As the European Union institutions prepare to embark on the final negotiations around the bloc’s diluted 2040 climate target, there is one last chance to shore up some of the goal’s loopholes for the good of the environment and society.

Given the loophole-riddled proposal from the European Commission in July, our expectations for the EU’s 2040 climate targets were, unfortunately, pretty low to start with. The proposal already contained a wishlist of so-called flexibilities (more reasonably called loopholes), with the most damaging being the inclusion of international carbon credits. 

Rather than improving the already weak Commission proposal, which was presented without the due diligence of a proper impact assessment, the joint position of member states and the deal struck at the European Parliament have made things worse. But to credit where it’s due, the Parliament added much-needed safeguards on the quality of international credits and clarified that international credits need to stay out of the EU’s carbon market. 

Although setting a 2040 target in the current political climate is a cause for muted celebration, the extent to which it has been watered down risks capsizing the EU’s ability to achieve its climate goals and will hurt the bloc’s future prosperity and competitiveness. If the current deal on the table becomes reality, it would constitute enormous steps backwards for climate action compared to what is required. However, there is still time to save some of the furniture, conduct damage control, and dispel confusion. 

So, in practice, what are the key improvements and safeguards the three institutions should integrate into the 2040 target before these proposals become law?

Avoid international credits

Environment ministers and MEPs agreed on an 85% emissions reduction target to be achieved domestically, which becomes a binding 90% only by relying on problematic international credits. 

This is considerably lower than the 90 to 95% domestic range without flexibilities recommended by the EU’s official scientific advisors, and also lower than the potential 87% suggested by the Commission in its proposal in July. This disingenuous dilution could cost up to €48.9 billion and result in EU emissions being 50% higher than under a fully domestic target, according to CMW calculations.

The EU should not count on emissions reductions achieved by other countries, highly likely in the Global South, to do what it can and should do at home. If EU policymakers intend to promote meaningful international climate action, then they should make sure the EU not only buys high-quality international carbon credits but also without counting them towards its domestic targets. This would help bridge the EU’s climate ambition gap while supporting international fairness and equity.

The texts approved by both the Council and the Parliament include a possibility of relying on a lower quantity of international credits if needed. However, since a domestic 85% net emissions reductions target is now specified, it means EU policymakers currently plan to use the full 5% of international credits.  This could become a crunch issue if it turns out that there won’t be enough high-quality credits available, which is a very realistic possibility because of the challenges facing Article 6 carbon markets and the first batches of carbon credits set to be issued under the framework. 

If the reliance on international credits is maintained, the three institutions must add “at least” before the 85% domestic target so as to leave space for more domestic ambition and ensure that any shortage of high-quality credit supply will lead to increased ambition domestically, without lowering credit quality requirements to ensure supply.

EU  policymakers have also proposed a flexibility for member states to use high-quality international credits to “fulfil up to 5% of their post-2030 targets and efforts” as a possibility for the next review of the Climate law. They have to clarify this does not mean an additional outsourcing of EU climate ambition, but that this is part of that overall flexibility planned to be used by the EU, as interpreted by researchers at the Oeko Institute. In any case, this provision, together with the flexibility granted for the land use and forestry sector mentioned below,  does not provide any incentive for member states to achieve their national climate, energy and environmental obligations.  

The Commission and Parliament are adamant that international credits need to stay out of the EU’s carbon market, but worryingly the Council deleted that safeguard from its position. Just as a reminder in case of policy amnesia: International credits already crippled the ETS once. This should be an obvious red line for everyone: keep credits out of the EU ETS.

Quality control

The European Parliament has outlined some necessary principles on the quality of international credits that are a starting point for far more detailed criteria that must ultimately be developed. These principles require that any international credits: 

• Come from credible and transformative mitigation activities in countries with Paris Agreement compatible targets and policies
• Have high environmental integrity, by being additional, permanent, and not double counted
• Have transparent governance as well as strong monitoring, reporting and verification
• Have economic, social and environmental cobenefits and human rights safeguards
• Contribute to climate adaptation funding through so-called share of proceeds (some credits are sold by a UN fund to support  adaptation),  and lead to an overall global net-emission (by cancelling a percentage of credits of every deal)
• The purchased credits are shared between the EU and the selling countries so that selling countries do not sell off significant portions of their mitigation abroad, making it harder for them to reach their own climate targets

The Parliament also asked the Commission to ‘consider’ setting stricter criteria than those laid down under Article 6.4 of the Paris Agreement. Considering the diplomatic weight of petrostates and low-ambition countries on the international negotiations, that ‘consider’ should be deleted and made into an enforceable demand for the EU to go further than UN-level agreements. EU quality criteria should go beyond what Article 6 stipulates. The EU should also enact strict safeguards to exclude carbon credits that have caused any social or environmental damage. 

These safeguards must become part of the final trilogue outcome to mitigate the damage of using international credits to reach the EU’s climate target, and to ensure that the EU is at the very least funding real and just climate action rather than buying cheap hot air.

