Milestones ahead

Greenhouse gas removals (GGRs) will be critical to the UK’s transition to net-zero. The UK Government recognises that, and has this month reaffirmed this view by providing further detail on plans to integrate GGRs to the UK Emissions Trading Scheme (ETS).

The UK ETS has been identified as one of two routes to market for GGRs, alongside the voluntary carbon market (VCM). In 2023, the UK ETS Authority pledged to consult on how engineered and, potentially, high-integrity nature-based GGRs could fit within the UK ETS.  In summer 2024, the Authority published a detailed consultation document indicating how it might proceed with integration, aiming to create a market for GGRs while adhering to core policy principles – including environmental integrity, sustained incentives for reduction, and economically efficient use of GGR.

In our response to last summer’s consultation, we advocated for a market design that would ensure climate integrity while maximising the market opportunity for GGRs and navigating the scale-up challenges engineered GGRs in the UK face today. On the 21st of July, the UK Government released its much-awaited response, representing a major milestone in developing a UK policy framework for GGR and reaffirming the UK’s position as a global leader on GGR policy. Overall, the response is a major step for the developing GGR sector and brings progressive policy thinking that largely aligns with the messages we advocated for last summer. But the document leaves open some issues that could reduce the credibility of the ETS and its ability to create long-term market for engineered GGRs.

We outline the key wins and remaining risks for GGRs in the consultation response and what it could mean for this nascent industry.

In its original call for consultation, the UK government expressed that it was intending to “maintain the gross cap” on allowances. This means that for every GGR allowance issued, one traditional allowance will be removed from the system (one-for-one substitution). The consultation response has now reaffirmed this position. This substitution approach is necessary to deliver sustained climate ambition in the ETS and means that the integration of GGRs does not lead to an increase in the total allowances, and thus total emissions, occurring in covered sectors. In fact, it improves overall ambition by bringing net emissions down compared with the counterfactual of no integration.

In addition, the government recognises a role for a “new net cap” in the longer term, which would be achieved by bringing down the cap on gross emissions but exempting GGRs from any cap. This mechanism is likely to increase economic efficiency but introduces uncertainty about gross emissions and hence is not appropriate for the near term where ambitious emissions cuts must be pursued.

Government commits to present the relevant legislation by 2028, with a view to GGR integration happening from 2029. Government saw no reason to delay to post-2030. This means UK integration could happen sooner than the EU, where integration would likely not happen until the next trading phase, starting in 2031. The UK’s swift timeline recognises the importance of creating a market for GGR units. Without the promise of reliable long-term revenue streams, UK GGR projects will struggle to build an investment case.

GGR methods are varied, each differing in terms of durability and reversal risk for carbon storage. Carbon Gap’s view is that nature-based removals like peatland restoration, which offer more temporary carbon storage, should only be used to compensate for shorter-lived emissions generated from the land-use sector. With this principle in mind, the ETS, which is made up of primarily fossil-derived emissions, should only involve permanent GGRs.

The 2024 consultation document also cited that peatland is currently an emissions reduction, rather than GGR, approach. As a result, government has decided to exclude peatland restoration from ETS eligibility in this phase. This is a positive step – peatland restoration units are not suitable for compensating the long-lived climate impact of ETS emissions. We think this exclusion is necessary even if UK peatlands do become a net sink.

Government has also adopted a three-pillar framework for ensuring the permanence of integrated GGRs, as proposed in the initial consultation document, involving three elements:

1. To ensure permanence, projects must prove a minimum storage period of 200 years (mirroring the requirement under the EU CRCF).
2. Project operators must be legally liable and accountable for maintaining carbon storage and remediating any risk of reversal.
3. Fungibility measures will be used to ensure consistency between different GGR methods in terms of the durability of storage provided. These measures will take the form of buffer pools.

This strong permanence framework is necessary to uphold impact and integrity as GGRs are integrated in the ETS. The 200-year minimum storage period helps cement the use of permanent removals to address fossil emissions; how operators will prove they align with this threshold is to be determined through technical consultation.

The response reaffirmed that any integrated GGR units will need to be ex-post, meaning that only credits that have been delivered and verified can be integrated into the ETS. This ex-post issuance strengthens trust and accountability in the system, by further limiting mitigation deterrence. In addition, units must be delivered by projects operating in the UK.

For covered entities that want to comply with GGRs, capacity could be an issue during the early phases of the market. Analysis by Lomax et al. (2025) finds that the GGR volume from projects in the UK’s current removal pipeline total just 2.8 MtCO2/year – half of the UK’s 2030 target of 5 MtCO2/year. If planned projects face delays, we may see very little GGR eligible to enter the ETS in the initial years.

UK-based, ex-post GGR capacity is further constrained by the interaction between the UK ETS and the UK GGR Standard, currently being prepared by the British Standards Institution (BSI). The consultation response says, “removals being operational means that firms can have their removals calculated according to the UK GGR Standard, be verified by accredited third party verifiers and be awarded with an ETS allowance to sell on the UK ETS market,” meaning that the development of the GGR Standard is an implicit constraint on the timeline for integration. The first methodologies (which focus on BECCS and DACCS) are expected to be ready by 2027, which (if on schedule) will enable BECCS and DACCS integration in 2029. BSI’s contract includes an option to extend to further methods, but it’s not clear which GGR methods might be in scope or what the development timeline might be. Biochar or enhanced rock weathering could perhaps provide additional GGR capacity in the ETS, if BECCS and DACCS projects face delays, but methodologies are likely several years away.

