Flexibilities In 2040 Target Risk Breaking The EU Carbon Market

Scoop

19-06-2025

The EU's Emissions Trading System is essential to meeting the European Union's 2040 climate target. Watering the EU ETS down with international carbon credits or carbon removals will prove fatal, concludes a study commissioned by Carbon Market Watch.
Under pressure from industry and pro-business stakeholders, the European Commission has been toying with ways to water down the EU's long-delayed 2040 climate target, which is due for release in July, without officially diluting it.
Among the options being considered is to allow the use of international carbon credits generated under Article 6 of the Paris Agreement for use towards the 2040 climate target or the European climate goal in the nationally determined contribution (NDC). These Article 6 credits, just like carbon removal credits, could be considered for use in the EU ETS.
However, a new study commissioned by Carbon Market Watch through the LIFE Effect project and conducted by the Oeko Institute, which considers the contribution of the EU ETS to the 2040 climate target, reveals that not only are such adjustments unnecessary, they would likely be counterproductive.
'The EU ETS has only recently reached a meaningful carbon price that, while not perfect, made the carbon market a more powerful climate tool. This latest research confirms that the ETS is well-equipped for its mission of reducing emissions for at least another decade,' says Sam Van den plas, CMW's policy director. 'Boosting ETS market liquidity can't come at the cost of the climate. Reforms must build trust in the ETS and keep the EU on track for its 2040 and 2050 climate goals.'
Quick fix or in a fix?
The Oeko Institute study models various climate scenarios and strategies for calibrating the Emissions Trading System to the new reality of the 2040 climate target, including enabling polluters to use international credits or carbon removals on the EU ETS.
These risky options could undermine the environmental effectiveness of the ETS, the analysis concludes. The current configuration provides a cost-effective means for the European economy to decarbonise by both putting a price on emissions and channeling that revenue into climate action and investment in Europe. Meddling with the scheme runs the risk of slowing or scuppering efforts to reduce the carbon footprint of the sectors covered by the ETS s and reducing investment within the EU through the purchase of credits abroad.
For international credits, the EU has been here before. In the early years of the EU ETS, polluters were allowed to use carbon credits generated by the Kyoto Protocol's Clean Development Mechanism (CDM) to offset part of their emissions. This practice led to the depression of carbon prices and delayed the decarbonisation of the bloc's heavy industry.
The fact that some CDM credits will migrate to the new Article 6 carbon market raises the spectre of dilution and delay once again. Moreover, using international credits enables the EU to renege on part of its obligation, enshrined in the European Climate Law, to reduce domestically its carbon footprint, removing the responsibility of large European polluters to decarbonise instead of offsetting.
The study also finds that it would be misguided to introduce carbon removals into the EU ETS, as the price on the ETS for industrial installations will not be high enough to incentivise the development of the high quality, permanent carbon removals needed to reach net zero by 2050. As recommended by the European Scientific Advisory Board on Climate Change (ESABCC) and as long advocated by Carbon Market Watch and its allies, setting separate targets for gross emissions reductions, permanent removals and land-based removals within the EU's 2040 climate target is the first step to ensuring emissions reductions occur alongside the development of high-quality carbon removals.
Any integration of carbon removals in the ETS poses the risk that efforts to slash emissions today will be scaled back in favour of carbon removals tomorrow. This would, in turn, increase pressure to allow cheap and volatile natural sequestration, with its doubtful climate impact, in the future.
When it comes to the EU ETS for road transport and buildings (ETS2), the report concludes that uncertainties surrounding how the new market will function and how fast emissions will fall from these two sectors means that ETS2 should be left to function and observed for several years before any changes are considered to avoid unnecessarily weakening the system. The existing safeguards in place to prevent high ETS2 prices must be accompanied by strong social climate plans under the Social Climate Fund and the dedication of all ETS2 revenue to socially targeted investments and income support to help people to decarbonise.
Stability, not liquidity
Two mechanisms govern the liquidity of the EU ETS: the Linear Reduction Factor (LRF), which sets the annual rate at which the cap or maximum emissions are reduced, while the Market Stability Reserve (MSR) is designed to temporarily hold excess pollution permits which are cancelled if oversupply continues or are injected back into the market if the carbon price spins out of control.
The study concludes that both mechanisms are performing their roles satisfactorily and do not need any adjustments until at least 2035. Any premature watering down of either risks depressing the carbon prices and stalling decarbonisation.
Don't break it
Based on the findings of the study, CMW has produced an accompanying briefing which makes a number of recommendations. These can be summed up in a few words: don't break the EU ETS.
This involves excluding international carbon offsets and carbon removals from the scheme. It also involves not tampering with the MSR or LRF until at least 2035.
About LIFE Effect
Led by Carbon Market Watch, LIFE Effect puts civil society across the EU in the driver's seat to help national policymakers navigate the design of socially fair and environmentally effective carbon pricing and revenue use for buildings and road transport