Recent amendments to EU emissions trading system clearly incentivizes permanently stored CO2 as an abatement option for regulated emitters. However, it has taken almost 20 years for these amendments to be put into place.
Heidi Sydnes Egeland, PhD Student at the University of Oslo, connected to the CO2 value chain and legal aspects task (Task 1) of the Norwegian CCS Research Centre (NCCS) explains why it took so long to arrive at this seemingly obvious conclusion, and what we can learn from this experience in the future.
Reducing European greenhouse gas emissions by 55 % by 2030 – making the EU ‘Fit for 55’ – has required extensive legislative revisions. Among them are amendments to the EU Emissions trading system (‘EU ETS’), which are of great significance to the carbon capture, utilization and storage (‘CCUS’) industry.
In short, the EU ETS requires emitters from industry, transportation and soon households to ‘pay’ for their emissions by surrendering one costly allowance per ton of CO2/equivalents emitted.
A fundamental idea of emissions trading is to incentivize abatement by imposing a price on emissions. Nevertheless, it has taken 20 years of legal uncertainty and contention to arrive at the more or less clear incentive for CCUS as an abatement option that exists today. In this blogpost, I will provide an overview of what these amendments are, and reflect on why it has taken so long and what emerging emission trading systems can learn from the EU ETS experience.
What are the amendments?
The ‘Fit for 55’ amendments to the EU Emissions trading system provides the following legal status for CCUS as an abatement option for emitters: operators do not have to ‘pay’ for the CO2 they produce if it is captured and permanently stored in either permitted geological formations or in products (see art. 12 nr. 3a-b Directive 2003/87/EC as amended by Directive (EU) 2023/959).
These revisions are now adopted at the Directive level, but we are still waiting for the Commission to adopt updated monitoring specifications and specific rules regarding the permanent storage of CO2 in products. These rules will most likely arrive in 2024. Nevertheless, the latest amendments are good news for stakeholders in the CCUS industry, as they provide an irrefutable incentive for industry to reduce emissions with permanent storage of CO2.
The latest development represents two main changes:
Firstly, all CO2 transport is now available – the incongruous limitation to pipeline transport is history.
Secondly, capture and utilization in products where the CO2 remains permanently bound is now explicitly recognized as an abatement option for emitters.
The latter development for CCU follows years of uncertainty and contention regarding whether all or no CCU was available as an abatement option for emitters. Consequently, some may view latest development of allowing abatement by permanent CO2 storage in products as a liberalization, while other may view it as a restriction.
Why has it taken so long?
The EU ETS has required industrial emitters to ‘pay’ for their emissions with allowances since 2005. Simply put, it has taken almost 20 years to clarify that operators do not have to pay with allowances for captured and permanently stored CO2.
Why? The answer lies somewhere between legislative cautiousness and conflicting interests. For a long time, there existed a tension between two sets of norms within the EU ETS legislative framework. The core of the EU ETS Directive was to impose an obligation to surrender allowances for greenhouse gases released into the atmosphere, implying that it did not matter how releasing greenhouse gases was avoided. This technologically neutral approach existed at odds with a technologically specific approach in the monitoring regulation adopted by the European Commission. The Commission’s approach was one of caution, preferring to restrict innovation in order to ensure environmental integrity.
The latest amendments resolve this tension by adopting a technologically specific approach at the Directive-level, but allowing for a broad range of CCUS technologies. While good news for most of the CCUS industry, the technology-specific approach may impede new innovative technologies that fall outside the current scope.
What ‘lessons learned’ should emerging emissions trading systems embrace?
The ‘carbon budget’ of the Paris Agreement’s temperature target is rapidly depleting. The implication for emerging climate mitigation frameworks is clear: there is very little time for ‘errors’. The currently proliferating emissions trading systems globally should therefore learn from the EU ETS’ trailblazing experience.
Regarding abatement options, at least two key ‘lessons learned’ have emerged. Firstly, legislators must aim for clear rules regarding the conditions for available abatement options. Secondly, the legislator should ideally aim for a technologically neutral approach to abatement in order to facilitate innovation, and thereby thus cost-effective emission reductions in the long run.
Must there be a trade-off between a technologically neutral approach to abatement options and environmental integrity? I don’t think so, as long as emissions trading systems that regulate emissions at their source are designed with care, which would include ad hoc tailored monitoring plans for CO2 in transit.
Twenty years with the EU ETS legislative framework represents a wealth of experience that can inform emission trading design worldwide. Clear conditions for CCUS as abatement options will hopefully be among the key lessons learned.