European Union (EU)

A look at the various funding programmes of Horizon Europe

The program consists of four main pillars, each having dedicated funding and established working programmes that guide priorities for research and funding support:  

Adapted from Horizon Europe: Investing to shape our future (2021)

• Pillar I – Excellent Science: aimed at strengthening the excellence and competitiveness of the EU’s scientific base. Three initiatives take the work forward:  

• • European Research Council: provides funding to researchers and their teams working on frontier science topics, with an emphasis on early-stage researchers.  
  • Marie Skłodowska-Curie Actions: focuses on enhancing the knowledge and skills of researchers through mobility and training.  
  • Research infrastructures: ensures world-class research infrastructure in Europe that is integrated, interconnected, and available to the top researchers in Europe and across the world.  

• Pilar II – Global Challenges and European Industrial Competitiveness: centred around 6 clusters that tackle key global challenges underpinning EU policies and the Sustainable Development Goals, with a total of €53.5 billion. The launch of “Missions”- specified in the main work programme – is also part of the strategic planning process. Each cluster publishes a number of projects and calls within the main work programme for the relevant year, following priorities in R&I for the EU. Horizon Europe sets out its own Technology Readiness Level (TRL) scale, and projects are set to support the path towards different stages of maturity through a diverse range of actions including Research & Innovation Actions (RIA), Innovation Actions (IA) and Coordination and Support Actions (CSA).  

• Pilar III – Innovative Europe:  

• • European Innovation Council (EIC): promotes breakthroughs, deep tech and disruptive innovation with scale-up potential at the global level through all stages of innovation.  It has two operating modes, an “Open” fund, holding no thematic preferences, and a “Challenge” fund, with specific thematic areas. Different technology readiness levels (TRL) are covered throughout its programmes:  
  • European Innovation Ecosystems (EIE): supports the creation of better-connected innovation ecosystems across Europe, at both national and regional levels.  
  • European Institute of Innovation & Technology (EIT): brings together business, education and research organisations. 
    
• Widening Participation & Strengthening the European Research Area (ERA): composed of two initiatives:
  • Widening participation and spreading excellence: aims to enhance research and innovation capabilities in countries that are currently falling behind according to the European Research Area policy goals.  
  • Reforming and enhancing the European R&I system: focuses on training researchers for successful R&I participation while prioritising networking, gender equality, ethics and integrity. 

A look at carbon removal in Horizon Europe

Horizon Europe’s work programmes benefit a wide range of topics and technologies, especially in the six clusters of Pillar II. A close look at these programmes shows Horizon Europe has committed funding to CDR–related topics (directly and indirectly, including calls with a high potential for spillovers), with the majority being clustered in three areas ( 8 – Climate, Energy and Mobility; 9 – Food, Bioeconomy, Natural Resources, Agriculture and Environment; and 12 – Missions) in both the 2021-2022 and 2023-2024 work programmes.  

The number of calls indirectly related to carbon removals found in both periods, – ranging from CCS and CO2 infrastructure projects to digital solutions and Monitoring, Reporting and Verification (MRV) – is higher than those with a direct link to CDR, such as blue carbon, carbon sequestration and BECCS projects.  For context, the funding allocated directly to CDR projects amounted to about 1.1% of the total budget for 2021-2022 and 0.9% of the 2023-2024 total budget. Direct and indirect funding for CDR reached 2.6% of the total 2023-2024 budget, instead of the 1.78% for 2021-2022.  

Research & Innovation actions (RIA) are dominant for the first period, while both RIA and Innovation Actions (IA) lead within the latest work programme, although RIA are slightly more present (65.73% of all projects) in direct CDR funding. RIA projects have 100% of costs covered by the EU and are directed to new knowledge and exploration of technologies. IA projects are covered until 70% of costs and focus more on prototyping, testing, piloting, and large-scale product validation, and marker replication.  

