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Putting the ‘Net’ in Net Zero: Carbon Removals and the EU Emissions Trading System

The Paris Agreement's goal of limiting global warming requires nations to achieve net-zero emissions by mid-century if not earlier. The science is clear that carbon dioxide removal (CDR), coupled with a robust emphasis on reducing greenhouse gas emissions, is ‘unavoidable’. CDR will be required on a gigatonne (Gt) global scale by 2050 to reach net zero and to have a realistic chance of limiting global warming to within 1.5 or even 2 degrees Celsius.

CDR will serve a threefold purpose: firstly, as a short-term mitigation option alongside emission reductions; secondly, to offset hard-to-abate emissions for net-zero targets; and thirdly, for net-negative emissions later, to help decrease global temperature.

In Europe, net-zero emissions is not a new target. In 2005 the European Union (EU) established its Emissions Trading System (ETS): a regulatory tool to reduce greenhouse gas emissions. In this market-based system, companies receiv 'emission quotas.' They can sell excess quotas and must purchase deficits, encouraging cost-effective emission reduction. The ETS is the largest so-called compliance carbon market in the world, amounting to 1,300 million tonnes of CO2 equivalent in 2022 with the value of traded EU ETS credits reaching €751b that same year and €39b in revenue generated for the EU.

The European Commission envisions that CDR will allow the EU ETS to achieve a net-negative cap by 2045. However, it is not yet clear how CDR can be effectively integrated into the European carbon markets and this question has prompted several insightful academic papers (detailed below).

Informed by this research, we at Carbonfuture argue that linking CDR technology to carbon markets is the best tool to achieve net-zero emissions in Europe. CDR should ideally be integrated through a dedicated Removal Trading Scheme. Alternatively, if integrated directly into the ETS, an intermediary body such as a Carbon Central Bank should be established, as outlined further below. Finally, in any scenario, emphasis should be on permanent carbon removals only, as outlined by the European Carbon Removal Certification Framework.

A Dedicated Removal Trading System

The creation of an EU Removal Trading System (RTS), as suggested in a 2023 report by the Ecologic Institute, represents the most favorable approach to linking CDR with carbon markets. The RTS would be designed to operate alongside the ETS after 2030, gradually merging as the EU progresses towards climate neutrality. Under this scheme, entities from selected industries would have removal obligations, incentivizing the acquisition of removal credits.

These removal obligations would be calculated based on historical emissions with a gradual increase over time. The scope of the RTS would encompass significant permanent carbon removals, including installations already covered by the EU ETS. The scheme's coverage could extend to international emissions, acknowledging the global nature of the climate crisis. Rigorous certification processes - such as the Carbon Removal Certification Framework (CRCF) - would ensure the permanence of storage for eligible removals. Entities subject to the RTS could fulfill their obligations by implementing carbon removal projects or purchasing removal credits, balancing flexibility with credibility.

An RTS would support net-negative goals, equity via historical emissions, and separation from emission reduction. There are challenges regarding the complexity of integration and the potential financial costs, but if properly managed an RTS will be an essential tool to address the climate crisis and further EU net-zero goals.


Direct Integration with the ETS

The path to implementing the RTS is ambitious and presents challenges, particularly within the current political landscape. Hence, a more pragmatic approach could be the inclusion of CDR within the existing ETS. To achieve this integration, an intermediary is needed to keep a clear distinction between reduction and removal, enabling efficient price and volume management.

There are various possible integration models, ranging from disconnected markets where the ETS and removals remain separated through to fully integrated markets between emitters and removers. Among the proposals, a model involving a central bank-like entity presents the most compelling approach for medium-term implementation. Governments would connect the ETS and removal markets by buying and distributing Removal Units (RUs), enabling CDR support and offering fiscal flexibility. This addresses the intricacies of pricing, volume control, and governance, making it well-suited for the task of harmonizing carbon reduction and removal efforts within the broader context of the ETS.

