EU ETS reform part 2: CORSIA, removals, and Article 6 through 2040

This analysis was co-authored by Fundi Maphanga (Policy Lead), Maria Benzoni (Project Lead, Custom Insights), Pranav Balaji (CDR Analyst) and Sean Comiskey (Carbon Policy Analyst)

In the first part of this blog, we covered the headline figures around the EU Commission’s ETS proposal, which was published on the 17th of July. In this edition, we provide a deep-dive of its implications on CORSIA implementation through to 2035, the supply challenges of integrating removals into the ETS, as well as the demand signal for international credits between 2036 and 2040.

CORSIA Mechanism and Dual Coverage

The proposed extension does not cut CORSIA demand; rather, it splits it into two distinct coverage categories. Starting in 2029, flights departing the EEA to destinations within 5,000 km face both EU ETS and CORSIA obligations. Operators are legally required to cancel CORSIA units to satisfy ICAO while surrendering EUAs to satisfy the EU ETS. Article 12(3-f) credits the airline's EUA bill using a fixed deduction benchmark based on published average market price ratios rather than the operator's actual spend. Because EU Allowances command a far higher price (~€90/t) than CORSIA units (~€12-15/t), airlines effectively absorb the higher ETS price floor. Sourcing CORSIA units below the benchmark average creates a cost saving margin, while overpaying results in a loss. Accounting for the portion of emissions moving to EU ETS coverage, the segment grows to roughly 50 Mt by 2035, about 14% of pre-proposal global CORSIA demand, without reducing the total volume of CORSIA units required overall.

Source: AlliedOffsets

Source: AlliedOffsets

Scope boundaries: departures, distance, and de minimis.

The extension applies to flights departing the EEA and landing at a third country's aerodrome within 5,000 km of Frankfurt airport, which the proposal treats as the largest aerodrome in the EU's geographical centre. Any flight beyond that radius stays outside direct EU ETS surrender obligations and remains governed by CORSIA alone. That leaves the long-haul network out,  North America, Latin America, most of Asia, Australasia, East and Southern Africa and pulls in short- and medium-haul: North Africa, Turkey, the Levant, the Gulf and parts of Central Asia, with the Gulf close to the boundary. Arriving flights into the EEA are governed by CORSIA alone.

Private jets (coined ‘business flights’) are brought into scope for the first time, which is seen as more politically significant given their small share of aviation emissions.

Flights to the UK, Switzerland and Gibraltar are treated separately and remain within EU ETS scope, as they have since 2021 and 2020 respectively. The reciprocal arrangement is that the UK ETS and Swiss ETS cover departures from those jurisdictions into the EEA, so each system prices its own departures. Two de minimis thresholds narrow the band further: aerodromes within 5,000 km of Frankfurt receiving less than 15,000 tons of annual emissions from EEA-departing flights are excluded, as are aircraft operators whose flights between two States total less than 10,000 tons annually.

The EU’s Assessment: Enforcement Deficits and Integrity Risks

The Commission's SWD(2026) 616 impact assessment highlighted concerns of accountability alongside environmental integrity. Actual voluntary coverage stands at 51% (well below the 70% threshold), dropping to 35% if the US and China opt out. Furthermore, 70% of currently eligible credits carry high integrity risk, and none qualify as low risk, explaining why the EU linked continued reliance on CORSIA to its 2032 review rather than treating it as a permanent solution.

CORSIA Phase 1 unit demand currently is hindered by severe enforcement gaps: roughly 25% of Phase 1 demand has no enforcement framework behind it, and only 14.4% faces direct financial penalties. Retirement data confirms that unit cancellations (~414K units) cluster almost exclusively in strict enforcement jurisdictions like Japan, Singapore and Canada.The EU has since dropped additional criteria on CORSIA eligible credits for EEA based airlines for Phase 1 (restrictions of units from High Forest Low Deforestation, or HFLD approaches, and cookstove credits issued above global FNRB benchmarks). For Phase 2, restrictions such as setting the Paris Agreement Crediting Mechanism (PACM) as the supply benchmark, and accurate corresponding adjustment reporting from project country host governments remain.