Knowledge and targeted funding

A number of projects in Horizon Europe can provide simultaneous benefits to Carbon Capture and Storage (CCS), Carbon Capture and Utilisation (CCU), and Carbon Removal (CDR). While there are sometimes overlaps between these families of methods – for example, shared CO2 transport and storage infrastructure – CDR is a much broader field and a set of methods on its own. The main work programme for 2023-2024, especially in Cluster 6, features more explicit mentions of carbon removals in the expected outcomes or scopes of the topics. However, the calls do not solely focus on CDR in most cases and are more likely to produce spillover effects that benefit CDR, such as providing CO2 transport infrastructure.  

It is a positive step that the Commission has progressively included mentions of CDR within Horizon’s work programmes. To ensure that Horizon Europe delivers the appropriate support for CDR solutions going forward, a more sophisticated approach must be introduced that differentiates between CCUS and CDR methods, providing dedicated funding for different types of CDR as part of a portfolio approach. 

Means in line with targets

There is substantial support for different types of removals given CDR’s status as a nascent field. Despite this support, the amount currently allocated to research into carbon removals is not nearly enough to meet the needs for accelerated development and deployment of CDR in light of the EU climate goals and the ambition for the EU to take the lead in this space globally. To deliver on these goals, the EU must commit to a significantly expanded budget for carbon removal, in line with the goals set out for the Green Deal, such as 310 MtCO2e of removals from the LULUCF sector, 55% emissions reductions by 2030, and climate neutrality by 2050.  

Diverse and precise support

Horizon Europe strategic plans guide the direction of the investments in research and innovation. Ahead of the next iteration, the Strategic Plan 2025-2027 analysis looks at changes in EU policy and how the global context has changed since the first Plan (2021-2024), to determine if adjustments in terms of priority, directions and actions need to be made for this period. The analysis states that significant research is needed to bring down the cost of nature-based and industrial removals, and further identifies areas where the current efforts need to be reinforced, for example:  

1. Sustainable economic models that incorporate ways to measure and incentivise the co-benefits of carbon removal; 
2. Addressing challenges in soil, water, nutrient and biodiversity through e.g, carbon removal; 
3. The removal potential of bio-based economies and bio-based value chains; 

Beyond these suggestions, directing calls for projects based on a diverse portfolio of CDR methods will be necessary to help the industry bridge the research and innovation gap and ensure the maturity of all removal technologies. This approach requires that Horizon Europe ensure there are sufficient calls for all levels of maturity (TRL levels) and types of actions (Research & Innovation, Innovation and Coordination & Support Actions), since carbon removal requires both early-stage research capacity and support for deployment. 

While the CBAM does not include CDR explicitly yet, there are a strong rationale for including it and several different ways it could be included.  

 The CBAM is intended to mirror the conditions that European Economic Zone actors experience when they emit carbon and fall subject to the EU Emissions Trading System (ETS). Assuming the EU-ETS includes permanent CDR within its scope to enable participants to reduce net emissions in 2030 at the earliest, a case can be made to integrate removals in the CBAM to make the two mechanisms work under the same rules. This would require clear rules on MRV mechanisms, with removals limited to hard-to-abate sectors. The CBAM could integrate CDR within its scope first, as it gradually phases in starting 2026.   

CDR could be included either directly or indirectly within the CBAM: 

1. By authorising importers to buy durable removals to compensate a share of the embedded emissions and reduce their CBAM obligations. A clear mention of this measure could be made in Article 7. This addition could be done in accordance with the forthcoming CRCF by clearly specifying that only permanent removals are allowed. 
2. By recognising CDR as a way to reduce a product’s overall embedded emissions, therefore reducing the product’s net-direct emissions. For example, a steel-making factory in a non-European country could buy durable CDR credits in its country of operations to reduce the product’s emissions. 

The revenues generated by the CBAM will go to the general EU budget. Since the CBAM covers many hard-to-abate sectors that will likely continue generating GHG emissions in the long term, it could be argued that some of the revenues generated by the CBAM could be used to incentivise/support CDR development/deployment. A share of the revenues could be used to finance the Innovation Fund.  

Including CDR within the CBAM does come with some risks. Among others, it could enable greenwashing and disincentivise decarbonisation along value chains. While the CBAM itself might not contain the tools needed to tackle these two risks, other EU legislations could help address these risks. Greenwashing will likely be prevented by the Green Claims Directive, whilst the EU-ETS incentivises European companies to reduce their emissions.  

