💥🇪🇺 How to integrate carbon dioxide removal (hashtag#CDR) into the world’s biggest emissions trading scheme (hashtag#ETS)? 🇪🇺 💥

🌊 There’s been a wave of developments around the integration of CDR into compliance markets (recent posts on the Japanese and the UK ETS in the comments). In all of these, we see different mechanisms to stabilise prices and regulate CDR usage to avoid jeopardising the trading system.

🗝️ CDR integration into the EU ETS is key. A new ‘State of the EU ETS’ report shows that industrial sectors under the EU ETS face significant challenges in meeting the 2040 target of a 90% reduction in GHGs emissions (ERCST - European Roundtable on Climate Change and Sustainable Transition).

💡 One option is a carbon bank or carbon removal reserve to regulate and integrate CDR into emission trading schemes. This option has received quite some attention in the past 18 months - see my analysis in the comments.

📜 A recent Kiel Institute for the World Economy Policy Brief lays out a detailed approach using a Carbon Central Bank (hashtag#CCB) to manage the transition to a net-zero and eventually net-negative ETS in three phases.

1️⃣ Procurement and Banking: The initial phase involves the CCB procuring CDR credits to establish a reserve while maintaining the existing Market Stability Reserve (MSR). This ensures a buffer of CDR credits that can stabilise the market when necessary.

2️⃣ Conditional Release of CRCs: In Phase II, the CCB would auction CDR credits from the reserve alongside the MSR initially. Once the MSR is depleted, the CDR credits reserve acts as the sole market stabilizer. This phase ensures that the market remains functional and stable, with the auctioning of CDR credits conditional on market outcomes and price developments.

3️⃣ Net-Negative Carbon Management: In the final phase, the CCB would adopt a flexible mandate similar to the European Central Bank's monetary policy. This would involve adjusting the supply of CDR credits based on market conditions, particularly during periods of low prices, and managing the transition to a net-negative emissions system. The CCB would also need to cancel CDR credits to achieve net-negative caps, ensuring that removals exceed emissions.

💭 This flexibility is crucial for the net-negative phase when CDR credits need to be both supplied and cancelled to meet emissions targets!

🎯 There is a revision of the EU ETS for 2031–2040 set to be proposed by the EU Commission in 2026. So stay tuned as this will be a critical opportunity to pioneer the inclusion of CDR into the EU ETS!

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