"Thoughtful CDR integration could turn the EU ETS into a catalyst for climate leadership and industrial innovation, while maintaining environmental integrity and focus on deep decarbonization."
Emerging ETS designs tend toward more restrictive, high-integrity CDR integration
Only seven jurisdictions have plans for a dedicated CDR role in their ETS so far
Out of 60 operational or planned ETSs worldwide, only seven — including the EU, UK, China, and Japan — currently plan to integrate CDR. Most allow a mix of CDR and reduction/avoidance credits. The UK and EU are the only ones planning to allow CDR credits exclusively.
CDR integration approaches into ETSs can differ along six broad design criteria
- Incorporation mechanism
- Credit type
- Credit origin
- Standard requirements
- Allowance relationship
- Flexibility provisions
Global split in cap integration mechanism
Countries differ in how they integrate Carbon Dioxide Removal (CDR) into Emissions Trading Systems (ETS). China, the UK, and Brazil follow a “deduction-from-cap” model, where each CDR credit cancels out one ETS allowance. In contrast, Australia and Japan use an “on-top-of-cap” approach, allowing emitters to emit more but compensate with CDR to meet the same net emissions target.
CDR mostly allowed among other offset credits
Most countries permit a mix of avoidance, reduction, and removal credits. China and Australia already include CDR (e.g., reforestation, afforestation), and Japan and Brazil plan to expand in similar ways. The UK stands out by restricting credits to high-permanence methods like DACCS and BECCS, delaying nature-based options due to permanence and land-use concerns.
Strong favor of generating CDR credits within jurisdiction
Australia, China, and the UK emphasize using CDR credits generated domestically to maintain oversight and promote local deployment. Japan has limited use of foreign credits and imposes ownership or investment requirements. Brazil currently restricts to local credits but is open to international trading under strict safeguards against double-counting.
Jurisdictions define their own standards
Each country uses its own criteria to approve offset credits. Australia and China require additionality and permanence, while the UK mandates high-quality standards through BSI. Japan and Brazil have evolving frameworks; Japan allows more lenient rules for older schemes, while Brazil is still shaping its standards as of early 2025.
Conversion factors aim to ensure offset integrity
China, Japan, and Brazil follow a 1:1 credit ratio, treating one CDR ton as one offset credit. Australia and the UK apply discounts based on permanence and risk of reversal, with buffer contributions and adjusted crediting. These differentiated approaches aim to better reflect the reliability of the offset.
Quantity limits restrict offset use
Offset usage limits vary: Australia is most flexible with no strict cap, though high usage needs justification. Japan and China cap usage at 5% of an emitter's obligation, with China also applying a time-based restriction. Brazil and the UK are still defining their rules, but the UK may introduce supply limits in early integration phases.
ETS linkages with CDR are continuously evolving across jurisdictions
CDR is already integrated in Australia and China, with both refining rules and considering foreign credits. Japan’s ETS will shift to compliance-based in 2026, likely expanding eligible methods. The UK is aligning MRV frameworks for potential EU ETS linkage, and Brazil is gradually implementing its ETS with full rollout by 2030.
Even limited EU ETS access could enable 50–75 Mt CDR by 2040
The EU has not released specific guidance on CDR integration, but some elements indicate direction
CRCF-established EU-wide framework categorizes CDR into three types, each with a minimum storage duration:
- Carbon farming (permanence at least 5 years)
- Carbon storage in long-lasting products (permanence at least 35 years)
- Permanent carbon removals (permanence at least 200 years)
Integration needs to uphold core principles of EU ETS and broader net zero efforts
Designing a viable integration pathway requires alignment with both the foundational principles of the EU ETS and the EU’s broader net zero objectives.
An ideal ETS should use CDR to enable net emissions reduction at affordable cost
As the EU ETS cap declines toward zero, balancing the remaining emissions becomes increasingly expensive or technically infeasible — especially in sectors with limited abatement options. This, combined with the planned reduction in available allowances, could cause a steep rise in modeled CO₂ prices: approximately €270 per ton by 2040 and up to €650 per ton by 2050. These price levels reflect the growing difficulty of eliminating all emissions through reductions alone, placing a mounting cost burden on industrial emitters. Introducing high-permanence removals into the system — such as BECCS, DACCS, BCR, or other high-permanence CDR methods — can offer a cost-effective mechanism to manage residual emissions and maintain system stability.
Meta-analysis shows strong consensus on most ETS design dimensions
To complement the policy-led view, a meta-analysis of recent academic literature and modeling studies reveals strong alignment across most design dimensions for integrating CDR into the EU ETS.
Meta-analysis suggests 50–75 Mt CDR by 2040 could be included in EU ETS scope
A steep CDR ramp-up is possible but hinges on design choices and country-specific constraints
Reaching even the low-end CDR deployment scenario by 2040 would require a rapid scale-up from under 1 Mt in 2026 to 50–75 Mt, implying a >40% annual growth rate. This is only feasible with clear regulatory pathways, early eligibility for high-permanence CDR methods, and access to both domestic and international credits. However, challenges such as insufficient project pipelines, financing uncertainty, and varying regional feasibility across EU member states pose major barriers that must be addressed in the design phase.
EU likely to phase in highpermanence CDR to ease allowance prices while stimulating CDR adoption
Phasing in a small amount of high-integrity removals into the EU ETS can help ease compliance costs and reduce allowance price volatility, especially during the sharp EUA supply decline expected by 2040. Eligible methods would likely include only engineered CDR solutions (like DACCS and BECCS) that meet CRCF standards on permanence and MRV. To manage costs, transitional support such as Carbon Contracts for Difference (CCfDs) and strict EU-based deployment rules could be combined with controlled international removals, with a suggested 5–10% cap by 2040 to allow gradual scaling and market stability
Outlook: Voluntary mechanisms can broaden CDR market support beyond the EU ETS
Voluntary carbon markets can support early-stage or currently ineligible CDR methods if key enablers are put in place. These include institutionalized net-zero accountability, enhanced registry integrity, better economic incentives, and clearer consumer communication. Upcoming policies like the EU Green Claims Directive and national laws like Switzerland’s Climate and Innovation Act could help drive hybrid demand, combining compliance and voluntary markets to accelerate high-quality CDR adoption.
Suppliers and buyers can act now despite policy uncertainty
- Specific impact on buyers & suppliers will depend on the EU's design choices
- Despite uncertainty, suppliers can consider several no-regret moves 🔗
- To prepare for CDR integration, buyers should organize across policy, strategy, and procurement
- EU and national policies need to bridge the gap until EU ETS integration of CDR in the 2030s
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