The European Union and the United Kingdom are pursuing distinct yet increasingly interconnected paths to integrate carbon dioxide removal (CDR) into their emissions trading systems (ETS). For professionals navigating the evolving landscape of climate policy and carbon markets, understanding these developments is important. The EU and UK approaches, shaped by differing regulatory frameworks and market mechanisms, present both opportunities and challenges for investors, project developers, and policymakers.
Why This Matters for Climate Finance and Compliance
The tendency of integrating carbon dioxide removal (CDR) into emissions trading systems (ETS) represents a significant climate policy evolution. As both the EU and UK advance their respective frameworks, financial institutions, project developers, multinational corporations, and other entities face new opportunities.
Three converging trends prompted this analysis:
- Regulatory Momentum: With the EU's CRCF implementation (2024) and UK's CFD consultations (2025) there is an opportunity for CDR to transition from voluntary markets to compliance systems.
- Market Pressures: The impending EU ETS allowance shortage and UK's tighter cap trajectory are forcing industries to evaluate CDR as both compliance tools and strategic investments.
- Geopolitical Realignment: The unresolved EU-UK ETS linkage creates cross-border compliance complexities, particularly for firms subject to CBAM.
Entities that map these trajectories now may have advantages in the evolving carbon market.
What Is the Emissions Trading System (ETS)?
An Emissions Trading System (ETS) is a market-based mechanism designed to reduce greenhouse gas emissions in a cost-effective manner. Under an ETS, a cap is set on the total amount of certain greenhouse gases that covered sectors are allowed to emit. Companies receive or buy emission allowances, which they can trade with one another as needed. The cap is gradually reduced over time to ensure a decline in total emissions.
The EU ETS: Certification and Expanding Scope
The EU is taking measured steps toward incorporating CDR into its ETS. A cornerstone of this effort is the Carbon Removals Certification Framework (CRCF), established in 2024 to define quality criteria for CDR projects. The European Commission is currently consulting on how to integrate certified removals into the EU ETS, with a focus on ensuring they complement, rather than replace, direct emissions reductions.
Simultaneously, the EU is expanding its carbon pricing policies beyond traditional sectors. The Carbon Border Adjustment Mechanism (CBAM) is expected to expand to cover indirect emissions and additional industries, including chemicals and polymers, by 2026. This expansion, alongside the accelerated phase-out of free ETS allowances by 2034, signals the EU’s intent to tighten carbon leakage protections (i.e., then risk that companies might move production to countries with less stringent climate policies) while driving industrial decarbonization.
What is CBAM?
The Carbon Border Adjustment Mechanism (CBAM) is the EU's tool to put a fair price on the carbon emitted during the production of carbon-intensive goods entering the EU, and to encourage cleaner industrial production in non-EU countries.
The UK ETS: Fast-Tracking Engineered CDR.
While the EU prioritizes certification, the UK is advancing a more interventionist approach to scale CDR. The UK ETS Authority proposes awarding tradable allowances (UKAs) to engineered CDR projects, such as direct air capture, while retiring one conventional UKA for every removal-generated allowance to maintain market integrity. This model is supported by the UK’s Contracts for Difference (CFD) mechanism, which de-risks investment by guaranteeing a strike price for negative emissions.
However, a looming challenge may be the UK’s tighter ETS cap trajectory, which aligns with its net-zero target, potentially complicating linkage negotiations with the EU.
Collision or Collaboration?
The EU and UK’s divergent timelines and policy tools—certification versus financial incentives—risk creating a fragmented CDR market. The stalled bilateral linkage talks, if unresolved, may disadvantage UK exporters facing EU CBAM costs. Yet, both jurisdictions agree on a foundational principle: CDR should supplement, not substitute, emissions reductions.
North America
For North American CDR developers, this may present an opportunity. The EU’s CRCF could validate high-integrity removals, while the UK’s CFD model offers near-term revenue certainty. However, navigating two distinct systems will require strategic flexibility.
Conclusion
The EU and UK’s ETS reforms underscore the centrality of carbon markets in achieving net zero. For professionals, key takeaways include monitoring the EU’s 2026 CDR review, the UK’s 2027 CFD auctions, and progress on EU-UK linkage. The linking would mean, in concrete terms, that companies in each jurisdiction could trade emissions allowances with companies in the other jurisdiction, resulting in a single market price. For international infrastructure investors and engineered CDR developers, particularly those in North America, these developments signal market opportunities. Alignment between the EU and UK markets could amplify liquidity and climate ambition.