Germany’s EU ETS Gambit: Negative Emissions, Global Credits and the Future of Carbon Pricing

What Germany Is Actually Proposing in the EU ETS Reform Debate

Germany’s push matters because the real debate is not about making the EU ETS “bigger.” It is about what can count as a compliance instrument after 2030.

The European Commission has already opened a public consultation on the EU ETS and the Market Stability Reserve as part of the 2026 review process. At the same time, the Commission’s 2040 climate framework already points to a limited role for high-quality international carbon credits in the second half of the 2030 to 2040 period. That means the policy question is no longer whether the system stays purely allowance-based. It is whether the compliance stack expands to include other asset types.

That distinction matters. One lever is the inclusion of permanent carbon dioxide removals inside the ETS architecture. The other is the possible opening to international carbon credits of high quality later in the 2030 to 2040 window. They are related, but they are not the same thing.

Germany is pushing for more flexibility while the system keeps tightening. In 2025, ETS-covered emissions fell again, and the system has already cut covered emissions by about half versus 2005. That is a sign that the cap still drives the price signal. Any reform that adds new eligible units will therefore be judged against a market that is already doing the heavy lifting.

The industrial angle is obvious. Hard-to-abate sectors such as cement, steel, chemicals, and refining want more predictable compliance pathways. That pressure is rising as the Carbon Border Adjustment Mechanism moves into full operation from 1 January 2026. The message from industry is simple: if the EU wants deep decarbonisation without sudden cost shocks, it needs a clearer rulebook for residual emissions.

The key question for buyers, traders, and industrial operators is straightforward. If ETS compliance can eventually include permanent removals and foreign credits, what becomes the benchmark for compliance quality?

Why Recognising Carbon Dioxide Removal Could Change the Logic of Compliance

Carbon dioxide removal is not just another offset category. It is a different compliance asset class.

The EU has already adopted a certification scheme for carbon removals, and the Commission is working on the methodologies needed to fit removals into future market structures. That is important because permanent removals are not the same as avoided emissions. Avoided emissions reduce future emissions. Removals take carbon out of the atmosphere and store it.

For a B2B buyer, the difference is practical. The real questions are storage duration, MRV, leakage, reversal risk, and how the unit is treated in internal carbon accounting and ESG reporting. A credit that looks acceptable for a voluntary claim may not be acceptable for compliance use. A compliance-eligible removal has to survive much tougher scrutiny.

If permanent removals enter the ETS, the price signal changes. The market would no longer reflect only the scarcity of allowances. It would also reflect the marginal cost of certified removal and the cost of storage, whether geological or biogenic. That could create a new reference point for carbon pricing across the market.

The industrial use case is easy to see. Cement plants with process emissions, steelmakers with residual emissions, and waste-to-energy operators with hard-to-eliminate emissions could use removals to cover part of their residual footprint. That would be different from simply buying EUA allowances. It would also change how companies think about long-term compliance portfolios.

The trade-off is clear. More CDR in the compliance stack could make limited international credits easier to defend politically. It could also make it harder to argue that the ETS remains a pure cap-and-trade system with a single, simple integrity standard.

The Case for Allowing Global Carbon Credits and Why It Is So Controversial

The Commission is not proposing an open-ended flood of foreign credits. It is already talking about a limited role for high-quality international carbon credits in the second part of the 2030 to 2040 period.

That is why the controversy is so specific. The fight is not over the concept itself. It is over timing, quality, and quantity.

From a buyer perspective, global credits can make sense. They can diversify a portfolio, lower average compliance cost, and channel capital into projects in emerging markets. That can be useful if the accounting is clean and the claims are defensible. But the rules have to prevent double counting, vague claims, and unclear ownership of the mitigation outcome.

The political resistance is equally understandable. Many stakeholders worry that foreign credits weaken the domestic cap. If companies can rely too much on external units, the pressure to improve efficiency, electrify processes, and switch fuels inside Europe may soften. That is the core fear.

