🇪🇺 How can #CDR be integrated into the EU Emissions Trading System? (#ETS)🇪🇺

There has been a lot of talk lately about the role of CDR in #compliancemarkets. Most people in the industry agree that it has to be the end game for scaling CDR to gigaton scale. Today, I'd like to highlight an insightful academic paper on this topic titled ‘Emissions Trading Systems and Net Zero: Trading Removals.’ It presents 4 specific pathways for integration:

1️⃣ Model A: Disconnected markets, where the ETS and removals market remain separate. While this provides long-term certainty for investors in abatement technologies, a fully disconnected model would limit added demand for negative emissions technologies (#NETs) from the ETS meaning that the voluntary carbon market (#VCM) would stay the main source of incentives for CDR.

2️⃣ Model B: Connected through the government, where the government buys removal units (RUs) and distributes them within the ETS. This offers opportunities for government financial support beyond the market price of allowances, bridging the cost gap between NETs and carbon prices.

3️⃣ Model C: Connected with restrictions, where allowance and removal markets are directly connected, but the government imposes limits on transactions. This reduces fiscal and administrative burdens while incentivizing regulated entities to purchase removals. However, NETs are exposed to price risks, potentially undermining their deployment.

4️⃣ Model D: Integrated markets, where emitters and removers are part of the same market, and there are no limitations on the number of removal units used in the ETS. This offers added liquidity and limits concerns over market power. It raises concerns about effective allowance price ceilings imposed by removal costs and a potential overdependence on removal technologies, however.

How can we apply these models in practice?

✔️I consider Model B the preferred approach, allowing the government to play a vital role in balancing abatement and removals, ensuring financial support for NETs, and guiding the decarbonization pathway. It provides opportunities for bridging cost gaps, compensating residual emissions, and reducing administrative burdens.

📖 However, the models are not mutually exclusive. The authors acknowledge that hybrid approaches are possible, where a jurisdiction may employ multiple models simultaneously, targeting different technologies. These hybrid options warrant further research to identify the most effective and context-specific strategies for integrating CDR technologies into the ETS.

This study by Stephanie La Hoz Theuer, Baran Doda, Kai Kellner, and William Acworth from the International Carbon Action Partnership offers valuable insights into the potential for integrating removal credits into the ETS.

Check out the paper here.

What do you think? What is the role of CDR in compliance markets?