Reaction to the legislative proposal on carbon removals in the EU Emissions Trading System

The European Commission’s proposal to reform the EU Emissions Trading System (ETS), published on Friday 17 July, integrates carbon dioxide removal (CDR) into the EU’s flagship carbon market, creating an incentive to permanently remove carbon from the atmosphere. Our full policy brief gives a break down of what the ETS proposal means for carbon removal.

To track Europe's largest carbon market reform throughout its legislative process and learn more about the ETS review, visit our dedicated webpage.

On Friday 17 July, the European Commission issued its legislative proposal for the ETS review on “how negative emissions resulting from greenhouse gases that are removed from the atmosphere and safely and permanently stored could be accounted for and how those negative emissions could be covered by emissions trading, if appropriate”.

The EU ETS review is a landmark opportunity to kickstart negative emissions, otherwise known as carbon dioxide removal (CDR), in the EU. Carbon removals are an important part of how the EU will reach its climate targets, since they compensate for residual emissions from industries that are hard or impossible to fully decarbonise. For now, the ETS is the only EU policy that could deliver the volumes of CDR needed to reach the EU's 2050 climate neutrality target. That makes this legislative proposal a make-or-break moment for the future of CDR in Europe. The EU must seize this opportunity, putting CDR on a credible path the success.

Carbon removals are needed to deliver a climate neutral EU. This role is underscored in the Climate Law and in EU modelling, as well as independent analysis, which puts the need at between 75 and 280 million tonnes of CO2 equivalent (MtCO2e) per year by 2040. Yet carbon removals are currently only happening at small scales in the EU today. The scale-up of removals will not be possible without a large-scale compliance market to channel fnance from emitters towards CDR providers (“polluter pays”) and to create certainty for investment.

The Commission has set out three options for CDR integration: a public authority that buys and retires CDR credits, ETS-obligated companies buying credits directly (“operator integration”), and a “one-inone-out” model, in which each CDR credit surrendered removes an EU allowance (EUA) from the system. Carbon Gap favours a public authority model, which would give the Commission better control over the quality and quantity of CDR entering the market, and provide certainty that CDR suppliers, investors, and policymakers need. The public authority should be combined with a one-inone-out cap to ensure CDR integration does not increase gross emissions from EU industry.

The ETS was not built with CDR in mind. In addition to the above recommendation, we've identified design fixes to make the ETS fit for CDR whilst supporting continued emissions reductions. These include addressing the price gap between CDR and current EUA prices; setting target volumes to specify how much CDR will be delivered, and presenting robust criteria to establish which CDR methods are appropriate for the ETS.

Around 180 CDR companies currently operate in Europe. Getting the ETS design right would give this growing sector its first real route to commercial scale, after years of relying largely on voluntary corporate buyers and limited public funding.

Carbon Gap is calling on Member States and the European Parliament to seize this opportunity to kickstart CDR at scale, ensuring the ETS creates a broad market for CDR in Europe whilst putting in place safeguards to continue to incentivise emission reductions.