Emissions Trading Systems and

Carbon Capture and Storage:

Mapping possible interactions, technical
considerations, and existing provisions

February 2023. Berlin, Germany.

Stephanie La Hoz Theuer and Andrés Olarte

Secretariat of the International Carbon Action Partnership

February 2023. Berlin, Germany

Cite as
S. La Hoz Theuer and A. Olarte. (2023). Emissions Trading Systems and Carbon Capture and Storage:
Mapping possible interactions, technical considerations, and existing provisions. Berlin:
International Carbon Action Partnership.

Acknowledgments
The development of this report was led by Stephanie La Hoz Theuer (ICAP Secretariat). The ICAP
Secretariat oversaw the report, providing inputs and managing the project. Many thanks to Victor
Alejandro Ortiz Rivera, Trevor Laroche-Theune, Leon Yannic Heckmann, Baran Doda, Maia Hall, and
Stefano de Clara for contributing with background research and review comments.

The team is grateful to Heidi Sydnes Egeland (University of Oslo) for support in conceptualizing the
initial survey that underpinned this report, raising issues for consideration, and providing review
comments. The team benefitted greatly from the insights and comments from Eve Tamme (Climate
Principles) and Oliver Geden (German Institute for International and Security Affairs). Many thanks
also to Luca Lo Re (International Energy Agency), Carl Greenfield (International Energy Agency), and
Wijnand Stoefs (Carbon Market Watch) for their valuable review.

We would also like to thank representatives from the following jurisdictions for their input and
comments: Rajinder Sahota, Mark Sippola and Camille Sultana (California); Frédéric Branger and
Marjorie Doudnikoff (France); Philipp Voss (Germany); Eoin Fahey (Ireland); Onil Bergeron, Patrick
Bordeleau, and Kim Ricard (Québec); William Space (Massachusetts); Mark Bressers (Netherlands);
Jacqueline Ruesga (New Zealand); Joe Glynn and Rufina Acheampong (United Kingdom); and Jens
Månsson (Sweden).

Report design and layout was done by Stefanie Gürgen (Simpelplus). Copyediting by Philippa
Nuttall.

Disclaimer
Any remaining inaccuracies are the sole responsibility of the authors. Moreover, the findings and
opinions expressed in this study are those of its authors and do not necessarily reflect the views of
ICAP or its members, or the endorsement of any approach described herein.

Cover photo credit: OpenAI

Executive Summary
The interaction between emissions trading systems (ETSs) and carbon capture and storage
(CCS)1 applications is likely to become an ever more relevant topic of regulatory attention. As a
key tool in the response to climate change, CCS can deliver climate change mitigation within the
scope of ETSs. Moreover, ETSs can support the development and deployment of CCS applications.
At present there is limited literature on the interactions between ETSs and CCS. This report aims to
contribute to filling this gap by understanding:

a) How ETSs could interact with CCS applications, and the attendant opportunities and risks;

b) The challenges faced when designing ETS regulation related to CCS; and

c) The specifics of how different ETSs implemented to date interact with CCS applications.

Key context and background

CCS applications capture and geologically store carbon dioxide (CO2). They can deliver
emissions reductions or, in very specific circumstances, CO2 removals. For the purpose of this report,
CCS applications are divided into two main categories:2

1. Fossil energy and industrial point-source capture: applications that reduce CO2 emissions
by capturing and storing CO2 from the combustion of fossil fuels (e.g., for electricity
generation), as well as from process emissions in the chemicals, cement, steel, and
aluminum sectors, among others. These emission sources are typically covered by ETSs.

2. Technological (or CCS-based) removals: CCS applications that remove3 previously emitted
CO2 from the atmosphere. These include direct air carbon capture and storage (DACCS),
bioenergy with carbon capture and storage (BECCS) – if using renewable biomass –, as well
as Waste-to-Energy (WtE) with CCS (to the extent that the waste contains biogenic fraction).
These activities are typically not covered by ETSs.

CCS can be an important element in the decarbonization pathways of sectors covered by ETSs.
Most jurisdictions with ETSs in force either already have policies on CCS in place or intend to make
use of CCS applications. Moreover, there is an important overlap between the sectors covered by
ETSs and those in which CCS shows the most promise: the International Energy Agency (IEA 2020b,

1
While the focus of the report lies primarily on CCS applications, a few thoughts and considerations on
carbon capture and utilization (CCU) are also provided.
2
It is important to note that combined approaches may also exist. E.g., a power plant with CCS may
combust both fossil fuels as well as renewable biomass.
3
Carbon dioxide removal (CDR) refers to anthropogenic activities removing CO 2 from the atmosphere
and durably storing it in geological, terrestrial, or ocean reservoirs, or in products, thus reducing the
atmospheric concentration of CO2. Many CDR methods, such as forestry and soil carbon, do not involve
CCS technologies.

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2022) and the Intergovernmental Panel on Climate Change (IPCC 2022d, Figure SPM.7) have
identified an important role for CCS and CCU in achieving ambitious climate targets across the
energy and industry sectors, the main sectors covered by ETS. In one of its scenarios, the IEA
projects that CCS and CCU applications will be responsible for approximately 13% of energy sector
CO2 emissions reductions in 2050 (see Figure ES. 1). In the cement sector, which is regulated by most
ETSs operational today, more than one third of the decarbonization effort by 2050 is forecast to rely
on CCS and CCU applications (GCCA 2020).
Figure ES. 1 – Global energy sector CO2 emissions reductions by measure in the Sustainable Development
Scenario relative to the Stated Policies Scenario, 2019-2070

Source: IEA (2020b), Figure 2.1

Several new CCS projects are under development, but there remains a large gap between their
potential capacity and projected decarbonization pathways. Current projects and those under
development include the Alberta Carbon Trunk Line4 in Canada, the Longship5 project in Norway,
the Porthos6 project in the Netherlands, and the Northern Endurance Partnership7 in the UK. Despite
these initiatives, current efforts fall far short of the level of deployment outlined in decarbonization
pathways. A further challenge is that only 2% of the decarbonization from CCS and CCU applications
by 2070 is expected to come from applications considered to be “mature” today; nearly two thirds is
expected to come from technologies that are still either in the “demonstration” or “protoype” stages
(see Figure ES. 2).

4
https://enhanceenergy.com/actl/
5
https://norlights.com/about-the-longship-project/
6
https://www.porthosco2.nl/en/
7
https://www.netzeroteesside.co.uk/northern-endurance-partnership/

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Figure ES. 2 – World CO2 emissions reductions from CCS and CCU by technology readiness category in the IEA
Sustainable Development Scenario relative to the Stated Policies Scenario

Source: Adapted from IEA (2020b), Figure 3.2.

A combination of policies and mechanisms will be necessary to support CCS development and
deployment; carbon pricing can play an important role, but it is not sufficient on its own.
Policies include capital grants, state-backed loans, tax credits, public procurement, and end product
standards, among others. By establishing an explicit carbon price, ETSs support low-carbon
production processes, products, and technologies such as CCS. As seen above, however, many CCS
applications still require significant research and development (R&D) investments to reach
technological maturity and deployment at scale. Even in their mature phase, they often involve
significant capital expenditures and ongoing operating costs. Encouraging investment in such
technologies requires sustained, long-term pricing support (Marcu et al. 2021). Many jurisdictions do
not price carbon, and in most jurisdictions where carbon pricing is operational, emissions
reductions from CCS are not taken into consideration or current and expected allowance prices are
not high enough to incentivize emitters to capture CO2 (see Figure ES. 3). Price volatility in carbon
markets also presents a significant challenge (IEA 2020c). In the early deployment stages, CCS
initiatives are likely to require additional support – e.g., in the form of “top ups” (such as contracts
for difference) that complement the carbon price and provide a higher and more predictable price
signal.

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Figure ES. 3 – Economic Gap: Carbon price versus cost of carbon capture

Source: Authors’ elaboration. Allowance prices based on data from ICAP (2022). Capture costs estimated based on
data from Global CCS Institute (2020b); Fasihi et al. (2019); Evans (2017); Shayegh (2021); Fuss et al. (2018); IPCC
(2022b).

Policy makers must balance the numerous risks and trade-offs associated with the use of CCS
applications when considering their role in decarbonization pathways. The main concerns
related to CCS applications include: legitimizing business-as-usual (notably fossil fuel) activities; the
underperformance of the technology so far, alongside resulting doubts over its ability to deliver
reductions and removals at scale; concerns about the magnitude of CDR deployment expected in

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many scenarios and the possibility that these predictions could dilute incentives to reduce
emissions today; concerns over CO2 leakage from storage sites; and concerns over the social and
environmental impacts of the large-scale adoption of certain applications (e.g., impacts on land use
from the large biomass needs of BECCS plants, including food security and biodiversity). Policy
makers must weigh up these considerations in light of the local context and their own policy
priorities, taking into account the importance of public acceptance in achieving mitigation goals and
the large-scale commercialization of CCS (Whitmarsh et al. 2019).

Mechanics of the ETS-CCS interaction: Inside or outside ETS sectoral scope

ETSs can interact with CCS applications irrespective of whether the relevant sectors are
covered by the ETS. Interactions between ETSs and CCS applications can be implemented in
multiple sectoral coverage configurations. This is relevant because ETSs differ in how they cover
e.g., fossil energy emissions. Most ETSs regulate emissions at source, at the point where the
greenhouse gas (GHG) enters the atmosphere (e.g., a coal power plant). This is the case for the
European Union ETS (EU ETS), the Regional Greenhouse Gas Initiative (RGGI), and the United
Kingdom ETS (UK ETS), to name a few. Other ETSs regulate emissions upstream, meaning that ETS
compliance obligations fall at the point at which the fossil fuel is first commercialized by extractors,
refiners, or importers. The ETSs in Germany and Austria, for example, exclusively cover emissions
upstream.

Interactions with fossil energy and industrial point-source capture are simplest in ETSs that
regulate emissions at source. The point of emission of a GHG is where CO2 capture takes place,
making it easier for such ETSs to interact with fossil energy and industrial point-source capture. The
ETS provides an incentive to adopt CCS applications by allowing regulated entities to reduce their
compliance obligations by capturing their emissions (and to reduce their compliance costs). This is
already the case in the EU ETS, the UK ETS, and the Québec Cap-and-Trade System.

Interactions with fossil energy and industrial point-source capture are also possible for ETSs
that cover emissions upstream. ETSs with upstream coverage that wish to interact with industrial
point-source capture could, for example, award a unit (e.g., an allowance or an offset credit) to
entities performing capture from an industrial point-source, which could then be sold in the ETS
market. Alternatively, the ETS could allow certain entities (e.g., a coal power plant) to voluntarily
participate in the ETS. These entities would assume compliance obligations but also be incentivized
to capture their emissions.

Interactions with technological removals within the ETS scope are possible, but the mechanics
may vary by application. Technological removals that involve point-source capture – such as
BECCS and WtE with CCS – could be covered directly under an ETS, as proposed by Rickels et al.
(2021). Such applications could, for example, be allowed to voluntarily participate in the ETS, and
receive free allowance allocations on the basis of renewable biomass used by the plant. In this case,
the plant could subtract captured emissions from its emissions compliance obligations such that a

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surplus of allowances would be generated and could then be sold to the market.8 Technological
removals that do not involve point-source capture – such as DACCS – could not be reflected in the
ETS through such a mechanism, but they could be included in the scope of the ETS through other
means. For example, the ETS could allow for the voluntary participation of the DACCS plant in the
ETS and then provide for this DACCS plant to receive an allowance for each tonne of CO2 removed.
This is similar to New Zealand’s approach to removals from forestry activities in its ETS.

Interactions with technological removals outside the ETS scope can be akin to offsetting
provisions. This could be done by awarding removal units (e.g., through a separate certification
mechanism) and allowing such units to be used for compliance obligations within the ETS. In this
case, two distinct “markets” would exist: a market for allowances (the ETS) and a market for
removals.9

ETSs and CCS: Whether to interact, and with what

ETSs can interact with none, either or both CCS applications. We refer to these different
configurations as “options” 10 (see Figure ES. 4).

• Option A: No interaction. Under Option A, the ETS does not interact directly with any CCS
applications. Entities covered by the ETS cannot reduce their compliance obligations by
undertaking CCS – the ETS does not recognize the captured CO2 as “not emitted”. There
are also no provisions for technological removals. This can be a deliberate policy choice or
the (potentially unintentional) result of there being no explicit regulation.

• Option B: Interaction with fossil energy and industrial point-source capture

applications. Under Option B, the ETS interacts with CCS applications by allowing fossil
energy and industrial point-source emitters to reduce their emissions by capturing them. If
such point-source emitters are covered by the ETS (which is usually the case), this leads to
a reduction in ETS compliance obligations and provides an incentive to implement CCS
applications.

• Option C: Interaction with technological removals. Under Option C, the ETS interacts
with technological removals such as BECCS and DACCS, but not with CCS applications
related to fossil energy or industrial point-source capture. This can be the case in ETSs that

8
It is useful to note that this approach could also reflect the use of sustainable biomass in fossil fuel
power plants.
9
For a detailed analysis on the interactions between ETSs and removal units, see La Hoz Theuer et al.
(2021).
10
It is important to note that, as elaborated above, each of the options is flexible in terms of sectoral
coverage, which means that ETSs can interact with CCS applications irrespective of whether the
relevant sectors are formally covered by the ETS.

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 regulate emissions upstream and that include provisions for credits from technological
removals.

• Option D: Interaction with fossil energy and industrial capture as well as with
technological removals. Option D combines Options B and C, and interacts with (and
provides incentives to) fossil energy and industrial capture as well as to technological
removals.
Figure ES. 4 – Four options for interaction between ETSs and CCS

Source: Authors’ elaboration

Interactions between ETS and CCS applications increase the flexibility for regulated entities in
meeting compliance obligations, but can also affect companies’ abatement decisions. The
absence of any possibility to make use of CCS applications under the ETS means regulated entities
must meet compliance obligations by reducing emissions through e.g., process changes or by
adjusting production levels, as well as by purchasing offset credits (if available) and allowances.
Including CCS applications under the ETS gives regulated entities additional means to meet their
obligations, potentially reducing compliance costs. More flexibility can mean lower compliance
costs for covered entities, but can also affect companies’ abatement behavior and could extend the
economic lifetime of fossil fuel infrastructure. Moreover, the inclusion of removal units in the ETS
can have a “mitigation deterrence” effect (see e.g., Grant et al. 2021), whereby regulated entities
may be less incentivized to reduce their emissions now if they expect removal units to come online
in the future.

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Increasing the points of interaction between ETSs and CCS can ease concerns related to ETS
market functioning and price discovery as the ETS cap approaches zero. As the cap approaches
zero and companies decarbonize their production processes, the number of participants in the ETS
and the system’s emissions coverage will decrease, giving rise to issues of liquidity and market
power and decreasing the effectiveness of the system. Allowance prices for residual emissions are
also likely to be high. Interactions with technological removals can increase the number of players in
the ETS and the supply of compliance units into the system, alleviating some of these issues.

Increasing the points of interaction between ETSs and CCS can further incentivize CCS
development and deployment, but this is contingent on price differentials and on the
availability of additional support. At one end of the spectrum, Option A offers no incentive from
the ETS for CCS applications, which means that actors interested in developing CCS applications
must seek incentives outside the ETS, potentially leading to missed abatement opportunities. At the
other end of the spectrum, Option D offers the broadest ETS-based incentive to CCS by including
both categories of CCS applications. Without further support policies, however, the strength of any
price incentive provided by the ETS will be subject to market and price risk — just as the future price
of allowances cannot be known with certainty, neither can the return on investment from CCS
installations and activities. Moreover, the current and projected price of allowances can be too low
to incentivize various applications.
Systems may not fall clearly within any of the ‘options’. This could be the case when an ETS has
no CCS-specific provisions, but regulated entities could nevertheless reflect captured emissions in
compliance obligations, notably through broader provisions related to the rules that determine
compliance obligations and MRV requirements. In ETSs where the compliance obligation relates to
emissions that are released into the atmosphere (as opposed to ETSs that regulate emissions
upstream, e.g., at the point of fuel distribution), and where MRV includes provisions for continuous
monitoring and/or for case-specific deviations, the system could be interpreted to allow for – or at
least not explicitly hinder – the reflection of captured emissions in the emissions reports of covered
entities. Entities interested in investing in CCS applications, however, would likely need a more
explicit regulatory endorsement of CCS applications before investments in CCS infrastructure were
made. In practice, this uncertain interaction is likely to result in a lack of incentives for CCS
applications.

ETS design considerations

Considerations related to price dynamics and incentives for CCS applications are impacted by
aspects of legal tender. Interactions with fossil energy and industrial point-source capture inside
the scope of the ETS relate to simply reducing the compliance obligations of regulated entities. But
others – such as interacting with fossil energy and industrial point-source capture outside the scope
of the ETS – can entail awarding units to such activities. The units awarded can be allowances or

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credits. An allowance would be fully fungible, but a carbon credit need not be – and can be subject
to e.g., quantitative restrictions on its use. 11,12

To the extent that units (allowances or credits) are allocated to entities involved in CCS
applications, an important question is the relationship between such units and the ETS cap. If
the allocated units are part of the cap, the allocation of units to CCS applications can create
additional scarcity for other entities under the ETS. Regulators may choose to establish unit
reserves, although this could effectively limit any incentive for CCS applications through unit
allocation. If units allocated to CCS applications are generated in addition to the cap, and especially
if there is no limit on the number of units that can be generated, the system effectively has no “cap”.
Gross emissions under the ETS are then not limited, with the risk that emission reductions and
removals from regulated entities would rely on CCS applications rather than on actual reductions.

