Depiction of Market design for negative emissions in the UK ETS

Market design for negative emissions in the UK ETS

For the UK to achieve its net zero ambitions and obligations under the Paris Agreement, all sectors will be required either to reduce or to offset their emissions. Some sectors that are inherently difficult to decarbonise completely, such as heavy industry, agriculture and aviation, will only be able to achieve net zero by utilising greenhouse gas removals (GGRs)—i.e. removals of CO2 from the atmosphere. These removals are to be used in addition to a significant abatement of emissions across all sectors, with most sectors needing to reduce emissions close to zero without offsetting by 2050.

Negative emission technologies (NETs) that produce GGRs include nature-based solutions—such as afforestation, reforestation and soil carbon sequestration—as well as technologies such as bioenergy with carbon dioxide capture and storage (BECCS) and direct air carbon capture and storage (DACCS). Engineering-based NETs have not yet been commercially deployed at scale but are likely to be deployed in the coming years. The UK Net Zero Strategy reports that by 2050 more than 70MtCO2 per year of engineering-based GGRs will be needed.

Drax commissioned Oxera to develop a number of potential market design mechanisms that can enable the uptake of NETs within the UK’s emissions trading scheme (ETS) framework while ensuring that polluters retain incentives to decarbonise. We have developed four policy options for integration of NETs in the ETS, with the following market design criteria: long-term effectiveness in reducing overall emissions, efficiency of markets, fairness of cost allocation, practicality and integrability with the EU ETS. These market design options—potentially in combination with other funding routes—would incentivise the deployment of NETs alongside decarbonisation.