Introduction

On July 2, the European Commission published its proposal for the EU 2040 climate target, aiming to reduce emissions to 90% below 1990 levels. While the topline figure has been long expected, two proposed mechanisms to help achieve the target are generating debate: allowing the use of international carbon credits and integrating domestic carbon dioxide removal (CDR) into the EU Emissions Trading Scheme (EU ETS). 

If adopted, these moves could bolster the global CDR market and enable the EU to shape the operationalization of Article 6 of the Paris Agreement. However, there are concerns among some that the EU is compromising its climate ambition amid challenging economic conditions for its industrial sectors. 

What is the EU 2040 climate target? 

The Commission has proposed that the EU achieve a 90% net greenhouse gas (GHG) emission reduction compared to the 1990 level. This sets a path between the goals to reduce emissions by 55% by 2030 and to achieve economy-wide climate neutrality by 2050, both enshrined in the European Climate Law. The 2040 climate target will also guide the EU’s 2035 Nationally Determined Contribution (NDC) to the UNFCCC, which is due by September 2025, in time for COP30. 

The EU will meet its combined emissions reduction targets through three mechanisms: the EU ETS, which covers industrial and aviation emissions; the Land Use, Land-Use Change and Forestry (LULUCF) regulation, which requires member states to enhance their carbon sinks; and the Effort Sharing Regulation (ESR), under which each member state has a target to reduce emissions across domestic transport, buildings, agriculture, small industry, and waste.

The LULUCF regulation encourages member states to support land-based CDR, and the EU ETS broadly incentivizes industrial installations to capture their emissions. However, several experts, including those at Carbon Direct, have called for distinct EU-wide targets for emissions reductions, nature-based CDR, and high-durability CDR to send clear policy signals to investors and project developers. As separate targets are not referenced in the proposal, this appears unlikely. 

The role of international carbon credits

The proposal states that, from 2036, the EU can employ “a possible limited contribution towards the 2040 target of high-quality international credits under Article 6 of the Paris Agreement of 3% of 1990 EU net emissions.” According to the EU’s latest GHG inventory, the 1990 level was 4,649 million tonnes of CO2 equivalent (MtCO2e). 

A 3% threshold could allow the EU to deploy around 140 Mt of Article 6 credits towards its 2040 target. For reference, the total volume of CDR purchases (spot and offtake) in 2024 was approximately 6.5 Mt. The inclusion of international credits would be subject to a risk assessment and quality criteria, though the Commission did not give details about what these may entail.

The FAQs supplementing the Commission proposal reference direct air capture carbon and storage (DACCS) and bioenergy with carbon capture and storage (BioCCS), but negotiators may hold very different positions on credit eligibility. For example, the German government endorses “permanent” CDR, while French officials have expressed interest in nature-based CDR and even renewable energy projects.¹

The EU has not yet indicated how credits would be incorporated into targets. However, as long as individual member states meet their ESR and LULUCF regulation targets according to EU rules, they can implement other mechanisms to achieve their own, more ambitious, national targets. This is why Sweden had signed agreements to facilitate the procurement of international credits before the Commission published its proposal. 

Article 6: Risks and opportunities

Until robust eligibility requirements are enshrined in law, this proposal will remain controversial. The EU’s own Scientific Advisory Board on Climate Change advised against the use of international credits, citing concerns about additionality, carbon leakage, and monitoring, reporting, and verification (MRV). EU officials are particularly cautious about the use of such credits after the misguided integration of units from UN Clean Development Mechanism into the EU ETS until they were phased out in 2020. 

Yet, with the lead time to 2036, there is a significant opportunity for the EU to codify rigorous MRV and durability standards. Clear eligibility requirements could prompt improvement and standardization of methodological assessments across the EU Carbon Removal and Carbon Farming (CRCF) regulation, Paris Agreement Crediting Mechanism (PACM), and the Integrity Council for the Voluntary Carbon Market (ICVCM).

An engaged Europe can send a powerful demand signal for project developers and help other countries build the technological and legal infrastructure necessary for the mechanism to succeed, such as domestic carbon registries and carbon market frameworks. This would have positive effects for other policies reliant on elements of Article 6, such as the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA). 

Integration of carbon removals into the EU ETS

The Commission proposed a role for “domestic permanent removals” in the EU ETS. This move is expected to allow the system to reach net zero while allowing its hard-to-abate sectors to compensate for residual emissions. The current emissions trajectory (dictated by the “linear reduction factor”) puts the ETS on track for an improbable zero absolute emissions by 2039. 

Any major changes would kick in after 2030, and compliance needs will depend on several factors, including the free allocation of emissions allowances and any quantitative limits imposed by the Commission. Regardless, the volume of EU ETS emissions in 2024 remained over 1,000 MtCO2e, suggesting that even modest CDR integration could catalyze large-scale demand in Europe. 

This move will greatly simplify the anticipated re-integration with the UK Emissions Trading Scheme (UK ETS), into which CDR will also be integrated from as early as 2028. In addition to boosting market liquidity, a common system would erase compliance costs and administrative barriers related to the implementation of separate Carbon Border Adjustment Mechanisms (CBAMs).

Eligible units will likely be issued from projects registered under the CRCF, through which experts are developing methodologies for high-quality European CDR. Although technical specifications for CRCF methodologies are in the draft stage, Carbon Direct has identified areas where the existing requirements fall short of the 2025 Criteria for High-Quality Carbon Dioxide Removal.

When CRCF project criteria are established, entities regulated by the EU ETS will provide a critical source of demand for issued units. The CRCF is particularly dependent on the EU ETS, given the uncertain future of the Green Claims Directive, which promotes the use of CRCF credits to substantiate corporate climate commitments. 

Next steps for the EU climate target 

The European Parliament and the Council of the EU will adopt their own positions on the Commission’s proposal before engaging in “Trilogue” negotiations. Should these go as planned, an official amendment to the European Climate Law will be passed in the next 1-2 years. Legislation to help achieve the target will follow, similar to the ‘Fit for 55’ package that accompanied the EU’s 2030 climate goal. 

The Commission’s endorsement has already added credibility to Article 6 as a way for climate leaders to reduce their emissions. Consequently, even before the EU rules are finalized, more countries may be empowered to sign bilateral agreements to accelerate carbon project implementation. 

Stakeholders should also anticipate the UK government’s position on the integration of Greenhouse Gas Removals (GGRs), following the conclusion of a public consultation. While the EU lags the UK on this front, the final policies are likely to closely resemble each other. Timely alignment with announced eligibility criteria could influence CDR project investment decisions and potential returns. 

The viability of the EU’s 2040 climate target will depend on the strength of enabling policies, especially those that support industrial decarbonization and the development of CO₂ transport and storage infrastructure. Should CRCF and Article 6 credits be integrated into the framework, further legislation will define quality criteria that will shape both the environmental integrity and market dynamics of these credits.

How Carbon Direct can help

Carbon Direct’s policy team helps clients navigate complex regulatory landscapes, including the network-shifting laws relevant to CDR. Our team advises on CDR procurement and investment strategies grounded in scientific expertise, always ensuring alignment with our high-quality criteria. This enables the implementation of CDR strategies that remain credible and resilient in the face of political uncertainty.