All information is accurate as of 11th July 2025
Author: Sawal Bacha
The European Commission has published its 2040 emissions reduction target and recommended reducing the EU’s net emissions by 90% by 2040 compared to 1990 levels. Significantly, the Commission envisages a role for international carbon credits under Article 6 of the Paris Agreement and domestic engineered carbon dioxide removals in meeting the target. But what will their impact be on the EU ETS?
The EU’s path to climate neutrality
Following the advice of the European Scientific Advisory Board on Climate Change, the European Commission formally proposed on 2nd July a binding 90% reduction in net greenhouse gas (GHG) emissions by 2040 compared to 1990 levels of approximately 4.7 billion tonnes.
The target is a critical milestone on the path to achieving climate neutrality by 2050, an objective enshrined in the European Green Deal and made legally binding through the European Climate Law.
The 2040 target builds upon the EU’s existing commitment to cut net emissions by at least 55% by 2030. It is framed as a strategic stepping stone, ensuring continuity and ambition in the EU’s long-term decarbonisation pathway.
The proposal put forward by the European Commission outlines the strategies to achieve that target, such as the use of international carbon credits under Article 6 of the Paris Agreement and of domestic engineered carbon dioxide removals. Lastly, the Commission also emphasised the importance of maintaining flexibility in the design of legislative instruments to deliver on this goal.
The role of Article 6 credits
Article 6 of the Paris Agreement establishes a framework for voluntary international cooperation through carbon markets. Under this framework, the EU may use Internationally Transferred Mitigation Outcomes (ITMOs) to complement domestic emissions reductions, provided they uphold robust accounting and environmental integrity. While the Commission has so far emphasised a domestic-first approach to emission cuts, Article 6 credits of international origins could play a limited and strategic role in reaching the EU’s 2040 target. Their potential use would depend on the development of strict eligibility criteria, including safeguards against double-counting and rules ensuring that such credits represent real, verifiable, and additional emissions reductions.
The proposal caps the use of Article 6 credits at 3% of net emissions, amounting approximately to 145 million tonnes of CO2 equivalent, based on the EU’s 1990 emissions. While 145 million tonnes account for just 4% of the EU’s total greenhouse gas emissions in 2024, by 2040 this same volume is expected to represent 30% of the EU’s projected total net GHG emissions.
According to the proposal, the EU can begin using Article 6 carbon credits for its Nationally Determined Contributions (NDCs) starting in 2036. However, these credits must adhere to strict rules, which will be detailed in future EU legislation.
Domestic carbon removals and the EU ETS
In contrast to international carbon credits under Article 6 of the Paris Agreement, which will not be eligible for compliance in the EU ETS, the proposal calls for incorporating domestic permanent carbon dioxide removals into the EU ETS to tackle residual emissions from hard to abate sectors.
While the proposal distinguishes between temporary and permanent carbon dioxide removals, it places a clear emphasis on permanent removals, particularly engineered solutions such as Direct Air Carbon Capture and Storage (DACCS) and Bioenergy with Carbon Capture and Storage (BECCS). With EU ETS covered sectors set to do the heavy lifting on the EU’s overall emissions reduction targets, the incorporation of these removal technologies into the EU ETS will provide some flexibility to manage residual emissions with permanent domestic removals.
Further clarity on the role and incentives for permanent carbon dioxide removals is expected during the 2026 review of the ETS Directive 2003/87/EC.
Towards an updated NDC
The proposal must still undergo examination by the European Parliament and the 27 member states in the Council of the EU. Both bodies need to approve the text before the new European Climate Law can be implemented, a process that could take several months, especially considering the European Parliament’s August recess. Once the 2040 EU targets are confirmed, an emissions cap for Phase V of the EU ETS will need to be established through a revision of the EU ETS directive.
Additionally, a new legislative package, informally referred to as “Fit for 90”, is expected in the latter half of 2026. The Fit for 90 package will address emissions across all sectors, including those not covered by the current EU ETS. The 2040 target plan aims to lay the groundwork for the EU to present an updated Nationally Determined Contribution (NDC) ahead of the UN Climate Change Conference (COP30) in Belém (Brazil) in November. However, specific details have not yet been provided, as this topic requires deliberation among the EU 27 Member States.
Potential market impact on the EU ETS
The EU’s acknowledgment of the potential role of Article 6 credits is set to increase demand for high-quality credits, further aligning with global efforts to strengthen the credibility and environmental integrity of voluntary carbon markets. On the other hand, the decision not to include Article 6 credits within the ETS is likely due to widespread scepticism around the adoption of international offsets. Between 2008 and 2020, the EU ETS allowed the use of Certified Emission Reductions (CERs) from the Kyoto Protocol-aligned Clean Development Mechanism (CDM) to meet emission reduction targets. However, the influx of credits contributed to depressed EUA prices over a number of years, reducing the incentive for domestic emission reductions.
By integrating domestic carbon removals in the EU ETS, it will create a clear investment signal, accelerating the development and deployment of these technologies. Moreover, the inclusion of domestic carbon removals in a regulated market like the EU ETS can help establish and enforce high standards for this type of projects, while driving technological innovation. Details around the potential integration of domestic carbon removals into the EU ETS remains uncertain. While the integration of carbon removals could exert downward pressure on the market over the long term by increasing the supply of compliance instruments, the impact is likely to be limited by the high costs and constrained availability of such removals in the EU.
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