Whether CDR could be used to circumvent the CBAM or not should be clearly defined, and if yes, clear eligibility criteria should be created and agreed upon. Effectively, only high-quality removals should qualify, and priority should be given to reducing embedded emissions in the first place. EU policymakers still need to discuss and agree on the methodologies related to embedded emissions accounting, which could provide some opportunities to promote a stringent and robust approach to CDR under the CBAM. For example, indirect emissions could be reduced or even negated if BECCS is allowed in the methodology. 

CBAM in perspective 

The CBAM is not only considered an essential tool to achieve the EU’s climate objectives but also serves to ensure the EU’s industrial competitiveness with the rest of the world. However, while it puts European production on a level-playing field with imported products, European exports are currently still at a disadvantage. How this issue is tackled remains to be seen, as carbon leakage could still occur if a company shifts its share of European production going to the rest of the world outside of the EU.  

Other geographies are also engaging with similar ideas. The United Kingdom is currently going through a public consultation as to whether it should introduce a CBAM. Interestingly, one of the questions asked pertains to whether carbon credits should be used to offset emissions. The United States is currently reviewing the “Clean Competition Act”, which would create a CBAM for the USA. California has already put in place a system similar to the CBAM regarding electricity imports in some situations, and Canada is considering adopting a border carbon adjustment mechanism. 

National Strategic Plans and support mechanisms  

Within the CAP 2023-2027, CAP National strategic plans operationalise the CAP’s policy objectives at the national level.  

The CAP amounts to 20% of the total EU budget and plays an enormous role in the EU’s intervention in the land sector. It provides different support mechanisms:  

• income support through direct payments, among others, to incentivise environmentally friendly practices; 
• market measures to deal with difficult market situations; 
• rural development measures (national and regional programmes to address specific needs and challenges). 

Each member state has relative freedom to distribute funding across these three types of support mechanisms and can freely allocate up to 25% of its budget between income support and rural development. The CAP Strategic Plans outline this allocation and describe which measures will be supported within each member state. The CAP 2023-2027 puts higher emphasis on tracking outcomes by setting an annual performance report and a biannual review process for national plans, assessing progress towards their goals and the 10 CAP overarching objectives. 

Direct payments use the biggest share of the CAP funding and are conditional to Good Agricultural and Environmental Practices (GAEC), which include measures on maintaining a minimum soil cover, limiting erosion and maintaining soil organic matter, and requiring farmers to save at least 3% of their arable farmland for non-productive areas/features with the possibility to get support to extend it to 7% of the arable land. The new CAP introduces a requirement prohibiting drainage, burning or extraction of peat from peatlands. This prohibition could have a favourable impact on peatlands, allowing them to serve as carbon sinks rather than as sources of carbon emissions.  

While a large share of utilised agricultural area (UAA) is set to be farmed under GAECs, only a limited share is set to be under commitments to reduce emissions or to maintain or enhance carbon storage, which includes permanent grassland, permanent crops with a permanent green cover, agricultural land in wetland and peatland. Moreover, this share varies dramatically between countries, from 0% to 85%. The metrics used in the strategic plans are also not the same; some mention the peak coverage year (note: peak year also varies between countries) while others use the average over the 2023-2027 period. It is quite concerning to see that several states currently have no measures to increase soil carbon storage. Experts have also raised the question of whether the measures proposed are enough to reach the objectives set in the strategic plans. 

Eco-schemes 

Additional subsidies in the form of eco-schemes can be made available to states as a reward for more environmentally friendly practices. Eco-schemes support various types of voluntary actions that go beyond the CAP’s obligation of conditionality. These include practices related to agro-forestry and carbon farming among others. The Commission has published an extensive list of examples. However, it includes only a handful of practices linked to CDR. Member states are not exploiting this opportunity to the fullest, as only a minority of them plan to use eco-schemes in relation to CDR. Some environmental NGOs raised concerns questioning the eco-schemes’ true environmental benefits. 

