How Europe can use emissions trading to also manage carbon removals

According to the study, the existing EU emissions trading system for the energy sector and energy-intensive industries alone could provide incentives for companies to remove between 68 and 86 million tonnes of CO₂ from the atmosphere annually by 2050, depending on cost developments. The research team uses the LIMES-EU calculation model developed at PIK, which optimises investment decisions. The analysis is based on the EU, as well as the United Kingdom and Norway. And it focuses on two novel, promising removal methods: using air filter systems (“direct air capture”) and burning biomass with CO₂ sequestration (“bioenergy with carbon capture”).

Supports acceptance of climate policy

“The removal potential we have calculated would make a significant contribution to the implementation of the EU climate targets,” says Darius Sultani, PIK researcher and lead author of the study. “Of course, dedicated support programmes for removals are also needed to achieve climate neutrality by 2050, and net carbon removals thereafter. But fiscal space is limited, and it makes sense to make good use of the market-based instrument of emissions trading. We show how this could work – and that it even strengthens the acceptance of climate policy.”

At present, firms are looking ahead to 2039 with concern: the annual reduction in emission allowances for the energy sector and energy-intensive industries will then reach zero, and CO₂ emissions will in principle be taboo. There are considerations to soften the timeline, but a more elegant solution emerges if removal companies are added to the system. These would be rewarded for their “negative emissions” with certificates from the trading system, which they would then be able to resell to companies that have not (yet) completely eliminated their CO₂ emissions.

The study calculates what the market equilibrium would be in such an environment, and finds that investments in the two new removal technologies will become more attractive – although the technology mix will heavily depend on the extent to which costs can be reduced through technical advances in air filtration. It also shows that the carbon price formed in emissions trading will rise steadily to a good 400 euros per tonne by 2050, but will then stabilise at a slightly lower level in the second half of the century due to the inclusion of removals.

A step-by-step model for implementation

Based on the model analysis, the research team then delivers a concept for integrating carbon removals into emissions trading. It recommends a step-by-step approach to ensure that rapid emission reductions towards zero remain the priority, and that carbon removal via bioenergy does not jeopardise biodiversity or the water cycle. First, precise standards for monitoring, reporting and verification should be established. Subsequently, removal projects would be gradually transferred to the trading system, in increasing quantities and in a manner that avoids misguided incentives for investors. Only in the third step, around 2040, would all removals and residual emissions be controlled via a uniform carbon price.

“With this scientifically sound proposal, we are targeting the current political discussion in Brussels on the future regulation of carbon removals,” explains Michael Pahle, PIK researcher and a co-author of the study. “The decision on whether to transfer removals to EU emissions trading is now pending, and the European Commission must submit a proposal on this by 2026. Our study shows that the objections to this can be refuted.”