Why does policy design matter when integrating permanent carbon removals into the EU ETS? Assessing the outcomes through dynamic modelling

[Geoengineering News]

https://helda.helsinki.fi/items/5b2dad84-add8-4f61-9ed4-b1a44360b7ce

Authors: Haavisto, Jami

25 June 2026

Abstract

Integrating permanent carbon removals into the European Union Emissions Trading System (EU ETS) is under an active debate, and such integration may occur as early as the upcoming reform of the EU ETS. This thesis examines how policy design affects the environmental and economic outcomes, using a dynamic ETS model extended to include permanent removals produced through bioenergy with carbon capture and storage (BECCS).

The results show that choosing the policy design has significant consequences. If carbon removal credits are additional to conventional emission allowances – that is, they do not displace issued allowances – forward-looking firms anticipate easing allowance scarcity, bank fewer allowances, and weaken the invalidation mechanism of the market stability reserve. This results in a 5.9% increase in cumulative net emissions from the ETS sector by 2050 and an 18% decline in the allowance price by 2040, which simultaneously weakens the incentive to produce permanent removals. By contrast, if carbon removal credits displace issued allowances one-for-one, cumulative net emissions decrease by 8.5% without affecting the allowance price.

These findings and their analysis yield three policy recommendations. First, carbon removal credits should displace issued allowances at least partly to preserve the integrity and ambition of the EU ETS. Second, the European Commission should act as an intermediary between the removal and emissions markets, controlling the volume of carbon removal credits inserted into the EU ETS and limiting speculative market responses. Third, the model assumes that permanent removal capacity becomes available as soon as the allowance price exceeds production costs, ignoring the investment decisions this requires in practice. Complementary instruments such as contracts for differences would reduce price risk for producers and help bring forward the necessary investments.

Source: University Of Helsinki