Policy flexibilities

International carbon credits:  

The agreed text allows for a limited contribution of high-quality international carbon credits towards the EU’s climate objectives. Based on the EU’s latest GHG inventory, net emissions in 1990 were 4,649 Mt CO₂e, with 5% of this figure representing approximately 232 Mt CO₂e.

Any use of international credits must comply with the accounting rules set out under Article 6 of the Paris Agreement, which establishes frameworks for cooperative approaches towards nationally determined contributions. The text foresees a pilot phase during 2031–2035, after which Member States may be permitted to use international credits from 2036, subject to agreed rules and any additional safeguards identified through the review process.

EU ETS – Integration of domestic permanent removals:

The 2040 target outlines an expanded role for the EU ETS to integrate domestic permanent carbon removals, explicitly mentioning biogenic emissions capture with carbon storage (BioCCS) and direct air capture with carbon storage (DACCS) technologies. The EU ETS, as the world’s largest carbon market, incentivises emissions abatement by putting a price on emitting CO₂.

The text acknowledges that reaching a 90% net reduction by 2040, and climate neutrality by 2050, will require not just reducing emissions, but also actively removing CO₂ that cannot be eliminated otherwise. If companies covered by the ETS could use certified permanent carbon removal credits to meet a portion of their emissions obligations, it would create a compliance-driven market for permanent removals.

However, the integration of removals into the ETS presents design considerations to preserve its core function of driving deep emissions reductions and ensuring the permanence and additionality of the removals.

Review mechanisms:

The Commission is required to regularly assess progress towards the 2040 target, taking into account competitiveness, energy prices, technology availability, land sink performance, and the scale and credibility of net carbon removals. These reviews may also inform future adjustments to the EU’s post-2030 climate framework.

The agreed text strengthens review provisions by requiring an assessment of the role of international credits, including their potential use by Member States for up to 5% of post-2030 targets, and whether additional criteria beyond those under the Paris Agreement are needed.

Missed opportunity – No separate targets for carbon removal:

Unlike the Commission’s February 2024 communication on the 2040 climate target, the current proposal and agreed text do not specify an indicative breakdown of carbon removals within the net 90% emissions reduction target. The earlier communication suggested residual emissions of under 850 MtCO₂ by 2040, offset by up to 400 MtCO₂ of industrial and land-based removals. This omission removes an early signal on the expected scale and role of carbon removals in meeting the 2040 target, deferring clarity to subsequent implementing policy frameworks.

Carbon Gap’s Policy Recommendations

• Separate targets for gross emissions reductions, permanent, and temporary removals. The Climate Laws implementing framework must distinguish between the roles of gross emissions reductions, permanent removals, and temporary (land-based) removals. This distinction is essential for climate integrity, preventing removals from replacing reductions, upholding like-for-like compensation, and providing clear market signals to scale the CDR sector.                                                                               .
• Recognise the need for CDR incentives beyond ETS integration. Permanent carbon removal must be viewed as a crucial climate and industrial pillar, rather than a flexibility to meet the 2040 target. The forthcoming post-2030 framework should acknowledge the necessity of policy efforts beyond the EU ETS to scale CDR volumes through a diverse mix of complementary policies (e.g., public procurement, carbon contracts for difference, dedicated investment support) to ensure a balanced and sustained growth of various CDR methods. An updated EU CDR strategy would set out a comprehensive vision for the sector’s development.                                                                              .
• Safeguard and strengthen the LULUCF framework to 2040: Delivering existing LULUCF targets is critical for meeting the Climate Law review requirements and avoiding a downward revision of the 2040 net target. The framework should be extended to 2040, reinforced with adequate funding and incentives to reverse ecosystem degradation and scale sustainable biogenic removals. Safeguards are needed to prevent LULUCF from offsetting continued fossil emissions in industrial sectors, in line with the like-for-like principle.                                                                                                                     .
• Include clear guardrails on the use of international carbon credits. A cautious approach to international carbon credits must be adopted, with the prioritisation of impact assessment and dynamic review mechanisms. Clear guardrails are required to preserve domestic mitigation efforts and environmental integrity, learning from past failures, while allowing for potential benefits if implemented with stringent quality criteria and continuous review of their impact on EU industrial transformation and climate leadership.