EU approves 90% emissions cut by 2040, boosts carbon credit use to 5%

EU climate ministers on Nov. 5 approved a 90% emissions reduction target for 2040, allowing member states to use international carbon credits for up to 5% of their emissions, an increase from the originally proposed 3%.

The agreement followed intense overnight negotiations and expands the role of international offsets, such as those under Article 6 of the Paris Agreement, in helping countries meet their climate commitments.

"We have listened to and worked with literally all parties around the table. That brought us to, I think, a very good compromise," EU climate commissioner Wopke Hoekstra said at a press briefing.

"We have agreed to a legally binding headline 2040 target of 90% with a domestic target of 85% and up to 5% international credits. We have reaffirmed the flexibilities that we've put on the table."

Industrial competitiveness

Agreeing the 2040 climate targets has not been a smooth journey for the EU, with many member states concerned about industrial competitiveness and energy security opposing stringent targets. The compromise reflects broader tensions within the EU over climate policy ambition. But these changes will now need to be negotiated with the European Parliament.

"After a tense 24 hours, the EU Council agreed to cut emissions by 90% by 2040 -- but behind the headline lies a new caveat: climate ambition must now do no harm to economic growth," said Coralie Laurencin, director of European gas, power and carbon policy, at S&P Global Energy.

"The EU salvaged its climate credibility with a 90% emissions-reduction target for 2040, yet the fine print tells another story -- actual cuts in the EU will reach at most 85%, and the goal can be lowered if progress falters," she said.

Italy was one of the countries pushing hard for more flexibility around climate commitments, as it was worried about the economic impact of some of the bloc's climate policies.

Italy's minister for the environment and energy security, Gilberto Pichetto Fratin, described the outcome as "a good compromise," suggesting Italy was satisfied with the negotiated deal.

"The European Commission recognized our proposals as relevant and balanced," he told reporters on Nov. 5.

Carbon market boost

Many in the carbon market view the decision as potentially significant for global carbon trading volumes and pricing dynamics ahead of the UN Climate Change Conference taking place in Belem, Brazil, from Nov. 10-21.

"The EU's decision to include international carbon credits in its 2040 target is a pivotal step for global carbon markets," said Frédéric Gagnon-Lebrun, global director of climate policy and finance at South Pole.

"Even at 5%, carbon credits will only play a modest role in the bloc's decarbonization efforts between now and 2040," he said. "Used appropriately, they can complement -- not replace -- domestic decarbonization, helping sectors with hard-to-abate emission sources in particular."

The use of international credits, which will be subject to thorough impact assessments, will be allowed in the second half of the 2030-40 decade, along with a pilot phase starting in 2031.

"The previous unnecessary limitation on the use of credits in the EU ETS has been removed, which is a very welcome step," said Julia Michalak, EU policy director at the International Emissions Trading Association.

"We are pleased that member states recognized the important role of international credits in supporting domestic decarbonization efforts by agreeing to increase their share, introducing a pilot phase starting in 2031, and allowing Member States additional flexibility to use credits at the national level," she said.

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.

"Europe's gamble that buying high-quality offsets will be cheaper than cutting emissions at home depends on one thing: the cost of gold-standard offsets must fall sharply," Laurencin said.

Platts, part of S&P Global Energy, assessed EU Allowances under the EU ETS at Eur82.20/mtCO2e ($94.43/mtCO2e) on Nov. 4, while Platts CEC, which reflects CORSIA-eligible carbon credits, was priced at $21.80/mtCO2e on the same day.

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.

Stronger policy measures

Hoekstra also confirmed that the EU's 27 countries agreed to set a 2035 target range of 66.25% to 72.5% GHG emissions reductions compared to 1990 levels as part of their formal nationally determined contributions ahead of COP30.

"The target is in line with science. It's needed not only for showing our global leadership in climate, but it's also there to give guidance to industry," said Denmark's climate minister Lars Aagaard, who presided over the discussions.

Many policymakers have warned that the EU's 90% emissions reduction proposal by 2040 appears unlikely without stronger policy measures and accelerated renewable energy deployment.

"The EU has achieved a 37% reduction in net GHG emissions between 1990 and 2023, demonstrating a consistent downward trajectory," analysts at Energy said in a recent report. "However, even under scenarios with strong policy intervention, which assume sweeping transformations in energy systems and consumption -- the EU would only reach a 76% reduction by 2040."

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