If an ETS allows entities to reduce compliance obligations by capturing CO2, any free allocation
of allowances could be affected by a reduction in reported emissions from entities capturing
CO2. Under benchmarking, this can reduce compliance obligations for entities capturing CO2, and
also lower the overall benchmark, affecting allocation to other entities. Under grandparenting, a
reduction in free allocation in line with CO2 capture could dampen the incentive for said CO2 capture.

ETSs need strict and enforced criteria on what constitutes renewable biomass to ensure the
environmental integrity of any biomass use in the ETS. This is important in terms of interacting
with BECCS and WtE with CCS applications, and in the context of the transition of e.g., fossil-based
power plants towards biomass use. There is a need for rules that reflect the spectrum of CO2
reductions and removals that CCS applications and biomass use can generate.

The treatment of operational emissions and CO2 leaks from the CCS value chain (capture,
transport, and storage) within the ETS must be clear. The CCS value chain has two main
categories of sources of emission. The first is operational emissions, generated from processes
inherent to the capture, transport, and storage of emissions (e.g., fuel emissions in energy and
transport equipment). The second is CO2 leaks (or leakage emissions), emissions not inherent to a
process but that are fugitive, vented, or result from the failure of one or more components of a
process. From a GHG accounting point of view, it is key that all these emissions are visible in national
inventories. It is also important to understand whether a jurisdiction wishes to make use of the ETS
as a tool for monitoring emissions and redress in case of CO2 leaks.

The ETS can be used as a tool to monitor operational emissions and CO2 leaks from the CCS
value chain and provide economic incentives to reduce them. Whether these emissions fall under

11
Allocating units to CCS applications outside jurisdictional borders would entail mechanics similar to
those applied to international credits/offsets, although aspects related to e.g., CO 2 leaks out of storage
and the treatment of operational emissions would still need to be taken into account.
12
Irrespective of choices over legal tender, it will be important to make sure that only one unit is issued
for each tonne reduced or removed – otherwise, double counting may occur.

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the scope of application of the ETS is regulated primarily through regulations on ETS scope and on
MRV. Including them in the scope of the ETS would provide incentives to reduce emissions, as
operators would face allowance surrender obligations for their emissions. Their inclusion would also
likely improve the accuracy of the emissions monitoring of these sources given the MRV
requirements in the ETS. Both the monitoring and options for redress in case of leaks, however, can
also be managed outside the ETS.

Liability provisions in case of CO2 leaks out of geological storage sites are necessary to ensure
the environmental integrity of the use of CCS applications. 13 Liability for such leaks typically falls
on the entity that operates the storage facility. If liability is to be enforced through the ETS (such that
the storage operator must surrender allowances in case of leaks), relevant storage sites must be
included within the scope of the ETS. This may be challenging in instances where CO2 is stored
outside jurisdictional borders. Another relevant question relates to the time period during which the
storage operator must monitor emissions and for how long allowance surrender obligations apply.
Responsibilities can also change hands over time. For example, in the EU ETS and the UK ETS,
responsibility for monitoring emissions – and surrendering allowances – in case of leakage from
storage remains with the storage entity for a minimum of 20 years after the closure of the storage
site. After this point, the responsibility for monitoring and leakage can be handed over to the
national government under specific conditions.
Only the EU ETS and the UK ETS currently explicitly include the entire CCS value chain within
the ETS scope. 14 Some other ETSs cover part of the CCS value chain: in the California program, for
example, “CO2 suppliers” (entities involved in the capture of CO2) are covered by the ETS, but
transport and geological storage are not. The Québec Cap-and-Trade System acknowledges that
multiple entities may be involved in the CCS value chain, but the economic incentive is provided
only to the industrial facility that would have emitted the CO2 had it not been captured.

Some ETSs can reflect storage outside their jurisdictional borders, while others cannot.
Upcoming CCS projects often involve the export of CO2 to geological storage sites outside of
jurisdictional borders. Different ETSs have different provisions for the export of CO2 for storage.
Under the New Zealand ETS (NZ ETS), for example, the export of GHGs as well as the GHGs
embedded in products are subtracted from entities’ compliance obligations. This allows the NZ ETS
to interact with emissions captured within its borders but used or stored outside them. Under the EU
ETS, provisions on CCS are subject to storage being carried out in accordance with the EU CCS

13
Leaks can also happen during CO2 transportation, and provisions for such leaks are also necessary.
Since most concerns related to leaks pertain to those out of geological storage sites, the analysis
focuses on leaks out of storage, noting that many of these considerations apply also to leaks during
transport.
14
As of January 2023, provisions under the EU ETS and the UK ETS only cover the transport of CO 2
through pipelines. For the EU ETS, the ongoing revision process is likely to result in an expansion of
these provisions to all means of transport (see section 7.1).

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Directive, which only regulates storage within the EU and the European Economic Area (EEA). If CO2
is stored in the EU and the EEA in accordance with the directive, the emitted CO2 will be considered
as “not having been emitted” under the ETS, and industrial point-source emitters can subtract the
captured emissions from their compliance obligations. Storing CO2 emissions outside the EU and
EEA is allowed, but such emissions cannot be used to reduce compliance obligations, providing little
incentive to store CO2 abroad (European Commission 2022a).

Brief considerations on CCU

CCU applications vary widely and have different environmental outcomes. Some CCU
applications lead to the long-term binding of CO2 into a product, which will not be re-emitted on use
or during disposal (e.g., construction materials). For this type of product, the environmental effect
depends primarily on the source of the CO2 that is embedded: using CO2 from fossil sources leads to
emission reductions, whereas using CO2 from renewable biomass and ambient air can lead to
removals. Most CCU applications, however, only bind the CO2 temporarily and the CO2 is released
into the atmosphere during use or disposal. This is the case for CCU applications that produce
synthetic fuels, plastics and carbonated drinks.

Provisions related to the triggers for compliance obligations are important in determining
whether an ETS interacts with CO2 that is captured and used in a product. In ETSs where the
compliance obligation stems from physically releasing emissions into the atmosphere, the
regulations could be interpreted to implicitly allow regulated entities to reduce their compliance
obligations through CCU applications by demonstrating that the CO2 was not emitted within the
boundary of the installation, even if the CO2 is ultimately released into the atmosphere during use or
disposal. Under the Schaefer Kalk court case,15 for example, the definition of “emissions” under the
EU ETS Directive in force at the time was key in arguing that the production of precipitated calcium
carbonate (which binds CO2 chemically in a stable product) does not lead to emissions and should
not be subject to compliance obligations.
Depending on the provisions related to permanence, MRV and the ETS scope, reflecting CCU
applications under the ETS can lead to a shift in emissions out of the ETS. The Québec Cap-and-
Trade System, for example, allows regulated entities to reduce compliance obligations in cases
where CO2 is re-used or transferred out of the installation. The NZ ETS contains provisions to issue
units to entities that either produce a product in which a GHG is permanently embedded, or produce
a product in which a GHG is temporarily embedded and the product is exported with the substance
embedded. Both systems can be said to enable regulated entities to reduce compliance obligations
if they engage in CCU, irrespective of whether the product leads to long-term or short-term CO2
storage. Indeed, several of these products would ultimately see the release of the embedded CO 2,
either during use (in the case of synthetic fuels) or during the end-of-life phase (e.g., during

15
Schaefer Kalk GmbH & Co. KG v Bundesrepublik Deutschland (2017).

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decomposition and incineration). If these emission sources are not subject to the scope of the ETS,
emissions from inside the ETS are effectively shifted out of the system. 16 By contrast, MRV
regulations under the EU ETS valid as of January 2023 include provisions for reducing compliance
obligations through CCU only for precipitated calcium carbonate, where the CO2 is bound in a long-
term fashion.17 Enhanced oil recovery (EOR) activities present a difficult case for inclusion in ETSs
due to the complex effect of CO2 storage on the one hand vs an increase in fossil fuel supply on the
other, which can also increase emissions outside the system.

CCS (and CCU) relevant regulations within current ETSs

Of the 26 ETSs currently in force, only five have regulations related to CCS or CCU applications.
These are the EU, the UK, Québec, New Zealand, and California. (See Figure ES. 5).

The EU ETS has detailed regulations for the use of CCS applications and is an example of a
jurisdiction employing Option B. In the EU ETS, point-source emitters can subtract from their
compliance obligations the CO2 originating from fossil carbon in activities covered by the EU ETS
that is not emitted from the installation and that is transferred out of the installation for capture and
geological storage. The elements of the CCS value chain (capture, transport and storage) are subject
to the scope of application of the EU ETS. Despite its detailed provisions, however, there are
currently no facilities under the EU ETS that are reducing compliance obligations through CCS
applications. As of January 2023, CCU is reflected in EU ETS regulations only for one specific
product. A revision of EU ETS rules is expected to be formally adopted in early 2023, and may entail
expanded provisions on CCS and CCU.

The UK ETS has incorporated several elements of the EU ETS and is an example of a jurisdiction
employing Option B. In terms of CCS and CCU regulations, the rules under the UK ETS are the same
as those that were valid under the EU ETS as of 2018. As the UK is no longer a member state of the
EU, revisions effected to EU ETS documents after 2018 do not apply to the UK ETS. A process is
ongoing to determine the role of CCS applications under the UK ETS. There are currently no facilities
under the UK ETS that are reducing compliance obligations through CCS applications.

The Québec Cap-and-Trade System contains some provisions that recognize the use of CCS and
CCU and is an example of a jurisdiction employing Option B. GHG emissions that are captured,
stored, re-used, eliminated or transferred out of regulated entities are subtracted from the
compliance obligation of regulated entities. The CCU/CCS sub-part of an emitter’s GHG declaration
is analyzed individually by the province. While the system does not cover any large CCS facility, 4%
of large emitters covered by it benefit from CCS/CCU provisions. As the GHG Reporting Regulation

16
Synthetic fuels may substitute other fossil emissions with no overall net increase in emissions. This
highlights the importance of considering life cycle assessments when including CCU in ETSs, including
an understanding of alternative mitigation pathways and avoiding loopholes and inconsistencies.
17
This is likely to change as part of the ongoing EU ETS revision process. See section 7.1.

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does not yet contain specific measurement protocols or methods to calculate the captured and
stored, re-used, eliminated or transferred emissions, these calculations are currently done on an ad-
hoc basis by individual installations.

The NZ ETS has operational provisions that are relevant for CCU; it also contains some
provisions on CCS, but these are not in force and New Zealand is an example of a jurisdiction
under Option A. The NZ ETS contains provisions for reducing compliance obligations by
permanently embedding GHG in a product (which includes some CCU applications) as well as some
provisions for carbon storage (which is relevant for CCS applications). The provisions on carbon
storage, however, are not in force. From the point of view of enabling CCS applications, New Zealand
currently falls under Option A, although this may change if and when the relevant provisions are
enabled and outstanding MRV requirements are put in place.

The California Cap-and-Trade Program does not currently recognize CCS or CCU as a means for
a covered facility to reduce its emissions and compliance obligations, nor does it have
provisions for enabling technological removals. It therefore falls under Option A. The only CCS-
relevant provisions under the California Program relate to the compliance obligations of “suppliers
of CO2”, which include facilities with production processes that capture CO2 to supply it to another
entity or to use it for geological sequestration. The current CO2 supplier provisions, however, do not
enable a covered facility to reduce its compliance obligations by capturing its CO2 and supplying it to
a sequestration site. Amendments would be required to the Cap-and-Trade Regulation and MRV
requirements to recognize CCS/CCU projects and to allow a covered facility to reduce its compliance
obligations by capturing and sequestering or utilizing CO2. California’s Low Carbon Fuel Standard
(LCFS) Program incentivizes entities that supply transportation fuels to invest in CCS projects.

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Figure ES. 5 – Interactions between selected ETSs and CCS applications

Source: Authors’ elaboration

Conclusions
Considerations on the interactions between ETSs and CCS (and CCU) are still in their infancy. Of the
26 ETSs in force, only five have any provisions on CCS, only two (the EU ETS and the UK ETS) have
detailed provisions, and only one (Québec) has facilities that reduce compliance obligations through
CCS applications.

No empirical data on the interaction between ETSs and CCS is available, and many additional issues
and questions are likely to arise as CCS projects materialize and jurisdictions engage with them. The
fast pace of innovation and technological development presents a challenge for policy makers, who
may have to establish regulatory frameworks that can adapt to changing technological
circumstances.

However, as the pipeline of CCS projects grows, so will pressure from stakeholders for clarification
about the relationship between these projects and ETSs worldwide. Now is the time for jurisdictions
to start grappling with these questions.

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Table of Contents

1 Introduction ................................................................................................ 1

2 CCS and ETS: Why does it matter? ............................................................. 2

2.1. Definitions _________________________________________________________ 2

2.2. Why CCS matters for ETSs ____________________________________________ 6

2.3. Why ETS matters for CCS ____________________________________________ 12

2.4. Societal considerations _____________________________________________ 15

3 In or out? The impact of ETS sectoral scope in the mechanics of the

interaction with CCS applications ........................................................... 17

3.1. Fossil energy and industrial point-source capture ________________________ 18

3.2. Technological removals _____________________________________________ 20

4 ETSs and CCS: Whether to interact, and with what ................................ 21

4.1. ETS and CCS applications: interacting with none, either, or both ____________ 22

4.2. Nothing, a lot, or in between: A discussion on the spectrum of interaction ____ 23

4.3. Uncertain interactions: when ETS regulation leaves space for interpretation __ 25

5 Considerations on ETS design ................................................................. 26

5.1. Unit choice _______________________________________________________ 27

5.2. Cap-setting _______________________________________________________ 27

5.3. Free allocation ____________________________________________________ 28

5.4. The semantics of defining the “ETS scope” ______________________________ 28

5.5. Credits for domestic versus international activities _______________________ 29

5.6. Interactions with the voluntary carbon market___________________________ 29

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 5.7. Dealing with quality and quantity spectrums of biomass use _______________ 29

5.8. Monitoring, reporting and verification __________________________________ 30

5.9. Addressing operational emissions and CO2 leaks: ETS scope and MRV ________ 31

5.10. When the CO2 leaves jurisdictional borders: ETSs and exported emissions_____ 35

6 Brief considerations on CCU .................................................................... 37

7 CCS (and CCU)-relevant regulations within current ETSs ...................... 39

7.1. EU ETS ___________________________________________________________ 39

7.2. UK ETS ___________________________________________________________ 41

7.3. Québec Cap-and-Trade System _______________________________________ 41

7.4. New Zealand ETS __________________________________________________ 42

7.5. California Cap-and-Trade Program ____________________________________ 44

7.6. CCS regulation in selected jurisdictions: Summary _______________________ 45

8 Conclusions............................................................................................... 47

9 Publication bibliography.......................................................................... 48

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List of Figures
Figure ES. 1 – Global energy sector CO2 emissions reductions by measure in the Sustainable
Development Scenario relative to the Stated Policies Scenario, 2019-2070 _________________ II

Figure ES. 2 – World CO2 emissions reductions from CCS and CCU by technology readiness
category in the IEA Sustainable Development Scenario relative to the Stated Policies Scenario III

Figure ES. 3 – Economic Gap: Carbon price versus cost of carbon capture _________________ IV

Figure ES. 4 – Four options for interaction between ETSs and CCS _______________________ VII

Figure ES. 5 – Interactions between selected ETSs and CCS applications _________________ XIV

Figure 1 – Categorization of CCS applications_________________________________________ 4

Figure 2 – Relationship between CCS, CCU and removal technologies in different applications _ 6

Figure 3 – Map of ETSs alongside intentions to make use of CCS and CCU applications _______ 7

Figure 4 – Global energy sector CO2 emissions reductions by measure in the Sustainable
Development Scenario relative to the Stated Policies Scenario, 2019-2070 _________________ 8

Box 1 – CCS and CCU value chain: a primer ___________________________________________ 9

Figure 5 – World CO2 emissions reductions from CCUS by technology readiness category in the
IEA Sustainable Development Scenario relative to the Stated Policies Scenario ____________ 10

Figure 6 – Carbon capture cost curve (USD/tCO2e) in 2020 and abatement potential (GtCO2 eq) 11

Figure 7 – CAPEX and OPEX support measures for CCS and CCU _________________________ 12

Figure 8 – Economic gap: Carbon price versus cost of carbon capture ____________________ 14

Figure 9 – Sectoral coverage of ETSs _______________________________________________ 20

Figure 10 – ETSs and reduction/removal CCS applications: Four options __________________ 23

Figure 11 – Interactions between selected ETSs and CCS applications ____________________ 45

Table 1 – Summary table of CCS provisions in selected ETSs ___________________________ 46

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Acronyms
BECCS Bioenergy with carbon capture and storage

CAPEX Capital expenditure

CARB California Air Resources Board

CBAM Carbon border adjustment mechanism

CCS Carbon capture and storage

CCU Carbon capture and utilization

CCUS Carbon capture, utilization, and storage

CDR Carbon dioxide removal

COD European Commission Document

CO2 Carbon dioxide

DACC Direct air carbon capture

DACCS Direct air carbon capture and storage

EEA European Economic Area

EOR Enhanced oil recovery

ETS Emissions trading system

EU European Union
EU ETS European Union Emissions Trading System

GDP Gross domestic product

GHG Greenhouse gas

IEA International Energy Agency

ICAP International Carbon Action Partnership

IPCC Intergovernmental Panel on Climate Change

LCFS Low carbon fuel standard

LT-LEDS Long-term Low Greenhouse Gas Emission Development Strategy

MRR EU ETS Monitoring and Reporting Regulation

MRV Monitoring, reporting, and verification

MtCO₂ Metric tonnes of carbon dioxide equivalent

NDC Nationally Determined Contribution

NZ ETS New Zealand Emissions Trading Scheme

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OPEX Operational expenditure

PMR Partnership for Market Readiness

RGGI Regional Greenhouse Gas Initiative

R&D Research and development

RU Removal unit

tCO₂ Tonne of carbon dioxide equivalent

TRL Technological Readiness Level

UNFCCC United Nations Framework Convention on Climate Change

UK United Kingdom

WRI World Resources Institute

WtE Waste-to-Energy

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1 Introduction
When drawing up their decarbonization pathways, jurisdictions have several policy instruments they
can employ to support low-carbon development in various sectors of the economy. These sectors, in
turn, have access to different mitigation options, and jurisdictions can choose if and how policy
instruments interact with them. This report focuses on the interaction between one of the key
instruments to drive decarbonization – emissions trading systems (ETSs) – and one of the key
decarbonization technologies – carbon capture and storage (CCS).

