International carbon credits get EU backing for 2040 climate goals

The European Commission has opened the door to using international carbon credits to help meet its ambitious 2040 climate target, marking a significant shift in the bloc's approach to achieving a 90% reduction in greenhouse gas emissions compared to 1990 levels.

Many in the carbon market welcomed the news, saying this could fundamentally reshape global carbon credit markets by sending a strong demand signal and reaffirming the credibility of carbon credits as a means of decarbonization.

The proposed amendments to the EU Climate Law on July 2 allows the "limited use of high-quality international credits" under Article 6 of the Paris Agreement starting from 2036 so that 3% of 1990 EU net emissions could be counted towards the 2040 target.

"Their specific role and deployment would need to be based on a thorough impact assessment and subject to the development of Union law setting robust and high integrity criteria and standards, and conditions on origin, timing and use of such credits," the proposal said.

European Commission President Ursula von der Leyen said these recommendations represented a pragmatic approach to the EU's climate goals.

"Industry and investors look to us to set a predictable direction of travel," she added. "Today we show that we stand firmly by our commitment to decarbonize the European economy by 2050. The goal is clear, the journey is pragmatic and realistic."

The proposal also envisions incentives for domestic permanent carbon removals, including biogenic emissions capture with carbon storage and direct air capture with carbon storage, to address residual emissions from hard-to-abate sectors.

These measures would be considered during the review of the ETS Directive scheduled for 2026, the commission added.

Carbon market reaction

With a 3% cap on carbon credits, this measure could generate up to 220 million mt of CO2 equivalent (mtCO2e) demand for Article 6 credits between 2030 and 2040, according to S&P Global Commodity Insights' Planning Case scenario.

Daniel Klier, CEO of South Pole, which is one of the largest traders of carbon credits, said this marked a pivotal moment for global carbon markets.

"If adopted, this proposal would create a much more substantial opportunity for Article 6 implementation globally, helping channel much-needed finance to climate-vulnerable countries and support low-carbon sectoral transformations, while helping the bloc achieve its climate targets," he added. "In reality, allowing the use of carbon credits for a modest share of Europe's reduction target will not slow decarbonization efforts."

Article 6 sets the rules for global trade in greenhouse gas emissions reductions, and, under Article 6.2, countries can allow cross-border exchanges of credits.

Countries can use credits, known as Internationally Transferable Mitigation Outcomes, under Article 6.2. This framework allows countries to transfer carbon credits earned from qualifying domestic projects to others, facilitating their efforts to meet climate targets.

This move also goes against the advice of the European Scientific Advisory Board on Climate Change, which warned the EU against relying on international carbon credits to achieve its 2040 climate targets, asserting that such an approach would siphon critical resources away from domestic investments and compromise environmental integrity.

The international credits would be deployed in the second half of the 2030-40 decade and would be subject to thorough impact assessments. Crucially, the commission specified that these international credits "should not play a role for compliance in the EU carbon market," maintaining the integrity of the bloc's flagship Emissions Trading System.

EU member states stopped using offsets to meet their climate goals under the EU ETS post-2020. The decision was made after questions emerged about the integrity of offsets under the UN's Clean Development Mechanism outlined in the Kyoto Protocol, leading to very low prices for EU allowances.

EU Allowances under the EU ETS were assessed by Platts, part of S&P Global Commodity Insights, at Eur70.80/mtCO2e ($83.22/mtCO2e) on July 1, while Platts CEC, which reflects CORSIA-eligible carbon credits, were priced at $21.85/mtCO2e on the same day.

Renewable energy push

Policymakers have also warned that the EU's proposal to reduce emissions by 90% by 2040 looks unlikely unless it is backed by stronger policy measures and a faster renewable energy rollout.

Many in the European renewables industry also welcomed the commission's proposal but warned that this target requires immediate translation into more clean energy commitments from EU member states.

WindEurope pointed to a stark deployment shortfall in wind capacity that threatens both the existing 2030 climate target and the proposed 2040 goal.

The EU built only 13 GW of new wind capacity in the previous year, far below the more than 30 GW annually required to meet the 2030 target of at least 55% emissions reduction compared to 1990 levels, according to the industry group.

"New targets alone won't get you more wind farms. National governments must deliver actual wind energy volumes," WindEurope said in a statement.

"National governments must ruthlessly implement the excellent Renewable Energy Directive (RED III), including the measures on overriding public interest and shortened permitting timelines."

This target is part of the EU's long-term climate strategy -- the European Green Deal -- which also calls for the EU to cut its greenhouse gas emissions by at least 55% by 2030 compared with 1990 and reach net-zero emissions by 2050.