EU-ETS: Europe's compliance gateway for carbon removal credits

Key Takeaway

Here's what's happening: The European Commission decides by mid 2026, whether to integrate Carbon Dioxide Removal (CDR) into the EU Emissions Trading System, potentially creating a €20-135 billion compliance market for CDR by 2040. 

Why it matters for companies: A potential integration of CDR into the EU ETS could significantly impact the compliance strategy and costs of affected companies.

Section 1: Framework Background

Concept & Purpose: The EU Emissions Trading System (EU-ETS), launched in 2005, is the European Union’s cap-and-trade to bring down greenhouse gas emissions in the EU by ~60% by 2030. It regulates major sectors such as power/heat generation, energy-intensive industries (like steel, cement, and chemicals), domestic aviation and maritime transport, setting a cap on emissions through allowances. Companies exceeding their allocated allowances must buy additional ones from other companies to remain compliant.  

Impact & Status: The EU ETS is the longest in operation, has the highest carbon market price of €73/tCO2e, and has raised >€175bn since 2013. It currently prohibits the use of carbon credits. However, as the cap declines and no further EU allowances are issued, the EU has signaled its intent to integrate CDR into the EU ETS, likely as part of Phase V which is set to begin in 2031. 

Section 2: Expected Legislative Changes

Upcoming Deadline: The European Commission is currently reviewing options for CRD inclusion as part of the next major ETS revision, and a report on potential integration is expected for late 2026. Final design decisions, including the structure and rules governing CDR allowances are expected by 2028 - before the next European parliament election. A gradual phase-in of CDR credits before 2040 is considered likely. 

Regulatory Adoption: Introducing high-permance removals into the ETS system, can offer a cost-effective mechanism to manage residual emissions and maintain system stability when the ETS cap declines towards zero. Political headwinds persist as several member states seek prolonged free allocation, while lawmakers warn that poorly designed CDR rules could flood the market unless removal units are ring-fenced e.g. through CRCF standdards. Questions remain on how removals will be incorporated into the cap structure, which credit types will qualify, how conversion factors may be applied, and what role - if any - international credits might play.

Section 3: Risks & Opportunities

Risks of Inaction:  The potential effects of EU ETS integration on CDR buyers will vary widely depending on how the EU defines key design choices. Stricter requirements — such as limiting eligible credit types to engineered removals with high permanence — could increase compliance costs (discussed CDR technologies represent 3-10x premiums over current EU ETS allowance prices). Allowing only EU-generated credits may restrict sourcing flexibility.

Benefits of Proactive Engagement: Active monitoring of policy and market signals can inform early scenario modeling, procurement planning and internal carbon pricing strategies. Participating in consultations, coalitions, and sector dialogues allows to shape evolving market rules and secure a more favorable compliance position. 

Conclusion – 3 Strategic Actions for CFOs/CSOs

As the ETS cap declines toward zero, balancing remaining emissions becomes increasingly expensive or technically infeasible causing a steep rise in CO2 prices. Simultaneously, the CDR market risks stagnating in pilot scale, particularly for capital-intensive technologies. Incorporating CDR into the ETS by 2031 is hence likely, not only to allow companies a way to compensate for an excess in their emissions but also to secure technological leadership in climate solutions in Europe. 

CFOs/CSOs should hence:

• Monitor EU ETS reform timelines and potential CDR design outcomes to assess future allowance price and volume dynamics.
• Engage in consultations and sector dialogues to shape evolving market rules and secure more favorable compliance position
• Build market knowledge early by developing partnership with credible suppliers, including offtake agreements to secure long-term access to high-quality inventory.

Appendix – Sources and Further Reading:

1. European Commission. About the EU ETS. https://climate.ec.europa.eu/eu-action/carbon-markets/eu-emissions-trading-system-eu-ets/about-eu-ets_en
   
   
2. ICAP. EU ETS Policy Details & LRF Update (2025). https://icapcarbonaction.com/en/ets/eu-emissions-trading-system-eu-ets
   
   
3. European Commission. FAQ – Maritime Transport in the EU ETS (2025). https://climate.ec.europa.eu/eu-action/transport-decarbonisation/reducing-emissions-shipping-sector/faq-maritime-transport-eu-emissions-trading-system-ets_en
   
   
4. Directive (EU) 2023/959, Art. 30a (Official Journal, 2023). https://eur-lex.europa.eu/eli/dir/2023/959/oj
   
   
5. Ecologic Institute. EU Carbon Removal Certification Framework – Options for ETS Integration (2024). https://www.ecologic.eu/sites/default/files/publication/2024/50122-the-eu-carbon-removal-certification-framework.pdf
   
   
6. European Commission. Innovation Fund: €4.2 bn for 77 Projects (11 Mar 2025). https://cinea.ec.europa.eu/news-events/news/innovation-fund-eu42-billion-support-77-cutting-edge-decarbonisation-projects-eus-clean-energy-2025-03-11_en
   
   
7. Reuters. France Demands EU Restrict CO₂ Price (27 Mar 2025). https://www.reuters.com/sustainability/climate-energy/france-demands-eu-restricts-co2-emissions-price-document-shows-2025-03-27/
   
   
8. Philip Lee LLP. Engineered CDR: The Path to ETS Integration (15 May 2025). https://www.philiplee.ie/engineered-cdr-the-path-to-ets-integration/
   
   
9. European Commission. COM(2025) 524 – ETS Revenues & 2040 Target Communication (2 Jul 2025). https://climate.ec.europa.eu/document/download/e1b5a957-c6b9-4cb2-a247-bd28bf675db6_en