Carbon removal allowances could ease CO2 price burden on Europe's industry – researchers

Adding carbon removal to the EU’s Emissions Trading System (ETS) could help ease the burden on Europe’s industry as it transitions to climate neutrality, a report by German research consortium Ariadne has found. According to the report, adding carbon removal certificates to the system could cushion CO2 price increases without jeopardising emissions reduction and the climate goals. 

The EU ETS puts a price on emitting CO2, meaning industry must hold a permit to emit one tonne of the greenhouse gas. These “allowances” can be traded, and their number is reduced each year in line with EU climate targets, making the remaining ones more expensive – an incentive designed to push industries to climate friendly practices. 

The authors worked under the assumption that the roll-out of infrastructure to make industrial processes climate friendly, such as carbon capture and storage facilities, carbon transport networks, and electrolysers, is happening at a slow pace. They then modelled carbon prices resulting from this delay, finding that demand for allowances, and their costs, will remain high as a result of the delay. In a next step, they compared their findings with scenarios where companies that remove CO2 from the atmosphere are awarded additional allowances, which can be sold to companies still emitting. 

The result was that carbon removal could dampen high carbon prices while incentivising investments in clean technologies. “If the infrastructure necessary for emissions avoidance is not in place in time, there is a risk of extreme CO2 price spikes that could jeopardise the competitiveness of our industry,” said report author Frank Best. 

Europe’s traditional industries, like steel and chemicals, are under mounting pressure from international competition, tariffs, and the need to decarbonise. The European Union has to find ways to strengthen its industrial competitiveness while plotting a viable pathway to a net-zero economy. The European Commission is currently reviewing the ETS's design and plans to make reform proposals on 15 July, including a requirement to lay out how carbon removals can be included.

Researchers have previously called on the EU to establish a so-called “Carbon Central Bank” – an institution that oversees market mechanisms to remove carbon emissions from the atmosphere – to reach climate targets. This could then be integrated into the ETS, aligning the price for removing and permanently storing one tonne of CO2 with the price for emitting one tonne of CO2 into the atmosphere. 

Germany recently announced its commitment to support carbon removal technologies with more than 400 million euros in subsidies, with support programmes set to launch as early as 2027 and a long-awaited national strategy on negative emissions expected by the end of the summer.