EU ETS Proposal Moves Carbon Removals from Certification Towards Compliance-Led Demand

Key Takeaways

• The proposal marks a structural shift in EU carbon-removal policy. The EU would move beyond defining and certifying permanent removals to creating a Commission-led mechanism for purchasing them using revenues generated from additional EU ETS allowances.
• This is not yet full integration of removal credits into the EU ETS. Regulated companies would not initially be permitted to purchase and surrender a broad range of CDR credits. The Commission would remain the central buyer, controlling eligible pathways, procurement volumes and cancellation.
• BioCCS and DACCS receive the clearest compliance-market pathway. The initial mechanism is restricted to domestically generated, CRCF-certified permanent removals from these two pathways, reflecting their stronger permanence and accounting characteristics.
• The proposal directly supports the transition from voluntary to policy-led demand. It is consistent with the view that voluntary corporate purchasing can catalyse early CDR deployment, but only structured public procurement and eventual compliance integration can create market scale.
• Allowance prices will not automatically become CDR prices. The proposal recognises that permanent removal costs may remain above EU allowance prices and provides for additional allowance revenues, but the effectiveness of the mechanism will depend on procurement design and contract bankability.

From CDR Certification to Policy-Led Market Formation

The European Commission’s proposed revision of the EU Emissions Trading System represents an important step in the evolution of carbon dioxide removal policy. Europe has spent the past several years developing the regulatory foundations for a high-integrity removal market, most notably through the Carbon Removals and Carbon Farming Certification Framework. The new proposal begins to address the next and more difficult question: who will purchase the certified removals, at what scale, and through which market mechanism?

The broader directive covers multiple aspects of EU ETS reform, but the provisions specifically relevant to carbon removals are concentrated in the proposed new Article 9c, “Domestic permanent carbon removals.” This article sets out the allowance-backed purchasing mechanism, funding arrangements, procurement rules, cancellation requirements and future review. The related amendment to Article 14(1a) establishes the narrower route through which operators may use eligible removals generated from their own biogenic emissions.

The proposal would increase the EU ETS cap by 250 million allowances. These allowances would be auctioned by the Commission between 2031 and 2040, with the revenues used to purchase an equivalent volume of certified domestic permanent removals from BioCCS and direct air carbon capture and storage, or DACCS, projects.

An additional 10 million allowances could be auctioned if the initial revenues are insufficient to purchase the targeted volume of removals. The Commission would prioritise a portfolio of cost-effective and high-integrity projects, with payment generally made upon delivery of certified units.

This creates a distinct market structure. Instead of immediately allowing EU ETS participants to purchase and surrender removal credits directly for compliance, the Commission would initially act as the central purchasing institution. The removal units purchased would subsequently be cancelled, while the corresponding allowances would create additional emission space within the ETS.

The proposal therefore integrates permanent removals into the net accounting of the EU ETS without initially creating a freely tradable, compliance-grade removal unit.

The Emerging EU Policy Stack: Standards, Procurement and Compliance

The proposal is best understood as the next layer in Europe’s emerging CDR policy stack. At the foundation is certification. The CRCF establishes the requirements under which removal activities can be quantified, verified and recognised. Without this layer, removals cannot credibly enter a government-backed market or interact with an emissions trading system.

The proposed purchasing mechanism adds a second layer: demand creation. By using allowance-auction revenues to procure removals, the EU would create a public buyer with a defined source of funding. This begins to address the gap between certified supply and actual demand.

The EU ETS provides the third layer: compliance-market accounting. The purchased removals would be matched against additional allowances on a broadly one-for-one basis, allowing permanent removals to contribute to the net ETS trajectory while preserving central control over the volume entering the system.

Supporting mechanisms such as the Innovation Fund, the proposed Industrial Decarbonisation Bank and national-level funding schemes provide an additional fiscal layer. These can support technology development, infrastructure and first-of-a-kind deployment before projects begin generating removal revenues.

The significance of the proposal lies in how these layers begin to interact. Certification without demand would produce eligible units with no assured buyer. Public support without a long-term revenue framework could create projects that remain dependent on grants. Compliance integration without robust certification could weaken environmental integrity. The proposal does not complete the entire policy stack, but it begins connecting elements that have until now largely operated independently.

Alignment with the Direction of the CDR Market

The proposal is broadly aligned with our prior analysis of how CDR markets will need to evolve; from concentrated, voluntary and transaction-specific demand towards policy-led, compliance-oriented market formation.

