Aligning the UK and EU emissions trading schemes: what this could mean for UK carbon dioxide removal policy  

In July 2026, the EU Commission proposed revisions to the EU emissions trading scheme, setting out rules the UK may be obliged to mirror. Josh Burke, Leonie Meissner and Luca Taschini examine a key area where the UK and EU approaches to their trading schemes are diverging: the integration of carbon dioxide removal (CDR), and what this means for the UK as it enters negotiations with the EU.

Since the UK launched its emissions trading scheme (ETS) in January 2021, a range of stakeholders including industry, academia and trade bodies have made increasingly vocal arguments for the UK and EU to link their emissions trading schemes. Proponents argue that linking the schemes would increase allowance liquidity and reduce price volatility, exempt UK entities from substantial Carbon Border Adjustment Mechanisms liabilities and strengthen energy security.

Political momentum behind linking the schemes increased in 2025, when UK and EU representatives met in London for the first joint summit since Brexit. A key outcome was a new UK-EU Strategic Partnership, setting the foundations for future bilateral cooperation on energy and climate change. While not legally binding, the partnership showed strong willingness to start negotiations on linking the UK and EU ETSs. Underpinning this was the concept of dynamic alignment: a legally binding commitment by the UK to keep pace with EU’s ETS rules as they evolve.

Comparing policy positions on CDR

The EU and UK positions on integrating CDR (technologies that capture carbon dioxide from the atmosphere and store it durably in the Earth’s geosphere) into their emissions trading schemes differ across almost every parameter (see table below).

Comparison of UK and EU approaches to integrating CDR into their ETSs

The table captures the main design parameters but warrants some clarification. The term ‘integration’ is used broadly. In the UK model, CDR units enter the compliance market and can be used by regulated entities; in the EU proposal, removals are procured and retired by the Commission using ETS auction revenues. This means CDR would support the ETS externally rather than circulate as a compliance instrument. There is one partial exception on the EU side: BioCCS, the process of capturing carbon dioxide from biomass energy or industrial processes and storing it underground permanently – credits generated by EU ETS-covered installations may be used instead of surrendering allowances. The UK has outlined a preference for including UK woodland within its ETS (a final decision has not been made).

Both the UK and EU ETS systems currently envisage eligible CDR being generated within their own jurisdictions. Even here, however, the position is not entirely coherent. The EU’s wider 2040 climate target and its ETS proposals allow high-integrity international credits to meet part of that target, and those credits could plausibly include carbon removals. This creates equivalence between international mitigation outcomes and domestic emissions reductions.

Although the UK and the EU have developed bespoke certification standards for CDR, there are encouraging steps towards convergence. For example, in March 2026, the UK government announced its intention to align future methodological work with the EU’s Carbon Removals and Carbon Framing (CRCF) Regulation, noting the significant benefits in avoiding duplication and divergence. Of the policy positions most likely to proceed, the most consequential differences between the UK and EU approach lie in the types of CDR that are integrated and the cap structure.

Direct versus procurement-based integration

CDR integration is a major point of divergence because the UK and EU models create different relationships between carbon removals, emitters and the carbon market. The UK intends to integrate CDR directly into the UK ETS, allowing entities regulated under the scheme to use verified carbon removal methods to achieve compliance. The government is also planning to support greenhouse gas removals operators by facilitating auctions on their behalf.

Notwithstanding the provisions for BioCCS generated by existing covered entities, the EU proposal is different. Rather than allowing emitters to buy and surrender CDR units directly, the EU Commission would purchase and retire carbon removals using revenue from auctioning additional ETS allowances. This makes CDR a publicly procured social good, rather than a tradable compliance instrument. This may change during the 2034 review, which will assess the feasibility of gradually transitioning to direct integration.

If the EU and UK ETS schemes are to be linked, this difference matters. If UK removal units are usable for compliance but EU removals are not, the two systems would not be treating CDR as an equivalent market instrument. That could complicate linking the registries, fungibility rules and competitive neutrality between UK and EU operators. A linking agreement would therefore need to decide whether UK CDR-linked allowances could circulate freely across the linked market, be restricted to UK compliance or be subject to separate limits.

Differences in cap structure

The choice between cap structures has been seen as binary: gross or net. The UK plans to adopt a gross cap, using a one-in-one-out approach: for each removal credit surrendered by an entity, an allowance will be cancelled. This means gross emissions cannot increase because of CDR use.

Many wondered whether the EU would follow suit or whether they would adopt a net cap. Under a net cap, the government would lower the existing cap to reflect the expected supply of CDRs that would enter the ETS. Allowances issued to CDR operators would then enter the market in addition to this reduced cap, allowing the system to regulate net rather than gross emissions. In fact, the EU proposal does neither. Rather than lowering the cap to account for expected CDR supply, it increases the cap by the volume of removals the Commission intends to purchase, while the CDR units themselves never enter the market. This creates additional emissions headroom before carbon removals are delivered, reducing allowance prices and weakening the incentive for entities to reduce their emissions.