Hands off the Emissions Trading System

The European Parliament is clear that international credits must stay out of the EU ETS, but its position on the EU carbon pricing framework is still damaging. For instance, MEPs, like environment ministers, want to slow down the phase out of free allocations: backpedalling once again on agreed-upon legislation and ambition. It’s striking how incoherent this request is when combined with their call for further public investment to support decarbonisation, specifically through an Industrial Decarbonisation Bank. 

This new funding mechanism, announced by the Commission in the Clean Industrial Deal, promises €100 billion to be disbursed to industries to support their transformation – what is not clear yet is how this bank will be funded, and how will this promise be maintained if the free allocation phase-out will actually be slower, which will depress revenue flows from the ETS. Granting both more free allowances and more public investments to companies who have fallen short on decarbonising and have barely contributed to the EU’s emission reduction objectives, boils down to yet another free pollution subsidy for heavy industry. 

The direction of travel is wrong-headed as a more rapid phase-out timeline for free allowances can help to create additional auctioning revenue that would help fund the EU Decarbonisation Bank.  In addition, the Carbon Border Adjustment Mechanism should be allowed to start operating as planned: any competitiveness issues won’t be solved by dismantling carbon pricing, which contributes minimally to the costs faced by manufacturers. More ETS auctioning-fueled investments in climate action can actually improve EU competitiveness.

The requests for a review of both the cap by 2039 and the Market Stability Reserve could have major implications on the overall strength of the carbon price signal and climate performance of the EU ETS. For the new targets to be effective, ETS sectors must have a strong and stable regulatory environment to guide them in their climate transition. With the power sector emissions significantly shrinking in recent years, it’s time for industry, aviation, and shipping to double down on their efforts. The current framework is still fit for this purpose, and should not be abused as a bargaining chip during the revision of the EU Climate Law.

No stalling on buildings and road transport

Unfortunately, backpedalling on the Emissions Trading System for road transport and buildings (ETS2) also became a bargaining chip in the 2040 EU climate target discussions. The Council and Parliament gave in to the opposition of some countries and agreed to delay the start of the ETS2 by one year. 

The co-legislators claim that a delay would ensure a smooth start of the ETS2, but in reality a delay rather counteracts a smooth and fair transition. By delaying the price signal, climate action will be postponed too, probably even leading to a higher initial carbon price in 2028 as the cap on pollution for that year remains unchanged. Policymakers say they are worried about high ETS2 prices, but are shooting themselves in the foot and exacerbating that same issue. This delay also spikes policy uncertainty – further undermining the smooth implementation of the new system. 

Moreover, by kicking the can down the road another year, the EU risks losing around €50 billion in auctioning revenue, which imperils the size of the Social Climate Fund risks – hampering climate investments and support for vulnerable households. The Commission has communicated that the size of the Social Climate Fund would not be impacted by a delay to the ETS2, and that it would still start in 2026. The Commission must clarify, however, how the reduction in revenue will be compensated for.

 The Social Climate Fund is critical to protect vulnerable households in the transition and there is no room to downsize it. Rather, the Social Climate Fund needs to be enlarged and extended in the next revision, removing the €65 billion cap and extending the fund after 2032, to provide more effective support to vulnerable households.

A fair and effective ETS2, also requires complementary policies. It is key that the bans on internal combustion engine vehicles and fossil fuel boilers are implemented and that no space is left for expensive and risky  fuels in road transport and the buildings sector. The limited supply of sustainable fuels must be used only in sectors that have no obvious path to full electrification.

Carbon removals realism

Finally, under the pretext of accounting for natural disturbances caused by climate change, member states added a request, subsequently upheld by the Parliament, to potentially adjust the overall 2040 climate target ambition in case of shortfalls in the land use and forestry sector. 

 
Yet reported data has shown that, over the last 20 years, natural disturbances on average accounted for 16% of the mean annual harvest in Europe. In addition, the latest Land Gap Report has flagged that 70 to 80% of European forests are managed intensively for timber and bioenergy. Common practices include clearcutting, removal of old-growth forests and planting vulnerable monocultures. This indicates that national governments are exaggerating the impact of natural disturbances because unsustainable forestry models are the key driver of Europe’s collapsing natural sink, and environmentally harmful subsidies continue to support intensive forestry practices. 

So, policymakers do not want other sectors to compensate for the possible underachievement of their land use targets so as to reach the overall net 90% target. At the same time, they want to ensure that any surplus carbon stored in natural systems, vulnerable as it is, can still be used to alleviate emissions reduction targets in other sectors. This is a case of having your cake and eating it. This loophole is just another cop out of actually compelling the forestry sector to shift away from unsustainable harvesting practices, and opens the door to further downgrading the real net-85% target. The European Commission didn’t propose this backdoor, and it’s up to them to slam it firmly shut during the trilogues. 

The realistic contribution of carbon removals has to be reflected in the Climate Law through the setting of separate targets. Any uncertainty about the deployment of carbon removals must result in higher gross emissions reduction targets, not be used to lower targets.