EU Pulp Mills Face Multi-Billion Carbon Shift as Carbon Capture and Storage (CCS) Emerges

Since January 1, 2026, around 40% of European pulp mills have been excluded from the EU Emissions Trading System, ending nearly two decades of surplus allowance income. Carbon capture and storage is emerging as a potential replacement.

Something counterintuitive is happening in EU pulp mills. The facilities that invested most heavily in decarbonization, driving fossil emissions to near zero through biomass, are now facing the sharpest financial hit from the very policy system designed to reward low-carbon production.

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A Reward System Running in Reverse for EU Pulp Mills

For nearly two decades, EU pulp mills built up billions in surplus EU ETS allowances. Free allocations arrived each year, set against product benchmarks. For mills running mainly on biomass, those allocations regularly outpaced the fossil emissions they were meant to offset. As a result, the surplus became a recurring and material revenue line for many facilities.

Between 2008 and 2024, the sector accumulated an estimated €4.5 billion in net surplus allowance value. The top ten recipients alone captured roughly €6 billion.

That era is closing, and for the mills that decarbonized furthest, it is closing fastest.

The 95% Threshold and Its Unintended Consequence

As of January 1, 2026, any installation with biogenic emissions above 95% of total verified emissions is excluded from the EU ETS entirely. The intent was to relieve the most biomass-intensive facilities of a compliance burden they barely carried. In practice, however, the effect is the loss of the allocation surplus that rewarded them for it.

Fastmarkets estimates that around 40% of EU pulp mills cross this threshold. Notably, the facilities most affected are not laggards. They are the sector’s decarbonization leaders — mills that spent years cutting fossil dependency and achieved it.

In fact, one of the industry’s leading players has already signalled the impact, disclosing that emission right sales are expected to fall by at least 70% this year as a direct consequence.

The paradox is structural. A mill that removed virtually all fossil emissions now loses the financial mechanism that rewarded that achievement. As a result, the Confederation of European Paper Industries has formally challenged the directive on precisely these grounds.

Carbon Capture and Storage Emerges as a New Path for EU Pulp Mills

Meanwhile, the same carbon profile that is stripping these mills of their allocation surplus — large volumes of biogenic CO2, surplus energy, minimal fossil exposure — is drawing attention from a different direction entirely.

Carbon capture and storage (CCS) is beginning to emerge as an avenue through which EU pulp mills could not only offset rising carbon costs but also generate an entirely new revenue stream. However, the opportunity is not evenly distributed.

Market pulp mills are best positioned: they produce large volumes of biogenic CO2 from biomass burning and run self-sufficient steam systems. Integrated mills, by contrast, divert most of their on-site steam to paper drying, which complicates any CCS retrofit.

Proximity matters too. Facilities close to storage hubs — such as saline aquifers or depleted oil and gas reservoirs — or to industrial CO2 buyers like food and beverage plants see far more favourable economics than those located far from either.

Demand for permanent carbon removal is already drawing major long-term corporate offtake commitments. In April 2025, for instance, Microsoft signed a 12-year agreement for BECCS credits derived from a pulp mill recovery boiler. For most facilities Fastmarkets carbon analysts examined, CCS retrofits result in lower production costs when short transport distances combine with rising EU ETS obligations.

Ultimately, whether CCS represents a viable path — and for which mills, at what cost, under what conditions — is the question Fastmarkets carbon analysts have examined in detail.

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