This is the executive summary of our position paper on the European Commission's proposal to integrate carbon removal into the EU Emissions Trading System. The full analysis, including the modeling behind our funding gap estimate, is available to download below.
On July 17, the European Commission published its detailed proposal on how to integrate carbon dioxide removal (CDR) into the EU Emissions Trading System (ETS). This is a potentially transformative proposal for the climate. It recognizes the essential role of CDR in getting to net zero and supporting the competitiveness of industrial sectors. It provides a definitive statement on the legitimacy of CDR by making it a climate solution equivalent to emissions reductions one-for-one, to be deployed as soon as possible. And it proposes committing considerable resources (on the order of €50 billion) to scale the sector.
However, there are aspects of the proposal that need to change or be clarified if the EU is to reach its objective of procuring 250 million tonnes (Mt) of CDR. Fundamentally, there is a funding gap. The proposed sale of 260 million ETS allowances will be insufficient to purchase the 250 Mt of CDR required. Our analysis estimates there is a gap of €2 billion per year on average between 2031 and 2040. The full analysis breaks down where this gap comes from and the three things the EU can do to close it, they are:
1. Being tech-neutral. Our analysis suggests that taking a tech-neutral approach could eliminate 35% of the funding gap. This should be done by including all permanent carbon removals under the CRCF, which in the immediate term means including biochar, and in the medium term technologies such as Enhanced Weathering and Mineralization. Technology-specific auctions, as are standard in renewable energy procurement, would allow each technology to be supported simultaneously, with potential net proceeds from the biochar auctions effectively subsidizing Biogenic emissions with Carbon Capture and Storage (BioCCS) and Direct Air Carbon Capture and Storage (DACCS). Finally, we also analyze the potential for further legislation on monitoring and liability and finds this is not a blocker for a tech-neutral approach.
2. Providing additional funding. Even after the Commission takes a tech-neutral approach, the remaining funding gap of €1.3 billion per year on average needs to be closed. This can be closed using other support policies funded through ETS revenues, including the Industrial Decarbonisation Bank, which should have permanent carbon removal under the CRCF brought fully into its mandate. Closing the gap could require up to 10% of the Bank’s budget. Alternative ways of closing the gap are increased Member State support (funded by ETS revenues) or increasing the 10 million allowances whose auction revenues are allocated to CDR.
3. Starting sooner. The funding must be translated into bankable investments as soon as possible. This will require offtake agreements, as Microsoft and Frontier have done, to translate future payments (over 2031-40) into contractual agreements that allow projects to be built ahead of that time. This means offering offtakes in 2029, which we estimate is the earliest administratively feasible date. This will drive the learning-by-doing cost reductions that unlock lower-cost deployment at scale by the end of the decade, without which the proposal will not add up. The Commission should not wait until 2031 to start awarding offtakes, as this will likely delay first delivery to 2035 at the earliest.
