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Carbon markets experts grapple with role of removals in ETS

Flags of the European Union
The EU is in the final stages of negotiating a voluntary framework to ensure the integrity of carbon removals, by defining quality criteria, along with a process to monitor, report and verify their authenticity © Andreas Arnold/Bloomberg

The European Commission has until July 2026 to decide whether carbon removals should be included in the EU Emissions Trading System

Since 2005, the EU Emissions Trading System has set a cap, or reduction target, on the total amount of greenhouse gases that can be emitted by companies operating in energy-intensive areas. Currently this covers industrial, aviation, maritime and electricity and heat generation sectors.

The cap is reduced annually to encourage companies to cut their emissions, which has driven down power and industry plant emissions by 37 per cent since its inception, according to the European Commission.

“Generally speaking, the ETS is achieving its primary purpose,” Mark Preston Aragonès, senior policy manager for carbon accounting at non-profit Bellona Europa, tells Sustainable Views.

In 2023, an EU directive tasked the commission to examine how emissions removed from the atmosphere and stored safely and permanently — for example, through direct air capture — could potentially be covered by emissions trading. It is due to report to the European parliament and council by July 2026.

The potential inclusion of removals in the ETS is part of the commission’s call for an EU target to reduce net emissions by 90 per cent by 2040, compared with 1990 levels.

While the directive insists “priority should be given to direct emission reduction”, many experts are unconvinced that carbon removals should be included in the ETS.

“We don’t want to risk watering down the mitigation measures by covering up for a lack of emission reduction through carbon dioxide removal,” Lidia Tamellini, policy officer for EU industrial decarbonisation at non-profit Carbon Market Watch, tells Sustainable Views.

Removals could still be omitted

There is already a link between the EU ETS and carbon removals: funds raised via the ETS are invested in the EU’s Innovation Fund, which finances low-carbon technologies including carbon removals. 

The EU is also in the final stages of negotiating a voluntary framework to ensure the integrity of carbon removals by defining quality criteria, along with a process to monitor, report and verify their authenticity

The European commission has not yet assessed the role of removals in the ETS, deputy head of the commission’s climate action unit Ruben Vermeeren said, at an April event hosted by the European Roundtable on Climate Change and Sustainable Transition think-tank.

Vermeeren emphasised that the exclusion of carbon removals from the ETS was one possible outcome of the commission’s assessment, and said: “We should not disincentivise investment in real mitigation.”

Speaking at the same event, Fabien Ramos, a policy officer in the commission’s climate action unit, told attendees: “We need to think about what type of carbon removal we need for the future, and what type of carbon removal can be easily integrated into the ETS.”

The commission needs to investigate the cost of carbon removals, along with their different characteristics, Ramos said, acknowledging that some are permanent while others are temporary.

“I am more and more convinced that there is not one solution. We need everything,” he added, and suggested both open-system and closed-system removals could be needed.

While a closed system stores carbon in a contained manner, such as in geological reservoirs, an open system refers to carbon storage that is not physically contained, such as in agricultural soils or in oceans.

Some experts consider open system removals as being particularly problematic. “The amount of carbon removed and initially stored can often be known accurately. However over time, soil and the ocean move, and the stored carbon is diluted in the environment,” says Bellona CDR research and technology adviser Allanah Paul.

“This makes it difficult to directly track and monitor the carbon over time. Models are then needed to estimate where the carbon ends up and calculate how much may have been lost.”

Industrial carbon removals should be recognised

The EU ETS is not the first emissions trading mechanism to consider including carbon removals. The UK’s Emissions Trading Scheme Authority confirmed last year that greenhouse gas removals would be included in the UK ETS.

“We intend to expand the UK ETS to include greenhouse gases removals,” a Department for Energy Security and Net Zero spokesperson tells Sustainable Views. “We will continue to engage with the sector on our proposals and will publish further detail in due course.”

Meanwhile, Japan’s GX-ETS will soon accept removal voluntary credits, including those that cover direct air carbon capture and storage.

“This will be a catalyst for the Japanese corporations to start thinking seriously about durable CDR,” Akifumi Takigawa, a manager in conglomerate Mitsubishi Corporation’s CDR department, wrote on LinkedIn.

Others are not convinced about the plans to include removals in emissions trading.

Naoyuki Yamagishi, chief conservation officer at non-profit WWF Japan, tells Sustainable Views: “We do not want any offsets for companies’ climate action as a matter of principle.” But he welcomes the fact the GX-ETS is considering “[the] ‘quality’ aspect of the credits”, including permanence and additionality.

Maintaining liquidity

Other experts insist including carbon removals in emissions trading is necessary if climate targets are to be met.

“We need to find solutions to ensure that there is no mitigation deterrence coming from CDRs, but accept there is no way we can reach our net zero targets without having carbon removals recognised within the EU policies in the long term,” says Julia Michalak, EU policy director at the International Emissions Trading Association. 

“Industrial carbon removals should be recognised under the EU ETS, obviously subject to conditions and rules that would guarantee that there is no mitigation deterrence,” she tells Sustainable Views. “Inclusion of carbon removals into the EU ETS would help to maintain market liquidity under the declining emissions cap and offer more compliance options, especially to sectors with hard-to-abate emissions.”

Bellona’s Preston Aragonès insists, however, that integrating carbon removals into the ETS could have negative consequences for the ETS cap. 

“If you integrate removals in such a way that they can generate allowances, then we’re very much falling into the trap of mitigation deterrence,” he says. “Instead of both cutting emissions and deploying removals, we’re simply deploying removals so that we don’t have to cut emissions.”

Preston Aragonès suggests a separate market for removals, or an intermediary body akin to the Innovation Fund that pools revenues from the ETS and invests these proceeds in carbon removals. “It’s already pretty clear that just a pure integration of CDR into the ETS is not going to be a good idea,” he says.

A service from the Financial Times