What’s the issue?

Net zero refers to a state where the residual emissions that remain after all feasible decarbonisation has taken place are neutralised by carbon removals. The UK targets net-zero emissions by 2050 (Scotland by 2045). Yet, until now, there has been no clear policy mechanism to address these residual emissions.

In July, the UK Government released the long-awaited outcome to its consultation on Integrating Greenhouse Gas Removal (GGRs) into the UK ETS. Historically, GGR credits were only usable in voluntary carbon markets as offsets. The new proposal would allow their inclusion in compliance markets, creating a policy mechanism we believe is necessary to achieve a true net-zero end-state.

Each year, organisations subject to the UK ETS must purchase and submit emissions allowances through auctions, in line with their operational emissions. Under the proposed changes, GGRs would be made available through the auction mechanism, replacing normal emissions allowances on a one-for-one basis. Crucially, this will not affect the overall supply cap, which continues to decline annually and remains the primary lever through which the ETS drives decarbonisation.

Intuitively, this is a sensible approach. To date, revenues from ETS auctions have flowed into the UK Treasury’s general budget. Integrating GGRs would continue to boost Treasury revenue, albeit to a lesser extent, while also incentivising capital flows into carbon removal projects. While imperfect, the approach offers a dual benefit of incentivising decarbonisation and generating capital for carbon removal projects.

A definitive list of the eligible removal methods hasn’t been provided, but it will be guided by the forthcoming GGR British Standard Institution (BSI) standards, which currently includes:

Why are woodland and peatland not on that list?

Peatland restoration

Not currently on the list, as it avoids emissions rather than removes them. We think excluding peatlands is a misstep. In the UK, degraded peatlands are a significant source of emissions, accounting for 15-20% of Scotland’s emissions alone. Their absence from the GGR means there’s still no clear financial mechanism to help prevent these emissions.

Woodland

There’s a strong indication that woodland creation will be included, but a few things must be resolved first:

1. Standard alignment: The UK Woodland Carbon Code (a voluntary scheme) already sets out standards that the GGR BSI will seek to develop. A decision is needed on whether these two frameworks will co-exist or be consolidated.

2. Policy debate: The UK Climate Change Committee recommended against inclusion, citing concerns around permanence, measurement and verification. Additionally, it highlighted the risk of market distortion and a strategic focus on engineered removals. However, several key organisations (including Department for Environment, Food and Rural Affairs) have pushed back on these concerns.

What are the investment risks and opportunities?

The proposed integration signals growing policy support and improves long-term market stability for GGR projects. It promotes investment in six ways.

1. Clear integration timeline – lays out the plan to legislate by 2028 and operationalise GGR integration into the ETS by the end of 2029. While subject to additional regulatory assessments and consultation, this blueprint helps reduce uncertainty for GGR developers and investors.

2. Ex-post credit issuance and long-term storage – UK ETS allowances will only be awarded after verified carbon sequestration, ensuring environmental integrity and accountability. Projects must also demonstrate a minimum carbon storage period of 200 years, with liability and fungibility measures in place. While this strengthens credibility, it diverges from some practices in the voluntary carbon market.

3. UK-based projects only – eligibility is limited to domestic removal projects, which is a positive for UK-based initiatives. Moreover, it enables offtake agreements to proceed, helping unlock investment. 

4. GGR operators – improved liquidity and price discovery for GGR credits.

5. Double-whammy for carbon capture operators – companies investing in carbon capture infrastructure stand to gain on two fronts: they reduce exposure to the UK ETS carbon price (currently £48/tCO₂) and could potentially generate revenue through GGR credits. This dual incentive could significantly improve project economics. 
However, GGR eligibility is limited to projects that result in a net removal of greenhouse gases from the atmosphere. Few projects meet this threshold, but BECCS could technically qualify. 

That said, we have concerns about large-scale UK assets, such as Drax’s 2.6GW biomass power station, where upstream supply-chain emissions might not be adequately accounted for. Smaller operations, including Evero’s Ince biomass power station at 21.5MW, raise fewer concerns. By 2029, the Ince BECCS project will seek to use the HyNet CCS infrastructure to transport and store around 250,000 tonnes of carbon beneath the Irish Sea.

Several companies own biomass plants that could meet the criteria: RWE, Veolia, SSE, and E.ON. 

6. Improved UK investor sentiment towards nature-based solutions – there’s strong momentum behind including woodland creation in the ETS, which would create a demand floor for such projects. Woodland creation is also cheaper than engineered removals like BECCS, making the opportunity scalable and cost-effective. 

Government modelling suggests including woodland creation in the ETS could result in a cumulative carbon sequestration of 29-39 MtCO2e by 2050 [1] But the benefits go well beyond carbon: the same modelling estimates a Net Present Social Value (NPSV) of £27-34 billion by 2027 [2], factoring in carbon savings, job creation, and wider ecosystem services such as flood protection, improved air quality, and biodiversity gains. (NPSV is an estimate of the total societal benefits of a policy or project, such as health, environmental, and economic gains, expressed in today’s money.)

Our take?

We’ve responded to the consultation and are encouraged by the findings. While we await final confirmation and further detail, we believe this marks a positive policy shift, one that broadens the range of technologies available to decarbonise the economy. It also strengthens the financial case for these projects and could spur the development of new asset classes, increasing opportunities to support decarbonisation at a lower cost.

The UK’s policy drive is not happening in isolation. We're seeing similar developments in the EU, California, Quebec, and Brazil [3]. We therefore expect this year’s COP30 conference to emphasise the important role of nature-based carbon removals and sinks in the global journey to net zero.

Sources include Carbonfuture’s 2025 Global Guide to CDR Policy, CCarbon’s WCI Emissions Outlook 2025–2026, and Climate Transparency’s Implementation Check on Brazil’s Carbon Market.