It is not yet clear what this European Carbon Central Bank (ECCB) could look like. Like independent central banks, an ECCB could serve as an intermediary agency, addressing long-term commitment issues related to carbon pricing and liability management. An ECCB would help to stabilize carbon prices, create a market for not yet cost-competitive emerging CDR technologies, and provide a flexible response to future developments, shielded from political influence. There are concerns, however, around the power of this decision-making authority, its equity in credit treatment, and how it would manage non-permanent removals.

Source: La Hoz Theuer et al, 2021

Focus on Permanent Removal Methods

Any approach focused on integrating CDR technology into European carbon markets needs to start with permanent removal methods and should build on the EU's Carbon Removal Certification Framework (EU CRCF). In this context, only permanent removals, as defined within the framework, should be integrated into the future scheme. This strategy ensures that the CDR integration contributes to European net-zero targets in a sustainable manner and minimizes the risk of public backlash.

At present, this would be limited to direct air carbon capture and storage (DACCS) and bioenergy with carbon capture and storage (BECCS). Looking at current discussions and negotiations around the CRCF, it does increasingly look like biochar carbon removal (BCR) will also make the cut to be considered a permanent removal method. It makes sense to start with these three methods, and gradually expand to other open system methods such as enhanced weathering (EW) or ocean alkalinity enhancement (OAE), which hold great promise but can be more complex.


Looking Ahead: The Road Towards CDR in European Carbon Markets  

In summary, the vital role of CDR in achieving net-zero emissions aligns with the EU ETS’s evolution. An EU RTS emerges as the most desirable solution for integrating CDR and carbon markets post-2030, aligning with upcoming dedicated CDR targets and avoiding mix-ups with emissions reductions. Should the RTS not be feasible and direct integration with the ETS be chosen, a model featuring a central bank-like entity offers a practical approach for harmonizing CDR within the ETS. The European Carbon Central Bank (ECCB) concept holds promise for maintaining linkage integrity. Finally, alignment with the EU Carbon RemovalCertification Framework will ensure credibility, particularly if only permanent CDR options are integrated.

The timeline for potential ETS and CDR integration unfolds in several key stages. In 2023, discussions continue for the CRCF in the European Parliament and Council, aiming for a draft report vote in October, passing in 2024, and implementation in late 2024 / early 2025. In parallel, detailed methodologies for various carbon removal activities are being worked on for Commission delegated acts. By 2026, the Commission will assess integrating CDR into the ETS and report findings to the European Parliament and Council. The earliest timeline for CDR/ ETS integration will be 2030, more likely a few years later.

For the CDR industry, integration into the European carbon market will provide a step change and a key path to scale to climate relevance. Compliance markets will unlock a reliable and predictable source of demand in the tens, if not hundreds, of billions of euros. As such, it should be the core focus of anyone working on CDR policy in Europe and beyond for years to come.

Further Reading

  • La Hoz Theuer, S., Doda, B., Kellner, K. and Acworth,W. (2021). Emission Trading Systems and Net Zero: Trading Removals. Berlin: ICAP.
  • Rickels, Wilfried & Rothenstein, Roland &Schenuit, Felix & Fridahl, Mathias (2022). "Procure, Bank, Release: Carbon Removal Certificate Reserves to ManageCarbon Prices on the Path to Net-Zero," OpenAccess Publications from Kiel Institute for the World Economy 266370, Kiel Institute for the World Economy (IfW Kiel).
  • Edenhofer, Ottmar and Franks, Max and Kalkuhl,Matthias and Runge-Metzger, Artur, On the Governance of Carbon Dioxide Removal– a Public Economics Perspective (2023). CESifo Working Paper No. 10370
  • Meyer-Ohlendorf, Nils (2023): Making Carbon Removals a Real Climate Solution. How to integrate carbon removals into EU Climate Policies. Berlin: Ecologic Institute.

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