CCS applications can support decarbonization by helping to reduce emissions from emissions-
intensive industries and through the retrofitting of existing infrastructure. Moreover, some CCS
applications can reduce atmospheric concentrations of CO2 and are a key component in
compensating for residual emissions and achieving net zero by mid-century.

CCS applications can deliver climate change mitigation within ETSs, and ETSs can support their
development and deployment. At present, there is limited literature on the interactions between
ETSs and CCS, and this report aims to contribute to filling this gap. It aims to understand:

a) How ETSs could interact with CCS applications, and the attendant opportunities and risks;

b) The challenges faced when designing ETS regulations related to CCS; and

c) The specifics of how different ETSs implemented to date interact with CCS applications.

While the focus of the report is primarily on CCS applications, a few considerations on carbon
capture and utilization (CCU) are also provided.

This report aims to address issues associated with possible interactions between ETSs and CCS, and
does not aim to advocate for any one approach. Any interactions, as discussed throughout this
report, are political and societal decisions that must consider different opportunities and
challenges. The report helps to inform such decisions by examining what the various approaches for
interactions between ETSs and CCS applications could be in theory, and what elements should be
taken into account by jurisdictions. The report builds on a survey conducted among ICAP member
jurisdictions on their regulations relevant for CCS and CCU.

The report is structured as follows:

• Section 2 provides essential background in terms of the key definitions used throughout
the report, the potential importance of CCS applications for economic activities under
ETSs, and the role ETSs could play in supporting the development and deployment of CCS.
It also discusses important societal issues that policymakers must take into account when
considering the use of CCS applications in decarbonization pathways.

• Section 3 explores how an ETS can interact with CCS applications. We distinguish two
broad categories of CCS applications and discuss the mechanics of their interaction with
an ETS, depending on whether the activities capturing CO2 fall inside or outside the scope
of the ETS.

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 • Section 4 discusses the key risks and opportunities of ETSs interacting with CCS
applications. The analysis focuses on whether (and not how) the ETS interacts with each of
the two categories of CCS applications.

• Section 5 draws on the preceding sections to discuss ETS design aspects that relate to CCS
applications, including issues around unit choice, cap-setting, scope, and MRV.

• Section 6 contains a few considerations on CCU.

• Section 7 summarizes the key provisions of the five ETSs in force that have regulations
related to CCS or CCU applications. It also includes a table summarizing the current
approach of the 17 selected ETSs currently in force.

• Section 8 concludes.

2 CCS and ETS: Why does it matter?

2.1. Definitions
Technical terms relevant to CCS and CCU are defined differently by different sources. The
atmospheric impact of using these technologies is also often a source of confusion. This section
clarifies the use of various terms used throughout the report.

2.1.1. Clarifying key terms

The Intergovernmental Panel on Climate Change (IPCC) Glossary defines carbon capture and storage
as “[a] process in which a relatively pure stream of CO2 from industrial and energy-related sources is
separated (captured), conditioned, compressed, and transported to a storage location for long-term
isolation from the atmosphere” (IPCC 2022c). The IPCC does not clarify what “long-term isolation
from the atmosphere” entails, but the section dedicated to CCS and CCU (IPCC 2022a; Chapter 6,
section 6.4.2.5), refers exclusively to geological storage in the context of CCS. The IPCC also notes
that “CCS and CCU applied to CO2 from fossil fuel use are not CO2 removal methods as they do not
remove CO2 from the atmosphere. CCS and CCU can, however, be part of CDR methods if the CO2 has
been captured from the atmosphere, either indirectly in the form of biomass or directly from ambient
air, and stored durably in geological reservoirs or products” (IPCC 2022b: Chapter 12, Box 8). 18

Simply put, carbon capture and storage (CCS) is understood as a suite of technologies (or
“applications”) that capture and geologically store CO2. CCS technologies can be used to capture
and store CO2 from large emission sources (referred to as “point-source” capture) as well as

18
It is worth noting that Enhanced Weathering (EW, which the IPCC defines as “[a] proposed method to
increase the natural rate of removal of CO2 from the atmosphere using silicate and carbonate rocks”) is
not typically characterized within the realm of CCS applications. Note also that EW does not entail the
conditioning, compression and transportation steps included in the IPCC definition of CCS.

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directly from the atmosphere. They can deliver emissions reductions or, in very specific
circumstances (see section 2.1.2 below), CO2 removals.

As illustrated in Figure 1, CCS applications differ in terms of the concentration and the source of the
CO2 being captured.

• Among point-source capture applications, for the purpose of this report, it is useful to
distinguish between those from emissions typically covered by ETSs – that is, emissions
from fossil fuel combustion (e.g., for electricity generation) and industrial process
emissions (from e.g., the chemical, cement, steel and aluminium sectors) – and those that
are typically not (notably, emissions from biomass). For brevity, this report will refer to the
point-source capture of emissions from the combustion of fossil fuels and process
emissions as “fossil energy and industrial point-source capture”, noting that this
includes emissions from fossil-based energy but excludes emissions related to energy
generation from biomass. These are CCS applications that reduce CO2 emissions.

• Biomass is associated with processes like bioenergy with carbon capture and storage
(BECCS), which the IPCC (2022c) defines as a “CCS technology applied to a bioenergy
facility”; and with Waste-to-Energy (WtE) with CCS, 19 to the extent that the combusted
waste contains biogenic fraction.

• The capture and storage of CO2 directly from the atmosphere is associated with direct air
carbon capture and storage (DACCS), which the IPCC (2022c) defines as a “chemical
process by which CO2 is captured directly from the ambient air, with subsequent storage”.

Applications such as BECCS, DACCS, and WtE with CCS can lead to the removal of previously
emitted CO2 from the atmosphere and are collectively often referred to as ‘technological removals’
or ‘CCS-based removals’. It is also important to note that real-life applications may employ
combined approaches, e.g., a power plant with CCS may combust fossil fuels and renewable
biomass.

19
The European Environment Agency defines Waste-to-Energy as the “incineration of waste with
recovery of generated energy. WtE schemes turn waste into steam or electricity to heat, cool, light
and/or otherwise power homes and industry through the process of combustion”. Capturing and
geologically storing CO2 emissions from WtE facilities is akin to BECCS for the biogenic component of
the waste. For the non-biogenic component of the waste, the process results in emission reductions.

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Figure 1 – Categorization of CCS applications

Source: Authors’ elaboration

In carbon capture and utilization (CCU) processes and applications, the sources of CO2 and
technologies used to capture carbon are the same as in CCS. The distinguishing feature between
CCS and CCU is that in the case of CCU, the CO2 is used in a product. The IPCC (IPCC 20221c) defines
CCU as “a process in which CO2 is captured and then used to produce a new product”, noting that the
“climate effect of CCU depends on the product lifetime, the product it displaces, and the CO2 source
(fossil, biomass or atmosphere)”.

CCS and CCU applications have sometimes been collectively referred to as “CCUS” or “CC(U)S”.

2.1.2. Most applications do not lead to “removal”: Clarifying the relationship

between CCS, CCU, and “removals”
It is important to clarify the relationship between the different CCS and CCU applications with
climate change mitigation – notably, emission reductions and removals.

“Mitigation” refers to “human intervention to reduce emissions or enhance the sinks of greenhouse
gases” (IPCC 2022c). This includes a variety of different environmental outcomes – such as reducing
the volume of emissions that would otherwise go into the atmosphere, avoiding emissions, reducing
the carbon intensity of products and processes, and removing emissions from the atmosphere.

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In particular, carbon dioxide removal (CDR) is defined as “anthropogenic activities removing CO2
from the atmosphere and durably storing it in geological, terrestrial, or ocean reservoirs, or in
products” (IPCC 2022c). As seen below, some CCS applications relate to CDR, but most do not.

Different CCS and CCU applications have different mitigation results. This is summarized in Figure 2.

• Some CCS applications lead to reductions in CO2 emissions but can, at best, be “zero”
carbon. For example, point-source capture in a coal plant can, at best, yield zero
emissions20 (see element A in Figure 2).

• Other CCS applications can entail carbon removals. This is the case for e.g., BECCS, if
renewable biomass binds atmospheric CO2 and is then burned, with the resulting CO2
being captured and stored geologically. 21 Another example is DACCS, where the CO2 is
captured from ambient air and then stored geologically (see element B in Figure 2).

• Many CCU applications entail products of short-term use, such as synthetic fuels and
carbonated beverages. Short-term CCU products that use fossil CO2 can, at best, help
reduce emissions (but they still cause emissions as the fossil CO2 is still released). 22 Short-
term CCU products using atmospheric CO2 can be zero emissions23 (see element C in Figure
2).

• Some CCU applications entail products where the CO2 is bound in such a way that under
normal use the CO2 would not be released from the product into the atmosphere. This is
the case of e.g., construction materials. When the CO2 bound into these long-term
products comes from fossil fuels, emissions can, at best, be zero (and in this case, CCU can
be said to overlap with CCS, although the carbon is not stored in geological reservoirs – see
element D in Figure 2).24 When the CO2 that is bound into long-term products comes from
atmospheric CO2, CCU can lead to removal (see element E in Figure 2).

• There are also several technologies that lead to CO2 removal, but are not related to CCS or
CCU. These include, among others, the planting of forests and increasing the content of

20
It is worth noting that current point-source capture installations typically capture up to 90% of the
available CO2. With current technologies, therefore, such applications typically do not deliver zero
emissions.
21
It is important to note that only renewable biomass can lead to removals through BECCS. Capturing
CO2 from the combustion of non-renewable biomass would not lead to carbon removal.
22
For products such as plastics, the effect depends also on end-of-life choices, e.g., landfilling versus
incineration (with or without CCS), versus recycling. Some end-of-life choices may lead to longer
retention of the CO2 in the product.
23
For products such as synthetic fuels, the mitigation effect also depends on whether the use of such
fuels displaces the use of fossil fuels.
24
EOR is often considered a CCU application. Whether it leads to climate change mitigation depends on
a number of factors, notably the source of the CO2, the permanence of the storage, and the balance of
storage versus increased fossil fuel combustion.

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 carbon in e.g., agricultural soil (see element F in Figure 2). These technologies can vary
widely in the permanence of the carbon storage.

The relationship between CCS, CCU, and removal technologies is presented in Figure 2 below.
Figure 2 – Relationship between CCS, CCU and removal technologies in different applications

Source: Authors’ elaboration

2.2. Why CCS matters for ETSs

Most jurisdictions with ETSs in force either already have policies on CCS or intend to make use of
CCS applications, as evidenced by their (country-level) Nationally Determined Contribution (NDC) or
their Long-term Low Greenhouse Gas Emission Development Strategies (LT-LEDS). Countries like
Norway, Canada, the US, and China mention CCS in their NDC (Global CCS Institute 2021a), whereas
countries like the UK, Sweden and France mention technological CO2 removals (which include CCS
applications such as BECCS and DACCS) in their LT-LEDS (WRI, 2022).

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Figure 3 below presents a map of operational ETSs that have stated the intention to make use of CCS
or technological removal applications. Several ETSs are implemented at a sub-national level, but the
map presents data at a country level in line with NDC and LT-LEDS submissions to the UNFCCC.
Information on NDCs and CCS comes from the Global CCS Institute (2021a), while information on LT-
LEDS comes from the WRI (2022). It is expected that as more NDCs and/or LT-LEDS are submitted or
updated, more jurisdictions will consider CCS to meet climate targets.
Figure 3 – Map of ETSs alongside intentions to make use of CCS and CCU applications

Source: Authors’ elaboration. ICAP (2022) for information on ETSs; 25 CCS Institute (2021a) for mention of CCS in
NDCs; WRI (2022) for mention of technological removals in LT-LEDSs. 26

There is an important overlap between the sectors typically covered by ETSs and those in which CCS
and CCU applications show most promise. The International Energy Agency (IEA 2020b, 2022) and

25
Countries colored green have an ETS in force and a CCS directive and/or mention of CCS in their NDC
and/or mention of technological removal in their LT-LEDS.
26
“Technological removals” are referred to in WRI (2022) as “technological CDR”, which includes CCS
applications such as BECCS and DACCS.

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the IPCC (IPCC 2022d, Figure SPM.7) have identified an important role for CCS and CCU in achieving
ambitious climate targets across the energy and industry sectors, which are the main sectors
covered by ETS. 27 Under the IEA “Sustainable Development Scenario” (IEA-SDS - IEA [2020b]), for
example, CCS and CCU applications are responsible for approximately 13% of energy sector CO2
emissions reductions in 2050 (see Figure 4). In industries like cement, regulated by most ETSs
operational today, CCS and CCU sit at the heart of net-zero strategies; by 2050, 36% of the cement
sector’s decarbonization effort relies on CCS and CCU applications (GCCA 2020).
Figure 4 – Global energy sector CO2 emissions reductions by measure in the Sustainable Development Scenario
relative to the Stated Policies Scenario, 2019-2070

Source: IEA (2020b), Figure 2.1

According to the IEA-SDS (IEA 2020b), the contribution of CCS and CCU to CO2 emission reductions
varies over the projection period, with distinct phases. Until 2030, priority is given to absorbing
emissions from existing power plants and industry. Most of the CO2 emissions captured in the power
and industry sectors during this decade come from coal and gas-fired power plants, chemical plants,
cement factories, and steel mills. During the second phase, between 2030 and 2050, CCS and CCU
deployment is expected to expand most rapidly in the cement, steel, and chemical industries,
accounting for approximately one third of the overall increase in CO2 capture worldwide.

27
The level of reliance on CCS and CCU applications varies significantly across scenarios, differing by up
to ten times on how much they rely on applications such as BECCS and DACCS (IEA 2022, Figure 3.6). In
all cases, however, such applications are expected to deliver several GtCO 2e of mitigation in 2050.

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Box 1 – CCS and CCU value chain: a primer

The value chain of CCS and CCU applications is composed of three elements: capture, transport
and end-of-life, which might be storage (in the case of CCS) or usage (in the case of CCU).

• Capture: As described in the definitions section, capture can occur from point sources or
from the atmosphere. Capture technologies for point sources, grouped from least to most
common, are oxyfuel combustion, pre-combustion and post-combustion. Post-
combustion technologies remove CO2 after fuel combustion. They are the most common
form of capture having the most advanced technological readiness level (TRL) of the three
categories (Oxford Energy 2022). In oxyfuel combustion, pure oxygen is used to burn the
fuel, which facilitates the post-combustion capture process. In pre-combustion, CO2 is
taken out of the fuel before it is burned. Pre-combustion applications are better suited for
incorporation into newly constructed facilities, whereas post-combustion and oxyfuel
technologies can be adapted into existing plants.

• Transport: CO2 is transportable by pipelines, ships, trains, and trucks. Each method’s cost-
effectiveness depends on the distance to be travelled, the volumes transported and the
number (and location) of capture sites that feed into the network (transportation,
storage/utilization). Of these four options, pipelines are the most mature option due to
their prevalent use and technological advances in the oil industry. Ships are more
competitive over long distances and for carrying lower volumes of CO2 (Energy Transitions
Commission 2022) 28 and are likely to play a crucial role in the future.

• Storage: CO2 can be safely stored in geological formations if the conditions are right and
the process is well controlled. CO2 storage involves injecting the collected CO2 into a
geological reservoir of porous rock under an impermeable layer of rock, which covers the
reservoir and prevents migration or “leakage” of CO2 upward into the atmosphere. Several
reservoir types are ideal for CO2 storage with deep saline formations and depleted oil and
gas reservoirs having the most significant capacity.