Carbon farming and related debates 

The recent communication by the EU Commission on “Sustainable Carbon Cycles” has highlighted that the CAP should be one of the primary mechanisms to promote carbon farming at the European level, together with LIFE and Horizon Europe’s “Soil Deal for Europe”. The Commission encouraged states to include measures to incentivise carbon farming in their strategic plans. The current efforts on the Carbon Removal Certification Framework (CRC-F), among others, aim to clarify what good carbon farming practices mean. 

There are, however, several issues related to carbon farming that need to be discussed and tackled with high priority.  

Firstly, carbon farming is a very loaded term. The EU defines it vaguely as “a green business model to reward farmers for adopting practices leading to carbon sequestration”. Therefore, carbon farming as an economic concept and the underlying practices it encompasses should be separated in order to differentiate the business model from the underlying practices.  

Secondly, there is a strong opportunity in the CRCF to make clear that the durability of carbon sequestration in soil is lower than for other CDR methods. Any market-facing claims need to be strictly regulated to ensure that fossil emissions are not compensated for through such practices.  

Thirdly, soil carbon sequestration comes along with many co-benefits besides carbon removal. These include improved soil quality, positive biodiversity impacts and better water retention. These practices should thus be incentivised. However, key questions remain, such as who should pay, and be paid, to implement these practices and what the basis for payment should be. 

Finally, the measuring, reporting and verification (MRV) of soil carbon fluxes is still very much a work in progress. There is currently a trade-off between the accuracy of results and the costs/scalability of methodologies. The EU has yet to determine how best to deploy MRV and at which geographical scale and granularity. The purpose of MRV deployment should be better defined. Furthermore, the commodification of sequestered soil carbon requires more strenuous MRV. 

Separate targets for emissions reductions and removals 

The climate law formally enshrines the objective to increase the EU’s interim 2030 emissions reduction target from 40% to at least 55% compared to 1990 levels. 

When the European Commission first came up with this proposal to step up ambition, moving from 40% gross to 55% net emission reductions, it was criticised for creating a net target that did not differentiate between reductions and removals. Academic voices and campaigners responded by initiating a campaign calling for separate targets, which the European Parliament took on board as part of its own negotiating mandate. Campaigners indeed voiced the fear that an overreliance on carbon removal risked distracting from or delaying action on emissions reduction, leading to the so-called “moral hazard” or “mitigation deterrence” effect. 

The recommendation to account separately for carbon sinks was finally mirrored in the ECL, as the 2030 target included a capped contribution of 225 million tonnes of carbon dioxide removal through natural sinks, linking to the pre-existing commitment made under the LULUCF Regulation. Since then, the LULUCF Regulation has been revised and the nature-based target was increased to 330 million tonnes by 2030, de facto increasing the ambition of the 2030 targets. However, the capped contribution of 225 million tonnes remains.  

No definition of carbon removal nor hard-to-abate emissions 

Despite formally acknowledging the need to balance emissions with removals, the ECL does not introduce a definition of what constitutes carbon dioxide removal. The Law mostly refers to removals as natural sinks, de facto looking at the CDR contribution mainly through the lenses of land use and forestry. 

However, this gap in the definition could be expected to be addressed in the proposal for a carbon removal certification framework, which the ECL mentions in the context of enhancing carbon sinks and supporting carbon farming. 

Finally, the Law acknowledges the role of “removals of greenhouse gases” as a necessary second step to avoiding emissions at source and compensating for residual emissions from “sectors where decarbonisation is the most challenging”, without further elaborating on what constitutes a hard-to-abate emission or sector. Hard to abate emissions should be explicitly defined. 

Some acknowledgements of technology-based solutions 

The role of more engineered forms of removals, including those enabled by carbon capture and storage technology, is not expanded upon in the Law. One reference is however made in the legislation to the “sinks” that will be needed to balance anthropogenic emissions including both “natural and technological solutions.” 

The climate law also includes a recital on the need to promote investment certainty and to introduce policy incentives for technological innovations that can fast-track the transition to a climate-neutral economy, providing an indirect legal hook for the scale-up of CDR solutions. 

Lastly, whilst the quantified contribution of natural sinks is specified in the ECL, no target is given for other forms of removal methods. 