Source: AlliedOffsets

Procurement Bottlenecks and Price Repricing

Market prices adjusted immediately to regulatory certainty, with ICE CORSIA December 2026 futures jumping 36% within a week of the proposal. The fixed deduction benchmark gives operators a clear incentive to lock in eligible CORSIA units early to beat the published price index. However, executing this strategy presents a severe bottleneck. Phase 2 eligible supply depends on host-country authorization and Corresponding Adjustments under Article 6, which very few countries have implemented. Buying early is the optimal financial strategy, but compliant volume barely exists.

SAF Subsidies and Supply Constraints

Within the package, Sustainable Aviation Fuel (SAF) acts as the single direct lever to reduce baseline emissions and shrink future carbon liabilities. The proposal allocates 20 million allowances between 2024 and 2030 to cover 50% to 60% of the price premium over fossil kerosene, featuring a 10-point bonus for EU-sourced feedstocks and multi-year contract support up to five years. As ReFuelEU Aviation blending mandates ramp up (2% in 2025, 6% by 2030), higher SAF usage will gradually lower offset liabilities. Near-term relief remains constrained, however, as announced global SAF reported capacity plateaus around 48 Mt post-2028*, creating a structural supply deficit once mandated demand accelerates into the early 2030s.

*In reality, current operational capacity globally sits at ~2 Mt, which paints a clearer picture of how much supply would need to catch up with mandates.

Source: AlliedOffsets

Removals

Article 9c introduces a central procurement program that auctions 250 million additional ETS allowances, plus a 10 million reserve, between 2031 and 2040 to purchase CRCF-certified permanent carbon removals. Procured under a new Removals Authority through competitive tenders, with payment on delivery. Only geological storage pathways qualify, BioCCS and DACCS, excluding biochar, carbon farming and nature-based solutions until 2034. The target is 48 million tons of annual procurement by 2040, with a 2034 review to consider expanding eligible technologies. Article 14(1a) lets operators offset facility emissions using self-generated BioCCS, though these units cannot create tradable EUAs.

Cap Impacts and Market Slack

Crucially, the 250 million headline figure represents a volume of allowances, not guaranteed physical removal tons. Because these additional allowances sit above the ETS cap, they operate outside the shrinking linear reduction factor. Rather than tightening the cap, the design adds 250 million tons of headroom for industrial emitters, justified by the removals funded through auction revenue.

Supply Constraints vs. Regulatory Targets

Based on AlliedOffsets CDR project capacity projections reported at facility, disclosure, and registry sources, total predicted capacity will yield just 5.6 million tons per year from 2030. Over a ten-year horizon, this capacity produces roughly 56 million tons, leaving a five-fold shortfall against the 250 million allowance target and requiring a 37-fold expansion over current global BioCCS and DACCS operations. Per CRCF tracking, the vast majority of disclosed European projects are BECCS, meaning supply will rely heavily on biomass capture while DACCS scaling remains uncertain.

The Procurement Funding Shortfall

Comparing Commission baseline estimates against AlliedOffsets, LSEG and LSE market data reveals that projected EU Allowance prices will remain well below the costs of permanent removal technologies like BioCCS and DACCS through 2040. Consequently, unless biochar is admitted or allowance prices follow an aggressively high path, auction revenues will fall significantly short of funding the 250 million tonne physical removal target.

Even if supply scales adequately, the auction proceeds may not stretch to buy 250 million physical removal tons. Because a tonne of permanent removal costs significantly more than an EUA, the purchasing power of the auction fund depends heavily on carbon allowance prices. Under the Commission's impact assessment baseline, average auction revenues are projected at roughly 41.2 billion euros.