• Utilization: Utilization refers to any use in which CO2 is incorporated into a product rather
than geologically stored (Energy Transitions Commission 2022). The number of possible
ways to use CO2 is vast and includes both direct uses, in which CO2 is not changed
chemically, and indirect uses, in which CO2 is turned into fuels, chemicals, or building
materials through chemical and biological processes (IEA 2019). 29

The CCS value chain has two main categories of emissions: operational emissions, which are those
generated from the processes inherent to capture, transport, storage or use (e.g., fuel emissions in
energy and transport equipment); and CO2 leaks (or leakage emissions), which are emissions not

28
Transport by ship or truck requires liquefaction of the CO2, which is an energy-intensive process.
29
It is worth noting that the CO2 embedded in CCU products can also be recaptured, e.g. capturing CO 2
emissions from the combustion of synthetic fuels or from the incineration of CCU products.

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inherent to an industrial process, but that are fugitive, vented, or result from the failure of one or
more components of a process. 30

The origins of CCS and CCU applications can be traced back to the oil industry’s early EOR
methods. Transport and storage technologies associated with EOR are the most mature today
thanks to decades of experience transporting and injecting CO2 for EOR. However, most CO2
capture technologies that promise mitigation in line with net-zero targets are still in the early
stages of development, demonstration, or prototyping (Tcvetkov 2021). According to the IEA
(2020b), mature technologies are expected to deliver only approximately 2% of the cumulative CCS
and CCU emission reductions projected by 2070 (Figure 5), even with a move beyond power sector
CCS towards industry sector CCS and DACCS.

Figure 5 – World CO2 emissions reductions from CCUS by technology readiness category in the IEA Sustainable
Development Scenario relative to the Stated Policies Scenario

Source: Adapted from IEA (2020b), Figure 3.2. Pertains to the IEA’s Sustainable Development Scenario. Values are in
comparison to the Stated Policies Scenario, which considers national energy/climate policies in the year 2020.

Historically, CCS projects tended to be vertically integrated with a capture plant having a
downstream transportation system (Global CCS Institute 2021b). This approach favored large-
scale projects, where economies of scale made downstream costs reasonable. Recently, projects
have consisted of “CCS networks”: clusters of multiple proximate emission point sources which
feed into shared hubs of CO2 transport and storage infrastructure such as pipelines, ships, port
facilities, and storage wells (Global CCS Institute 2020a).

30
The leaks referred to here pertain to CO2 that physically escapes e.g., pipelines and storage sites. It is
not related to the concept of “leakage” used elsewhere in the carbon pricing literature, whereby the
avoidance of emissions in one place can lead to higher emissions elsewhere.

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In recent years, CCS technologies have advanced rapidly thanks to testing in numerous pilot
projects and experience gained during the deployment of large-scale projects (Fasihi et al. 2019).
According to the Global CCS Institute (2020a), many CCS networks are being formed and are
expected to expand. The Alberta Carbon Trunk Line, 31 for example, is already operational and
delivers CO2 from two plants near Edmonton to oil and gas reserves. Under the Longship32 project
in Norway, European emitters will be able to use transport and storage facilities to geologically
store captured CO2. Similarly, the Porthos33 project in the Netherlands is expected to transport CO₂
from industry in the Port of Rotterdam and store it in empty gas fields under the North Sea. 34 In the
UK, the Northern Endurance Partnership35 will provide shared infrastructure to several emitters for
CO₂ storage in the North Sea.

The costs of CCS and CCU applications vary significantly across technologies, and there is
considerable uncertainty regarding future costs. Figure 6 outlines the costs of carbon capture
across industries and applications.

Figure 6 – Carbon capture cost curve (USD/tCO2e) in 2020 and abatement potential (GtCO2 eq)

31
https://enhanceenergy.com/actl/
32
https://norlights.com/about-the-longship-project/
33
https://www.porthosco2.nl/en/
34
As of November 2022, the project is awaiting final investment decision.
35
https://www.netzeroteesside.co.uk/northern-endurance-partnership/

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Source: Goldman Sachs (2020)

2.3. Why ETS matters for CCS

Achieving the level of CCS and CCU deployment envisaged in projected decarbonization pathways
requires the deliberate development and planning of technology chains, backed by many policies
and mechanisms operating in parallel.

The Energy Transitions Commission (2022) identified a series of enabling policies for capture
technologies targeting capital (CAPEX) or operating (OPEX) expenditures, as outlined in Figure 7.
CAPEX supported policies are intended to be one-time payments to support “first-of-its-kind”
projects, and can include capital grants, state-backed loans, tax credits, production incentives, and
contracts for difference. OPEX supported policies, on the other hand, are intended to be permanent
policies that provide support for carbon capture investments in the medium and long term and can
include public procurement, end product standards or measures, carbon pricing, carbon border
adjustment mechanisms (CBAM), or coal storage obligations.36 Almost all CCS and CCU projects
currently in operation have benefited from some form of public support, largely in the form of
capital grants (IEA 2020b).
Figure 7 – CAPEX and OPEX support measures for CCS and CCU

Source: Adjusted from Energy Transitions Commission (2022)

36
It is useful to note that the categorization is not fixed. Contracts for difference, for example, can also
be employed to support operating expenses and are listed as an OPEX measure by the IEA (2020b,
Table 5.1). Policy instruments may also not follow this dichotomy strictly; the EU Innovation Fund, for
example, funds both CAPEX and OPEX for up to ten years.

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In practice, a combination of measures will be needed (IEA 2020a; Energy Transitions Commission
2022), tailored to the local context, sectors, and applications. According to the IEA (2020b), a
fundamental element is designing a framework that supports the creation of a sustainable and
viable market for CCS and CCU. In so doing, the IEA highlights that the private sector is unlikely to
invest in the technology unless (a) it is obliged to do so, or (b) it can make a profit from the sale of
the CO₂ or through revenues related to the emissions avoided under carbon pricing arrangements.

ETSs are a key means of pricing carbon and changing market circumstances to support low-carbon
production processes, products, and technologies. The price signal makes new low-carbon
technologies such as CCS and CCU more competitive, which encourages short- and medium-term
investments (Energy Transitions Commission 2022). Beyond the increased deployment of otherwise
uncompetitive low-carbon technology, ETSs have been shown to stimulate incremental innovation
in manufacturing processes and inputs, especially where fundamental technologies already exist,
and a moderate carbon price (or the expectation of a higher price) is sufficient to motivate change.
Yet many CCS and CCU applications still require significant research and development (R&D)
investments to reach technological maturity and deployment at scale, which requires additional
R&D support. Even in their mature phase, CCS and CCU are expensive technologies that require
significant capital expenditures and impose ongoing operating expenses requiring sustained, long-
term price support to encourage deployment (Marcu et al. 2021).
In most of the world, carbon pricing is still non-existent, and in most jurisdictions where carbon
pricing is operational, emissions reductions from CCS are not taken into consideration or prices are
not high enough to incentivize emitters to capture CO₂. This leaves industrial and power facilities
without a commercial driver for capturing CO₂ instead of emitting it, even where capture and
storage can be done at low cost (IEA 2020b). Figure 8 contrasts the gap between observed allowance
prices to date and (roughly) estimated costs for carbon capture over time (note that costs for CO₂
transport and storage are not included).

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Figure 8 – Economic gap: Carbon price versus cost of carbon capture

Source: Authors’ elaboration. Allowance prices based on data from ICAP (2022). Capture costs estimated based on
data from Global CCS Institute (2020b), Fasihi et al. (2019), Evans (2017); Shayegh (2021); Fuss et al (2018); and IPCC
(2022b)

Price volatility also presents a significant challenge for the growth of CCS (IEA 2020c). For example,
the price instability and oversupply of EU allowances observed in the EU ETS throughout the 2005-
2018 period contributed to the cancellation of a large number of planned CCS projects (Marcu et al.
2021). Also, although the EU CCS directive has been in force since 2009, there are still no operational

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applications of CCS in the framework of the EU ETS. 37 To our knowledge, only the Québec Cap-and-
Trade System has facilities that are reducing compliance obligations through CCS applications.

Pioneering CCS initiatives are likely to require additional support in the form of carbon contracts for
difference or similar “carbon price top-up” approaches to provide a price signal that is more
significant and less volatile. The Porthos project in the Netherlands, for example, will receive most of
its grants through a subsidy from the Netherlands Enterprise Agency (the SDE++ subsidy), which
bridges the difference between ETS allowance prices and the total costs for the capture, transport,
and storage of CO₂ (CATF 2021). In the UK, the GBP 1 billion CCUS Infrastructure Fund will provide
revenue streams for carbon capture projects through contracts for difference (CATF 2021). As the
technology matures and is increasingly deployed, the market should require less government
support, such that targeted subsidies are phased out and economy-wide measures such as carbon
pricing become the primary measure to support investment (IEA 2020b).

Provisions to strengthen the carbon price signal, such as tightening the ETS cap and adopting
complementary pricing instruments, are therefore also important components of an effective CCS
and CCU policy. Marcu et al. (2021), for example, propose a scheme of carbon storage obligations,
whereby companies in the fossil fuel industry would be obliged to geo-sequester an increasing
percentage of the carbon embedded in their products. Credits would be issued for storing (rather
than capturing) carbon. Such a mechanism could complement an ETS by establishing a secondary
price signal that incentivizes a separate set of actors. 38

2.4. Societal considerations

There are numerous risks associated with the use of CCS and CCU applications. The main sources of
criticism are concerned about such applications legitimizing business-as-usual, heavy reliance on
immature technologies to achieve decarbonization, “mitigation deterrence”, and uncertainty
regarding social and environmental trade-offs related to the expected expansion of these
technologies. Moreover, it is increasingly recognized – for instrumental, regulatory, and substantive
reasons – that public awareness and acceptance of CCS are crucial prerequisites for its large-scale
commercialization and the achievement of expected mitigation goals (Whitmarsh et al. 2019).

Considering the risk of legitimizing business-as-usual activities, the Energy Transitions Commission
(2022) notes that some scenarios propose a large role for CCS and CCU, which may justify a larger
role for fossil fuels in the future. This is fuelled by widespread skepticism towards oil and gas
companies and compounded by EOR’s early prominent involvement in the development of CCS and

37
However, some are already underway, such as the Northern Lights project in Norway and Porthos in
the Netherlands.
38
This is relevant in particular because interactions between ETS and CCS applications relate primarily
to the capture of CO2, as this is where carbon pricing instruments mainly value the emission reductions
or removals. From the point of view of incentivizing CCS development and deployment, this presents a
challenge to the remaining activities in the CCS value chain (notably transport and storage), which rely
primarily on the economic incentives provided at the point(s) of capture.

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CCU applications. Furthermore, currently most CCS/CCU projects are EOR projects to produce more
oil or gas, indirectly resulting in even more GHG emissions (IEEFA 2022a), although this is likely to
change as new CCS projects ramp up in the coming years.

There is also doubt as to whether CCS and CCU applications will be able to deliver the projected
reductions, as the current pace of technological development is far below what is needed. Over the
past decade there have been project cancellations and government funding failures (Global CCS
Institute 2021b). The projects to date have delivered below expectations and still have great
technical and financial barriers to overcome (Energy Transitions Commission 2022). Since 2010, a
global average of less than 3 million tonnes CO₂ (MtCO₂) has been captured per year, and annual
capture capacity stands at around 40 MtCO2. Annual storage capacity needs to rise to 1.6 billion
tonnes CO₂ (GtCO2) by 2030 to meet a net-zero emissions trajectory in 2050 and requires CCS and
CCU to be available and operational on a gigantic scale by mid-century. Assumptions that CCS and
CCU can be deployed at an extremely fast rate should be balanced with important questions around
feasibility, scale, and cost (IEA 2021). For example, significant technological and economic
constraints exist that may slow the predicted growth of technologies like DACCS. Taking this
technology alone, the risk of thinking that DACCS can be deployed at scale and then realizing it is
unavailable would result in a 0.8°C global temperature overshoot (Realmonte et al. 2019). Likewise,
there are concerns that the magnitude of CDR deployment expected in many scenarios could dilute
incentives to reduce emissions now, a phenomenon known as “mitigation deterrence” (Grant et al.
2021). 39

There are polarized opinions regarding the risk of CO₂ leakage (particularly out of storage) and the
integrity of these technologies, which has led to public concern (Batres et al. 2021; Energy
Transitions Commission 2022; IEEFA 2022b). The risk of CO₂ leaks out of storage sites is dependent
on the site in question. 40 The IPCC (2005) states that the fraction of CO₂ retained in geological
reservoirs that have been correctly identified and managed is very likely to exceed 99% over 100
years and remains likely to exceed 99% over 1,000 years. In other words, the likelihood of leakage is
negligible at well-selected and maintained storage facilities. However, the same IPCC report states
that “CO₂ storage is not necessarily permanent. Physical leakage from storage reservoirs is possible via
gradual and long-term release or sudden release of CO₂ caused by disruption of the reservoir”. This

39
The term is commonly used in the literature, and we therefore use it here. It is useful to note,
however, that both abatement and removals are part of “mitigation” (see Honegger et al. 2021).
40
This work adheres to Vinca et al.’s (2018) definition of leakage, which refers to unintended CO2
emissions into the atmosphere due to infrastructural or storage failures. CO 2 can leak during
transportation, subsurface injection, and after storage. Pipeline leaks cause leaks during transport.
Additionally, the injection method can result in undesirable CO2 leakage. Injection requires a well and a
pipeline with the capacity for up-flows. Lastly, improper storage site sealing might result in unintended
CO2 leakage from storage sites. Leakage from storage sites is delayed in time so that CO2 can leak out of
the subsurface several years after capture. In this instance, CO2 leakage is proportional to the total
amount of CO2 stored in the past. This element is crucial as the long-term viability of storage choices is
one of the primary challenges associated with CCS deployment.

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underscores the need to implement robust and reliable criteria for site selection, as well as
monitoring systems that measure CO₂ fluxes.

There are also concerns related to the local impacts of the large-scale deployment of CCS
applications. The large-scale application of BECCS, for example, could mean significant additional
demand for biomass, putting pressure on limited natural resources, increasing conflicts over land,
biomass and water (Fern 2018). Significant DACCS expansion rates would also necessitate
considerable sorbent production and enormous energy inputs in the coming years (Realmonte et al.
2019). It is therefore crucial to discuss assumptions about the scale of deployment and contextualize
the magnitude of the possible trade-offs (Creutzig et al. 2021).

Concerns regarding CCS and CCU applications vary by context. People in different countries may
have different perceptions of risk and expect a different role for these technologies in the transition
to a low-carbon economy (Cox 2020), leading to different degrees of support (Evensen 2022). In
addition, support for CCS and CCU could also be conditioned by the source of the emissions
captured, the part of the value chain under discussion, and the public’s experience with energy
projects (Evensen 2022), as well as the specific enabling policies employed (Bellamy et al. 2019).

3 In or out? The impact of ETS sectoral scope in the

mechanics of the interaction with CCS applications
The interactions between ETSs and CCS applications can be discussed based on two key
dimensions:

1. The relationship between the ETS scope and the sectors employing CCS applications; and

2. The CCS applications with which the ETS interacts.

This section focuses on the first item, while the second is the topic of section 4. The discussion below
includes examples from specific ETSs. For more information on the approach of various ETSs to CCS,
see section 7.

We distinguish between two main categories of CCS applications (for more details see section 2): 41

• Fossil energy and industrial point-source capture. These are applications that reduce CO₂
emissions. They relate to CO₂ emissions typically (though not always) covered by the ETS,
notably those from the combustion of fossil fuels (e.g., for electricity generation) as well as
process emissions from the e.g., chemical, cement and aluminium sectors.

• Technological removal, or CCS applications that remove previously emitted CO₂ from the
atmosphere. This application relates primarily to activities and to CO2 emissions typically

41
It is important to note that combined approaches may also exist, e.g., a power plant with CCS may
combust both fossil fuels as well as renewable biomass.

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 not covered by ETSs to date, such as DACCS, as well as BECCS and WtE with CCS.42 It is
useful to note that both BECCS and WtE with CCS entail the combustion of biomass in
point-source capture, but such activities typically do not face compliance obligations
under ETSs as the emissions factor of biomass is usually zero.

The sectoral scope of an ETS refers to the gases, sectors, and types of activities that are regulated by
the system, i.e., which emissions lead to compliance obligations under the ETS, and who is legally
responsible for complying with the ETS regulations.

An ETS can interact with CCS applications inside and outside the ETS scope. Whether or not the
activities capturing CO₂ are covered by the ETS will, however, be key in determining how the ETS
interacts with CCS applications. It is also an important factor in determining how incentives are
provided to CCS applications.

3.1. Fossil energy and industrial point-source capture

Interacting with fossil energy and industrial point-source capture means the ETS is able to reflect the
capture of (fossil) emissions that would otherwise go into the atmosphere. The mechanism through
which an ETS interacts with the capture and storage of these emissions depends on the formal
relationship between the ETS and the source of the emissions.