An aspirational, non-binding target for technological solutions was however subsequently proposed as part of the European Commission’s communication on sustainable carbon cycles, which calls for a 5 million tonnes objective by 2030, thereby giving a strong signal to investors and formally recognising the need to increase research and deployment for these types of solutions. 

New Scientific Advisory Body 

The law officially establishes the launch of an independent scientific body to provide unbiased advice on the EU’s climate neutrality pathway and encourages Member States to set up their own entities to do so. 

Interestingly, the ECL specifically mandates the advisory body to provide scientific knowledge on climate modelling and monitoring but also on “promising research and innovation” which contribute to increasing removals, indirectly mandating the advisory body to assess the potential of more emerging types of carbon removal methods. 

Right-sizing the EU carbon budget for the 2040 climate target 

The climate law enshrines the objective for the European Commission to propose an intermediate 2040 climate target within six months of the first global stocktake exercise of the Paris Agreement. For transparency and accountability purposes, the law notes that the European Commission will in parallel publish an indicative greenhouse gas budget for the period spanning 2030-2050 defined as the total net greenhouse gas emissions (expressed as CO2 equivalent and providing separate information on emissions and removals) that are expected to be emitted without compromising the Paris Agreement. The law specifies that here too, the recommendations of the Advisory Board will be solicited and that the Commission will publish the underlying methodology used. 

Making sense of the Renewable Energy Directive

To help deliver on the EU’s increasing climate ambitions, including the EU-wide 55% emissions reduction target by 2030 and the target to achieve net neutrality by 2050, the targets set by the RED have been repeatedly increased. As a result, the RED has evolved from RED I to its latest version, RED IV. Starting from a target of 20% RES as a share of total final energy consumption by 2020 set in 2009, RED I was revised as part of the “Clean energy for all Europeans” package in 2018 to include a target of a 32% RES share by 2030, thereby becoming RED II.

In July 2021, as part of the “Fit-for-55” package, RED III was proposed and the target was raised to 40% by 2030. Following the Russian aggression against Ukraine, the Commission proposed a first amendment (RED IV) with a target of 45% as part of its “REPowerEU” plan. In November 2022, the Commission proposed a second amendment for a Council regulation to accelerate RES deployment.

In March 2023, the EU Parliament and the Council reached a tentative agreement to raise the target to a 42.5% RES share by 2030. Member states will need to increase their national contributions in their integrated National Energy and Climate Plans (NECP), which are due to be updated in 2023 and 2024, to collectively achieve the target. Achieving the target would bring EU member states’ total renewable energy generation capacity to 1236 GW by 2030.

RES considered within the RED’s scope include wind, solar, hydro, tidal, geothermal, and biomass. The binding target is supported by differentiated targets for a variety of sectors, such as heating and cooling, industry, and transport. The provisional agreement under RePowerEU also aims to remove barriers to the scale-up of renewable energy generation by making permitting processes for renewable energy installations quicker and easier. To this end, member states will define regions (so-called ‘go-to areas’) with limited environmental risks and high renewable energy generation capability, in which the permitting procedure shall be simplified. 

The RED and its impacts on biomass use

Biomass is considered a RES within the provisional agreement, provided that its use meets several sustainability criteria. These include requirements that woody biomass used in energy generation follows the cascading principle – ensuring that biomass of higher quality should serve purposes demanding higher-quality biomass first – and that forest biomass may not be harvested from areas with particular significance with regard to carbon stocks or biodiversity. Furthermore, no financial support shall be granted when energy facilities use stumps and roots for energy generation (as they are considered important, for example, to protect soil carbon stocks) or when they use high-quality biomass that should be reserved for other use cases under the cascading principle, such as industrial-grade roundwood, veneer logs, and saw logs.

The provisional agreement sets out a new binding combined target of 5.5% for advanced biofuels, generally derived from non-food-based feedstocks, and renewable fuels of non-biological origin, mostly renewable hydrogen and hydrogen-based synthetic fuels, in the share of renewable energy supplied to the transport sector. The increasing need for advanced biofuels that use biomass as a feedstock may conflict with the demand for the lower-quality biomass upon which several CDR methods rely, such as BECCS and biochar.

Where does BECCS fit in?