To further support the development of UK GGR capacity and mitigate against potential supply bottlenecks, suppliers could arrange offtake or pre-purchase agreements with ETS-covered entities. Through such agreements, covered firms could stand to benefit, for example, from hedging against future ETS prices. But it’s imperative that they can enter into offtake agreements with confidence that any contracted units will be usable in the ETS when they eventually come to be delivered. While the ex-post requirement “does not prevent” bilaterally negotiated offtake agreements, these agreements should be explicitly permitted by the Authority. Government has said that it is considering other “routes to market” alongside auctions (see below), citing bilateral offtake agreements as an example.

The Government is “minded to” differentiate GGR units from traditional ETS allowances. While units will have the same compliance value under the ETS (they can be used interchangeably to meet requirements), differentiation means providing information to buyers about the type of allowance, which government believes could motivate different preferences for each allowance type. It is suggested that doing so could promote price discovery for GGRs.

Further differentiation – i.e. creating different allowance types for different GGR methods – appears unlikely, though a final decision on the extent of differentiation has not yet been made.

We support this move to differentiate GGR allowances in the ETS, which will provide much better visibility of climate outcomes as well as supporting market development. But creating two different allowance types in the ETS is a bold new direction and needs to be handled with caution.

One challenge for differentiated allowances is liquidity, particularly when it comes to auctioning allowances, as auctions risk failure if markets are too “thin”. The government identifies the possibility to address this risk through “Product-Mix auctions”, which allow bidders to express preferences and submit bids across different types or “products” of allowances within the same auction, choosing quantities and prices according to their needs.

Differentiated allowances also means potentially differentiated pricing. Ideally, GGRs would cost more relative to conventional units – which would promote GGR market development and also reduce the overall subsidy needed from government (under the contract for difference structure, in which the government tops up the cost of GGRs if they are below a certain price). 76% of stakeholders who responded to the consultation believed that obligated entities would voluntarily pay more for GGR units. While it would be great to see such a price premium emerge, we don’t think it is likely in the current design. Firstly, there is no additional compliance value associated with GGR units to drive such behaviour, and  secondly, it is our view that any additional value of GGR credits to ETS entities beyond their compliance value (such as the ability to meet corporate net-zero commitments) appears overstated in the government’s response. We also note that there is a limited overlap between ETS-covered entities and the voluntary market actors that have been active in GGR purchasing to date, meaning the relevant entities could be even less likely to pay more.

One option we have proposed is a sub-mandate or similar mechanism to ensure demand for GGR allowances and maintain the right price, but we do not currently agree with the speculative idea that such a premium is likely to be established voluntarily.

While no final decision has been made, the Government has signalled openness to including woodland creation units in the ETS, after stakeholders tended to support this option (65% expressed support). This support is motivated by the need to find a market for much-needed woodland creation in the UK. The government has put forward evidence that UK woodland creation can lead to long-lasting storage. The government’s response also challenges arguments put forward by the Climate Change Committee to keep woodland out of the ETS.

The inclusion of woodland credits is a tricky debate. While we wholeheartedly recognise the need for more woodland creation in the UK, we do not see the ETS as the right policy instrument to drive this. This concern is linked to the lower durability of woodland carbon storage, which could limit the ability to effectively address the longer-lived fossil emissions covered under the ETS. But we are also concerned about the impact of woodland integration on the demand for engineered GGRs, as well as the precedent this sets for ETSs elsewhere. Ultimately, integrating woodland may be trying to achieve too many goals at once, while risking achieving none of them. We are currently preparing further research and policy recommendations on woodland integration in response to the additional evidence presented by government in its consultation response.

What is more, the possibility to include woodland could represent a divergence with the approach of the EU, which has committed to focus on “permanent” GGR. Given plans to link the UK and EU schemes, differences in the approach to GGRs could potentially slow down linkage negotiations.

Our response to the 2024 consultation advocated for a sub-mandate, which stipulates that a minimum share of compliance requirements must be met through GGRs rather than conventional allowances (this share would also grow over time). A sub-mandate, or similar mechanism, would guarantee a minimum demand for engineered removals and in turn, potentially facilitate the desired price premium. However, the consultation response rules out the sub-mandate for now, citing the need for simplicity and minimal market distortions, and the potential additional costs for compliance entities.

We strongly believe such a tool will be essential to ensure GGR demand within the ETS and sustain the GGR price, especially with differentiation. While GGRs may bring a greater net impact than conventional units and draw in buyers, they are also unfamiliar, and may be seen as riskier by ETS entities – jeopardising potential demand. A sub-mandate would provide more reliable GGR demand within the ETS, maximising the market opportunity for suppliers, and creating a more compelling case for investors in GGR projects. We will continue to explore this issue over the coming months.

The fact that the Government has laid a solid foundation that aligns with many of our 2024 recommendations is incredibly encouraging. We’re excited to see the establishment of a large-scale, long-term compliance market that helps make GGRs bankable, while upholding climate integrity and impact. The proposal is 90% there, but the lack of a sub-mandate (or similar mechanism) and the potential inclusion of woodland credits means that the Government could still jeopardise its objectives.

In the coming years, an increasingly important consideration will be the linkage between the UK and EU ETSs. While the commitment to link has been made, a timeline for the linkage negotiations has not yet been set. With the UK government pressing ahead with GGR integration policy in the interim, emerging differences between the UK and EU approach could generate barriers to the negotiations later on.

The Government response is promising, but scaling GGRs is not in the bag. We will continue to work closely with DESNZ and our ecosystem partners to ensure that the impact of ETS integration is maximised, integrity is maintained, and the UK can maintain its momentum on the path to creating one of the world’s first GGR compliance markets.  Watch this space as UK GGR ETS integration policy develops .

By Francesca Battersby