The risk of mitigation deterrence

Several factors suggest the EU approach could lead to mitigation deterrence: the concept where reliance on future carbon removal delays urgent, present-day emissions abatement. First, there is a time lag between the creation of allowances and the removal of carbon dioxide. An allowance grants the right to emit a tonne of emissions when it is surrendered, while the corresponding removal would be delivered later and depends on sufficient CDR supply at acceptable prices. Neither is a given and preliminary analysis suggests there will be a significant funding shortfall. Second, unlike international credits, under-delivery of CDR does not automatically trigger a steeper cap trajectory. There appear to be limited provisions to tighten the cap via the EU ETS’s Linear Reduction Factor if CDR procurement fails to keep pace with the additional allowances auctioned.

In this way, the UK and EU are moving in different directions: the UK aims to ensure the environmental integrity of its ETS with CDR, signalling to regulated entities the continued importance of mitigation, while the EU is creating more emissions space for ETS covered entities and reducing the stringency of its climate policy.

These differences could hinder the linking of the two ETS schemes and are likely to require adjustment on both sides. A net-cap model could provide a middle ground: the emissions cap would be reduced to reflect expected CDR supply, while verified removal units could enter the market in addition to that reduced cap. This aligns with the UK’s stated long-term intention to move from gross to net emissions. For the EU, it would better align allowance creation with the volume and timing of carbon removals.

Eligible methods

Both the UK and EU have signalled their intention to only integrate (or purchase in the case of the EU) bioenergy with carbon capture and storage (BECCS) and direct air carbon capture and storage (DACCS). This appears to accept the principle of like-for-like, whereby any remaining fossil fuel-based CO₂ emissions can only be neutralised using permanent CDR.

However, both the UK’s and EU’s policy positions undermine this. As noted, high integrity international credits, which could include non-durable carbon removal, may start to count towards compliance from 2036 onwards. And secondly, the UK has signalled a preference to include domestic woodland credits in the UK ETS, despite advice to the contrary from the independent review on greenhouse gas removals.

Woodland integration by the UK could pose a barrier to linking the schemes since it is explicitly different from the EU’s current approach (although this could change during the 2034 review if the EU considers carbon farming) and could reflect a weakening of ambition. The arguments against integrating woodland stem from a lack of adherence to the like-for-like principle and the high reversal risk (carbon stored in woodland can return to the atmosphere through disturbance) compared to BECCS and DACCS. In addition, there is the potential for cheaper woodland units to depress market prices, further dampening the incentive to purchase more expensive CDR.  

Reconciling differences

So how can these differences in approach be reconciled? One option would be a quantitative limit on UK woodland units usable only by UK entities, tagged in the registry as a distinct instrument invisible to EU participants for compliance purposes. This may be permissible to EU policymakers as it addresses a core concern: that its operators might surrender a unit that would not meet the EU’s own permanence standard, and reversal risk remains within the UK system. However, this does not negate the fact that the UK operators would have access to a compliance pathway unavailable to EU counterparts, potentially conferring a cost advantage in a linked market. Strict quantitative limits may mitigate this.

An alternative would be quantitative limits on woodland units usable by both UK and EU entities, sitting under the UK cap with no corresponding adjustments. An EU operator surrendering a UK woodland unit would fulfil its compliance obligation, but the transaction would not reduce the EU’s Total Number of Allowances in Circulation in the standard way. This option may extend lower-cost compliance options across the linked market, while protecting the EU’s formal ambition metrics from dilution. In practice, this creates a governance inconsistency. An EU compliance obligation would be discharged by an instrument the EU’s Carbon Removals Certification Framework would not certify as permanent, without the reduction in EU system headroom that a standard allowance surrender would produce. It is hard to see the EU accepting a design in which its operators can take advantage of price differentials using instruments outside the EU’s own ETS permanence standard.

EU red lines and resulting dynamic alignment

Many of the critical technical elements that require convergence, including monitoring, reporting and verification harmonisation and registry linkage, are already progressing. Differences in cap design may also be overcome. For example, the Common Understanding specifies that the UK’s ETS cap will be “guided by the UK’s obligations under the Climate Change Act 2008”, preserving some domestic determination. With the UK cap looking increasingly stringent, and therefore of arguably higher ambition, dynamic alignment may not require any deviation from the current approach. International examples suggest this may be possible. For example, California, Quebec and Washington have agreed to link their schemes despite Washington counting offsets under its overall emissions cap, while California does not.

A divergence that may be more difficult, and where the EU is likely to be more forceful, is the eligibility of UK woodland. The UK should be willing to compromise here, as the economic gains from linking the schemes outweigh sovereignty in this narrow area.

If made, that concession should not obscure the wider picture. Dynamic alignment was primarily envisioned to prevent a backsliding of ambition on climate policy – yet on CDR it is the EU, not the UK, that has arguably chosen the less stringent path. The UK should approach upcoming negotiations with confidence, prioritising integrity and ambition. That means conceding on woodland, where it must, anchoring both systems to the like-for-like principle and not importing the EU’s policies that risk mitigation deterrence.