EU’s 2040 climate target brings back welcome dose of pragmatism and flexibility

On Wednesday the European Commission presented its proposal for the bloc’s next climate target, targeting a 90% reduction in greenhouse gas emissions from 1990 levels by 2040.

Europe’s 2040 target is the key missing piece in the EU’s decarbonisation pathway toward its mid-century net-zero goal. However, the Commission has emphasised that the policies to achieve this target must differ from those designed to deliver the climate goal of at least a 55% net GHG reduction by 2030 — calling for more pragmatism and greater flexibility.

The Commission’s suggested target includes a quota of 3% of the target that can be met through the use of international carbon credits generated under Article 6 of the Paris Agreement.

The proposal heralds a new era of market-based cooperation under Article 6, by offering companies the “flexibility” to deliver emissions reductions and removals where they are most cost-effective.

IETA welcomes this pragmatic move by the Commission to link the EU ETS with the wider international carbon marketplace. European policymakers have long been sceptical about allowing international credits into EU carbon markets, often citing the EU’s “negative experience with CDM credits.”

This reluctance harks back to the period from 2008 to 2020, when the EU allowed the use of credits issued under the Clean Development Mechanism (CDM) to meet a limited portion of the emission reductions required by EU ETS compliance entities.

Unfortunately, CDM credits entered the EU’s carbon market just as the 2008-9 global financial crisis hit, creating a perfect storm of decreasing demand and increasing supply in the EU ETS. Additionally, CDM credits were not without controversy concerning their environmental integrity, forcing the EU to introduce bans on certain types of projects entering the EU ETS.

Today, however, international credits are very different from what they were 15 years ago. Article 6 now provides a global framework for international carbon market collaboration, and the nascent Paris Agreement Crediting Mechanism (PACM) is delivering standardised rules and improved governance.

Credits generated under Article 6 represent a significant shift from the CDM era; they are subject to more stringent methodologies, mandatory safeguards, and corresponding adjustments to ensure high environmental integrity and to prevent double counting of emission reductions.

And while the PACM is still being operationalised, a clear demand signal from the EU is precisely what the emerging global carbon market needs.

Engagement with international credits and enhanced inter-sectoral flexibilities have the potential to ease the cost of the EU’s low-carbon transition, especially for hard-to-abate sectors. In this context, the role of Article 6 credits should not be limited to supporting mitigation efforts in land-based and forestry sectors.

While IETA applauds the proposal to recognise permanent carbon removals under the EU ETS — as this can help boost market liquidity and reduce price volatility — the next step should be to integrate international carbon credits removal into the EU’s carbon market, starting with removals generated under the Paris Agreement Crediting Mechanism. Naturally, all eligible removals must meet high-quality criteria, with credible safeguards on permanence and reversal risk.

But maintaining market stability and the effective functioning of the EU ETS must remain a priority. The EU should be able to set guardrails to guarantee the quality of imported credits and to control their quantity and market impact. The same principle should apply to the integration of domestic removals — their interaction with EU and Member State policies and impact on carbon market functioning should be closely monitored.

We urge Member States and the European Parliament to support enhanced flexibilities and the role for Article 6 credits in the 2040 climate package. We acknowledge that agreeing specific rules for market-based cooperation and integration of removals into the EU ETS will take time.

The legislative package is expected next summer, followed by months — or years — of negotiations with co-legislators. Still, the proposal for the 2040 target deserves a swift endorsement, to provide business with stability and long-term predictability. That should be followed by in-depth analysis to determine whether the proposed flexibilities are sufficient.

The Commission proposal represents a strong vote of confidence in international carbon markets, which is all the more significant after the EU’s chastening experience with carbon credits in the 2008-2020 period. It also highlights the immense efforts of stakeholders around the world to increase the reliability and integrity of carbon reductions.

Julia Michalak is the EU Policy Director at IETA and, Andrea Bonzanni is the International Policy Director at IETA.