This direction was also evident in our recent webinar on global policy frameworks shaping CDR. The discussion identified government procurement and compliance-market integration as the mechanisms most likely to move CDR beyond its current dependence on a small group of voluntary corporate buyers. The EU proposal now begins to translate that market signal into a concrete policy framework.

Voluntary offtakes have played an essential role in developing methodologies, supporting early projects and demonstrating buyer willingness to pay for durable removals. However, demand concentrated among a few companies cannot provide the scale, diversification or long-term certainty required to finance CDR as infrastructure. A purchasing mechanism linked to the EU ETS shifts demand towards a structured and recurring policy basis.

The proposal also responds to the market’s bankability challenge. The primary constraint for many CDR projects is no longer simply the availability of capital, but the absence of predictable revenue arrangements that lenders and infrastructure investors can underwrite. Commission-backed procurement could improve project financeability if contracts provide sufficient duration, price visibility and protection against delivery and regulatory risks.

Finally, the proposal reinforces the transition from individually negotiated transactions towards standardised market infrastructure based on common certification, eligibility, procurement and cancellation rules. It therefore extends the market direction previously identified. At the same time, its centralised and selective design shows that the EU is pursuing compliance integration gradually, creating policy-backed demand while retaining control over removal quality, volume and its impact on the wider ETS.

Market Design and Pricing: The Allowance Price Is Not the Removal Price

One of the most important features of the proposal is its recognition that the EU allowance price and the cost of permanent removal are different. Auctioning an allowance generates revenue based on the prevailing EU ETS price. The removal procured using that revenue may cost substantially more. The provision for an additional 10 million allowances acknowledges this funding gap, but it does not fully resolve how different project costs will be supported.

The eventual procurement structure could include auctions, fixed-price contracts, carbon contracts for difference or other forms of long-term support. Each approach would create different incentives. Pure lowest-price auctions may deliver near-term volume efficiently but concentrate awards in a narrow group of pathways. Technology-specific auctions could support market diversity but increase procurement costs. Contracts for difference could provide greater revenue certainty but require clear benchmarks and long-term public commitments.

The policy challenge will be to combine cost-effectiveness with market development. The objective should not only be to purchase existing removal capacity, but also to support investable projects that expand future supply and reduce costs over time.

Pathway Implications: BioCCS and DACCS Lead, Others Remain on Hold

The proposal provides the clearest compliance-market pathway for BioCCS and DACCS, reflecting their high durability, clearer accounting boundaries and compatibility with geological storage. BioCCS may be particularly well positioned because many projects can combine removal revenues with existing energy or industrial income and leverage shared CO₂ transport and storage infrastructure. ETS operators, airlines and shipping companies could also use CRCF-certified removals from their own biogenic emissions to compensate for fossil emissions, although this cannot create net-negative compliance positions or additional allowances.

DACCS receives an important long-term demand signal but remains more exposed to high energy, infrastructure and financing costs. If procurement prioritises only the lowest-cost tonnes, DACCS may struggle to compete with BioCCS, making pathway-specific auctions or allocation windows potentially necessary to develop a diversified supply base.

Biochar, enhanced rock weathering, mineralisation and nature-based removals remain outside the initial mechanism. Their exclusion indicates that CRCF certification will not automatically guarantee EU ETS eligibility; pathways must also demonstrate compliance-grade MRV, durability and liability arrangements. The planned 2034 review could expand eligibility, making investment in standardised MRV, feedstock traceability and uncertainty management increasingly important for developers seeking future access.

Looking Ahead: From Policy Architecture to Market Delivery

The proposal moves the European CDR discussion from whether permanent removals should enter the EU ETS to how that integration should be managed. It is an important market signal because it links certification with public purchasing and net compliance accounting. It also confirms that the EU intends to treat permanent removals as a distinct climate instrument rather than allowing broad offset use within the ETS.

At the same time, the proposal remains a transitional model. Demand begins only from 2031, the Commission remains the principal buyer, eligibility is limited to BioCCS and DACCS, and many commercial details are deferred to future rules.

The next phase will therefore be shaped less by the headline volume and more by policy delivery: when procurement schedules are published, how contracts are structured, which projects qualify, how risks are allocated and whether developers can use future awards to raise capital today.

The broader direction is nevertheless clear. Europe is moving from defining high-integrity removals towards creating a system capable of purchasing and accounting for them. If implemented with credible contracts, strong MRV and clear liability, the mechanism could become one of the first large-scale bridges between the emerging CDR industry and a mature compliance carbon market.

Our next convening for the Canadian-curious folks out there is the Canada Clean Fuels & Climate Markets Summit in Toronto on the 21-22^nd October,2026.

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