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How can countries legislate for carbon removal? Insights from Luxembourg's L-NET

It is increasingly clear that emissions reductions alone will not be sufficient to confront the climate crisis. The deployment of carbon dioxide removal (CDR) to counterbalance residual emissions will be necessary to meet global climate targets. Since we have already released too much carbon dioxide into the atmosphere, we need to reach gigatonne scale CDR per year by the middle of this century.

But how can countries promote carbon removal? How can they drive the growth of negative emissions technologies? This article will explore one of the most innovative CDR policies in the world, developed in Luxembourg, and suggest what we can learn from it about supporting the development of CDR.

We at Carbonfuture have been sharing our analyses of climate legislation and developing CDR frameworks across different countries. Check out our article on the current state of play of CDR and point-source carbon capture and storage (CCS) policy across the United States. Keep watching this space for our exclusive analysis on the development of CDR in climate policy across Europe.

The country of Luxembourg has received limited attention in climate policy debates when compared to its more populous European neighbours. The country does not have a formal carbon management plan that involves CDR technology,  which perhaps makes sense for a country responsible for a very small percentage of emissions in the EU (0.34%).

Nonetheless, Luxembourg is a major financial centre in the EU and has been demonstrating serious innovation in CDR policy. The country’s climate law sets a net zero goal by 2050, with an emissions reduction goal of 50-55% by 2030 compared to 2005 levels. This puts Luxembourg among the 10 EU member states which have passed net-zero commitments into law. In addition, the removal of carbon dioxide would complement the circular economy paradigm articulated in the 2017 National Strategy.

An article from members of the OpenAir Collective highlighted some of Luxembourg’s competitive advantages when it comes to implementing CDR. Two of the most significant are its regulatory framework and financial leeway. In terms of regulatory framework, policies like the National Innovation Strategy and Digital Luxembourg Initiative support the development of new technologies and could be adapted to suit carbon removal. Luxembourg’s financial leeway, with one of the lowest government debt burdens in the Eurozone and a dedicated (currently underspent) Climate & Energy Fund, offers further resources to support the development of the CDR industry.

The most exciting development is Luxembourg’s Negative Emissions Tariff (L-NET) Bill, which could offer significant insights for other countries looking to integrate CDR into their formal carbon management plans.

What is the L-NET?

In November 2022, the country’s Parliament saw a proposal of the Luxembourg Negative Emissions Tariff (L-NET), a first-of-its-kind legislation that would aim to leverage the country’s wealth to drive innovation and growth of negative emissions technologies like Direct Air Carbon Capture (DACC) by directly paying project implementers for  CDR domestically and abroad. The currently introduced bill is scheduled for revisions later this summer.

The L-NET’s design is in large measure inspired by the renewable energy feed-in tariff (FIT), a programme supporting the scaling up of renewable electricity capacities that was adopted throughout Europe in the last two decades. FITs are market-based economic instruments offering long-term contracts that guarantee the price a producer of renewable energy will receive for electricity fed into the grid.

The FIT policy implemented in most EU member states until 2015-17 for utility-scale and commercial projects was based on 20 year fixed-price contracts and was largely credited with accelerating cost reduction for solar and wind energy development. The L-NET could do the same for CDR, providing price certainty to suppliers and shielding them from fluctuations in market prices.

Under the L-NET Bill, which was deposited in November 2022 by Deputy Sven Clement, eligible projects can enter five-year contracts with Luxembourg’s government to benefit from subsidies for atmospheric CO2 removal or long-term CO2 sequestration. The amount of financial support is based on the delivered quantity of removed or sequestered CO2. The L-NET Bill is not yet law and more work will be needed to convince members of Parliament to support it. Stay up to date by joining the LinkedIn group here.

What does the L-NET mean for CDR policy?

  1. The L-NET offers a clear framework for how governments can support the development of CDR. As we learned from the FIT, public demand support has a key role to play in both emissions reduction and carbon removal or sequestration.
  2. The L-NET makes CDR financeable. Fixed prices and multi-year contracts backed by law reduced revenue uncertainty for renewable energy with the FIT, lowering risk for developers, investors and lenders; and consequently lowered the cost of capital for projects. This structure can deliver the same for CDR, a critical need for this new sector.
  3. The L-NET shows how countries can invest in CDR beyond their own borders.  Under the L-NET, as long as projects are majority-owned by entities from Luxembourg they can be located anywhere in the world.
  4. The L-NET is impact focused. Subsidies are based on the delivered quantity of carbon which encourages more efficient removal and sequestration.

What’s next for the L-NET?

As noted, the bill is already introduced in the Chamber of Deputies (Parliament) and with the conclusion of election season this October, it will begin to move through the legislative process in earnest before the end of the year. The bill’s sponsor in parliament, MP Sven Clement, aims to incorporate some revisions to the legislation before then which will reflect greater alignment with EU level regulations.

Luxembourg’s L-NET is one to watch and will hopefully be the first of many government bills of its kind. The general mechanics are already well established and proven across many EU member states, based on the experience of the FIT. Overall, the L-NET sets a positive example for the rest of the EU and beyond as to how to support the development of CDR while driving strong positive economic impacts.

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