Carbon dioxide removal certificates stabilise CO2 prices and ease the burden on industry

Industry’s transition away from oil and gas is still facing hurdles. The planned reduction in CO₂ emission allowances under the European Union’s Emissions Trading System (EU ETS) threatens to drive up costs. At the same time, the transition is hitting its limits due to the slow expansion of climate-friendly infrastructure. However, a new dossier from the Kopernikus project Ariadne, funded by the German Federal Ministry of Research, Technology and Space shows that integratingcarbon dioxide removal into emissions trading can act as a safety valve for industry. Even a moderate number of such credits is sufficient to cushion the rise in the CO₂ price without jeopardising the EU’s climate goals.

With a view to the goal of making the EU climate-neutral by 2050, the industrial sector relies on two alternative paths in areas that are difficult to electrify: (1) capturing and storing unavoidable CO₂ emissions, and (2) increasing the use of hydrogen. However, the expansion of necessary infrastructure – such as CO₂ capture plants, electrolysers, transport networks and storage facilities – is taking longer than expected.

Demand for EU ETS emission allowances for the energy sector and energy-intensive industries therefore remains high. However, the supply of allowances is being reduced year by year in line with the EU’s climate targets. The result is that the price of CO₂ is rising. According to a model calculation by Aurora Energy Research, in cooperation with researchers from the Potsdam Institute for Climate Impact Research (PIK) and the University of Konstanz (HTWG), the price per tonne of CO₂ could be 77 percent higher than in an optimistic baseline scenario due to the delay. “If the infrastructure necessary for emissions avoidance is not in place in time, there is a risk of extreme CO₂ price spikes that could jeopardise the competitiveness of our industry, as well as political support for the European Clean Industrial Deal,” explains Frank Best of HTWG in Konstanz, lead author of the dossier.

Even a credible announcement helps

The study shows that if certificates for permanent CO₂ removal are integrated into emissions trading as an additional option, this gives industry more leeway. Those who remove CO₂ from the atmosphere are rewarded with additional allowances, which they may sell to companies that still rely on emissions. The former can be achieved through air filtration systems or the cultivation of fast-growing biomass for combustion, coupled with the capture and storage of the greenhouse gas. The chemical sector, which is expected to bear the heaviest burden in scenarios involving the feared shortages, stands to benefit especially. However, this should not be viewed as a free pass. “If the framework conditions for climate-friendly industrial projects are right, the investment incentives for a clean industry will remain in place,” says Darius Sultani of PIK, a co-author of the study. “To pave the way for climate-neutral industry, carbon dioxide removal should be combined with targeted support for green hydrogen and CO₂ transport infrastructure.”

According to the study, a credible announcement of removal credits being introduced in the mid-2030s could lower the CO₂ price as early as today. In one scenario, the research team anticipates a linear introduction of these new credits starting in 2035, reaching a maximum coverage of 40 million tonnes of CO₂ annually by 2039. Under this assumption, the CO₂ price would be only 27 percent higher than in the baseline scenario. An earlier start to the removal certificates – as early as 2030 – rising to a maximum coverage of 80 million tonnes of CO₂ per year, would even fully offset the cost increase.

CO₂ removal allowances are no substitute for climate protection

Currently, less than 5 percent of revenue from the EU ETS flows directly into industrial decarbonisation. The Experts recommend that these funds be directed more specifically toward CO₂ capture and storage as well as hydrogen infrastructure in the future. This would mitigate price pressure from the outset. Furthermore, it is conceivable that the so-called market stability reserve (MSR) in emissions trading could provide additional stability for removal credits; this needs to be examined more closely.

The conclusion is clear: CO₂ removal credits are no substitute for climate protection, but they can help ensure the economic viability of the transition to a climate-neutral industrial sector.

Institutions of the contributing authors: University of Technology, Business and Design Konstanz, Potsdam Institute for Climate Impact Research, Aurora Energy Research