16 June 2022

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

As part of the consultation on Developing the UK Emissions Trading Scheme (UK ETS), the UK Government is seeking evidence on the role of the UK ETS as potential long-term market for greenhouse gas removals (GGRs).

GGRs: a potential future market?

GGRs could play an important role in the UK reaching 'net zero' emissions by 2050 by compensating for the residual emissions from the sectors which will not be able to decarbonise completely by then. These include aviation, industry and agriculture.

The UK ETS could support the growth of GGRs, by allowing polluters to pay for removals where they cannot fully decarbonise.

The Government is open to the inclusion of GGRs in the UK ETS in the future, while also recognising that other steps, or a mixture of methods, may be better suited to supporting GGRs.

What are GGRs?

GGR methods fall into two broad categories:

nature-based approaches such as afforestation and land, coastal and marine habitat restoration; and
engineered approaches such as Direct Air Carbon Capture and Storage (DACCS); Bioenergy with Carbon Capture and Storage (BECCS); wood in construction; biochar; and enhanced weathering.

Potential Benefits

Including GGRs in the UK ETS could:

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

Challenges and risks

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

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

Eligibility criteria

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

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

Consultation questions

The Government seeks views on:

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

Next steps

The UK ETS consultation closes on 17 June 2022. Government will consult later this year on preferred business models to incentivise early investment in engineered GGRs, to be deployed from mid-to-late 2020s.

Conclusion

The challenges associated with nature-based GGR approaches have been long know. For example, under the Clean Development Mechanism (CDM), credits were registered in respect of some GGR projects, but only on a temporary basis:

temporary credits or tCERs, for emission removals from afforestation or reforestation CDM projects. These temporary CERs must be replaced upon expiry at end of the second commitment period; and
long-term credits or lCERs for emission removals from A&R CDM projects (that is, projects certified under Afforestation and reforestation methodologies approved by the CDM Executive Board). The long-term CERs must be replaced upon expiry at end of the project's crediting period or in event of storage reversal or non-submission of a certification report.

Since under Article 6.4 of the Paris Agreement, neither temporary nor long-term CERs may be used towards a party's NDC, their potential use is rather limited.

Any proposal to include nature-based GGRs in the UK ETS is likely to be controversial. A paper by Wildlife and Countryside Link [4] argues that the UK ETS should not include land use sectors within the cap, or allow domestic offsets to be bought by covered sectors, so as not to compromise the integrity of the cap. It suggests that a carbon tax would be a better route to incentivise emission reductions in this sector rather than market-based approaches.

On the other hand, under California's Cap-and-Trade Program, entities are able to meet a small part (4% per year for 2021 - 2025 emissions) of their compliance obligation through offsers originating from certain pre-approved types of projects, which include forestry, rice cultivation and mine methane capture. To address concerns over environmental integrity, the Program rules allow the state to invalidate any credit not meeting requirements of an offset protocol (for example, due to double-counting) and place an obligation on the entity that surrendered the credit to substitute a compliant instrument for the invalidated credit [5].

With respect to engineered GGRs, one question to ask is what level the allowance price must achieve in the UK ETS to make investment in these technologies viable. For the moment, Government support is available under several schemes, such as the Direct Air Capture and GGR Innovation Programme and the Emerging Energy Technologies Fund in Scotland.

Footnotes

[1] https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1026994/mrv-ggrs-task-report.pdf

[2] Page 12.

[3] https://woodlandcarboncode.org.uk/

[4] https://www.wcl.org.uk/docs/Wildlife_and_Countryside_Link_Offsetting_Briefing_23042021.pdf, page 8

[5] https://icapcarbonaction.com/system/files/document/220408_icap_report_rz_web.pdf, page 91