EMISSIONS TRADING SYSTEM

Today, the EU ETS does not accept carbon-removal credits. The architecture for change is now assembling, however. The first Carbon Removal Certification Framework methodologies for permanent removals (DACCS, BioCCS and biochar) were adopted in February 2026, giving any future integration a certified unit to reference, and the Commission’s statutory report on negative emissions technologies under the revised ETS Directive is due by 31 July 2026. The integration debate has crystallised around three design families: central public purchasing of removals financed from allowance revenues, operator-led surrender of removal units for compliance, and one-in-one-out substitution in which removal units replace allowances under an unchanged cap. Whichever design prevails, the direction of travel is set by the 2040 framework’s arithmetic: a net target without removal supply is not deliverable, and the ETS is the largest demand engine the Union owns.

The UK ETS Authority’s Main Response (21 July 2025) confirms engineered GGRs will be integrated by end-2029 (legislation targeted by 2028). Integration will keep the gross cap unchanged by replacing emissions allowances one-for-one with removal allowances issued ex-post. The framework includes a minimum 200-year storage requirement, operator liability for reversals, and buffer-pool provisions.

NZ ETS fully integrates removals: forestry generates NZUs that are fungible with emissions units for compliance. The government’s latest settings account for significant removal supply; ICAP notes ~13.8 million NZUs from removals forecast for 2025, mainly forestry. Authorities have flagged excess unit risks and advised reducing auction volumes to protect ambition, underscoring how integrated removals materially shape ETS market dynamics. ICAP Carbon Action+1

Offsets (including forestry) are integrated with limits: up to 4% of a covered entity’s obligation for 2021–2025, rising to 6% for 2026–2030, with at least 50% of any offset use required to deliver direct environmental benefits in California (DEBs). Offsets remain distinct from allowances and are subject to buyer-liability invalidation rules, so they complement but do not replace the core allowance market.

Shenzhen launched China’s first pilot carbon market in 2013, following approval by the National Development and Reform Commission. The municipal government sets the annual allowance total and allocation rules, maintains the registry, oversees trading and verification, and enforces compliance. By 2024, cumulative trading had exceeded 100 million tonnes. Shenzhen therefore demonstrates that an ETS can be operated at City/Municipal level, but not necessarily established independently: the pilot relied on national authorisation and Shenzhen’s special-economic-zone legislative powers. It covers emissions rather than CDR, so its relevance is as a governance precedent rather than evidence for integrating removals.