EU proposes historic €50B ETS Carbon Removal Compliance Market

The European Commission’s long-awaited revision proposal for Phase 5 of the EU Emissions Trading System (EU ETS) represents a landmark transition for permanent Carbon Dioxide Removal (CDR). 

For the first time, the world’s largest carbon compliance market is laying down the specific legal architecture to integrate high-integrity, domestic removals, signaling a massive shift from voluntary corporate offsets to state-backed compliance demand.

Addressing previous uncertainty surrounding market dynamics, the Commission’s proposal outlines a centralized, intermediary purchase mechanism to preserve the ETS cap while driving liquidity:

• The Mechanism: The EU will not simply allow emitters to source credits directly on the open market. Instead, the Commission, acting as a centralized Removals Authority, will issue and auction 250 million additional ETS allowances (+10Mt contingency) between 2031 and 2040.

• Revenue Recycling: The proceeds from these auctions will be used directly to purchase an equivalent amount of permanent, domestic CDR units, ramping up to 48 million tonnes per year by 2040.

• Strict Eligibility: Only BioCCS (Bioenergy with Carbon Capture and Storage) and DACCS (Direct Air Capture with Carbon Storage) certified under the EU Carbon Removals and Carbon Farming Regulation (CRCF) will qualify in this initial phase. Lower-tech options like biochar are excluded from the initial rollout pending future review.

• International Offsets: The proposal permits up to 260 million international credits between 2036 and 2040 (subject to a 2033 review), though these will similarly be vetted and procured through a centralized EU facility.

A €50 Billion Market Signal

At a baseline carbon price estimate of €200 per ton, the procurement of 250 million tons over the 2031-2040 window creates a €50 billion ($57 billion) compliance market for domestic CDR. 

By 2040, annual government-backed spend under this program could hit nearly €10 billion ($11.4 billion) per year, providing the long-term off-take certainty needed to bankroll capital-intensive DACCS and BioCCS infrastructure.

The proposal was welcomed by industry experts, with Codie Rossi, Senior Policy Manager for Carbon Management at CATF, calling it a ‘major milestone for carbon removals’ that would ‘give the sector the strongest demand signal it has ever had.’

“Now the discipline has to match the ambition: procurement that starts years before the tonnes are due, and a clear legal rule that room to emit only exists where real removals stand behind it,” Rossi said.

Meanwhile, others offered a healthy amount of criticism, calling for the need to ‘look beyond BECCS and DACCS for domestic removals,” according to BeZero Carbon CIO and Co-Founder, Sebastien Cross.

“The new central purchasing body must use established project-level due diligence, including independent ratings, to manage risk without unnecessarily constraining supply or driving up costs,” he added.

While the proposal sets a bullish foundation for the removal industry, it marks the start (not the end) of the EU legislative process. The draft text now enters intense trialogue negotiations between the European Parliament and the European Council. 

source: carbonherald news