In a Nutshell

What is the EU ETS?

The EU Emissions Trading System (EU ETS) is a market-based approach for setting a price for carbon dioxide (CO₂) emissions. It works on a ‘cap and trade’ basis whereby a ‘cap’, or limit, is set on the total greenhouse gas (GHG) emissions allowed from specific sectors of the EU economy each year, with the aim of achieving emissions reductions over time. This cap is converted into tradable emission allowances, which are then allocated to market participants through free allocation or auctions. One allowance gives the holder the right to emit one tonne of CO₂ (or its equivalent) during a specified period. Companies covered by the EU ETS must monitor and report their emissions each year and purchase or trade allowances as needed to cover their annual emissions.

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On the Horizon

2026–2027: The European Parliament and Council will consider the Commission’s proposal and develop their respective negotiating positions before entering interinstitutional negotiations.

2034: The Commission is expected to review the operation of the carbon removal purchasing mechanism and assess its relationship with the wider development of the EU ETS.

Deep Dive

The 2023 revision of the EU ETS

The ETS was revised as part of the Commission’s ‘Fit for 55’ package, which aimed 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 a 4.3 to 4.4% yearly reduction in the allowance cap from 2024 to 2030.
• Progressive phase-out of free allowances for aviation in 2024-2026 and an end of free allowances for sectors covered by the Carbon Adjustment Mechanism (CBAM) in 2026-2034.Inclusion of maritime shipping in the ETS.
• Creation of a separate ETS2 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).

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.

What does the 2026 EU ETS review proposal mean for CDR?

The Commission’s 17 July 2026 proposal introduces an indirect pathway for integrating permanent carbon removals into the EU ETS. Rather than allowing covered companies to purchase removal credits directly to meet their compliance obligations, a public authority would purchase removals through a dedicated programme financed by auctioning ETS allowances.

The proposal provides for the auctioning of 250 million additional allowances to finance carbon removal purchases, supplemented by revenues from a further 10 million allowances intended to help bridge the difference between removal costs and the ETS allowance price. However, the proposal does not explicitly require the delivery of 250 million tonnes of removals: the volumes ultimately purchased would depend on removal prices and the detailed design of the purchasing programme.

Eligibility would initially focus on DACCS and Bio-CCS, identified as removal methods for which potential reversals can be monitored. Detailed rules governing procurement, including auction design, frequency, eligibility requirements and the structure of purchase or offtake contracts, would be established through secondary legislation. The proposal also envisages reviewing the possibility of moving towards more direct, operator-led integration over time.

What are the main design considerations in the review proposal?

Indirect integration could create more predictable demand for permanent CDR while maintaining a separation between removal units and the compliance obligations of ETS operators. Nevertheless, important questions remain concerning the volume of removals that will be delivered, the adequacy of the available financing and the relationship between removals and the declining ETS cap.

Safeguards may also be needed in case CDR deployment is slower or more expensive than anticipated. Under the proposal, allowances reserved to finance removals could be returned to the wider market if they are not auctioned for that purpose. Without corresponding removals, this could increase allowance supply and weaken the contribution of ETS sectors to the EU’s climate targets. The treatment of international credits and the conditions for expanding eligibility to additional removal methods will also affect the framework’s environmental integrity.

Carbon Gaps position on the 2026 review proposal

Carbon Gap welcomes the proposed public purchasing model as a potentially significant step towards creating large-scale, polluter-funded demand for permanent CDR. To strengthen the proposal, Carbon Gap recommends translating its indicative purchasing ambition into an explicit legal volume mandate, introducing safeguards against CDR under-delivery, and ensuring sufficient funding to bridge the gap between CDR costs and ETS allowance prices.

These measures should be accompanied by an ambitious ETS emissions-reduction pathway, the integration of removals “below the cap” as far as possible, robust quality and durability requirements, and a clear hierarchy between domestic permanent removals and international credits.

Read Carbon Gap’s full assessment in our reaction paper to the legislative proposal on carbon removals in the ETS and on the dedicated EU ETS review webpage.

Further Reading

• Should negative emissions be included in the EU ETS? by Eve Tamme
• Review of the EU ETS, European Parliament briefing, 2023
• EU ETS Key Policy and Advocacy Milestones, Emission Trading Extra, 2024