The European Union’s compliance and voluntary carbon markets, as they currently stand, cannot sustainably fund carbon-removal technologies. But policymakers can use regulation, such as requiring firms to purchase negative emissions credits, to promote investment and deployment of this green solution across the bloc.
BERLIN/PARIS – The European Union has committed to achieving net-zero greenhouse-gas (GHG) emissions by 2050, and there are strong signals that EU policymakers will approve a new target to reduce emissions by 90% by 2040. The science is clear on what must be done to limit global warming to 1.5º Celsius above preindustrial levels: rapid and dramatic cuts in emissions and the removal of 6-10 gigatons of carbon dioxide from the atmosphere annually. And yet the former receives far more attention than the latter.
This must change – and fast. Removal of atmospheric CO2 will require scaling up investment in carbon-removal technologies from $5-13 billion today to $6-16 trillion by 2050. For comparison, this is at least double the amount of revenues generated by the oil and gas industry each year.
Setting aside the moral – one could say existential – obligation to protect the climate, there is a business case for deploying carbon-removal technology across the EU. By 2050, a global carbon-removal industry capable of achieving net-zero emissions could be worth between $300 billion and $1.2 trillion.
Besides private- and public-sector investments, carbon markets – where companies purchase credits to offset their emissions – have emerged as one of the most important sources of finance for carbon-removal projects. By putting a price on carbon, businesses are incentivized to improve energy efficiency and develop and deploy green solutions across their operations.
Today, there are two main approaches to carbon pricing: compliance and voluntary carbon markets. The compliance market is regulated by mandatory carbon-reduction regimes, mainly targeting high-emitting industries such as steel, oil, and transportation, while the voluntary market operates independently, without direct regulatory oversight.
The EU’s Emissions Trading System (ETS), the bloc’s compliance market, works on a cap-and-trade principle, whereby firms in specific sectors receive emission allowances, the supply of which is capped at a level that reduces total CO2 emissions. They can sell unused allowances on the market, often to companies that require additional ones.
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By contrast, voluntary carbon markets allow businesses and individuals to purchase credits from verified offset projects in order to meet sustainability goals independently from any emission allowances. These markets use different methodologies to ensure that the emissions reductions are real, measurable, and permanent.
Unfortunately, despite the urgency of climate action, recent debates about voluntary carbon markets have cast doubt on their usefulness. Skeptics argue that the lack of transparency and inconsistent standards lead to low-quality credits based on offsets that fail to deliver the promised emissions reductions. In their view, these markets allow large companies to engage in a sophisticated form of greenwashing.
The controversy came to a head earlier this year, when naysayers questioned the legitimacy of the Science Based Targets initiative (SBTi), which develops the global standards and tools that enable companies to set GHG targets in line with reaching net-zero emissions by 2050. The SBTi’s decision to allow firms to include voluntary carbon credits in the calculation of their indirect emissions triggered a significant backlash, with many challenging the credibility of such instruments. A few months later, the SBTi revised its position, clarifying that environmental attribute certificates – including carbon credits – cannot be used to offset a company’s value-chain emissions.
These developments have held up critical financing for climate solutions – especially carbon removal. Neither the EU ETS nor the bloc’s voluntary carbon markets can sustainably fund carbon-removal technologies. Many have suggested using advanced technology to improve the transparency and accountability of carbon markets. But given the situation’s complexity and the lack of unified voluntary standards, scaling up carbon removal requires another tool: regulation.
Japan serves as a good example. The country’s compliance carbon market now accepts credits from carbon-removal methods, including direct air capture and bioenergy carbon capture and storage. California’s Carbon Dioxide Removal Market Development Act could likewise foster the widespread adoption and deployment of this technology by defining which types of emissions it can counterbalance.
The EU should require companies to reduce emissions to a certain threshold and purchase “negative emissions credits” to compensate for their remaining climate impact. Equally important, clear rules for certifying carbon-removal practices to ensure their effectiveness and long-term storage will incentivize businesses to invest in these technologies.
Some progress has already been made. The EU’s adoption of the carbon removals certification framework this year was an important first step toward regulating this technology.
But more must be done. For starters, it is unclear how this new framework will work with existing regulations, including the ETS. Moreover, standards-setting organizations such as the SBTi must better integrate “beyond value chain mitigation” – a firm’s efforts to reduce GHG emissions outside of its own business activities – and carbon removal into short-term corporate climate targets to help guide the regulatory response. As the EU prepares to revise the ETS in 2026, it must take advantage of this opportunity to take the lead in promoting a crucial green technology.
Disclosure: The authors of this article are, respectively, the CEO of a company that certifies credits for voluntary carbon markets and an investor with a stake in the company.
