Navigating ETS Reform: A Role for Carbon Removal?

This month, the political debate around Europe's climate policy has intensified. At the centre of it is the revision of the EU's Emissions Trading System (ETS), expected in July.

The ETS is the backbone of the EU's climate architecture. By putting a price on CO₂, it creates both a penalty for emissions and a financial incentive to reduce them. It has helped drive emissions down across key sectors and shape investment decisions well beyond the industries directly covered.

But the system is increasingly contested.

Supporters, including the European Commission and several industrial players, argue that the ETS has successfully decoupled emissions from growth and should maintain its long-term trajectory. It has achieved this whilst mobilising large-scale investment, driving innovation, and creating a business case for clean technologies.

Political pressure is rising. Critics argue that the ETS undermines European competitiveness, claiming that some emissions reductions reflect declining industrial output rather than innovation and efficiency. Leaders such as Friedrich Merz and Giorgia Meloni have called for the system to be weakened, revised, or even paused.

The current situation sets the stage for highly politicised negotiations in the months ahead.

If uncertainty around the ETS continues to grow, the consequences could be serious. Investor confidence in climate technologies could weaken, incentives to decarbonise could blur, and early movers in European industry could face stranded assets.

At the same time, legitimate concerns from industry and policymakers must be addressed if the ETS is to remain politically durable.

This moment of uncertainty is where carbon removal can play a critical role.

Europe needs the ETS to meet its climate targets and transform its strategic industries. The ETS, in turn, can benefit from carbon removal to deliver that transition in a way that strengthens competitiveness.

Linking permanent carbon removals generated in Europe with the ETS, whether directly or indirectly, could achieve two things at once:

• support the growth of a domestic European carbon removal industry that provides both climate benefits and economic growth; and
• position the ETS as an enabler of EU climate goals in a way that preserves the competitiveness of ETS industries navigating the transition.

Growing a domestic CDR industry

In a political climate increasingly shaped by “Buy European” thinking, carbon dioxide removal (CDR) is also one of the emerging sectors where Europe still has a chance to lead. At a time when policymakers seem keen to pay others to compensate for our emissions through the purchase of international credits, we should instead consider the potential of our own domestic carbon removal industry.

Investing in CDR is an investment in the European economy. Multiple reports have shown that a fully realised European carbon removal sector would bring significant added value; it would add percentage points to European GDP, support hundreds of thousands of highly qualified jobs, and build a new innovative sector where the EU can lead.

Making sure the ETS is set up to deliver on climate neutrality goals

Integrating high quality, permanent carbon removals into the ETS could help maintain the system's climate ambition while giving covered sectors some degree of flexibility during the transition. In particular, CDR could help manage the endgame for the ETS as we approach 2050. Success here relies on near-term investment in scaling CDR sector here and now.

Whilst the current discussions on ETS focus on short-term relief for certain industries, we also need to consider the ability of the ETS to deliver the industrial transition long term. Alternatives such as lowering the ambition of the ETS gross cap would undermine the incentive for industrial decarbonisation, and punish early movers in climate investments, without addressing the underlying causes of EU competitiveness.

The credibility of the ETS, and of EU climate policy more broadly, will depend on the policy choices made in the coming months. Linking carbon removals to the ETS could help policymakers stay the course in these politically challenging times.

Opportunities to strengthen climate ambition while supporting competitiveness are rare. Linking permanent carbon removal with the ETS may be one of them.