Engineered CDR: The Path to ETS Integration

Key Contacts: Lev Gantly – Partner | Anna Hickey – Partner | Michael Byrd – Partner | Ryan Covington – Partner | Simon Puleston Jones – Consultant to Philip Lee LLP | Jordan Baber – Counsel |

The regulatory and commercial landscapes surrounding investment in and deployment of carbon dioxide removal (CDR) technologies are rapidly shifting and evolving, presenting an important opportunity for North American CDR project developers and technology companies. The European Union (EU) and the United Kingdom (UK) are actively assessing the potential integration of CDR methodologies and crediting mechanisms into their respective emissions trading systems (EU ETS and UK ETS).

Possible integration of CDR into the EU and UK mandatory compliance markets represents the potential promise of new scalable, bankable revenue streams, as well as the chance to secure important footholds in: (i) the largest carbon market in the world by market value and trading volume (EU ETS); and (ii) a jurisdiction that has espoused a strong commitment to global climate leadership (UK). For North American climate project and technology developers, being prepared for what may become a defining pillar of global climate regulation warrants serious attention.

1. Background

Until now, participation in these mandatory compliance markets has been primarily limited to emitters and abatement focused projects operating within the geographic boundaries of the EU and UK. Driven by the legal imperative to achieve net zero in both jurisdictions, regulators are increasingly acknowledging that engineered CDR projects must complement emissions reduction efforts, meaning that hard-to-abate emissions will need to be offset by durable, verifiable removals.

For North American project developers and technology companies focused on direct air capture deployments, biochar manufacturing or other CDR pathways, the implications are profound. First, eligibility in the EU ETS or UK ETS could unlock a robust source of demand for high-integrity carbon removal credits. Second, it opens the door to siting projects in or near the EU and the UK, ideally in tandem with long-term offtake contracts from compliance entities subject to carbon pricing obligations. Finally, integration into these regulated markets lends a stamp of credibility that has occasionally proved elusive for the voluntary carbon markets – an especially important factor when seeking financing, strategic buyers or public support of CDR projects.

As discussed in detail below, both the EU and the UK are still in the process of designing exactly what the integration of CDR into their mandatory compliance markets will look like. Both regimes have signalled an openness to CDR project deployment, provided that the removals meet stringent monitoring, reporting and verification standards and contribute credibly to participating countries’ climate targets. Understanding the timing, criteria, and strategic implications of the intersection and integration between the EU ETS and the UK ETS and the voluntary carbon markets is no longer optional but is now a necessary step for any entities aiming to stay ahead of the curve in global climate finance, compliance and innovation.

2. The EU ETS and CDR Integration

The EU has a legally binding target of net zero greenhouse gas emissions at the latest by 2050, and an intermediate
target of reducing net greenhouse gas emissions by at least 55% by 2030, compared to 1990 levels. By 31 July
2026, the EU Commission must assess and report on the methods for accounting for negative emissions resulting from CDR. Integrating removals into the EU ETS will require amendments to the ETS Directive, including permitting the use of CDR and distinguishing between traditional EU Allowances (EUAs) and removal allowances. As an important first step that may lead to CDR integration, in 2024 the EU approved a certification framework for permanent carbon removals, carbon farming and carbon storage in products (CRCF). The CRCF establishes quality criteria for CDR. Building off the CRCF, the EU Commission is currently consulting with the public until 8 July 2025. The consultation covers the possible inclusion of domestic permanent carbon removals in the EU ETS, including how:

• the EU ETS could account for negative emissions resulting from CDR;
• those negative emissions, if appropriate, could be covered by emissions trading or other policies, setting a clear scope and strict criteria; and
• safeguards can ensure that such permanent carbon removals complement rather than replace necessary emissions reductions in accordance with the EU’s climate targets.

The questionnaire associated with the EU’s current consultation identifies the cost rationale for integration. In
particular, the shrinking EU ETS emissions cap is expected to result in no new EUAs by 2045, which, the questionnaire suggests, may reduce market liquidity and drive up prices. Further, the questionnaire states that achieving emissions reductions in regulated sectors may become increasingly difficult in the future, as remaining emissions are likely to
be the hardest to abate. These cost considerations have led the EU to consider CDR as a means of achieving EU targets.

The questionnaire seeks feedback on various integration proposals. These include: prohibiting the use of CRCF certified removals for ETS compliance; permitting only permanent removals (stored for centuries); allowing temporary removals (such as carbon farming or storage in products for at least 35 years); determining whether ETS entities should purchase CRCF removals directly from suppliers or through a central agency; enabling EU ETS installations to deduct removals from their own activities without requiring a CRCF credit; restricting or gradually phasing in the use of CRCF removals by ETS participants; and imposing limits on gross, rather than just net, emissions by ETS entities.

Given the early stage of the EU Commission’s public consultation, no specific market deployment subsidy nor public procurement instrument is proposed. However, the questionnaire indicates that CDR developers may have a route-to-market where CDR in the EU could generate new allowances or ETS installations could deduct any removals generated from their CDR activities from their compliance obligations.

In addition to the Commission’s consultation, the European Scientific Advisory Board on Climate Change (ESABCC) recommended in February 2025 that the EU set separate legally binding targets for gross emission reductions, permanent removals and temporary removals. The ESABCC also recommended that the EU consider a progressive integration of permanent removals into the EU ETS, under strict conditions, and that permanent removals be gradually integrated once a robust certification framework is established under the CRCF.

The ESABCC report calls for increased public investment and innovation funding to accelerate the development and deployment of both nature-based and technological removal solutions (e.g. from Horizon Europe and LIFE programme) as well as Innovation Fund support for permanent removals. Market incentives are also recommended with the ESABCC identifying reverse auctions, contracts for difference (CFD), and tax credits as examples of possible market deployment subsidies.