3.1.1. Fossil energy and industrial emissions within the ETS scope: ETSs that
regulate emissions at source
Regulating emissions at source means the ETS places compliance obligations on the entities that
physically release GHGs into the atmosphere, 43 e.g., a coal power plant. The majority of ETSs
currently in force cover energy and industry emissions at the point where the GHG enters the
atmosphere (see Figure 9).

The point at which a GHG is emitted is also the point at which CO₂ capture can take place. The ETS
incentivizes CCS applications by allowing regulated entities to reduce their compliance obligations
by capturing their emissions (and, therefore, reducing their ETS compliance costs). This is the case
under the EU ETS, the UK ETS, and the Québec Cap-and-Trade System, which allow covered entities
to reduce their compliance obligations by capturing their emissions in specific circumstances.

Alternatively, ETSs could allocate compliance units to regulated entities for the capture of CO₂. If
these are allowances, this amounts to a reduction in compliance obligations; if the allocated units
are offset credits, the incentive effect depends on the restrictions placed on the use of such credits.
For a discussion on the different types of units see section 5.1 below.

42
Capturing and geologically storing CO2 emissions from WtE facilities is akin to BECCS for the biogenic
component of the waste.
43
Regulating emissions at source is sometimes referred to as regulating emissions “downstream”. This
term, however, is used in different ways in the ETS literature; we therefore do not use it here, so as to
avoid confusion.

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3.1.2. Fossil energy and industrial emissions outside the ETS scope: upstream ETSs
Regulating emissions upstream means the ETS places compliance obligations on fossil fuel
importers and distributers. Under the coal example, an upstream ETS could place compliance
obligations on the distributer that supplies coal to the power company. The ETSs in Germany,
Austria44 and Oregon, for example, cover emissions exclusively upstream (see Figure 9).

ETSs with upstream coverage that wish to interact with industrial point-source capture could
operationalize that in at least three ways.

1. The first approach is to award a unit to entities performing carbon capture from an
industrial point-source. This unit could then be sold by that entity in the ETS market.

2. The second approach is to allow (certain) entities (for example, a coal power plant) to
voluntarily participate in the ETS. Under this example, the company supplying coal would
be released from ETS compliance obligations for the portion of coal supplied to the power
plant. The power plant would buy the coal at a correspondingly cheaper price, but would be
faced with ETS compliance obligations. The power plant could capture and store its
emissions and reduce these compliance obligations. The economic incentive for the CCS
application stems from the possibility of purchasing cheaper coal without having to
surrender allowances. The NZ ETS, for example, covers energy emissions upstream, but
enables entities performing certain activities to voluntarily participate in the ETS and
receive NZUs, although provisions relevant for CCS are not yet in force (see section 7.4).

3. A third possible approach is to establish a system whereby the covered entity (e.g., a coal
distributer) receives the information that a consumer of its fuels (e.g., a coal power plant)
has captured emissions from the fuel it had acquired. An economic incentive through the
ETS could exist if the system allowed the fuel distributer to reduce its compliance
obligations in accordance with the CO₂ captured by the fuel consumer. In exchange, the fuel
consumer could pay a reduced fuel price or have their costs reimbursed.

Some ETSs have mixed coverage, e.g., covering power and industry at the point of GHG emissions,
and covering the buildings and transport sectors upstream (by covering fuel distributers/importers
inasmuch as they supply fuels to these sectors). This is the case of e.g., California, Québec and New
Zealand (see Figure 9). In ETSs with mixed coverage, incentivizing industrial point-source capture
could require mixed policy approaches (e.g., through both reduced compliance obligations from
point-source emitters and through the issuance of units for emissions that are not covered by the
ETS at source).

44
The ETSs in Germany and Austria cover heating and transport fuels, which are not covered by the EU
ETS.

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Figure 9 – Sectoral coverage of ETSs

Source: ICAP (2021b)

3.2. Technological removals

The avenues for the ETS to interact with technological removals depends on the sectoral coverage of
the ETS and on the type of CCS application. This section presents relevant considerations, noting
that to date, no ETS interacts with technological removals.

3.2.1. Interacting with technological removals within the ETS scope

Technological removals that entail point-source capture – such as BECCS and WtE with CCS – could,
in principle, be covered directly under the ETS. Rickels et al. (2021), for example, suggest that BECCS
plants could be covered under the ETS and that they receive free allocation of allowances “if
allowances were freely allocated to biomass installations, these allowances could be sold by using
BECCS instead of surrendered for emissions. As such, biomass installations would implicitly receive
allowances for the removal of CO₂ from the atmosphere”. This could be operationalized by including
BECCS (and WtE with CCS) plants in the scope of the ETS (potentially as voluntary participants), and
freely allocating allowances on the basis of the volume of renewable biomass (see section 5.6) used
by the plant. The plants would have compliance obligations for their emissions, but would be
allowed to subtract from their compliance obligations emissions captured for the purpose of

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storage. The economic incentive to CCS applications is provided by the value of the freely allocated
allowances that do not have to be surrendered and can be sold to the market. This approach could
also reflect the use of renewable biomass in fossil fuel power plants with CCS.

Technological removals that do not entail point-source capture – such as DACCS – could not be
reflected in the ETS through such a mechanism, but could nevertheless be included in the scope of
the ETS. The ETS could, for example, allow the voluntary participation of DACCS plants, which could
receive an allowance for each tonne of CO₂ removals. This approach would be akin to how New
Zealand manages removals from forestry activities in its ETS.

3.2.2. Interacting with technological removals outside the ETS scope

Alternatively, the ETS could interact with technological removals by excluding them from its scope,
but by awarding removal units (e.g., through a separate certification mechanism) and allowing such
units to be used for compliance obligations within the ETS. In this case, two distinct ‘markets’ would
exist: a market for allowances (the ETS) and a market for removals. Following the models proposed
by La Hoz Theuer et al. (2021), removal units could enter the ETS in at least two ways:

1. Removal units could, for example, be purchased by the government, which could introduce
them into the ETS. By acting as an “intermediary” between the ETS and the market for
removals, the government could also provide additional support to certain technologies by
e.g., purchasing removal units that are costlier than allowance prices. This approach could
be particularly relevant for technological removals such as DACCS, whose costs are still high
(see section 2.3).

2. Alternatively, the removal units could be purchased directly, through transactions between
ETS-covered entities and removers — akin to offset provisions in ETSs. In this case, the
government could place qualitative and quantitative limits on the transactions between the
two markets. 45

4 ETSs and CCS: Whether to interact, and with what

Section 3 discussed how an ETS could interact with CCS applications, showing that the various
potential avenues are strongly influenced by whether CCS applications fall inside or outside the
scope of the ETS.

In this section we discuss whether ETSs can interact with CCS applications, irrespective of how this
interaction takes place. An ETS can interact with none or with either or both categories of CCS
applications, as described in section 4.1 below. For ease of reference, we refer to each of these
possibilities as “options”. Section 4.2 briefly discusses the key advantages and disadvantages each

45
The two approaches for use of removal units in the ETS described here correspond to Models B and C
of La Hoz Theuer et al. 2021. Model D, as described by the aforementioned authors, corresponds to the
approach described in the previous bullet, in which removal technologies fall within the scope of
application of the ETS.

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of these options according to three criteria. Section 4.3 discusses what happens when the ETS
regulations are such that the interaction with CCS applications is unclear.

4.1. ETS and CCS applications: interacting with none, either, or both
ETSs can interact with none of the two categories of CCS applications, with either one or with both.
We distinguish these as four “options” as described below and in Figure 10.

a) Option A: No interaction. In Option A, the ETS does not interact directly with any CCS
applications. This means that entities covered by the ETS cannot reduce their compliance
obligations by undertaking CCS; the ETS does not recognize the captured CO₂ as “not
emitted”. Moreover, under this option no units from technological removals can be used in
the ETS. In short, the ETS does not provide any direct incentive for CCS applications. Option
A may be the result of a deliberate policy decision, e.g., where policymakers decide to keep
CCS applications out of the ETS. Alternatively, it can be the (unintentional) result of ETS
regulations which ignore CCS applications, e.g., because MRV regulations for covered
entities rely exclusively on calculations of input materials and standardized emission
factors, and are therefore not able to reflect CO₂ capture — but there was no deliberate
policy decision to impede the use of CCS technologies inside the ETS.

b) Option B: Interaction only with fossil energy and industrial point-source capture. Under
Option B, the ETS interacts with CCS applications by allowing fossil energy and industrial
point-source emitters to reduce their emissions by capturing them for the purpose of
storage. If such point-source emitters are covered by the ETS (which is usually the case), this
leads to a reduction in ETS compliance obligations and incentivizes CCS applications. 46,47
Under Option B, however, the ETS does not interact with technological removals.

c) Option C: Interaction only with technological removals. Under Option C, the ETS
interacts with technological removals such as BECCS, WtE with CCS or DACCS, but does not
interact with CCS applications related to fossil energy or industrial point-source capture.
This can be the case in e.g., ETSs that regulate emissions upstream (ICAP 2021a) 48 and that
include provisions for credits from technological removals. 49

46
In ETSs where such emitters do not face compliance obligations under the ETS, the incentive can be
provided by issuing units (e.g., offsets or allowances) to them that can be sold to covered entities and
submitted for compliance. See section 0 for a discussion on sectoral coverage.
47
It is worth noting that the incentive for CCS applications exists also in the presence of the free
allocation of allowances. This is because even though companies do not pay to purchase allowances,
they are still exposed to the opportunity cost of reducing their emissions and of freeing up allowances
that can be sold in the market.
48
Upstream coverage in an ETS refers to covering fossil fuels at the point at which it is first
commercialized by extractors, refiners or importers (PMR and ICAP 2021).
49
It seems likely that a jurisdiction with an upstream ETS that chooses to interact with technological
removals would also wish to interact with CCS applications related to fossil energy and industrial point-

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 d) Option D: Interaction with fossil energy and industrial capture as well as with
technological removals. Option D combines Options B and C, and interacts with (and
provides incentives to) fossil energy and industrial capture as well as technological
removals.
Figure 10 – ETSs and reduction/removal CCS applications: Four options

Source: Authors’ elaboration

It is useful to note that, irrespective of the “option” of interaction chosen, the ETS can interact
indirectly with CCS applications through, for example, the use of auction revenues to provide
financial support for technological development and innovation.

4.2. Nothing, a lot, or in between: A discussion on the spectrum of

interaction
The options described above differ in various aspects related to the ETS and the incentive provided
to CCS applications. The sections below offer a brief discussion on a few of the most relevant
dimensions. Rather than trying to pitch options against each other (which would offer a limited
picture in the absence of local context and implementation details), this section aims to present the
various issues and the range within which they vary across the options. 50

source capture, and would therefore fall under Option D and not Option C. Nevertheless, since the
interaction only with technological removals is a theoretical possibility, we list it here for completeness.
50
See La Hoz Theuer et al. 2021 for a detailed assessment of the pros and cons of various models for
the interaction between the ETS and removal units.

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4.2.1. Flexibility for covered entities and governmental control over mitigation
pathways
The level of interaction between the ETS and CCS applications alters the amount of flexibility
covered entities have in meeting ETS compliance obligations, as does the amount of control the
regulator retains over decarbonization pathways. In the absence of any possibility to make use of
CCS applications under the ETS (Option A), regulated entities can meet compliance obligations by
reducing emissions through e.g., process changes or adjusting production levels, as well as by
purchasing credits (if available) and allowances. Enabling CCS applications (Options B, C and D)
gives regulated entities additional means to achieve their obligations, be it through reductions in
compliance obligations or by having access to a pool of additional abatement options (and
corresponding compliance units).

More flexibility can mean lower compliance costs for covered entities, but can also affect
companies’ abatement behaviour. The possibility of capturing emissions from fossil fuel combustion
(Options B and D), for example, can extend the economic lifetime of fossil fuel infrastructure.
Moreover, regulated entities could anticipate cheap future CCS solutions for fossil energy and
industrial processes, and decide to reduce investments in process changes that could result in
higher carbon efficiency independent from CCS applications.

Similarly, under Options C and D there is the risk of “mitigation deterrence” (see e.g., Grant et al.
2021), whereby regulated entities anticipating future removal units are less incentivised to reduce
emissions now. Keeping technological removals disconnected from the ETS (Options A and B) has
the advantage that incentives (and targets) for emission reductions under the ETS are separate from
those for removals, as recommended by McLaren et al. (2019). This approach provides more long-
term certainty for investors, removing the risk that their investments in abatement technologies
under the ETS are rendered unprofitable by the availability of cheaper removal options in the
futureThis approach also alleviates concerns about high-carbon lock-in due to myopic behaviour
and uncertainty about the future supply of removal units. The extent to which the regulator retains
control over mitigation pathways also depends on the level of control over the influx of removal
units into the ETS: the higher the allowed influx of removal units, the higher the possible
substitution of emission reductions for removals. The expectations of regulated entities about the
influx and price of removal units in the future is also likely to affect present abatement choices.
Including the unlimited use of technological removals within the scope of the ETS would mean that
regulated entities could risk facing an effective allowance price ceiling imposed by the costs of
eligible removal technologies.

4.2.2. ETS market functioning and price discovery

As the ETS cap approaches zero and companies decarbonize production processes, the number of
players in the ETS and their respective covered emissions is also likely to decrease, giving rise to
issues of liquidity and market power, decreasing the effectiveness of the system. Market participants
may become hesitant to trade, auctions may be distorted and secondary markets may not function
as intended. Allowance prices for these remaining emissions are also likely to be high as they will be

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from sectors and processes that are the hardest to decarbonize and cheaper abatement options will
have been exhausted. Some interaction options between ETSs and CCS applications could help
alleviate these issues. The interaction with technological removals (Options C and D), in particular,
could increase the number of players and the supply of compliance units into the system. 51

4.2.3. Strength and type of incentive for CCS

Interactions between ETSs and CCS will also influence the strength of the price signal offered to the
various CCS applications. At one end of the spectrum, Option A offers no incentive from the ETS for
CCS applications, meaning that industrial players interested in developing CCS applications must
seek incentives outside the ETS. This approach may lead to missed abatement opportunities in
situations where covered entities could deploy CCS technologies but have no incentives to do so (as
they would also have to surrender allowances for the emissions captured). At the other end of the
spectrum, Option D provides incentives for both categories of CCS applications and offers the
broadest ETS-based incentive for CCS.

However, as highlighted in section 2.3, including CCS provisions in the ETS is no panacea. Under all
options, and in the absence of further support policies, the strength of any incentive provided by the
ETS will be subject to market and price risks. The future price of allowances cannot be known with
certainty nor can the return on investment in CCS installations and activities. This fact is important
as investments in CCS infrastructure are highly capital intensive. Moreover, the (current and
projected) price of allowances can be too low to provide an incentive for several application types.
This effect is even stronger in the case of technological removals. Removals are projected to remain
more expensive than CCS applications in the energy and industrial sectors, and price differentials vis
à vis allowance prices can be substantial.

4.3. Uncertain interactions: when ETS regulation leaves space for

interpretation
ETSs may not fall neatly into either of the Options described above, which is often the case when the
ETS has no provisions directly related to CCS applications. This, however, does not automatically
mean that the ETS does not interact with CCS applications (Option A); in some cases, the ETS
regulation could be interpreted to allow for the reflection of captured emissions in companies’
compliance obligations, even if this is not stated explicitly in the regulations.

This issue pertains mainly to two ETS design elements: what triggers the compliance obligation and
requirements for MRV.

• What triggers the compliance obligation relates to the fundamental rules that determine
what conditions lead an entity to have to surrender a compliance unit under the system. In
upstream systems such as those in New Zealand and Germany, this can relate to the sale

51
The flip side of this is that gross emissions under the ETS would possibly be higher than under
Options A and B. See section 5.2.

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 or purchase of a fossil fuel. In systems that regulate emissions at source, this can relate to
the release of GHG emissions into the atmosphere.

• MRV regulation. Under ETSs, MRV can be done in roughly two ways: by calculation or
through continuous emissions monitoring. A coal power plant covered by an ETS, for
example, may be offered the option of (a) calculating its emissions by multiplying the
volume of coal burned over a period by a standard emissions factor, and/or (b) having
sensors in its process that measure the amount of CO₂ being emitted in real time. MRV
regulations can also allow for flexibility and case-specific deviations.

In ETSs whose compliance obligation pertains to emissions released into the atmosphere, and
where MRV includes provisions for continuous monitoring and/or for case-specific deviations, the
system could be interpreted to allow for (or at least not explicitly hinder) the reflection of captured
and stored emissions in the emissions reports of covered entities (H. Egeland, pers. comm., 2022). In
other words, there could be space for the ETS to reflect the capturing of emissions in covered
entities (e.g., fossil energy and industry installations) even in the absence of explicit regulations on
CCS.

Yet to the extent that regulators wish to use the ETS as an avenue for incentivizing CCS applications,
this uncertain situation provides, at best, a weak incentive for the development and deployment of
CCS. ETS and MRV regulations that theoretically allow for the reflection of captured/stored
emissions, but do not make such an incentive explicit, provide a weaker incentive than an explicit
provision with detailed rules and guidelines on captured/stored emissions. The lack of explicit
references can create uncertainty; there is no endorsement of CCS applications and there could be
concerns about varying interpretations of existing rules.

