Carbon markets have been an unregulated wild west. This resulted in a series of scandals with millions of carbon credits being issued that did not actually correspond to a real climate benefit. 

Removing carbon from the atmosphere at a grand scale has become a critical part of meeting global climate goals. Governments have recognized the issues with trust and quality in the carbon markets and are starting to step up to the plate.

Policy interventions fall into three types. Firstly, supply-side regulation that sets minimum quality standards for carbon removal credits (CDR aka carbon dioxide removal). Secondly, demand-side initiatives that nudge companies into buying CDR. And finally, direct financial support to help scale up a nascent industry to the level it needs to reach in just over a decade: billions of tonnes of annual carbon removal.

There are examples of progress in all these areas across different jurisdictions. Here’s a whistle-stop tour of the runners and riders in the race to regulate carbon removal.

What good looks like

Perhaps unsurprisingly, the EU is the furthest ahead with its Carbon Removals Certification Framework (CRCF). This establishes a regulatory framework for CDR: minimum quality thresholds (such as a 200+ year requirement for storing the carbon) as well as a regulatory architecture (such as authorizing and overseeing the registries such as Isometric that will verify and issue the credits).

This is the most comprehensive carbon removal regulation in the world. And it has the potential for GDPR-style spillover effects – every major multinational corporation buying CDR, even outside the EU, will have a strong incentive to require CRCF-level quality in their purchases.

There is still work to get this done. The legislation delegates responsibility to the European Commission (EC) to draft methodologies. Methodologies set the requirements for specific carbon removal pathways. The EC has started drafting two methodologies but CRCF will remain an incomplete solution until there are methodologies in place for all the main CDR pathways (there are around five).

This is as strong a signal as possible that the US Government cares about the integrity of carbon markets and wants to encourage a higher bar for quality.

The US has taken some first steps on regulation. In May, the White House, US Treasury, and other agencies jointly published a Policy Statement and Principles for the carbon markets. These Principles are very high level and non-binding – the political constraints within the US system make federal legislation on this topic vanishingly unlikely. But this is as strong a signal as possible that the US Government cares about the integrity of carbon markets and wants to encourage a higher bar for quality, with the document noting that the US Government “expect[s] removal credits to constitute a growing share of the market over time.”

There is another initiative taking place within the US Government which may be even more important in defining what good looks like for CDR. The Department of Energy (DoE) is buying CDR credits directly. It has set aside $35m as part of its CDR Purchase Pilot Prize. This matters less for the direct financial benefits (up to $3m for each of the 10 overall winners) and more for the market signal the DoE is sending. It has provided detailed guidance on the criteria it is using (for example, on robust and independent monitoring, reporting, and verification). When the competition progresses through to the final stage the DoE will publish further information about the winners it has selected and why they were chosen.

The outcome of this work looks likely to set de facto regulatory guidance about what the US Government considers to be high quality CDR. DoE is also encouraging the private sector to buy CDR, including an offer to leverage the diligence DoE is carrying out for its own purchases. Google was the first to then announce it will match the $35m spent with its own CDR purchases.

Requirements to buy

There are existing regulated markets that control how much industries can emit carbon dioxide. These “cap-and-trade” systems require companies to buy allowances if they want to emit beyond specified limits. Since a carbon removal credit represents one tonne of CO2 removed from the atmosphere, there is a common expectation (and hope) in the CDR industry that buying CDR credits will become another option for companies to meet their emission limits. This could prove a major boost for demand as companies will have a direct incentive to buy CDR credits, and over time that incentive may become a requirement as the available “allowances” in these schemes falls to zero. 

Here, the UK is furthest ahead. It has already published a detailed policy consultation setting out its intention to plug CDR credits into the UK’s Emissions Trading Scheme (ETS). This gets into the nitty gritty policy issues, such as the mechanics of how the introduction of credits should affect the total amount of allowances issued. The implementation is not until 2028, and there is still a major missing piece – the UK has not yet produced a CRCF-equivalent that defines minimum quality standards for CDR. However, this could be in place well before 2028 – the UK has a team of around 20 officials working on CDR policy (more than any other jurisdiction) and the recent election provides the political impetus for ambitious climate policy.

