Developing the UK ETS – potential market for greenhouse gas removals?

Including GGRs in the UK ETS could: 

• incentivise investment in GGR technologies by sending a market signal;
• accelerate development and deployment of GGR technologies;
• encourage competitiveness and increase efficiency of GGRs;
• maximise co-benefits of nature-based approaches (biodiversity, water quality and climate adaption);
• increase market liquidity of the UK ETS as the cap reduces over time; and
• help the hard-to-abate sectors to contribute to the UK's net zero and climate targets.

To protect the integrity of the UK ETS, the following challenges must be addressed.

• Incentive to decarbonise: GGRs should only be used to compensate for any residual emissions from the activities which are technologically impossible or prohibitively expensive to directly abate. They should not be seen as a substitute for decarbonisation efforts.
• Additionality: to prove that the GGR would not have occured under a "business as usual" scenario, there needs to be a method to calculate the baseline carbon stock at the start of a project and how carbon stocks on the site would have changed over the project duration had the project not gone ahead.
• Permanence: the permanence of the CO2 stored and the risk of reversal vary between GGR technologies. A report from the Task and Finish Group [1] considers it essential to develop an approach to valuing GGRs (or removal credits) relevant to the permanence of the store. It suggests [2] the concept of a partial or discounted credit, where a tonne of CO2 permanently removed could be awarded one full credit, while a GGR approach that resulted in the leakage of CO2 after a century having the net effect of, say, a 39% reduction relative to no GGR, to be awarded no more than 39% of a credit.
• Liability: if the CO2 stored is subsequently released into the atmosphere, which party should be liable for this "delayed emission" and how might they be held responsible? The way in which liability is allocated will impact on the market price of the GGR credits.
• Monitoring, reporting and verification (MRV) of emission reductions: since potential CO2 storage options (biological and  geological) vary in terms of permanence and risk of reversal, the accuracy, precision, cost and frequency of monitoring to verify quantity of CO2 stored will likely depend on the GGR technology. The approach to MRV should be tailored accordingly. The Task and Finish Group report addresses these challenges. AMong its recommendations are detailed, GGR specific MRV protocols and an independent regulatory body to perform an audit of the MRV process.
• Voluntary carbon market: existing voluntary markets, provided they are underpinned by robust standards, could be built on - for example, by allowing GGR credits from voluntary schemes to be used to satisfy a compliance obligation under the UK ETS. The UK Woodland Carbon Code [3] is an example.
• Double counting: if the came credit were used under multiple schemes (for example, under the UK ETS and a voluntary scheme), this would misrepresent the environmental benefit achieved, resulting in loss of market confidence.
• Article 6 of the Paris Agreement: this could help establish a framework for countries and companies to exchange carbon credits. The Government will explore any potential future interactions between the ARtcile 6 market mechanisms and the UK ETS.
• Wider land management considerations: nature-based GGR projects could help improve biodiversity, promote sustainable food production and create benefits to local communities. Future policy should incentivise GGRs to provide these additional benefits.
• Phasing and timing: potentially, the GGR methods already operating could be included in the market earlier than those not yet deployed at scale. Government is keen to understand the impact of GGRs on the functioning and design of the UK ETS, different-phasing options and policies to support GGR deployment and scale-up.

To be eligible under the UK ETS, GGRs will need to satisfy a number of requirements, including:

• robust MRV of emissions;
• permanence of carbon removal, or, for the approaches (such as nature-based GGRs) that could be impermanent, adequate arrangments to address the risk and compensate for any carbon leakage; and
• clear property rights for GGR credits and a clear chain of liability, including for any carbon leakage.

The Government seeks views on:

• the advantages and disadvantages of including GGRs in the UK ETS;
• phasing options and timings of eligible GGR projects for possible earlier inclusion in the UK ETS;
• the market criteria to be applied to GGRs;
• the possible impacts of GGRs on the UK ETS;
• potential solutions; and
• any future challenges that may remain after a market for GGRs has been established.