Carbon removals inclusion into UK ETS to incentivize project funding but hurdles remain

The UK government's decision to include carbon dioxide removal credits in the UK emissions trading scheme is a positive demand signal that could aid financing for removal projects, stakeholders active in the country's carbon market have said, but questions remain on the inclusion of nature-based solutions and price harmonization.

The market welcomed the decision by the UK ETS Authority to integrate removals by 2029, with participants active in both the voluntary and compliance segments viewing the auction model announced by the government as a mechanism that will aid project funding.

"The possibility of removal auctions is a significant development," said George Robinson, policy manager at carbon removals registry Isometric.

"It would give project developers a direct route to market and send a strong demand signal -- helping to unlock financing for major UK-based projects and lowering barriers to entry, especially for smaller operators," Robinson added.

The government will apply a one-in-one-out principle for the introduction of removals into the ETS. This is intended to preserve the price signal of UK Allowances by maintaining the current supply cap.

However, there is a lack of clarity on what credit types and carbon methodologies will be allowed at auction.

"We know the UK ETS Authority will host auctions, but we don't know exactly what they will include," said a carbon analyst. "There is an idea for a mixed auction."

The authority said it would consult further on auction type but remains open to all formats, making note of product mix auctions. These allow market participants to bid on various products in a single auction.

Price challenges

One of the remaining challenges for market integration is the high price gap between removals credits and prices in the UK compliance market.

Analysts at S&P Global Energy expect UK Allowances to rise to GBP86/mtCO2e and GBP101/mtCO2e by 2029 and 2030, respectively.

The authority has only allowed technologies under the UK's Greenhouse Gas Removal Standard. These are limited to Bioenergy with Carbon Capture and Storage, or BECCS, and Direct Air Capture, or DAC, said Robinson.

These credits carry high market premiums due to the high associated development costs, with BECCS credits usually indicatively valued at around $300, a signficiant premium to UK ETS prices.

It is unclear why market participants would choose the more expensive option of credit retirement, according to Eszter Bencsik, voluntary carbon market analyst at Energy.

"The price gap is too wide," said an analyst. "But greenhouse gas removals cannot be integrated before 2029 and by then UKA prices are expected to link with EUAs and go higher in price."

Further, the supply of removal credits in the UK is limited, said Bencsik. Only 67,286 credits are currently issued to the public voluntary registry Puro.Earth.

"An annual supply of over 1.5 million credits is necessary," she said, adding that there is an urgent need to scale removal projects if their integration into the UK ETS is to have a significant impact.

Woodland units

No decision was taken on the inclusion of Woodland Carbon Code removals credits, the UK's national voluntary standard for woodland creation projects. The government will publish further evidence on the integration of woodland units and aims to make a decision later this year.

In a response to stakeholders involved in the consultation, the UK ETS Authority said that it had received evidence suggesting a strong case for woodland integration.

"I was surprised that they excluded woodland credits for now. I hoped that, if woodland removals got included, UKAs could drop down and encourage investment in woodland," a carbon trader told Platts.

The inclusion of woodland units, which retailed at a weighted average price of GBP26.85/mtCO2e in 2024, could help increase available supply, Bencsik said.

"As of March 2025, the Woodland Carbon Code issued 12,300 ex-post credits and 12,153,000 ex-ante credits, suggesting greater potential for scaling, though these ex-ante credits typically have a delivery timeframe of over 50 years," she said.

Permanence

The UK ETS Authority said that it would require projects to prove they can store carbon for a minimum of 200 years for them to be included in the ETS.

"Adopting a 200-year permanence threshold enables a broader set of carbon removal pathways, such as biochar, to potentially qualify for inclusion," said Robinson.

There is no internationally agreed-upon definition for the permanence of carbon removals, with counterparties calling for a balance between long-term sequestration and scalability.

"Permanence has been defined. That's a good thing," said a carbon analyst. "It has been a grey area, so clarity makes things easier."

A Europe-based CDR developer echoed the sentiment, adding that the focus on BECCS projects will allow the technology to scale and incentivize an existing bioenergy company to integrate carbon capture and storage into its operations.