Japan is stepping up to the plate too. It has created a cap-and-trade system called “GX”-ETS (GX = Green Transformation). This is a trial run due to transition to a mandatory ETS from 2026. That means that participation in the ETS is currently voluntary, although has had high uptake (700+ corporates) so far. GX-ETS includes an option for corporates to buy CDR as a way of meeting up to 5% of their emission reduction targets. To be eligible, the CDR needs to meet the requirements set out by the Japanese Government – the first methodology due to be published is for Direct Air Capture (DAC).

The forthcoming Green Claims Directive clamps down on greenwashing, including claims companies make of being “carbon neutral” based on buying low-quality offsets.

The EU is due to review the overall functioning of its ETS in 2026. Many expect that CRCF-credits will become eligible following that review. The EU has not given any formal indication on whether this will happen, but EU officials have expressed a clear interest in learning from the UK’s policy work in this area, which will be well advanced by 2026. The EU is, however, a frontrunner in potentially generating a different source of policy-driven demand. The forthcoming Green Claims Directive clamps down on greenwashing, including claims companies make of being “carbon neutral” based on buying low-quality offsets. This opens the possibility that such claims would be reserved for companies who buy high-quality credits, such as those defined under CRCF.

The US does not have a federal carbon market. Some states do, including California’s Low Carbon Fuel Standard (LCFS), which permits Direct Air Capture as an eligible offset–but this has failed to generate demand for CDR because the scheme allows much cheaper avoidance (as opposed to removal) offsets to be used as well. Several Canadian provinces (for example British Columbia) also operate compliance markets where CDR is a potential offset within those schemes.

Finally, there is an international “compliance scheme”, CORSIA. This is overseen by the UN and requires airlines from participating countries (including the UK, EU, and US) to purchase CORSIA-approved credits to offset their emissions. Similar schemes may be established for sectors such as shipping. However, similar to the LCFS, CORSIA currently allows for a wide range of offsets, including avoidance credits, which are much cheaper than CDR. If those requirements are tightened over time in line with frameworks such as CRCF then these could become a significant source of demand. 

Funding CDR

The US has been funding Direct Air Capture since 2018 through the 45Q tax credit – this got a major boost in 2022 through the Inflation Reduction Act, offering $180 per tonne of CO2 captured and stored (and funding BECCS as well). That has led directly to the US becoming the global hub for Direct Air Capture projects, with the spend in the coming decade likely to be measured in billions of dollars. However, it leaves other CDR pathways unsupported, beyond the relatively smaller (millions) dollar amounts being deployed through the DoE Prize.

The EU has some research and development incentives through its Innovation Fund, but not designed around funding CDR specifically and not comparable to the scale of 45Q. Some Member States are deploying cash, most notably Denmark which provided a billion euro subsidy to Orsted for a BECCS plant, and more recently announced tens of millions of euros in subsidies for carbon credits from three other BECCS projects as well as plans to directly support biochar production. 

The UK’s initial focus is also on supporting BECCS and DACCS projects, although it is committed to broadening this out to other pathways too. It plans to implement its CDR subsidies through a policy framework that worked well in helping scale renewable energy: so-called contracts-for-difference, where the government will pay the difference between the providers’ costs (the “strike price”) and the market rate that the credits can be sold at (the “reference price”). 

Podium time

The impact of US 45Q in catalyzing parts of the CDR industry and getting shovels in the ground makes it the policy intervention in CDR that has had the most impact to-date. However, the foundational importance of CRCF in creating a regulatory framework for carbon removal has the potential to prove more significant in the long run, and means the US cedes the gold medal to the EU for now. The UK lands a deserved third spot as a useful proving-ground for innovative CDR policies such as integrating removals into an ETS, or on trying out relatively novel forms of public funding for CDR. 

There is a lot of work to be done. All G20 countries should implement comprehensive policies in all three policy areas before 2030: regulating quality, mandating demand, and providing direct funding for the industry. But we’re off to a strong start, with different jurisdictions playing to their relative strengths: the US in funding innovation, the EU in setting regulatory standards, and the UK in nimble and innovative policy-making. We should all be cheering this race on from the sidelines.