Source: AlliedOffsets

Source: Author’s interpretation. AlliedOffsets, EU Commission Impact Assessment, LSE, LSEG data

• High EUA Scenario (150 to 400 EUR): Allowance auction proceeds could reach approximately 74 billion euros. Using the Commission's official technology cost curves, this revenue level successfully funds the full 250 million tonne removal portfolio.
• Lower EUA Scenario (130 to 185 EUR): Lower allowance prices yield a substantial funding deficit. Based on official Commission technology assumptions, this price path results in a 102 million tonne shortfall without biochar, which narrows to 66 million tons if biochar is included.
• AlliedOffsets Market-Derived Estimate: Using AlliedOffsets market data under the lower EUA path, the funding deficit widens to roughly 130 million tons without biochar, or 95 million tons if biochar is admitted.

• Market Interaction Risk: The lower EUA path represents the most probable outcome because injecting 250 million additional allowances into the ETS increases overall supply, naturally suppressing EUA prices.

Biochar Exclusion:

Despite biochar being cheaper, scaling faster, and already possessing a formal CRCF methodology, the Commission opted to exclude it from Article 9c until at least the 2034 review. The rationale is geological permanence and existing MRV infrastructure: BioCCS and DACCS store carbon in geological formations, formally recognized under Directive 2009/31/EC, so admitting them extends an established accounting framework. Including biochar would require new land-use and feedstock sustainability verification. AlliedOffsets modeling indicates the exclusion widens the delivery deficit by 30–36 Mt, making the 250 Mt target materially harder to reach. Market experts such as Dr. Mai Bui, Director of Climate Science and Policy at Supercritical, seem to agree that biochar needs to be included in the proposal. (https://carbonherald.com/opinion-why-biochar-belongs-in-europes-carbon-market/)

Frontloading Capital and National Support Model:

Without dedicated early funding, European durable removal capacity reaches only 55 Mt/yr by 2050, far short of the Commission's 100 Mt baseline. Directing 10% of the proposed €200bn frontloading envelope (€20bn) into removals between 2028 and 2034 compounds capacity gains and pushes 2050 output to 137 Mt/yr. Delaying to 2038 halves projected 2040 capacity through lost lead time. National support structures, Sweden's BECCS reverse auctions, the Netherlands' SDE++, Denmark's CCUS fund, the UK's Contracts for Difference, remain the bridge until central ETS procurement begins in 2031.

International credits

Under the Phase 5 proposal the EU aligns its carbon market cap with a 90% net reduction target for 2040. To prevent bottlenecks as domestic decarbonization gets harder in the late 2030s, the proposal operationalizes European Climate Law provisions allowing a limited volume of high-integrity Article 6 credits to contribute between 2036 and 2040.

The Commission introduces a centralized procurement model rather than allowing regulated installations to buy international offsets directly on open markets, which historically raised concerns over credit quality.

• 260 million EU ETS allowances are ring-fenced from the system-wide quantity and auctioned.
• Auction revenues fund a centralized EU facility that buys Article 6 ITMOs meeting strict Union integrity, permanence and host-country adjustment standards.
• Purchased ITMOs are permanently cancelled, offsetting an adjustment to the Linear Reduction Factor, which drops to 1.7% instead of a harsher 2.7% fallback.
• If the Commission determines by January 2033 that high-integrity supply cannot be secured at scale, the purchasing program is cancelled and the LRF reverts to 2.7% to preserve the domestic 90% net target.

Policy Foundation and the 2040 Annual Ceiling

The proposal is underpinned by the European Climate Law, which caps total reliance on international credits at a maximum of 5% of the EU's 1990 net greenhouse gas emissions (~4,640 MtCO₂e). In the latest proposal, the Commission outlines using 2% of that pool explicitly for the carbon market via the ETS. Applying 2% of the ~4,640 Mt baseline across a five-year linear ramp-up yields the ~260 million allowance buffer.

The remaining 3% (~445 Mt cumulative) are left unallocated to the ETS carbon market. Instead, this portion remains available for Member State national targets, and under the post-2030 Effort Sharing framework (buildings, road transport, agriculture), as strategic reserves, or as potential flexibilities during legislative Trilogue negotiations between the Council and Parliament.