The European Commission's long-awaited revision for Phase 5 of the EU Emissions Trading System (EU ETS) marks a landmark shift for permanent carbon dioxide removal (CDR).

For the first time, the world's largest carbon compliance market has established clear legal frameworks to integrate high-integrity domestic carbon removals, transforming the market paradigm from voluntary corporate offsetting to state-backed compliance-driven demand.

To resolve long-standing market uncertainty, the Commission has introduced a centralized intermediary procurement mechanism designed to stabilize the ETS emissions cap while boosting market liquidity.

Rather than allowing emitters to source carbon credits directly from open markets, the European Commission will act as a central Removals Authority and auction an additional 250 million ETS allowances, alongside a 10 million-tonne contingency reserve, over 2031-2040.

All proceeds generated from these extra allowance auctions will be exclusively used to purchase equivalent volumes of permanent domestic CDR units, with annual certified carbon removal capacity set to scale up to 48 million tonnes by 2040.

Under the initial phase, only two technology pathways certified under the EU Carbon Removals and Carbon Farming Regulation (CRCF) will qualify: Bioenergy with Carbon Capture and Storage (BioCCS) and Direct Air Capture with Carbon Storage (DACCS). Low-tech solutions such as biochar are excluded for the time being pending further regulatory review.

The proposal also permits up to 260 million international carbon credits for compliance use between 2036 and 2040, subject to a formal 2033 policy review, and all such international credits will go through unified verification and procurement via the EU's centralized platform.

Based on a €200/t ($228.35/t) baseline carbon price estimate from leading carbon removal expert Sebastian Manhart, the 250-million-tonne procurement plan for 2031-2040 will create a €50 billion formal compliance market for domestic EU carbon removals.

By 2040, annual government-backed CDR investment under this framework is expected to approach nearly €10 billion, delivering long-term off-take certainty to support capital-intensive DACCS and BioCCS infrastructure development.

The proposal has garnered wide industry recognition. Codie Rossi, senior policy manager for Carbon Management at CATF, hailed it as a major milestone for the carbon removal sector, stating that it delivers the strongest-ever policy demand signal for the industry.

"Now the discipline has to match the ambition: procurement that starts years before the tonnes are due, and a clear legal rule that room to emit only exists where real removals stand behind it," Rossi commented.

Meanwhile, industry insiders have raised targeted concerns over technological inclusivity. Sebastien Cross, co-founder and CIO of BeZero Carbon, stressed the need to diversify domestic removal pathways beyond BioCCS and DACCS.

He added that the newly established central procurement body must adopt robust project-level due diligence and independent rating mechanisms to mitigate risks, while avoiding excessive restrictions that could squeeze market supply and drive up abatement costs.

While the proposal lays a bullish foundational framework for the European carbon removal industry, it only initiates the legislative rollout process. The draft regulation will now enter intensive trialogue negotiations among the European Commission, European Parliament and European Council before final implementation.