In a recently published policy brief, ‘In or Out: What’s Best for Carbon Removals and the EU ETS?’, Adrien Assous, Duncan Woods and Emma Wikstrom from Sandbag have concluded that CDR is not sufficiently mature so as to be incorporated into the Emission Trading System (‘ETS’). Moreover, they have stressed that the ETS market can adequately perform until 2040 without CDR.
Key takeaways:
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Net-zero and net-negative emissions may only be achieved through the deployment of permanent CDR methods.
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CDR methods that can permanently remove carbon are currently immature. Their implementation has not grown considerably at the EU level. In addition, there are a number of ambiguities surrounding the standards that have been established for monitoring, reporting and verification as well as the mechanisms that need to be in place for transferring and preserving CO2.
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In addition, whether or not CDR methods that rely on biomass can be implemented sustainably should be thoroughly investigated with a focus on factors such as ‘biodiversity, water use, land use and competition for land’.
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Integrating CDR in the ETS prior to the development of correct conditions may lead the supply to increase excessively, a situation that has rendered the ETS an inefficient mechanism in the past.
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Efforts that may be made towards limiting the amount of supply may prove to be futile in practice given the unforeseeability with the amount of CDR units issued before investments are directed to CDR activities.
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Using permanent CDR to make up for the residual emissions in the ETS can increase the amount of emissions in cases where scientific studies fail to demonstrate that permanent removal methods have the same effect as emission cuts.
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The utilization of ‘carbon contracts for difference’ to compensate for the differences between the costs of carbon removal and allowances may worsen this situation and create a stronger mitigation deterrence for private companies.
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Given the current ambiguity surrounding the rules regulating CDR, market tools lack the rigour to incentivize the dedication of funding for the ‘early-stage development or shared infrastructure’ of permanent CDR.
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The aforementioned goal can only be achieved through investment. Notwithstanding the availability of sporadic public funds, there exists no tool that can be utilized for the sole purpose of incentivizing public investment for CDR uptake.
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Under the ETS, polluters may be required to pay to a public fund, a rule that has already been enshrined in regulations governing the Carbon Border Adjustment Mechanism.
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That said, forcing polluters to pay excessive amounts of compensation can create a disproportionate financial burden for consumers.
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To reach net-negative goals, compensation should not be requested on the basis of ‘direct emissions’ but financial charges levied upon goods imported to and consumed in Europe whose production generates emissions.
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Permanent removal methods can be integrated to the ETS only after 2040 if they grow in maturity and sufficiently attract the attention of investors.
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Even though the extent to which investment in CDR infrastructure would be profitable is uncertain, they can receive financial support from private funds given that carbon capture activities can also generate revenues.
To read the policy brief, visit https://sandbag.be/2024/12/17/carbon-dioxide-removals-eu-ets/