The ESABCC did not specify a specific funding pathway but rather recommended that the EU and the 27 Member States make use of subsidies, state procurement (e.g. reverse auctions) and tailored financing instruments, such as targeted loans and support from the European Investment Bank. The EU’s introduction of the CRCF, the ESABCC’s recommendations and the ongoing EU Commission consultation demonstrate growing momentum for integration of CDR into the EU ETS.

3. UK ETS and CDR Integration

The UK’s legally binding net zero target, established in 2019, commits to a 100% reduction in greenhouse gas
emissions from 1990 levels by 2050. The UK ETS Authority (Authority) is consulting on integrating greenhouse gas
removals (GGRs), including engineered CDR methods, into the UK ETS. This integration aims to allow operators who verifiably remove and store CO2 to receive tradable allowances, supporting the UK’s net zero targets. The consultation commenced in 2024, and the Authority is currently analysing the feedback received.

In its 2024 consultation, the UK Government requested input on a proposal that GGR operators that meet UK ETS market participation requirements would be awarded UK ETS allowances (UKAs) for each tonne of CO2 they remove and store. These allowances would be the same as conventional UKAs by allowing the UK ETS participant that purchases the allowance to emit one tonne of CO2e and surrender the allowance.

The 2024 consultation also considered how the integration of GGRs will affect the overall UK ETS emissions cap. The Authority is proposing to address the risk of mitigation deterrence by removing a UKA for every allowance generated by GGRs to maintain the total supply of allowances.

The Authority also believes it is sensible to adopt supply controls, which would put an upper limit on how many GGRs can enter the market in the early years of integration, to ensure that integration of GGRs into the UK ETS is implemented successfully. The Authority is not currently considering the use of GGRs as a form of free allocation. The Authority is also taking a phased approach to integration, starting with engineered removals and potentially expanding to high-quality nature-based removals, subject to further work on issues regarding permanence, costs and wider land management impacts.

The consultation states that for engineered CDR, the main driver of deployment in the immediate term will be via the UK Government’s GGR business model and Power Bioenergy with Carbon Capture and Storage (Power BECCS) business model. The models aim to attract private investment in GGR projects based on a “contract for difference” structure, whereby projects may receive a “top-up” payment from the Government if the market “Reference Price” is lower than the “Strike Price” reflecting the cost of producing negative emissions. While the 2024 consultation on integration refers to a 2023 policy update on GGR business models, a new consultation was launched in April 2025 and will remain open until 9 June. The details of the UK CFD are described in further detail at Section 4.

4. Summary of UK Carbon CFD

The UK Government, pursuant to the Energy Act 2023, is consulting on amendments to the Carbon Capture Revenue Support (Directions, Eligibility and Counterparty) Regulations 2024 (Regulations). These amendments are intended to facilitate the implementation of business models for GGRs and Power BECCS by using revenue support contracts. Responses are due by 9 June 2025. The Regulations currently facilitate the Industrial Carbon Capture and Waste Industrial Carbon Capture.

The UK’s CFDs would ensure developers are compensated for the cost of negative emissions generation, paying the difference between a pre-agreed “Strike Price” (the cost of generating negative emissions) and a “Reference Price” (the market value of negative emissions). The Government has two distinct business models in development: the GGR business model, with the potential of supporting diverse GGR technologies, and the Power BECCS business model, supporting large-scale Power BECCS projects with a minimum abated generating capacity of 100MWe. In particular:

• GGR Business Model: The CFD will support a range of engineered GGR technologies, such as Direct Air Carbon Capture and Storage, by providing a stable revenue stream for the net removal of greenhouse gases. As stated in the December 2023 GGR business model update, the Strike Price for the GGR business model will include CAPEX and OPEX elements, as well as an allowed return on investment. CAPEX payment rates will be included within the Strike Price for the GGR business model.
• Power BECCS Business Model: A “dual CFD” approach is proposed, comprising:
  • A CFD for electricity generation; and
  • A CFD for carbon removals (CFDc). The CFDc specifically supports the production of negative emissions via the capture and permanent storage of biogenic CO2.

The CFD schemes aim to de-risk investment in negative emissions technologies and ensure financial viability through stable revenue mechanisms. The GGR business model and CFDc component of the Power BECCS business model provide revenue stability in the form of a difference payment designed to bridge the gap between the costs of constructing and operating the project, including a rate of return (Strike Price) and the market price for the produced GGR credits sold on approved carbon markets (Reference Price).

If developers sell their GGR credits for prices below their Strike Price, they receive a difference payment from a government counterparty up to the Strike Price. If they sell credits above their Strike Price, they must pay back to the government counterparty the amount they received above the Strike Price.

Nevertheless, the devil will most certainly be in the detail of auction and CFD design – two key items to look out for will be the price cap in the CFD allocation rounds as well as indexation of the strike price. In other words, when submitting bids for the preferred strike price, project developers will need to ensure that the submission is below the Government designated price cap. In the context of offshore wind auctions in the UK, Ireland and other European jurisdictions, governments have tended to make the cap lower than it should be, particularly for emerging technologies – this has resulted in project developers ultimately failing to reach Final Investment Decision and commence construction.

5. Conclusion

The EU and the UK are each taking critical steps toward integrating CDR into their respective emissions trading schemes, reflecting a broader recognition of CDR’s potential role in achieving net zero targets. The approach of both the EU and the UK is to use removals to complement — rather than replace — emissions reductions. For the international infrastructure investment community as well as engineered CDR project developers and technology companies (particularly those based in North America), these developments present emerging route-to-market opportunities. As policy mechanisms develop, the integration of CDR into emissions trading systems could become a transformative tool in the EU and UK’s climate strategies.

This article was written with the assistance of Climate Projects associate Max Bail.

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