The recognition of biomass as a renewable energy source affects the feasibility and potential scale of BECCS. BECCS can both provide renewable energy and remove carbon dioxide from the atmosphere. The 2021 proposal states that member states should not support electricity production from installations producing only electricity, as opposed to, for example, installations producing both heat and power), unless these installations are located in regions included in the Just Transition Plan, or if the installations used CCS technologies to capture and store the associated (biogenic) CO2 emissions.

Currently, negative emissions stemming from BECCS cannot contribute towards targets set under any of the three main legislative pillars of EU climate action, namely the EU Emissions Trading System (EU ETS), the Effort Sharing Regulation (ESR), and the LULUCF Regulation.

The RED: Are sustainability criteria enough to ensure the sustainable use of biomass?

The role of biomass within the RED is important. While sustainability criteria exist to prevent the misuse of biomass for energy generation, the demand for biomass may increasingly exceed supply. Some communities might be adversely impacted, especially in terms of resource use and food security. It is therefore critical that future revisions of the RED take these concerns into consideration.

As one pillar of a larger Green Deal Industrial Plan, the NZIA is meant to strengthen and support the EU’s capacity to reach its climate goals. It ensures Europe seizes the potential to be a world leader in the global net zero industry in the context of strong support for net zero technologies coming from different parts of the world, such as the United States’ IRA.

(Strategic) net zero technologies

The NZIA proposes key developments for net zero technologies. Two main aspects of the definition are particularly relevant: (1) the definition is not technology-neutral, it identifies key areas to be addressed, and further lists a family of eight strategic net-zero technologies, which benefit from even faster permitting, priority status, and in some circumstance of overriding public interest, and (2) net zero technologies must be at least Technology Readiness Level (TRL)  8. CDR is not explicitly listed as a strategic net zero technology, and the TRL 8 requirement would exclude most CDR methods. However, if based on TRL only, some could fall under the definition of ‘innovative net zero technologies’, e.g., some forms of direct air capture are considered TRL 7. This flaw of the proposal could be addressed by co-legislators by adding carbon removal in the definition of net zero technologies and in the related annex.

CO₂ injection capacity target to incentivise CO₂ storage infrastructure

The NZIA proposes a 50 million tonnes per year of CO₂ injection capacity in the EU by 2030. The act rightly identifies the lack of storage capacity as one of the largest bottlenecks for CO₂ capture investments. One of the key aspects of the act is the transparency of CO₂ storage capacity, including the obligation for member states to make publicly available data on sites that can be permitted on their territory, as well as reporting on CO₂ capture projects in progress, and their needs for injection and storage capacity. The NZIA clarifies that CO₂ injection capacity will also be available to accommodate CDR, but provisions are not proposed to ensure the shared CO₂ infrastructure can efficiently be used to accommodate both CCS and CDR methods. A comprehensive and coordinated approach to carbon management that considers both CCS and CDR is needed to ensure that limited CO₂ storage capacity is used effectively to reach the EU’s climate neutrality targets. The target will need to be continuously reassessed to meet the storage needs in the EU, especially beyond 2030. Furthermore, separate provisions to ensure adequate transport infrastructure should be foreseen. The European Commission estimates that about 550 million tonnes of CO2 may need to be captured annually by 2050 to meet the net zero objective.

Oil and gas producers’ responsibility to develop the EU  CO₂ injection capacity has the potential to be a world-leading initiative

The NZIA Article 18 introduces an innovative obligation on oil and gas producers to take responsibility for building EU CO2 storage infrastructure subject to the EU’s injection capacity target. This obligation could introduce an element of producer responsibility for fossil fuel producers in a similar way as producers of packaging, car tires, and other products are required by law to take responsibility for the environmental footprint of end-of-life disposal. If confirmed, this provision would also allow the development of open carbon storage sources by mapping and hosting transparent, open data on carbon storage resources, much of which is held today by private companies. Critical details of this obligation, such as how different sources of CO₂ for storage are prioritised or barred, which entities, beyond oil and gas producers, are required to build the CO₂ infrastructure, and the procedures to determine their location remain open and need further attention.