The commercial context makes the debate sharper. With CBAM becoming fully operational from 2026, the EU is trying to protect industrial competitiveness without reducing climate ambition. In that setting, global credits can look like a shortcut. Even if they are high quality, they may still be read as a way to delay domestic decarbonisation.

That brings the market question into focus. If compliance can be partly covered by removals and international credits, what happens to EUA pricing, futures spreads, and industrial capex decisions?

How This Shift Could Affect EU Carbon Prices, Industrial Strategy, and Investment Signals

The EU ETS is still a large and liquid market. Auctions continue weekly through EEX, and the system still clears enormous volumes of EUA. That means any change in the compliance mix can move expectations quickly, even before it changes physical demand.

The price effect would depend on timing. A gradual entry of CDR or international credits could reduce near-term demand for EUA. At the same time, it could improve visibility on the long-term cost of abatement for hard-to-abate sectors. Markets often react to that kind of policy signal before they react to actual volumes.

The industrial strategy effect could be even bigger. If EUA is no longer the only serious compliance signal, companies with long investment cycles may reassess the timing of electrification, carbon capture, or hydrogen switching. Some may prefer hybrid compliance strategies that combine allowances, removals, and other units.

That matters for competitiveness. CBAM is meant to reduce carbon leakage and protect exposed sectors while keeping the climate signal intact. If the policy mix becomes too complex, the market could send mixed messages. Firms may delay investment if they cannot tell whether the future value of abatement will be set by EUA scarcity, removal costs, or access to external credits.

The real risk is not just a lower or higher carbon price. It is a loss of clarity. If the market believes the cap can be filled with units of very different quality, confidence in the price signal weakens.

The Biggest Risks: Integrity, Additionality, and the Future of Europe’s Carbon Market Credibility

Integrity is the central risk here.

If global credits and removals enter the EU ETS without robust criteria, the system starts to look less like cap-and-trade and more like a platform for comparing very different units. That is a harder story to defend to investors, audit firms, and ESG stakeholders.

The technical issues are familiar, but they matter more in compliance than in voluntary markets. Additionality has to be credible. Permanence has to be durable. MRV has to be strong. Reversals have to be managed. Double counting has to be prevented. Corresponding adjustments have to be clear where relevant. Registry interoperability has to work.

The ETS already has a strong credibility base. Covered emissions have fallen by about 50% since 2005, and they still declined in 2025. If the policy narrative shifts too fast, the market may read that as a relaxation of discipline rather than a refinement of the system.

Developers will feel that pressure too. If compliance demand moves toward high-integrity assets, the market will reward stronger standards, better due diligence, and tighter pricing discipline. Projects with weak baselines or limited verifiability will struggle.

The unresolved question is the hardest one. What mix of rules can protect the carbon price, preserve climate ambition, and still give industry enough flexibility without eroding trust in the market?

What International Buyers, Project Developers, and Policymakers Should Watch Next

The next signals will come from policy, not from theory.

The first thing to watch is the outcome of the ETS and MSR consultation and the legislative proposal that follows the 2026 review. The second is how the Commission turns the 2040 target into operational rules for domestic removals and any limited international credits.

International buyers should focus on due diligence, contract structure, delivery risk, and claims architecture. Not every carbon credit will be fungible with European compliance needs. If the EU narrows eligibility to high-quality units, the bar for acceptance will rise sharply.

Project developers should prepare for a more selective buyer base. Demand will likely shift toward CDR, storage integrity, permanence, and verified MRV. That is a very different market from one driven mainly by volume.

Policymakers face the biggest test. EU ETS, CBAM, industrial carbon management, and the climate neutrality pathway all need to point in the same direction. If they do not, investment will slow and capital will move to jurisdictions with clearer rules.

The next reform round is not just about how much it costs to emit. It is about which units can truly count in a European carbon market that is becoming more hybrid, more financial, and more strategic.