In the absence of regulations that explicitly make space for CCS applications, the policy interaction
between ETS and CCS remains uncertain and any incentive from the ETS is unlikely to be strong
enough for new CCS projects to materialize. Entities interested in investing in CCS applications are
likely to need a more explicit regulatory endorsement of CCS applications before the investment is
made. On-the-ground, this uncertainty is likely to result in the lack of any incentive for CCS
applications. Where regulated entities do perceive an incentive to implement CCS applications
through the ETS, the effects would be those outlined under Option B, albeit moderated by a weaker
incentive.

On the other hand, this uncertainty also means that in situations where ETS regulators specifically
wish to not reward emissions reductions by CCS, the absence of rules may not suffice to guarantee
that this is the case. Rather, the legislation may have to explicitly say so for that to become the rule.
(H. Egeland, pers. comm., 2022)

5 Considerations on ETS design

The sections above highlighted that the ETS can interact with CCS applications in multiple ways.
This section outlines several resulting considerations for ETS design.

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5.1. Unit choice
As highlighted in section 3, the relationship between the ETS scope and the activities employing CCS
applications dictate important aspects of the mechanics of the interaction. Some configurations,
such as interacting with fossil energy and industrial point-source capture inside the scope of the ETS,
relate to simply reducing the compliance obligations of regulated entities. Others, such as
interacting with fossil energy and industrial point-source capture outside the scope of the ETS, can
entail awarding units to such activities. The units that are awarded can be allowances or credits.

This choice of unit (or “legal tender”) is important: notably, an allowance would be fully fungible
with other units in the ETS, but a carbon credit need not be and can be subject to e.g., quantitative
restrictions on its use (PMR and ICAP 2021). This impacts the various considerations discussed in
section 4.2, including price dynamics and the strength of the incentive provided to CCS applications.

5.2. Cap-setting
To the extent that units (whether allowances or credits) are allocated to entities involved in CCS
applications, an important question is the relationship between such units and the ETS cap (i.e., the
total number of allowances under the system) as well as the impact on gross emissions by regulated
entities, which is determined by the cap plus any additional eligible compliance instruments.

ETS A may, for example, have a cap of 100 MtCO₂e, and allow for the use of up to 5 million removal
units (credits or allowances), generated by technological removals outside the system and in
addition to the cap. While the cap within ETS A is 100 MtCO₂e, its gross emissions (if the removal
units are used, which would depend, among others, on price differentials across allowance prices
and removal costs) could reach 105 MtCO₂e. The result for the atmosphere is 105 – 5 = 100 MtCO2e.

ETS B, by contrast, may also have a cap of 100 MtCO₂e, and allow for the use of up to 5 million
removal units (credits or allowances). But in ETS B, the 5 million removal units are taken from the
cap. For example, the ETS regulator may issue only 95 million allowances, earmarking the remaining
5 MtCO₂e for the issuance of removal units. In this case, gross emissions within the system stay at
100 MtCO₂e, and the result for the atmosphere is 100 – 5 = 95 MtCO₂e.

The examples above pertain to interactions with technological removals, but similar examples could
be built for the interaction with fossil energy and industrial point-source capture. What the examples
above highlight is that if units allocated to CCS applications are generated in addition to the cap (as
in the case of ETS A above), and especially if there is no limit on the number of units that can be
generated, then there is effectively no limit to the aggregate gross emissions of regulated entities
under the ETS. There is also a higher risk of substitution of emissions reductions within regulated
entities for emission reductions and removals generated by CCS applications. Most of the concerns
in the literature pertain to the substitution of emissions reductions for removal activities. This
aspect is most critical when the ETS interacts with technological removals (see e.g., Geden et al.
2019; McLaren et al. 2019; Geden and Schenuit 2020).

If regulators desire gross emissions under the system to be the same as the number of allowances,
then no additional compliance instruments beyond the cap can be generated. Each unit allocated to

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a CCS application must then either be an allowance or entail the conversion or cancellation of one.
This can be implemented by reducing free allocation (which would tend to increase costs for
regulated entities) or by reducing allowance auctions (which could lower government revenues)
(Oxera, 2022). Regulators may choose to establish unit reserves especially dedicated for this
purpose, although this would limit the incentive for CCS applications through unit allocation. Total
scarcity in the system would remain unchanged, provided that the market price of units allocated to
CCS applications is no higher than that of allowances. 52

5.3. Free allocation

If an ETS allows entities to reduce their compliance obligations by capturing CO₂, and if (part of) the
allowances are allocated for free, the free allocations could be affected by a reduction in reported
emissions from entities capturing CO₂.

If the system uses grandparenting, 53 the regulated entity capturing the CO₂ could see its free
allocations reduced, which could reduce the incentive for CO₂ capture.

If the system uses benchmarking, 54 at least two effects are possible. First, the individual installation
capturing CO₂ would report fewer emissions and come closer to (or under) the benchmark, reducing
compliance costs or possibly freeing up allowances for sale. Second, the overall system could also
see an impact, with the benchmark itself lowered as regulated entities reduce their reported
emissions, reducing free allocations to other regulated entities.

In both benchmarking and grandparenting approaches, the precise impacts will be context
dependent. It is important that ETS regulators consider the effect of interactions with CCS
applications and free allocation, as certain configurations could affect the incentive for CCS
applications.

5.4. The semantics of defining the “ETS scope”

The sectoral scope of an ETS refers to the gases, sectors, and types of activities regulated by the
system, namely which emissions lead to compliance obligations under the ETS and who is legally
responsible for complying with the ETS regulations. In the current ETS literature (see e.g., PMR and
ICAP 2021), matters related to the participation of legal entities in the ETS pertain primarily to
obligations: the obligation of a regulated entity to surrender compliance units for emissions released
into the atmosphere. Interactions with CCS applications could challenge this definition. Regulators

52
ETSs interacting with technological removals could, for example, purchase removal units as a way of
enabling a (soft) price ceiling, as proposed by Rickels et al. (2022). The regulator could purchase units in
the removals market and reduce the availability of allowances accordingly in the short term, but
introduce the acquired removal units in the market only much later, e.g., once a certain price threshold
is achieved. Such an approach would increase the short-term scarcity in the ETS.
53
Grandparenting pertains to the free allocation of allowances based on historical emissions.
54
Benchmarking pertains to the free allocation of allowances on the basis of emissions intensity per
unit of product.

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could wish to state, for example, that if a CCS application receives an allowance for reducing
emissions or removing CO₂, this entity is then “covered” by the ETS. This thinking could impact the
ETS scope and the idea that legal entities have the right to receive an allowance (e.g., for a removal)
and have legal implications that may have to be addressed in the ETS regulation. For an elaboration
on some legal issues under the EU ETS, see Rickels et al. (2021) and Nehler and Fridahl (2022).

5.5. Credits for domestic versus international activities

The sections above implicitly assume that the CO₂ capture activities that interact with the ETS are
located within jurisdictional borders. Yet ETSs could potentially interact with reduced emissions and
CO₂ removals outside jurisdictional borders. In this case, the mechanics would be similar to those
applied to international credits/offsets, although aspects related to e.g., CO₂ leakage out of storage
and the treatment of operational emissions from CCS applications would still need to be taken into
account.

5.6. Interactions with the voluntary carbon market

CCS applications (both those that reduce emissions and those that deliver removals) can aim to
obtain credits from crediting programmes (such as the Verified Carbon Standard, and the Article 6.4
mechanism under the Paris Agreement, among others) for their activities. This can be particularly
relevant for applications that face very high price differentials vis à vis current ETS allowance prices:
voluntary demand for removal units from DACCS, for example, is small but existent, and is able to
reflect current costs of DACCS plants (Climeworks 2022). This means that CCS applications could
potentially receive credits under such crediting mechanisms before inclusion in an ETS. It would be
important to ensure that only one unit (a credit or an allowance) is issued for each tonne reduced or
removed – otherwise, double counting may occur.

5.7. Dealing with quality and quantity spectrums of biomass use

Biomass can be used by fossil energy and industrial installations (e.g., a coal plant that also makes
use of agricultural waste) as well as by technological removals (notably BECCS). Two key
considerations relevant for ETS design are worth highlighting.

A first important consideration is that biomass that is not truly renewable (or “sustainable”) does
not lead to removals. For example, a coal plant with CCS that uses non-renewable biomass (e.g.,
from deforestation, such that the harvested biomass does not grow back) would, at best, be
delivering zero emissions through its biomass component (with all the attendant damage due to
deforestation). The same applies to a BECCS plant that uses non-renewable biomass. BECCS with
renewable biomass, on the other hand, can lead to removals. ETSs need strict and enforced criteria
on what constitutes renewable biomass. This will be key to ensure the environmental integrity of
any biomass use in the ETS and to provide incentives for applications such as BECCS and WtE with
CCS. Such criteria may have to reflect GHG emissions in the biomass production lifecycle and take
into account the climate impact of releasing into the atmosphere, in the short term, a large amount
of CO₂ that will take several years (or decades) to be re-absorbed into biomass (EASAC 2019). The

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criteria may also have to straddle and provide consistency across the reporting of and accounting
for emissions at various levels, e.g., across national and company-level inventories, sectors and
policy instruments.

A second important consideration is that even when using renewable biomass, installations may fall
somewhere between 0% and 100% of renewable biomass use. For example, a BECCS plant may be
found to have used non-renewable biomass, such that not all of its captured emissions pertain to
removals. Moreover, a power plant employing CO₂ capture may gradually transition from coal to
renewable biomass use, such that over time, the CO₂ capture moves gradually from delivering CO₂
reductions towards delivering CO₂ removals. This has two important consequences:

a) It may not be possible to establish rules that create a strong dichotomy between emission
reduction and removals, or a strong dichotomy between fossil-based and (renewable)
biomass-based installations. There is a need for rules that can reflect the spectrum of CO₂
reductions and CO₂ removals that CCS applications and biomass use can generate. This is
relevant also for WtE with CCS plants, which are likely to deliver emission reductions and
removals.
b) ETSs looking to interact exclusively with technological removals (and not with CCS
applications related to fossil energy and industrial emissions: Option C in section 4.1) may
face difficulties. Once the ETS starts interacting with removals from the use of renewable
biomass, it may be difficult to rule out a possible interaction with non-renewable biomass,
and consequently a possible interaction with fossil energy point-source capture.

5.8. Monitoring, reporting and verification

MRV provisions are key to maintain environmental integrity in the interaction between ETSs and CCS
applications, and to enable the ETS to provide an incentive to CCS applications. The IEAGHG (2016)
lists three key requirements in this regard. These are:

a) Recognizing captured CO₂ for storage as “not emitted”, such that the captured CO₂ be
deducted from the relevant inventory (e.g., at installation level);

b) Including transport and storage within the scheme accounting rules; and

c) Creating a mechanism to address permanence, such that any leaks are quantified and there
is assurance that the injected CO₂ remains in the intended geological formation.

The IEAGHG report also lists a few “special cases” which require specific considerations:

d) Recognizing negative emissions from BECCS: GHG accounting schemes and MRV rules are
needed to evaluate, attribute and reward any negative emissions;

e) Accounting for EOR: MRV rules can address emissions associated with incremental oil
production; and

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 f) Accounting for CCU: the different mitigation pathways associated with these CCU
applications must be evaluated and suitable MRV rules developed if such applications are to
be recognized and supported.

All these aspects are touched on in this report, even if briefly. 55 A couple of additional aspects are
also worth mentioning.

In relation to aspect (a) above, it is useful to note that current point-source capture installations
typically only capture up to approximately 90% of the available CO₂ (Brandl et al. 2021). This fact
should be taken into account in MRV frameworks as they should not assume that e.g., a power plant
equipped with capture technology would cease to emit carbon from its energy generation
operations.

Moreover, and more importantly, there seems to be uncertainty around the interaction between
ETS-level MRV and international-level MRV and accounting – notably, in terms of national GHG
inventories and corresponding IPCC inventory guidelines. A first point of contention relates to rules
for DACCS as the IPCC does not yet have guidance on how to account for removals through DACCS.
While this does not strictly prevent the inclusion of DACCS projects in ETSs, it may affect countries’
ability to reflect those removals in their national inventories and, consequently, in their national
reports tracking progress towards nationally determined contributions. Country representatives
also seem to have differing interpretations about the flexibility available to individual countries to
employ ad-hoc quantification methodologies to reflect DACCS in national inventories: some
countries assume that ad-hoc inventory provisions reflecting DACCS removals are possible, whereas
others assume such ad-hoc provisions are out of reach.

A second point of contention around national GHG accounting relates to how emission reductions
and removals from CCS applications are accounted for in national inventories in case of
transboundary transport and storage. Conversations with experts in the field indicate there is no
clear view on which of the countries involved would be able to record the removal or the emission
reduction.

5.9. Addressing operational emissions and CO2 leaks: ETS scope and
MRV
To the extent that an ETS includes provisions for CCS applications, an important question is whether
activities within the CCS value chain fall within the scope of the ETS, i.e., whether they face

55
Section 3.1 discusses how to ETSs can interact with point source emissions such that captured CO 2 be
recognized as “not emitted”. Section 4.3, moreover, outlines the role of MRV (in particular continuous
emissions monitoring) as a potential avenue for recognizing captured CO2 as “not emitted” even in the
absence of explicit CCS provisions under the ETS. Section 5 addresses operational emissions from
transport and storage, as well as provisions for CO2 leaks. Sections 3 and 4 address the various
pathways related to the recognition of CO2 removals through e.g. BECCS and DACCS. Section 6
addresses, briefly, a few issues related to CCU and EOR.

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obligations under the ETS for their emissions. Fundamentally, operational emissions from the CCS
value chain (i.e., those generated from the processes inherent to the capture, transport, storage, or
utilization, such as fuel emissions in transport equipment), as well as CO₂ leaks (i.e., emissions that
are fugitive, vented or result from failures) must be visible in national inventories so they can be
appropriately accounted for, also in relation to jurisdictional targets. Whether these emissions fall
under the scope of application of the ETS is regulated through provisions on ETS scope and on MRV.
Two considerations are of particular relevance when considering whether to cover these emissions
under the ETS. 56

• Monitoring. The ETS can be used as a tool to monitor operational emissions and CO₂ leaks
from the CCS value chain. The ETS is not, however, the only tool that can monitor these
emissions. Even if operational emissions and CO₂ leaks from the CCS value chain fall
outside the scope of the ETS, they should in any case be accounted for in the national
inventory (e.g., following relevant IPCC inventory guidelines) and fall under the purview of
national climate targets. Ultimately, if the jurisdiction has an economy-wide ambitious
NDC and if the emissions are visible in the inventory, the emissions will be accounted for
and environmental integrity will be safeguarded. Nevertheless, the ETS may provide a
more granular set of MRV guidelines, although this depends on what other MRV provisions
are in place.

• Economic incentives (and costs): Covering operational emissions and CO₂ leaks from the
CCS value chain under the ETS provides an economic incentive to keep them in check as
transport and storage entities would be liable to monitor their emissions and to surrender
allowances e.g., in case of CO₂ leaks. This harmonizes the price signal across the CCS value
chain and can be particularly valuable in the absence of regulations or incentives in non-
ETS sectors.

It is also worth noting that even if the ETS does not explicitly include CCS value chain activities in its
scope of application, it can implicitly cover operational/leakage emissions. This can happen in
systems where MRV provisions stipulate that regulated entities have to report each and every GHG
emission that occurs within their emissions reporting boundary (the Mexico ETS, for example,
contains provisions requiring that every emission within the boundary of the covered entity be
subject to compliance obligations under the ETS). To the extent that elements of the CCS value
chain take place inside the boundary of the regulated entity/installation, operational emissions and
CO₂ leaks would be reported under the ETS. Such a provision, however, would likely only cover
emissions related to capture, as all other activities within the CCS value chain would likely happen
outside the boundaries of regulated entities.

Currently, the only ETSs that explicitly include the entire CCS value chain within the ETS scope are
the EU ETS and the UK ETS (restrictions on transport apply; see section 7 for details). Some ETSs

56
It is useful to note that both functions listed below could be performed by other instruments, such as
carbon taxes or other regulations.

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cover only part of the CCS value chain; in the California ETS, for example, “CO₂ suppliers” (entities
involved in the capture of CO₂) are covered by the ETS, but transport and geological storage are not.
In the Quebec ETS there is acknowledgement that multiple entities may be involved in the CCS value
chain, but the economic incentive is provided only to the industrial facility that would have emitted
the CO₂ had it not been captured.

5.9.1. Liability provisions for CO2 leaks

The transport and geological storage of CO₂ can entail physical leaks of the gas into the atmosphere.
Provisions for such leaks are necessary to ensure the environmental integrity of CCS applications.
From a system design point of view, past experience indicates that robust regulations are key to
preventing future problems: rigorous criteria on storage site selection, for example, can go a long
way in preventing CO₂ leaks.

In addition to ensuring that CO₂ leaks are visible in the national inventory, jurisdictions may wish to
impose liability57 (notably, sanctions and/or redress measures) to entities within the CCS value
chain in case of leaks during transport and storage. For this, it is important to clarify the extent of the
liability of the various involved entities over time, and to make sure these liabilities can be enforced.
A few aspects merit further consideration. Since most concerns relate to leaks out of geological
storage sites, the sections that follow focus on these leaks, noting that many of these considerations
apply also to leaks during transport.

