How to accommodate CCU in ETS Phase V

It's evident from the provisionally agreed Phase IV ETS text that incorporating CCU into the ETS is going to be left to Phase V. Recital 10 recognises CCU, but there is no exemption from the obligation to surrender allowances in Article 12 for installations capturing emissions for CCU purposes, nor is there a zero rating for CCU-fuels burned by ETS installations. Indeed, the Commission’s statement on the negotiated text says the following on CCU:

The Commission takes note of the European Parliament’s proposal to exempt emissions verified as captured and used ensuring a permanent bound from surrender obligations under the EU ETS. Such technologies are currently insufficiently mature for a decision on their future regulatory treatment. In view of the technological potential of CO2 Carbon Capture and Use (CCU) technologies, the Commission undertakes to consider their regulatory treatment in the course of the next trading period, with a view to considering whether any changes to the regulatory treatment are appropriate by the time of any future review of the Directive. In this regard, the Commission will give due consideration to the potential of such technologies to contribute to substantial emissions reductions while not compromising the environmental integrity of the EU ETS.

CCU is indeed relatively immature, and the EU must take an evidence-based approach to integrating CCU technologies into the policy framework. Nevertheless, we can consider some general principles for accommodating CCU in ETS Phase V:
 

1. Article 12 3(a) of the ETS Directive excuses installations from the obligation to surrender allowances for emissions that are captured and geologically stored, but there is no equivalent derogation for installations capturing emissions for utilisation. This exemption should be explicitly extended to installations where emissions are captured for use in applications that offer permanent storage, e.g. mineralisation. Indeed, the ECJ has already ruled that i) such an exemption follows from Article 3 (b) of the Directive, ii) the omission to mention it in Article 12 does not preclude such an exemption, and iii) passages of the Monitoring and Reporting Regulation which explicitly rule out such an exemption are invalid.
2. For CCU applications that do not offer permanent storage, the situation is more complicated, because the emissions captured from the ETS installation will be re-emitted at the end of the CCU product’s life (e.g. when a CCU-fuel is burned, or a CCU-polymer is incinerated). If these end-of-life emissions take place outside the ETS (as they would do with combusted transport fuel, or incinerated plastic waste) it is inappropriate to exempt the ETS installation from the obligation to surrender allowances, because this would provide an incentive to move emissions outside the jurisdiction of the carbon price.
3. If the end-of-life emissions associated with these CCU applications would take place within the ETS, however, steps should be taken to avoid double counting: for instance, if emissions were captured from one ETS installation, processed into CCU-fuel by a second, and burned by a third, (or if incinerators were incorporated into the ETS in the future and were burning CCU-products). The simplest approach here would seem to be exempting the end-of-life emitter from the obligation to surrender allowances for the relevant emissions, following the model taken with biomass (cf. Annex IV of the ETS Directive), i.e. zero rate the CCU-fuel.
4. This is not to say that CCU applications that don’t offer permanent storage cannot deliver emissions savings. It’s just that the emissions savings would be in the value chain, and not equivalent to the amount captured at the ETS site (unlike with permanent storage). That is, the emissions saving would be defined by comparing how using CO2 as a material compares to the counterfactual of using virgin fossil feedstock, cradle to gate, in the specific application. Indeed, CCU is in most cases about energy and resource efficiency or facilitating electrification, not capture and storage: it offers savings through substitution and leaving fossil resources in the ground, rather than capturing them and putting them back.
5. The obligation to surrender allowances at point of capture within the ETS could theoretically be modified to reflect this value chain saving, but this would be complicated to administer (varying according to application, country, and over time). Incentivising CCU from the demand-side may be easier, therefore, where there is no permanent storage and the end-of-life emitter is outside the ETS. This could be done through RED quotas, or eco-design standards for CCU-polymers in products, for instance, insofar as the evidence supports providing market support.