Fresh funding is needed

The proposal establishes new initiatives, such as the “Net Zero Europe Platform”, that will discuss the financial needs of the net zero strategic projects and could be key in advising how the financing of these projects can be achieved. Beyond this, the NZIA is anchored in already existing funding mechanisms such as Innovation Fund, InvestEU, Horizon Europe, Important Projects of Common European Interest (IPCEI), the Recovery and Resilience Facility, and Cohesion Policy programmes. Clarity on new and additional funding will be key, as bigger goals will require bigger means that can support the variety of CDR methods at different TRL stages.

Update to the ETS

The ETS was revised as part of the Commission’s ‘Fit for 55’ package, which aims to introduce new or improve existing legislative tools for achieving the EU’s target of reducing net GHG emissions by at least 55% below 1990 levels by 2030. The proposed changes to the ETS include:

• Increased ambition to reduce emissions by 62% in the sectors covered by the ETS by 2030  and reduction of the cap by 4.3% per year in 2024-2027, and by 4.4% in 2028-2030.
• End of free allowances for sectors covered by the Carbon Adjustment Mechanism (CBAM) in 2026-2034.
• Phase-out of free emission allowances for aviation (25% in 2024, 50% in 2025 and 100% from 2026).
• Inclusion of maritime shipping in the ETS.
• Creation of a separate ETS for the building and road transport sectors, applying to the distributors that supply fuels for combustion. A new Social Climate Fund will direct part of the revenue from the auctioning to support vulnerable households and micro-enterprises.
• Increase in the Modernisation Fund and Innovation Fund.
• Strengthening the market stability reserve (MSR), the mechanism to help prevent excessive carbon price fluctuations.

Support for CDR through the Innovation Fund

Although the EU ETS is designed to incentivise emissions reductions as opposed to carbon removals, money raised through auctions of emission allowances under the ETS are reinvested into the EU’s Innovation Fund, which provides a source of funding support for technology-based CDR methods among other low-carbon technologies.

For more information on the link between CDR and the Innovation Fund, see here.

Should carbon removal be integrated into the EU ETS?

The inclusion of carbon removal (with permanent storage of captured carbon) in the EU ETS is subject to a nascent and growing debate in the EU policy ecosystem, in anticipation of the announced Commission report. Integrating negative emissions into the ETS would allow participants to offset a portion of their emissions by purchasing carbon removal credits. This, in turn, could create a potential long-term market for CDR.

Including removals in the EU ETS could have a number of benefits. As the ETS allowance cap is steadily reduced over time, integrating negative emissions would create additional market liquidity and decarbonisation options for hard-to-abate sectors. It would therefore help to satisfy demand for removal credits or allowances from hard-to-decarbonise sectors like aviation and would allow for carbon removal credits to be easily integrated into existing market infrastructure and trading platforms.

Carbon removal project developers and investors would gain greater confidence that there will be sustainable long-term demand for carbon removal credits. It would also allow removal projects to benefit from the carbon price. However, the price differential between the cost of CDR and the EU ETS carbon price will be a key consideration. The EU ETS would only incentivise CDR solutions within a certain range of the ETS price. This could be sufficient for some approaches such as BECCS (cost at scale  USD 15 – 400/tCO₂) and waste-to-energy with CCS, but additional incentives would be needed for direct air capture given its higher price point (cost at scale USD 100 – 300/tCO₂) – although this is expected to change as technologies improve and costs of different methods decrease. Complementary incentive mechanisms such as Carbon Contracts for Difference (CCfDs) could bridge the gap between the actual cost of certain CDR methods and the EU ETS carbon price to drive the investment needed. The Commission is considering CCfDs as part of the overall agreement on the revision of the ETS Directive.

However, it is imperative that the potential inclusion of carbon removal credits in the EU ETS does not undermine the incentive for emitters covered by the ETS to decarbonise, or the urgency with which they should do so. One option to address this risk would be to limit access or quantities of removals to specific sectors that are harder to decarbonise and more likely to have residual emissions.

Another important consideration is the impact that any inclusion of CDR in the EU ETS would have on the integrity of the market. Developing robust monitoring, reporting and verification (MRV) standards would safeguard the integrity of the ETS. The introduction of these standards is underway under the EU’s CRCF legislation.