How is liability enforced?

If a jurisdiction wants to impose liability provisions in case of CO₂ leaks out of storage to entities
within the CCS value chain, the first question is to whom this liability should apply. Most, if not all,
current regulatory frameworks for CCS liability have in place liability provisions for leaks out of
storage on the entity that operates the storage facility (see Global CCS Institute 2019). This means
that in the case of leakage, the operator of the storage facility would be responsible for any
applicable sanctions or redress measures.

The second question is through what instrument is liability for CO₂ leaks out of a storage site applied
and for what is the storage operator responsible?

Policymakers may regulate that redress for CO₂ leaks be applied through the ETS, i.e., by
surrendering ETS allowances. In this case, the storage operator would have to be inside the scope of
the ETS. This is the approach of the EU ETS and of the UK ETS, where point-source emitters can
subtract CO₂ that leaves their installations for capture and geological storage, and where the various

57
Liability in the context of CO2 storage can pertain to three distinct issues: (a) civil liability where
another party seeks compensation for damages; (b) administrative liability where an entity is subject to
specific requirements imposed by the regulator, e.g., on storage site selection, monitoring, reporting,
and inspections; and (c) climate change liability where CO 2 leaks may require the entity to provide
economic redress (Global CCS Institute 2019). We focus here on the third element.

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entities involved in the CCS value chain are responsible for their respective operational and leakage
emissions.

Another (theoretical) avenue for covering liability under the ETS could be to place the liability on the
point-source emitter. In this case, the reduction in compliance obligations for the industrial emitter
(or, potentially, the removal unit generated for technological removals) would pertain to what could
be demonstrated to have been safely stored (as opposed to, for example, CO₂ that was captured and
transported to geological storage). This approach could ensure that liability for CO₂ leaks stays
inside the ETS even in situations where the CCS value chain is not within the scope of application of
the ETS (e.g., in case of transboundary CO₂ storage). This approach could work well in vertically
integrated CCS value chains that include the point source and where the point-source entity is also
able to control or influence what happens in the rest of the value chain. 58 As soon as the value chain
is no longer vertically integrated, however, this option places the responsibility on the industrial
emitter even though this entity has no control over what is happening. Moreover, this approach is
difficult in instances where multiple point sources share the same transport and storage
infrastructure (which is the approach of many of the new CCS endeavours under development) as it
is not possible to attribute a leak at the point of storage to a particular point source. It would be
possible to attribute liability for leakage proportionally to all point sources that use the storage
infrastructure, although this could be further complicated if the storage site is used both for ETS and
non-ETS emissions.

Yet the liability can also be applied by provisions other than the ETS. In this case, the jurisdiction
can put in place other provisions for economic penalties in case of leakage, such as fixed monetary
sanctions. Alternative approaches to address leaks or reversals have been in place in crediting
mechanisms. For removals from forestry projects, for example, some crediting mechanisms employ
reserves or “buffer pools”, which retain a percentage of all credits issued and act as a collective
insurance mechanism against reversals. Such instruments could potentially be adapted to the case
of CCS. Whatever the approach to enforce liability, clarity is important. Provisions for liability at
jurisdictional level clarify the liability between the actors involved, removing the need to deal with
such issues on an ad-hoc basis in commercial contracts. Placing the economic liability with the actor
that causes leaks/emissions (such as under the EU ETS), for example, removes the need for
contractual redistribution of liability. If the liability for emissions from the whole value chain is
placed with the capturing operator, that operator would likely engage in contractual redistribution
of liability with the transport and storage operator in non-vertically integrated value chains (H.
Egeland, pers. comm., 2022).

Where CO₂ is stored outside jurisdictional borders (see section 5.10), it seems that it would not be
possible to cover storage leaks under the ETS, unless (a) the jurisdiction effecting the CO₂ storage

58
This vertical integration would need to be maintained throughout the operational lifetime of the
chain.

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has an ETS which covers leaks out of storage and is linked to the ETS of the jurisdiction exporting the
CO₂; or (b) the industrial point source emitter is made liable under the ETS exporting the CO₂.

Liability over leakage of which emissions?

The second question pertains to how leakage liability provisions under the ETS deal with the fact
that storage sites may receive CO₂ from multiple sources. This clarification is important because in
cluster/integrated projects, transport and storage infrastructure will be shared by many sources of
capture, and it will not be possible to connect the leakage of one tonne to any particular point
source. Further, not all point sources may relate to emissions regulated under the ETS. The fact
transportation and storage networks can be used also by DACCS plants makes the picture even
more complicated. Including the CCS value chain under the ETS (such that operators of storage sites
are responsible for CO₂ leaks) may mean that the ETS will also cover leaks of emissions that were not
originally covered by the ETS.

This can be of particular relevance, for example, in situations where multiple policy instruments
interact with individual CCS applications. Nehler and Fridahl (2022), for example, note that if a policy
(other than the ETS) establishes economic incentives that reward technologies such as BECCS, then
perverse incentives to catch and release CO₂ might be created if the reward for the capture is higher
than the penalty for the leak.

Liability for how long?

While “permanent” storage may mean “forever”, an infinitely long period of liability is not
compatible with business operations. It is important that ETS rules determine for how long
monitoring needs to happen and by whom, for how long liability for leakage is in place and to whom
it applies. Responsibilities can also change hands over time. For example, in the EU ETS and in the
UK ETS, the responsibility for monitoring (and leakage) remains with the storing entity for a
minimum of 20 years after the closure of the storage site. Thereafter, the responsibility for
monitoring and leakage can be handed over to the “relevant authority” under specific conditions
(see section 7.1).

It is also useful to note that the responsibility for monitoring leaks need not be contingent on, and
can be decoupled from, the economic liability of surrendering allowances in the event of leaks.
Ultimately, environmental integrity for leaks is safeguarded by making sure such leaks are
monitored and are visible in the national inventory in the context of an ambitious national climate
target. This means that responsibility for monitoring is key, even if it is not always accompanied by
economic liability for handing in allowances in the case of leaks.

5.10. When the CO2 leaves jurisdictional borders: ETSs and exported
emissions
While all steps of the CCS value chain tend to be in the same country in existing projects, upcoming
CCS projects, which rely on broad networks of capture, transportation and storage, often do not. A
crucial element for the integration of such CCS networks into ETSs lies in the regulation of cross-

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border issues. This aspect relates to ETS regulations covering the export of emissions. The
integration of CCS networks is expected to involve the export of CO₂ to geological storage sites
outside jurisdictional borders. In September 2022, for example, Northern Lights (Norway) made the
world’s first cross-border commercial agreement to transport and store CO₂ from the Netherlands
(TotalEnergies 2022).

Different ETSs have different provisions for the “export” of CO₂ for storage. Under the NZ ETS, for
example, the Climate Change (Other Removal Activities) Regulation 2009 (SR 2009/284) 59
establishes that GHGs that are exported (e.g., as liquid CO₂, as synthetic GHGs (HFCs and PFCs) and
the GHGs “embedded” in products such as methanol and liquid petroleum gas), are to be subtracted
from entities’ compliance obligations. This allows the NZ ETS to provide an incentive for emissions
that are captured within its borders but stored outside them.

The EU ETS has a different approach due to the fact its provisions on CCS are subject to storage
carried out in accordance with the EU CCS Directive, which can only regulate storage within the EEA.
If CO₂ stored in the EEA is done so in accordance with the directive, the emitted CO₂ will be
considered as “not having been emitted” under the EU ETS, and industrial point-source emitters can
subtract captured emissions from their compliance obligations. Storing CO₂ emissions outside the
EEA is not banned, but these emissions cannot benefit from the possibility of not surrendering
allowances under the EU ETS, providing little incentive to store CO₂ abroad (European Commission
2022a). This also includes CO₂ transported for storage from the EEA to the UK.

The issue of cross-border CO₂ transport and sub-seabed storage also relates to the London
Convention and the London Protocol on the Prevention of Marine Pollution caused by the dumping
of wastes and other matter. Since 2006, the London Protocol has served as the basis for
international environmental law to permit CO₂ storage beneath the seafloor where it is safe to do so
and to control the injection of CO₂ into sub-seabed geological formations for permanent isolation.
Article 6 of the London Protocol bans the export of waste or other substances for disposal in the
marine environment. Contracting Parties to the London Protocol enacted a resolution in 2019 to
allow the temporary application of the 2009 amendment to Article 6 of the Protocol to permit the
export of CO₂ for storage in sub-seabed geological formations prior to its ratification, which had
been proceeding slowly. This eliminated the final substantial international legal obstacle to CCS,
allowing CO₂ to be transported internationally for offshore storage (IEAGHG 2021). Countries,
however, must ratify the resolution and establish bilateral intergovernmental agreements to make
use of its provisions. As of September 2022, only a few countries, including Belgium, Denmark,
Estonia, Finland, Islamic Republic of Iran, Netherlands, Norway, Republic of Korea, Sweden and the
UK, had ratified the resolution (European Commission 2022b). A recent analysis by the European
Commission, however, concluded that EEA countries can make use of a simplified process under the
existing EU legal framework to benefit from the resolution's provisions (European Commission
2022b).

59
https://www.legislation.govt.nz/regulation/public/2009/0284/latest/DLM2381201.html

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6 Brief considerations on CCU
As described in section 2.1, CCU applications vary widely and have different environmental
outcomes. These depend, among other factors, on the source of the CO₂ (fossil or not), on the
permanence of the embedded CO₂ (that is, whether the CO₂ embedded in a product can be released
back into the atmosphere or not), and on the product that is displaced.

• Some CCU applications, for example, lead to the long-term binding of CO₂ into a product,
meaning it would not release the CO₂ into the atmosphere during use or disposal.
Construction materials such as concrete, for example, bind CO₂ for decades or centuries.60
For this type of product, the environmental effect depends primarily on the source of the
embedded CO₂. Using CO₂ from fossil sources leads to emission reductions as the CO₂ that
would otherwise have been emitted gets “trapped” in the concrete and is not released;
using CO₂ from renewable biomass or from the atmosphere can lead to removals as CO₂ is
sucked out of the atmosphere and bound into a product.

• Most CCU applications, however, only bind the CO₂ temporarily and the CO₂ is released
into the atmosphere during use or disposal. This is the case for CCU applications that
produce synthetic fuels, carbonated drinks and plastics. 61 While the precise
environmental effects vary depending on the source of the CO₂, emissions are generally
reduced by e.g., displacing virgin fossil fuels and using the same molecule of CO₂ more
than once. In such cases, life-cycle analyses are key to understanding environmental
outcomes.

• EOR is often considered a type of CCU as CO₂ is used to increase fossil fuel extraction. On
the one hand, CO₂ (e.g., from coal power plants) is captured and geologically stored; on
the other, the activity may increase fossil fuel supply. Whether or not EOR leads to climate
change mitigation depends on several factors, notably the source of the CO₂, the
permanence of the storage, and the balance of emissions stored versus increased
emissions from fossil fuel combustion.

Whether and how an ETS interacts with CCU applications relates to several ETS design aspects.

The ETS scope is an initial starting point. The interaction between the ETS and CCU can happen: (a)
at the point of CO₂ capture, such that entities that would face compliance obligations can reduce
their obligations by demonstrating that the CO₂ is bound into a product; and/or (b) at the point of
CO₂ emission from the product when entities that make use of products produced from CCU
applications or that deal with the end-of-life of such products (notably waste management) have

60
Whether a long-term storage in the range of decades or centuries can be said to be “permanent” is a
relevant question that we do not expand upon here. For the purpose of this report, we assume this
type of long-term storage to be sufficient for ETS purposes, but future research may wish to investigate
this matter further.
61
For plastics, different modes of disposal (e.g., recycling versus landfilling versus incineration) may
have different effects in terms of how much and when CO2 is released to the atmosphere.

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their emissions covered by the ETS. Since the latter option is a relatively “standard” case of covering
emissions from point sources under the ETS, we focus this section on the first element, namely if
and how the ETS interacts with CCU applications at the point of CO₂ capture.

Our analysis examines the possibility of reducing the compliance obligations of ETS-covered entities
that engage in CCU applications, where CO₂ is embedded in products instead of being emitted
within the boundaries of an installation. It is key to understand which provisions and grounds lead to
reductions in compliance obligations.

This question relates, first, to understanding what triggers compliance obligations, namely, what
conditions lead an entity to have to surrender an allowance under the system (e.g., engaging in a
specific type of process or economic activity and/or the act of physically releasing emissions into the
atmosphere). In ETSs where the compliance obligation stems from physically releasing emissions
into the atmosphere, the regulations could be interpreted to implicitly allow regulated entities to
reduce their compliance obligations through CCU applications by demonstrating that the CO₂ was
not emitted. Higher level provisions under the ETS, however, can also be relevant to address this
question. Under the Schaefer Kalk court case, 62 for example, the definition of “emissions” under the
EU ETS Directive was key in arguing that the production of precipitated calcium carbonate (which
binds CO₂ chemically in a stable product) does not lead to emissions and should not be subject to
compliance obligations.
Conditions related to permanence, MRV, and ETS scope are also relevant. Some systems do not
require the embedding of CO2 in a product to be permanent or long-term. The Québec Cap-and-
Trade System, for example, allows regulated entities to reduce compliance obligations in cases
where CO₂ is re-used or transferred out of the establishment. The NZ ETS contains provisions to
issue units to entities that make (a) a product containing a GHG that is permanently embedded; or
(b) a product containing a GHG that is temporarily embedded and the product is exported with the
substance embedded. Both systems can be said to enable regulated entities to reduce compliance
obligations if they engage in CCU, irrespective of whether the product leads to long-term or short-
term CO₂ storage. Several of these products would, however, ultimately see the release of the
embedded CO₂ either during use (in the case of synthetic fuels) and/or during the end-of-life phase
(e.g., during decomposition and incineration). If these emission sources are not subject to the scope
of the ETS, emissions from inside the ETS are effectively shifted out of the system. 63 Similarly, EOR
presents a difficult case for the inclusion in ETSs due to the complex effect of CO₂ storage vs an
increase in fossil fuel supply, which can also increase emissions outside of the system.
By contrast, MRV regulations under the EU ETS valid as of January 2023 have provisions for reducing
compliance obligations for CCU only in the case of precipitated calcium carbonate, which binds CO₂

62
Schaefer Kalk GmbH & Co. KG v Bundesrepublik Deutschland (2017)
63
In the case of synthetic fuels, it is possible that the use of such fuels substitute other fossil emissions,
leading to no net increase in emissions overall. This highlights the importance of life-cycle assessments
when considering including CCU in ETSs, including an understanding of alternative mitigation pathways
and ways to avoid loopholes and inconsistencies.

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long-term. The EU ETS revision is likely to include CCU provisions only to the extent that GHGs are
permanently chemically bound in a product and cannot enter the atmosphere under normal use
and disposal (see section 7.1). This approach would exclude products like synthetic fuels, which are
burned and release CO₂ during their use, and products like plastics, which can release CO₂ during
decomposition or waste incineration.

7 CCS (and CCU)-relevant regulations within current ETSs

Out of the 26 ETSs currently in force, only five have regulations related to CCS or CCU applications:
the EU, the UK, Québec, New Zealand, and California. The sections above have provided some
insights into their provisions on various aspects of the interaction with CCS applications. This
section offers a more cohesive description of the regulations under each of the five systems. It also
provides a table with a brief summary of the CCS and CCU relevant provisions found in the 17
selected ETSs currently in force.

7.1. EU ETS
The EU ETS has detailed regulations for the use of CCS applications and is an example of a
jurisdiction that enables the point-source capture of fossil energy and industrial emissions (Option
B, interacting with fossil energy and industrial emissions inside the scope of the ETS). The EU ETS
regulates emissions at source, which means that interactions with fossil energy and industrial
emissions point-source capture takes place inside the scope of the ETS. In the EU ETS, point-source
emitters can subtract from their compliance obligations the CO₂ originating from fossil carbon in
activities covered by the EU ETS that is not emitted from the installation and that is transferred out
of the installation for capture and geological storage (see Article 12 paragraph 3a of the EU ETS
Directive64 and Article 49 of the Monitoring and Reporting Regulations65). Despite its detailed
provisions, however, there are currently no facilities under the EU ETS that are reducing compliance
obligations through CCS applications. 66 The CCS Directive67 provides detailed requirements for the
safe geological storage of CO2. Under current regulations, reductions in compliance obligations are
allowed only if the captured CO₂ is stored in a site permitted under the CCS Directive.

The elements of the CCS value chain (capture, transport, and storage) are subject to the scope of
application of the EU ETS, as per Annex 1 of the EU ETS Directive. 68 Operational and leakage

64
https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A02003L0087-20210101, as of
January 2023.
65
https://eur-lex.europa.eu/eli/reg_impl/2018/2066/2022-01-01, as of January 2023.
66
The Sleipner and Snøhvit projects have been capturing and storing CO 2 in Norway since 1996 and
2008 respectively; they are supported through the Norwegian carbon tax and other state funds (Global
CCS Institute 2020c). The CO2 captured is not subject to the EU ETS.
67
https://eur-lex.europa.eu/eli/dir/2009/31/2018-12-24
68
https://eur-lex.europa.eu/eli/dir/2003/87/2021-01-01. It is worth noting that under the EU ETS
Directive and MRV regulation valid as of January 2023, explicit provisions for the transport of CO 2 cover

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emissions for activities within the CCS value chain are covered by the legal entities conducting these
activities, and MRV provisions for such emissions are contained in the Monitoring and Reporting
Regulations. There is also a provision for the monitoring of and liability related to storage to be
transferred, under specific conditions, to member states 20 years after a storage site is closed
(European Commission 2022a).

