Issue #75 of the Carbonaires Monthly Newsletter covers the development shaping carbon markets in July 2026: the European Commission’s proposal to revise the EU Emissions Trading System, published on 17 July, and what it means for the maturing of carbon dioxide removal demand. Between a 250 million allowance domestic removals purchasing facility, a 260 million allowance international credits facility, SBTi Version 2 and the draft ISO 14060 standard, the demand signal this market has been waiting for is becoming something that can be modelled, dated and priced, moving carbon removal from interest to bankable offtake.
What happened
On 17 July the European Commission published its proposal to revise the EU Emissions Trading System, amending the ETS Directive and the Market Stability Reserve Decision. This is the first piece of the post-2030 climate package delivering the 2040 target. The target for agreement on the file has been set at Q1 2027, although negotiations of this nature usually take 12 to 18 months, so it remains to be seen whether that ambition is met in practice. Until then, much of the detail is still up for negotiation. Among a large number of amendments, I set out a few of the key ones that will matter for the carbon dioxide removal (CDR) market.
1. Cap and trajectory
The linear reduction factor, the percentage by which the ETS cap falls each year, is set at 3.7% for 2031 to 2035 and 1.7% from 2036, against the 4.4% applying at the end of this decade. The 1.7% leg reflects a domestic ambition of -85% rather than -90%, with the remaining gap met through the procurement of international Article 6 credits. In practice, this means the ETS cap will fall more slowly, leaving more allowances in the market and keeping prices from rising dramatically, softening the impact on EU industry.
2. Domestic permanent carbon removals
Here the Commission has proposed to increase the cap by 250 million allowances, auctioned from 2031 to 2040, with the proceeds ring-fenced to purchase an equivalent volume of BioCCS and DACCS units certified under the Carbon Removal and Carbon Farming Regulation (CRCF) at 1:1, paid on delivery, plus a further 10 million allowances to cover the price gap between removals and EU Allowances (EUAs). Purchases ramp towards 48 million tonnes a year by 2040 through a new central purchasing facility, giving ETS sectors certainty over emission space and the removals industry predictability of demand.
The budget will ultimately be determined by the allowance price. Taking an EUA price of €80, auctioning 250 million allowances would raise around €20 billion. On the Commission’s own impact assessment price path, approaching €200 per EUA by 2036, the figure would be closer to €50 billion.
On methodology, only BECCS and DACCS qualify for now. Biochar is already recognised as permanent under the CRCF and costed by the impact assessment at roughly half the price of BECCS, so its inclusion in some form is likely to be a significant negotiation topic.
3. International credits facility
For international credits, a further 260 million allowances will be set aside to fund the purchase of up to 260 Mt of high-integrity international credits between 2036 and 2040. This is part of what enables the domestic reduction of 85% in the 2040 target: international Article 6 credits may cover the remaining five percentage points of the net 90% target, and the 260 Mt is the share of that flexibility allocated to the ETS. Many details of this international purchasing programme, as well as the quality criteria for credits, are still to be determined, with some initial proposals due later this year. This is likely to set the quality bar for Article 6 credits globally. The EU remains fairly sceptical of Article 6 credit quality, and has included a review clause for the whole programme in 2033, which will assess whether cost-effective, high-quality credits are available. If not, the ETS will revert to a steeper cap decline, with the reduction factor rising back to 2.7% rather than 1.7% from 2036.
The tide turns on demand?
There has already been some brilliant analysis of this proposal on LinkedIn, and I would recommend the CDR Policy Scoop, run by Sebastian Manhart and Eve Tamme, for interesting insights across different aspects of it. I wanted to focus here on the wider demand signal this provides, particularly alongside the recent announcements from the voluntary side of the market: SBTi Version 2 and ISO’s new draft organisational net-zero standard. The demand this market has been waiting for is slowly coming to fruition.
First, some thoughts on the assumptions. One of the budgets outlined above relies on carbon prices approaching €200 by 2036, with BECCS costs falling below them. Given that one of the central themes of this ETS review is affordability, competitiveness and easing the burden on domestic industry, I am not sure how politically feasible it will be for the EU to let EUAs rise close enough to match the projected price of CDR at the time. Interviewed by the CDR Policy Scoop, Mette Quinn of the European Commission hinted that the 2034 review clause would also serve as an assessment of price and financing, noting that the 250 Mt is a promise rather than a hard guarantee, and that the review clause will determine whether wider financing needs will be allocated for the purchase. This is broadly positive, showing that the Commission is taking the scaling of removals and the task at hand seriously, even if much of the detail is yet to be ironed out.
Many in the market have said for a while that the supply side and integrity problem is now largely settled, thanks to the work of the likes of the ICVCM and the emerging standards of the Paris Agreement Crediting Mechanism (PACM). The focus has since shifted to driving demand, which has been one of Carbonaires’ advocacy focuses this year. The missing piece has been clearer demand signals and commitments. Financiers could not see credible long-term demand, so larger pools of capital stayed out, particularly where projects lacked offtake. A government purchase programme with published criteria and ring-fenced funding is about as bankable as it gets: project finance and offtake-backed lending can be built on top of it. There are clear parallels here with how renewables financing grew from being largely subsidy-led in the first instance into fully self-sufficient infrastructure.
To put this into context, CDR.fyi has reported that the durable removals market has to date contracted around 49.5 Mt of CDR, at a spend of around $12.4 billion, with most of course coming from a single buyer, Microsoft. When the tech giant paused new purchases in April, sentiment across the market dampened significantly. We covered this at the time, arguing that it was also an opportunity for demand to diversify and for new buyers to enter the market. This commitment from the Commission is a far larger demand signal: 250 Mt is more than five times everything ever contracted, on a budget ten to thirty times Frontier’s entire $1.8 billion commitment, from a buyer whose demand would sit in statute rather than in a corporate strategy review. Combined with the recent news from the voluntary standards, namely:
this all points to demand that can be modelled, dated and priced. Some might even argue it is the convergence of compliance and voluntary markets we have all been waiting for.
What does this mean for financing carbon removal?
Beyond providing a serious projection of demand, it solves the tenor problem. Most voluntary offtakes in the market today deliver over five to ten years, so revenue visibility ends by the early or mid-2030s. SBTi obligations from 2035 and an EU programme contracting out to 2040 extend cash flow certainty far enough to carry debt. That is currently a major gap: debt remains a small fraction of the $11.5 billion committed to date, which cCarbon’s 2026 State of the Sector report identifies as the clearest sign the sector is not yet financeable at scale. A guaranteed offtake from a creditworthy counterparty allows banks to finance counterparty risk rather than technology risk, and the EU, alongside potential SBTi and ISO voluntary buyers, could become one of the most creditworthy removal buyers out there. It is worth noting that the Commission’s proposal, like most offtakes in the market, is payment on delivery, so developers will still be seeking pre-delivery capital. That gap also poses an opportunity: for financiers willing to take on delivery and technology risk ahead of a creditworthy offtake, the risk-return profile is likely to remain fairly attractive.