An alternative approach might be establishing a separate, regulated negative emissions market. This separate market could later be linked with the EU ETS after the differential between CDR and ETS prices has been reduced and CDR technologies have a demonstrated track record at scale.

The EU ETS & other markets

The EU ETS was the world’s first international emissions trading system when it was set up in 2005. It has since inspired the development of emissions trading in other countries and regions, including most recently the UK and China. The potential role of the UK ETS as a market for CDR has been explored through a call for evidence published by the UK ETS Authority in 2022, the outcome of which is expected in 2023. In 2017, the EU and Switzerland signed an agreement to link their emissions trading systems. The agreement entered into force on 1 January 2020, and the link became operational in September 2020.

Context of the law

In 2021, the European Parliament requested that the Commission develop an EU-wide common legal framework for the protection and sustainable use of soil. The 2023 Framework proposal followed up on this request. Soil health also plays a key role in delivering existing EU strategies and targets, including the EU Biodiversity Strategy for 2030, the EU Soil Strategy for 2030 and the 8th Environment Action Programme.  

Reaching the new climate objectives set under the European Green Deal, as well as ensuring a stable food supply, relies on healthy soils. In the proposal, the Commission reports that an estimated 61% to 73% of agricultural soils in the EU are affected by erosion, loss of organic carbon, nutrient exceedances, compaction or secondary salinisation, or a combination of these threats, which not only impacts soil carbon sequestration but also food production capacities. For example, crop yields can be reduced by 2.5-15% by soil compaction. It is estimated that around 75 billion tonnes of organic carbon are stored in EU soil. As a point of reference, the EU’s total CO2 emissions were about 4.5 billion tonnes in 2017.  

What does it look like in practice?

The proposal for a directive applies to all soils in the territory of member states. Under the Framework, member states are required to delineate their territories in ‘soil districts’, which is a newly defined governable unit introduced in the directive. Some loosely defined parameters to determine soil districts are laid out in the proposal. A competent authority designated by each member state will be assigned for each soil district. Member states are then required to establish a monitoring framework based on a set of criteria laid out in the directive, ensuring comparability of measurement across soil districts and member states. Most importantly, the European Union now has a measurable definition of soil health. Using this framework, member states are required to accurately and regularly measure soil health. The Directive lays out methodologies to do so and an obligation to measure soils at least every five years.   

Under this proposed directive, member states would also be required to set up a mechanism for voluntary soil health certification, viewed as a way to incentivise the uptake of sustainable soil management practices by land owners. As per the current proposal, this certification would be complementary to the Carbon Removal Certification Framework (CRCF). This linkage is still unclear and needs to be further clarified by the Commission.

Room for improvement

The Commission’s plan to create a strong soil health monitoring framework is a positive move for Europe. It will help foster healthier soils, potentially leading to greater quantities of carbon being absorbed. Carbon Gap especially welcomes the establishment of measurable common thresholds for soil health across a wide range of variables, minimum criteria for determining sampling points, an EU-wide soil health assessment and reporting system, and a digital portal to make soil data publicly accessible as important steps towards boosting Europe’s soils through a harmonised framework.  

However, it is important to recognise that monitoring soil health does not necessarily mean that soil health will be improved. The proposed directive would better serve its purpose if it included a legally-binding target for soil health by 2050 holding member states accountable for their stated goal. Another concern is that the proposed frequency of measurement and the timelines for reporting cycles is insufficient. Effectively, if the law enters into force as it stands today, the first soil measurements would only be required within four years. New soil measurements would then be required every five years, meaning that it would take close to a decade before a clear view is established of whether EU soils are recovering, protected or enhanced.  

While the Commission’s desire to incentivise sustainable soil management principles is welcome, its proposed mechanism of soil health certification for land owners and managers raises concerns. The suggested link to the CRCF warrants scrutiny as soil health and soil carbon are not interchangeable, soil carbon fluxes are difficult to measure accurately at scale, and the durability of soil carbon storage is low. Therefore, soil health certificates should not be sold as carbon credits or used to contribute toward net-zero targets. Rather, these certificates might be supported by entities wanting to make contribution claims or do good for the environment and society.