Under the current regulations, the EU ETS does not provide incentives for technological removals
through BECCS, DACCS or for the biogenic component of WtE with CCS.

As of January 2023, CCU is reflected in the EU ETS only to a very limited extent. CCU is currently not
explicitly incentivized under the EU ETS, with one exception. Under the current ETS Directive and
MRR, there is no provision to subtract from compliance obligations CO₂ captured and converted into
products. The only exception is for CO₂ that is captured and used to produce precipitated calcium
carbonate, as per the result of the Schaefer Kalk court case. This is reflected in Article 49 of the MRR,
Paragraph 1(b).
The EU ETS is currently undergoing a revision. Commission document 2021/0211(COD), 69 which
proposes amendments to the EU ETS, contains several provisions that pertain to CCS and CCU. The
European Parliament and the Council of the European Union have adopted proposed
amendments70,71 to the Commission document. As of January 2023, trilogue negotiations have
reached a provisional agreement, 72 which is expected to be formally adopted by co-legislators in
early 2023. On CCS, the proposed revisions could include a new preambular element which would
state that GHGs “not directly released into the atmosphere should be considered emissions under the
EU ETS and allowances should be surrendered for those emissions unless they are stored in a storage
site in accordance with [the CCS Directive] (…)”. This would further specify the conditions that trigger
a compliance obligation, enabling EU ETS regulations more discretion to define under what
conditions a GHG can be considered to not have been emitted and, consequently, under what
conditions regulated entities can be freed from the obligation of surrendering allowances. The
proposed amendments could also increase the ETS scope to include all means of CO₂ transport (at
the moment, EU ETS provisions refer to transport by pipelines). On CCU, the revision could allow a
reduction in compliance obligations “in respect of emissions of greenhouse gases which are
considered to have been captured and utilized to become permanently chemically bound in a product
so that they do not enter the atmosphere under normal use and disposal”.

only transport by pipelines. (For a discussion on this see Hegeland [2020]). The current EU ETS review
process (see below) may address this question.
69
https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52021PC0551
70
https://www.europarl.europa.eu/doceo/document/TA-9-2022-06-22_EN.html#sdocta1
71
https://data.consilium.europa.eu/doc/document/ST-10796-2022-INIT/x/pdf
72
https://www.europarl.europa.eu/legislative-train/package-fit-for-55/file-revision-of-the-eu-
emission-trading-system-(ets)

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7.2. UK ETS
The UK ETS incorporates several elements of the EU ETS, including the EU ETS Directive, the EU ETS
Monitoring and Reporting Regulation and the CCS Directive.73 In terms of CCS and CCU regulations,
the rules under the UK ETS are the same as those that were valid under the EU ETS as of 2018. The
UK ETS employs Option B, interacting with fossil energy and industrial emissions inside the scope of
the ETS, although there are currently no facilities covered by the system that are reducing
compliance obligations through CCS applications.

As the UK has left the EU, revisions to the EU ETS regulatory documents mentioned above will not
apply to the UK ETS. The UK government has been considering the role of CCS applications under
the UK ETS, particularly in the context of CO₂ removals. A consultation process by the UK
government has invited views and inputs on this issue and is due to be further discussed in 2023.

7.3. Québec Cap-and-Trade System

The Québec Cap-and-Trade System contains some provisions recognizing the use of CCS and CCU
and is an example of a jurisdiction under Option B (and interacting with fossil energy and industrial
emissions inside the scope of the ETS). 74

According to section 6.9 of chapter Q-2, r. 15 “Regulation respecting mandatory reporting of certain
emissions of contaminants into the atmosphere” (the GHG Reporting Regulation), 75 “GHG emissions
that have been captured, stored, re-used, eliminated or transferred out of the establishment” are
subtracted from the verified emissions of the covered entity. The system therefore contains basic
provisions for CCS and CCU. The CCU/CCS sub-part of the emitters’ GHG declaration is analysed
individually by the province. While the system does not cover any large CCS facility, 4% of large
emitters under its remit benefit from CCS/CCU provisions. As the GHG Reporting Regulation does not
yet contain specific measurement protocols or methods to calculate the captured and stored, re-
used, eliminated or transferred emissions, these calculations are currently done on an ad-hoc basis
by individual installations.

73
The Greenhouse Gas Emissions Trading Scheme Order 2020:
https://www.legislation.gov.uk/uksi/2020/1265/made
UK ETS MRV Regulation:
https://www.legislation.gov.uk/eur/2018/2066/data.xht?view=snippet&wrap=true
74
Chapter Q-2, r. 46.1 - Regulation respecting a cap-and-trade system for greenhouse gas emission
allowances (Cap-and-Trade Regulation): https://www.legisquebec.gouv.qc.ca/en/document/cr/Q-
2,%20r.%2046.1?&target=
75
Chapter Q-2, r. 15 - Regulation respecting mandatory reporting of certain emissions of contaminants
into the atmosphere (GHG Reporting Regulation):
https://www.legisquebec.gouv.qc.ca/en/document/cr/Q-2,%20r.%2015

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7.4. New Zealand ETS
As described below, New Zealand has provisions for reducing compliance obligations by
permanently embedding GHG into a product (which includes some CCU applications) and some
provisions for carbon storage (which is relevant for CCS applications). The provisions on carbon
storage, however, are not in force. From the point of view of enabling CCS applications, the NZ ETS
currently falls under Option A and does not interact with CCS applications. This may change if and
when the relevant provisions are enabled and missing MRV requirements are put in place.

The NZ ETS has operational provisions that are relevant for CCU, albeit only in respect of emissions
that would have resulted in the surrender of obligations. Even though the NZ ETS has a mechanism
for awarding units in respect to “removals” (see note on this below) and some CDR technologies,
such as forestry, are covered in the ETS, current regulations do not include incentives for
technological removals such as BECCS, DACCS or WtE with CSS. 76

Under the NZ ETS, provisions relevant to CCU and CCS applications are operationalized through the
issuance of “removal units” (see note below on the definition of “removals” under the NZ ETS).
Entities engaged in “removal activities” can voluntarily participate in the NZ ETS as per the
provisions of Schedule 4 of the Climate Change Response Act77 and receive New Zealand Units
(NZUs). In addition to forestry removal activities, these include:

a) Producing products. This includes: producing a product containing a GHG that is

permanently embedded; or producing a product containing a GHG that is temporarily
embedded and the product is exported with the substance embedded. In both cases, the
provisions only apply if an entity would be subject to surrender obligations under the NZ
ETS in respect of the emissions that would result if the GHG were not embedded. The
Climate Change (Other Removal Activities) Regulations 200978 lists the activities and
monitoring provisions for them. These are:

i. producing methanol;

ii. exporting liquid petroleum gas; and

iii. producing liquid CO₂ for export.

b) Storing of CO₂ after capture, where an entity would be subject to surrender obligations
under the NZ ETS in respect of the emissions that would result if the CO₂ were not captured
and stored. This provision is not yet in force, and no MRV provisions for it have been put in
place. This means that currently, the NZ ETS does not provide incentives for activities that
would capture and store CO₂ in the domestic territory.

76
It could be possible, however, to add these to the list of eligible activities as long as the removals can
be included in New Zealand’s target accounting.
77
https://www.legislation.govt.nz/act/public/2002/0040/latest/DLM1662864.html
78
https://www.legislation.govt.nz/regulation/public/2009/0284/latest/whole.html#LMS152788

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 c) Exporting or destroying hydrofluorocarbons or perfluorocarbons.

Section 16279 of the ETS legislation allows the Minister to add to that list of activities. If a DACC
activity were close to becoming operational in New Zealand, for example, the Minister could add this
to the list above and create the MRV regulations to enable ETS recognition within one year.

“Removals” under the NZ ETS: Under the NZ ETS, removals are defined broadly to include not only
carbon dioxide removals, but also emissions reductions (see Climate Change Response Act 2002,
Part 1, Item 4 Interpretation, 80 emphasis added):

“removals,—

a) in relation to a removal activity, means carbon dioxide equivalent greenhouse gases that are,
as a result of the removal activity,—

i. removed from the atmosphere; or

ii. not released into the atmosphere; or

iii. a reduction from emissions reported in—

(A) New Zealand’s annual inventory report under section 32 as required under the
Convention or Protocol for any year; or

(B) any emissions report from New Zealand under a successor international
agreement; and

b) in Part 1B and the definitions of net accounting emissions and offshore mitigation, means
greenhouse gases that are removed from the atmosphere.”

This means that under the NZ ETS, the concept of a “removal” is broader than what is often referred
to as CDR (see section 2.1), as it also includes emission reduction activities.

Entities performing “removal” activities can either be those mandatorily covered by the NZ ETS, as
per Schedule 3 of the Climate Change Response Act, 81 or other entities, meaning multiple legal
entities can be involved in the above-mentioned activities.

This flexibility is particularly important because fossil fuels are covered upstream, meaning that
energy-related point-source emitters are not under the scope of the (mandatory) application of the
NZ ETS. For example, should a coal power plant implement a facility to capture CO₂ and export it as
liquid CO₂, it would have to become a voluntary participant under the NZ ETS and issue NZUs to
receive an incentive through the NZ ETS. However, if the coal power plant “opted in” to take the NZ
ETS compliance obligations off a coal mining company (an option only available for large fossil fuel
consumers above certain thresholds), the MRV regulations could be adjusted to ensure the plant

79
https://www.legislation.govt.nz/act/public/2002/0040/latest/DLM1662739.html
80
https://www.legislation.govt.nz/act/public/2002/0040/latest/DLM158592.html
81
https://www.legislation.govt.nz/act/public/2002/0040/latest/DLM1662841.html

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only reports and surrenders emission units for its actual emissions. This would negate the need for
additional reporting on removals by the plant.

If an entity is a mandatory participant under Schedule 3 and wishes to engage in one of the
“removal” activities listed above, it must apply the calculations contained in the Climate Change
(Other Removal Activities) Regulations 2009. In this case, the entity’s monitoring report or
“emissions return” contain an assessment of its liability to surrender units in respect to emissions
and entitlement to receive units in respect to removals (see Article 65). 82 As per Article 64A, 83 the
transfer of NZUs is done after deducting any NZUs to be surrendered in respect of the entity’s
compliance obligations.

CCS value chain activities (i.e., capture, transport, and storage activities) are not explicitly covered
by the NZ ETS. Persons undertaking “removal activities”, such as exporting hydrofluorocarbons or
perfluorocarbons, are only entitled to emission units for the GHG actually exported, not those
collected and stored prior to export. Because the ETS is designed around an upstream obligation,
any downstream, processing, operational or leakage emissions are counted when the potential
greenhouse gas emissions are imported, manufactured, or mined.

7.5. California Cap-and-Trade Program

California’s Cap-and-Trade Program does not currently recognize CCS or CCU as a means for a
covered facility to reduce its emissions and compliance obligations, nor does it have provisions for
enabling technological removals. It therefore falls under Option A.

The only CCS-relevant provisions under the California Program relate to the compliance obligations
of “suppliers of CO₂”. These are, among others, facilities in California that capture CO₂ from
production processes, or that extract or produce CO₂ as a byproduct of oil production, and then
supply the CO₂ to another entity for use or for geological sequestration. The current CO₂ supplier
provisions, however, do not enable a covered facility to reduce its compliance obligations by
capturing its CO₂ and supplying it to a sequestration site. Amendments would be required to both
the Cap-and-Trade Regulation and MRV requirements to recognize CCS/CCU projects and to allow a
covered facility to reduce its compliance obligations by capturing and sequestering or utilizing CO₂.

However, the California Air Resources Board (CARB) has adopted a CCS Protocol, 84 which describes
the requirements that transportation fuel producers must meet for a CCS project to be recognized in
the Low Carbon Fuel Standard (LCFS) 85 Program. CARB’s LCFS Program is a market-based tool for
transportation fuel producers that includes credit trading as a potential compliance pathway.

82
https://www.legislation.govt.nz/act/public/2002/0040/latest/DLM1662495.html
83
https://www.legislation.govt.nz/act/public/2002/0040/latest/LMS366359.html
84
https://ww2.arb.ca.gov/resources/documents/carbon-capture-and-sequestration-protocol-under-
low-carbon-fuel-standard
85
https://ww2.arb.ca.gov/our-work/programs/low-carbon-fuel-standard

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In passing Assembly Bill 127986 in August 2022, the California Legislature set targets to achieve
statewide carbon neutrality no later than 2045 and to ensure anthropogenic emissions are reduced
85% from 1990 levels by 2045. The legislation requires CARB to identify and implement policies that
enable carbon dioxide removal and CCS/CCU projects in California to support the 2045 target. The
Legislature also passed Senate Bill 90587 in August 2022, giving CARB significant authority to
establish a Carbon Capture, Removal, Utilization and Storage Program, while prohibiting carbon
dioxide injection for EOR (California State 9/26/2022). CARB’s 2022 Scoping Plan Update, 88 which
lays out how California can achieve statewide carbon neutrality by 2045 reflects the direction on
CDR and CCUS from both pieces of legislations. The 2022 Scoping Plan Update will inform potential
new measures and updates to existing CARB policies and programmes, and include the CCS Protocol
in the Cap-and-Trade Regulation to advance CDR and CCS/CCU in support of California’s long-term
carbon neutrality goal.

7.6. CCS regulation in selected jurisdictions: Summary

The figure and table below provide a summary of CCS regulations in selected ETSs.
Figure 11 – Interactions between selected ETSs and CCS applications

Source: Authors’ elaboration

86
https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=202120220AB1279
87
https://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=202120220SB905
88
https://ww2.arb.ca.gov/our-work/programs/ab-32-climate-change-scoping-plan/2022-scoping-plan-
documents

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Table 1 – Summary table of CCS provisions in selected ETSs

Option A – ETS does not interact with CCS applications

• Austria: upstream coverage and no possibility to reflect emission reductions from CCS.
• California: emission reductions from CCS not deductible from ETS covered emissions (but
support for CCS projects is provided to transportation fuel producers through another
instrument).
• China national: no mention of CCS and emission reductions from CCS not deductible from ETS
covered emissions.
• Germany: upstream coverage and no possibility to reflect emission reductions from CCS.
• Kazakhstan: no mention of CCS and emission reductions from CCS not deductible from ETS
covered emissions.
• New Zealand: CCS provisions exist but are not in force, and elements for their
operationalization are missing.
• Oregon: upstream coverage and no possibility to reflect emission reductions from CCS.
• Saitama: no mention of CCS, and emission reductions from CCS not deductible from ETS
covered emissions.
• Switzerland: no mention of CCS, and emission reductions from CCS not deductible from ETS
covered emissions.
• Tokyo: no mention of CCS, and emission reductions from CCS not deductible from ETS covered
emissions.

Unclear interaction between ETS and CCS applications

• Republic of Korea: no explicit CCS provision, but continuous monitoring could potentially
reflect emission reductions from CCS. Offset provisions could in theory cover CCS-related
projects.
• Massachusetts: no explicit CCS provision, but continuous monitoring could potentially reflect
emission reductions from CCS.
• Mexico: no explicit CCS provision, but continuous monitoring could potentially reflect
emission reductions from CCS.
• RGGI: no explicit CCS provision, but continuous monitoring could potentially reflect emission
reductions from CCS.

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 Option B – ETS interacts (only) with fossil energy and industrial point-source capture
• European Union: provides CCS-specific provisions. Emission reductions from CCS are
deductible from ETS covered emissions. CCS value chain activities are in the ETS scope.
• United Kingdom: provides CCS-specific provisions. Emission reductions from CCS are
deductible from ETS covered emissions. CCS value chain activities are in the ETS scope.
• Québec: emission reductions from CCS are deductible from ETS covered emissions, yet
technical specifications for this are yet to be developed. CCS value chain activities fall outside
the ETS scope.

Option C – ETS interacts (only) with technological removals

n/a

Option D – ETS interacts with both fossil energy and industrial point-source capture as well as
with technological removals
n/a

8 Conclusions
Considerations on the interactions between ETSs and CCS (and CCU) are still in their infancy. Of the
26 ETSs in force, only five have any provisions on CCS, only two (the EU ETS and the UK ETS) have
detailed provisions, and only one (Québec) has facilities that are reducing compliance obligations
through CCS applications.

No empirical data on the interaction between ETSs and CCS is available, and many additional issues
and questions are likely to arise as CCS projects materialize and jurisdictions engage with them. The
fast pace of innovation and technological development presents a challenge for policy makers, who
may have to establish regulatory frameworks that can adapt to changing technological
circumstances.

However, as the pipeline of new CCS projects grows, so will the interest and pressure from
stakeholders for policy makers to clarify the relationship between these projects and ETSs
worldwide. Now is the time for jurisdictions to start grappling with these questions.

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