Emissions trading systems: Trading removals?

Emissions trading systems (ETSs) and negative emission technologies (NETs) delivering carbon dioxide removal (CDR) are important tools to mitigate climate change. An important question is whether and how ETSs could or should interact with CDR. To our knowledge, there has been no broad and systematic assessment of the various options for interaction between ETSs and CDR, alongside its attendant benefits, risks and design considerations. Drawing on a literature review, interviews and workshops with policymakers, four options for the interaction between ETSs and CDR are categorized: ‘disconnected markets’, ‘connected through government’, ‘connected with restrictions’ and ‘integrated markets’. The options differ in terms of the level of government control over the balance of abatement and removals in the system; the flexibility on cap-setting and how to deal with residual emissions; the availability of policy instruments to facilitate effective price discovery as emissions under the ETS dwindle; the impacts on market expectations that could lead to high carbon lock-in; the avenues for additional support for CDR in the case of large differentials between abatement and removal costs; and the resulting fiscal and administrative burden on governments aiming to achieve net zero. The options are not mutually exclusive, and different options may work better in different contexts. Important design considerations are also identified: whether emissions and removals are fungible, and which units (if any) should be allowed; whether removals should be allocated credits or allowances; effects on ETS scarcity and ambition; quantitative limits for the use of removal units; the possibility to establish removal obligations; and the timing of inclusion.Several ETSs (e.g. in California, China, Korea and New Zealand) already interact with removal units (RUs) and provide incentives for CDR, albeit limited to domestic forestry.ETSs could be disconnected or fully integrated with CDR, with intermediate options. They are each a steady state for the ETS and jurisdictions could employ several models simultaneously.Effective management of RU inflow by governments can balance abatement and removals, mitigate economic risks, and bridge cost differentials, albeit with increased administrative burden.Integrated markets can enhance economic efficiency but risk high-carbon lock-in and reduced control over decarbonization pathways.Inclusion of RUs in ETSs can incentivize CDR development, although large abatement-removal cost differentials and price uncertainty remain significant challenges.