes of high-quality GGR at pace, requiring consideration of additional policy interventions such as government procurement of GGR.

Discussions on ETS integration remain at an early stage and our response to this consultation represents an initial position and a basis for discussion, building on our core principles – high integrity climate action, durable net-zero, limiting mitigation deterrence, and maximising the scale-up opportunity for CDR.

Key strengths of the UK government’s proposal include:

• Cap Option 2 – The minded-to position to pursue cap Option 2, at least initially, is an effective way of managing certain sources of mitigation deterrence (assuming the price of GGRs remains sufficiently high). GGR integration should not be used to increase the overall cap, as in Option 1, as this would undermine the carbon price signal of the ETS. We recognise certain benefits of Option 3, which can ensure. Carbon Gap is exploring how these objectives could be achieved outside the ETS, for instance as part of an RTS dedicated to GGR. Adopting Option 2 in the near term can provide much-needed demand-pull for GGRs and bring down net emissions on the journey to net-zero, while targeting a negative cap in the long term.
• Ex-post restriction – The minded-to position to focus on ex-post units will ensure more accurate accounting and further limit mitigation deterrence.
• Focus on UK GGRs (partial support) – A focus on UK GGRs will enable greater oversight of projects and allow high standards to be enforced. However, eventually establishing linkages to the EU ETS, or other ETSs or GGR sources, as long as these meet the same high standards, would add liquidity to the GGR supply and

Carbon Gap also has some serious concerns with the proposal. These include:

• Woodland integration – Carbon Gap is deeply concerned with the proposal to integrate “high quality nature-based GGRs”, starting with GGRs from UK woodland, into the UK ETS. To reach a durable state of net-zero, only removal methods that can provide high durability, low risk of reversal, and precisely measurable carbon dioxide storage would be appropriate for matching against the fossil emissions that are priced under the UK ETS. A growing body of literature is evidencing the fragility of natural sinks to increased natural disturbances (due to climate change) across the globe and in Europe. Carbon Gap believes that the proposed permanence framework, particularly the use of fungibility measures, cannot deliver the climate impact guaranteed by more permanent removals. For this reason, it is not advisable to include woodland units into the UK ETS. A strong permanence threshold of centuries to millennia at minimum, combined with strong liability measures in case of reversal, should be adequate to manage permanence, reducing the need for fungibility measures that involve risky value judgements about storage and intergenerational burdens.
• Inadequate market size – As presented, the proposal is not likely to deliver the consistent and high-confidence price signal necessary to drive substantial volumes of higher-durability carbon removal in the requisite timeframe. There is no incentive for buyers to purchase GGR over other types of units, and the likelihood of buyers doing so voluntarily is overestimated (due to knowledge gaps as well as uncertainty about the impacts and costs of different GGRs). The cited example of Frontier purchases does not represent market behaviour at large, and ETS entities differ from voluntary market buyers in crucial ways. If GGRs are to be differentiated from UKAs, we do not expect that compliance buyers at large would voluntarily invest additional effort to navigate the GGR market to meet their obligations.

Carbon Gap’s proposals to enhance the opportunity for GGR while securing climate integrity include the following:

• A GGR incentive or sub-mandate – The government should consider a mandatory requirement for ETS participants to use GGR to cover an increasing share of their ETS obligations, starting as a small share of obligations and increasing over time. This is especially needed if GGRs are to be differentiated from UKAs, as it would allow a clearer price signal to emerge in the GGR market.
• Carbon Clearing House – Carbon Gap calls for an intermediary institution such as a Carbon Clearing House, to streamline the market for suppliers and buyers, and provide greater control over the portfolio and scale of GGR coming forward in the UK. The Clearing House could be based on, and preceded by, a shorter-term pilot programme to procure GGR that would help establish good practices.
• Measures to increase market size – A long-term negative cap and expansion to a wider array of sectors would enhance the market opportunity for GGR. This could also be achieved with a complementary mechanism (e.g. RTS) if evolving the ETS into a generalized GGR market proves too complex or risky.
• Interventions to address the surplus and maximise the ETS price are needed, to reduce the discrepancy with EU ETS prices and maintain a strong decarbonisation signal.
• Certainty about the future – GGR operators looking to sell into the ETS need certainty about their future eligibility for the scheme. A mechanism to approve projects for the ETS well in advance would ensure new sources of supply are brought forward. Investors in GGR projects and GGR offtakers (including those currently outside the ETS) would also benefit from certainty about the units’ eligibility for the ETS.
• Certification mechanism – The lack of certification mechanism planned for UK GGR places an over-emphasis on the ETS as the only market where units become certified. An underpinning certification that can be applied across compliance and voluntary markets, and indeed in other contexts (such as public procurement), could ensure integration in the UK ETS is no longer a dependency for GGRs to find a market in the UK.

Recognising the limitations of the ETS, the UK should establish additional voluntary and compliance mechanisms to bring forward UK GGR, such as a regulated corporate standard and a GGR public procurement programme. The ETS “cannot do it all” for GGR. Carbon Gap encourages the UK to broaden its policy mix to effectively address the needs of this new sector and position itself as a global leader on GGR.