Why the EU Could Turn Carbon Removal Into a Competitive Advantage for Heavy Industry

What the proposal would change in the EU ETS and why it matters

The EU ETS is the policy anchor for industrial decarbonisation. It covers about 10,000 installations across power and manufacturing, and one allowance equals 1 tonne of CO2e. That means any carbon-removal incentive has to fit inside a cap-and-trade system, not replace it.

The policy shift is part of a wider move toward industrial carbon management. The Commission has already signalled support for industrial carbon removals, and the CRCF Regulation now gives the EU a certification framework for permanent removals, carbon farming, and carbon storage in products.

The practical change for buyers is simple. Removals could move from a voluntary offset story to a compliance-linked asset class. That matters for hard-to-abate firms trying to manage residual emissions inside a tighter ETS, especially as the cap keeps tightening and industrial emissions fell again in 2025 by 2.5% in energy-intensive industries.

Procurement teams will care about a narrower question. Can carbon removal be used for residual process emissions, not just energy emissions? In sectors where electrification and fuel switching move slowly, benchmarks, MRV, and unit eligibility become commercially decisive.

The next question is obvious. If the policy is redesigned to reward removals without weakening the cap, which industrial sectors would see the first commercial upside?

Which industrial sectors could benefit first from carbon removal-linked incentives

The first likely beneficiaries are the sectors already most exposed to EU ETS and carbon leakage logic. Steel, cement, lime, aluminium, refineries, bulk chemicals, pulp and paper, glass, ceramics, acids, and hydrogen-related value chains are the clearest early candidates.

Cement and steel are likely first movers. The Commission’s 2025 reporting shows energy-intensive industry emissions declined by 2.5%, with the trend mostly driven by cement plus iron and steel. That tells buyers these sectors are already under the strongest compliance pressure.

Process emissions make these sectors especially relevant. Some CO2 cannot be removed through power decarbonisation alone because it comes from calcination, metallurgy, or chemical production. That is especially true for cement, lime, and some chemical and metal products.

The commercial case is straightforward. Firms facing carbon leakage exposure, CBAM transition risk, or high electricity bills will look for incentives that lower total abatement cost per tonne, not just headline emissions cuts. That creates room for removal-linked offtakes, forward purchases, and bundled compliance products.

Some sectors may benefit indirectly first. Electricity-intensive manufacturers and midstream suppliers could gain if the reform improves power-system decarbonisation economics and raises demand for low-carbon industrial inputs.

The harder policy question comes next. How do you redesign free allowances and indirect cost relief so industry gets a transition signal without diluting the EU ETS cap?

How free allowances and indirect cost relief could be redesigned without weakening the cap

The current baseline is familiar. Under EU ETS free allocation, benchmark-based allowances are still distributed to many manufacturing installations at risk of carbon leakage, and the Commission says less-exposed sectors move from 30% free allocation up to 2026 toward phase-out by 2030.

The main design tension is also clear. If carbon-removal incentives are layered on top of free allocation, policymakers must avoid double protection that overcompensates firms and weakens the carbon price signal. The cleanest design would likely link support to verified residual emissions, not gross emissions.

Indirect cost relief is part of the same debate. The Commission confirms Member States can compensate energy-intensive sectors for ETS-driven electricity price pass-through, so a redesign could redirect state-aid support toward electrification, low-carbon heat, and removal of residual emissions rather than broad-based subsidy.

A cement producer shows how this could work in practice. It could receive declining free allocation based on benchmark performance, while a separate, capped mechanism rewards permanent removals for verified residual process emissions after BAT and efficiency upgrades.

The cap logic has to stay intact. Any recognition of removals should be matched by tighter cap management, stricter eligibility rules, or retirement of allowances rather than netting away obligations.

Once incentives are tied to verified tonnes, integrity becomes the real gatekeeper. Who counts, what qualifies, and how do policymakers prevent double counting or low-quality credits?

The market risks: integrity, double counting, and who should qualify

Trust is the first test. Buyers in heavy industry will only adopt carbon-removal-linked incentives if the units are durable, additional, MRV-backed, and clearly separated from voluntary claims and compliance obligations. The CRCF framework matters here because it requires third-party verification and sets EU-level certification rules.

Double counting is the biggest market risk across value chains. If a removal unit is used to support compliance, corporate claims, and public policy targets at the same time, credibility can fall fast. That is especially sensitive for cross-border industrial supply chains and CBAM-adjacent products.

The strongest candidates are permanent removals with long durability, robust monitoring, and clear ownership of the environmental attribute. Weaker candidates are temporary or hard-to-verify activities unless they are ring-fenced and disclosed.

The EU’s current certification work already distinguishes permanent removals, carbon farming, and carbon storage in products. That suggests policymakers are trying to separate durable industrial instruments from broader land-sector credits.

Finance teams will ask the practical questions. Can the project survive due diligence on leakage, lifecycle emissions, permanence, and reversal liability? That matters even more if the offtake is meant to support a regulated industrial asset.

If those integrity rules are tightened properly, the bigger question becomes macroeconomic. Can the EU create enough removal demand to move capital, lower compliance cost volatility, and strengthen climate policy credibility at the same time?

What this could mean for carbon removal demand, investment, and EU climate policy

The market opportunity is large if removals become compliance-relevant for heavy industry. That would create a bankable demand signal beyond voluntary corporate procurement, which is what most project developers need to finance capital-intensive capture, storage, and MRV infrastructure.

The policy momentum is already there. The EU ETS has driven emissions down in covered sectors, with verified 2025 ETS emissions falling 1.3% year on year and the system having cut covered emissions by 50% since 2005. Adding removals would extend an already effective policy instrument rather than invent a new one.

The investor angle is practical. Predictable offtake rules could improve project bankability for direct air capture, bioenergy with carbon capture and storage, mineralisation, and industrial storage pathways, especially where revenues can be stacked with innovation funding or long-term industrial supply contracts.

The strategic policy benefit is also clear. Integrating removals into industrial decarbonisation could help the bloc keep manufacturing competitiveness while tightening the cap, which supports the idea that climate ambition and industrial policy can work together.

The caution is just as important. If the framework is too broad, it risks weakening scarcity and delaying real abatement. If it is too narrow, it may fail to unlock investment. The best outcome is a narrow, durable, benchmarked use case for hard-to-abate residual emissions.

That is the core thesis. The EU could turn carbon removal into a competitive advantage only if it treats removals as a high-integrity industrial input, not a loophole. That distinction will decide whether capital flows in or stays on the sidelines.