EARMARKING CARBON REVENUES FOR REMOVALS

This lever answers the least glamorous and most decisive question in removal policy: where does the money come from. Earmarking dedicates a defined share of carbon pricing revenues, from ETS allowance auctions, carbon taxes or fuel levies, to funding removals and the infrastructure beneath them. It converts the polluter-pays principle into a polluter-funds-the-fix pipeline, giving removal programmes a revenue base that grows with the carbon price rather than competing annually against every other budget line. Paired with an emissions trading system, the design is also known as cap-and-invest.

The core design choice is the strength of the link: full legal hypothecation into a dedicated fund, a soft political commitment to spend “an equivalent amount”, or a statutory fund fed by carbon revenues but allocated by programme. Finance ministries resist hard hypothecation on principle, since it constrains budgetary sovereignty, so most working examples are funds with earmarked inflows and governed outflows. Volatility matters: carbon revenues move with allowance prices, so multi-year programmes need smoothing reserves or commitment authority that survives price dips. And the removal share must be defended within the fund, or removals lose every internal contest to cheaper abatement.

Earmarking solves the political economy problem that sinks most removal funding: taxpayers resist new spending, but revenue recycled from polluters to climate repair polls well and survives fiscal consolidation better than general-budget programmes. It creates automatic scaling, since tightening caps raise prices and therefore removal budgets exactly when deeper mitigation makes residual emissions more expensive to neutralise. For the EU, the machinery already exists: the Innovation Fund has shown that auction revenues can be converted into project finance at billion-euro scale without a new tax.

Hypothecation can misallocate: locking revenues to removals regardless of relative cost-effectiveness may fund expensive tonnes while cheaper mitigation goes begging, so earmarks need periodic review clauses. Revenue volatility can strand multi-year commitments unless buffered. A dedicated fund can also become a honeypot, attracting definitional creep in which ever more activities are relabelled as removal-adjacent to qualify. And political reversibility is real: what one budget act earmarks, another can raid.

Evaluation should compare the share of carbon revenue promised to removals with the share reaching removal programmes, alongside disbursement speed and cost per tonne relative to other uses of the revenue. Annual accounts can disclose inflows and spending. Reviews should also test whether earmarking increased removal funding or merely relabelled expenditure that would have occurred anyway.

Finance ministries are the decisive constituency and must co-design governance, or the earmark dies in the budget committee. Climate ministries and delivery agencies define eligible spending; industry and project developers need visibility of the pipeline the fund will finance; fiscal watchdogs and auditors keep the definitional boundary honest.