The EU's climate law amendment: can it help carbon dioxide removal?

Introduction

With the United States under the new Trump administration largely abdicating its commitment to carbon dioxide removal support, the European Union’s role becomes all the more important. This article will focus on how emerging EU legislation could drive European leadership on this critical component of climate policymaking. 

In 2021, the European Union, acknowledging “[t]he existential threat posed by climate change,” and the need for more ambitious climate actions, adopted the European Climate Law as Regulation 2021/1119. The Regulation called upon the Union to “aim” to “achieve a balance between anthropogenic economy-wide emissions by sources and removals by sinks of greenhouse gases domestically within the Union by 2050 and, as appropriate, achieve negative emissions thereafter.” It also established an intermediate target of reducing net greenhouse gas emissions (emissions after deduction of removals) by at least 55% from 1990 levels by 2030.

In early July of this year, the European Commission proposed a Regulation that would require the EU to reduce net greenhouse gas emissions by 90% below 1990 levels by 2040. The Commission indicated that this intermediate commitment on the road to net-zero would help to ensure that the Union meets its Paris Agreement commitments. 

The 2021 European Climate Law Regulation acknowledged a role for “removals” as part of a portfolio of climate responses. However, the proposed 2040 target Regulation is much more granular in this context, citing both a number of specific carbon dioxide removal (CDR) options, such as Direct Air Capture and Biogenic Emissions Capture with Carbon Storage, as well as some general policy prescriptions to drive uptake.

The EU’s increasing focus on CDR as a complementary strategy to emissions reductions is salutary. The Intergovernmental Panel on Climate Change has concluded that “all pathways that limit global warming to 1.5°C with limited or no overshoot” require large-scale adoption of CDR.  Many analyses project that the world will need to remove a whopping 5-10 gigatons of carbon dioxide annually by the middle of the century, and as much as 20 gigatons per year in the latter half of the century. The EU has estimated that it may need 400 megatons of removals by 2040, and as much as 550 megatons by 2050 to meet its net-zero target. 

Ultimately, as the Commission emphasizes in the proposed regulation, this will require scaling up so-called “permanent removals,” that is, approaches that can sequester carbon dioxide on timescales commensurate with the atmospheric residence time of fossil fuel and industrial emissions. These approaches, often also termed “technological,” include Bioenergy with Carbon Capture and Storage (BECCS) and Direct Air Capture, as well as more nascent options, such as enhanced rock weathering, and marine carbon dioxide removal approaches. At the current time, deployment of such approaches in the EU is extremely limited. This is largely attributalbe to cost considerations and limited supply given the low technological readiness level of many of these approaches.

In the next section, I will briefly discuss the specifics of the Commission’s 2040 proposal in the context of carbon removals and suggest a way forward to ensure that the EU achieves its removals goals. 

The 2040 EC Proposal and Carbon Dioxide Removal

The proposed Regulation acknowledges the need for both emissions reductions and enhancement of “removals” to achieve the 2040 goal of a 90% net reduction in greenhouse gas emissions by 2040, the EU net-zero objective in 2050, and “negative emissions thereafter.” It calls for both pursuit of “natural and technological solutions.” It’s contemplated that permanent (technological) removals will be needed to “compensate for residual emissions from hard to abate sectors.” 

While the term “hard-to-abate” emissions remains an amorphous and frequently contested concept, it generally refers to sectors where it will be difficult to wholly decarbonize. These sectors include aviation, agriculture, shipping, steel, cement and chemicals, where energy demands, economics or social or political considerations may constrain wringing out all emissions.  A recent study concluded that hard-to-abate emissions in Annex I countries may comprise almost 18% of all greenhouse gas emissions.

The proposed Regulation states that both natural and more permanent technological approaches will play “an increasing role” over this century in climate policymaking in the EU. It suggests that a primary incentive for scaling these approaches may be incorporation into the European Union’s Emissions Trading System (EU-ETS). It’s contemplated that the EU-ETS will incorporate permanent CDR options into the trading system “to compensate for residual emissions from hard to abate sectors.” 

The proposed Regulation does not prescribe how the incorporation of removals into the EU-ETS should be structured. However, this architecture may prove critical both from the perspective of driving the scaling of carbon dioxide removal and preserving the integrity of the EU ETS. 

Should permanent CDR approaches be integrated into the trading system within the next decade or so, it’s likely that demand would be low, given the high costs and current supply constraints for such options. This would be unfortunate, because as Nemet concludes, stimulation of demand in the “formative phase” for technology-based carbon removal approaches (over the next 10-15 years) could be an essential pre-condition for long-term widespread adoption. 

One potential way to address this issue would be to establish a separate Removal Trading System under the rubric of the EU ETS, with regulated entities obligated to deliver or purchase increasing volumes of permanent removals over time in parallel to their emissions reduction commitments. This could provide a clear and stable demand signal that would help “grow” CDR in Europe into a potential $220 billion euro market by 2050, including the creation of 670,000 jobs on the continent. 

A number of analysts and research groups have advanced several other rationales for separate removal and emissions reduction targets in the EU’s revised Climate Change Law. This would include obviating the risk of “mitigation deterrence, whereby CDR might be “misused as a license to emit,”  as well as providing more transparency and ability for policymakers to track progress in effectuating this critical complementary strategy to emissions reduction. 

Of course, the establishment of a new removals mandate might prove to be politically challenging, so the key would be to slowly phase in the commitments, much as transpired with the emissions reduction mandates under the EU ETS. In the longer term, it may make sense to scrap the dual emissions reductions/removals architecture. Under the “Fit for 55” reforms, the EU ETS will cease issuing new allowances in 2039. At that point, it would make sense to permit regulated entities to use removal allowances to compensate for hard-to-abate emissions, though criteria for what will constitute “residual emissions” will need to be worked out. This approach could help to avoid market volatility in this period, including potentially substantial price spikes.

The proposed Regulation also suggests that the EU should develop further incentives to drive the scaling of carbon dioxide removal, but it only focuses on the potential role of the EU ETS. Another potential way to drive scaling of CDR might be to operationalize a mechanism that has been used in the renewable energy context in several European countries, including the United Kingdom and the Netherlands, known as “contracts for difference” (CfD). 

Governments can enter into CfDs to guarantee a fixed price (“strike price”) for project developers if their costs are above current market prices. As such, CfDs in the context of CDR projects could ensure revenue stability for project developers, helping them to raise financing and deploy projects. CfDs are usually facilitated through competitive auctions, with project developers submitting bids to government entities, specifying the lowest price at which they can provide their product. Governments can award CfDs to developers who proffer the lowest strike prices and “top off” payments if market prices are below said strike prices. As Grillo concludes, in the context of CDR projects, this could result in “de-risking future cash flow and aggregating long-term demand.”

With the United States largely abdicating its commitment to carbon dioxide removal support under the Trump administration, the European Union’s role becomes all the more important. The proposed 2040 Regulation could prove to be a keystone document in driving European leadership on carbon removal if it’s robustly operationalized.

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