EU to Allow Use of International Carbon Credits in 2040 Climate Target Proposal

The European Commission is set to propose a landmark climate target for 2040 that will, for the first time, allow EU countries to use international carbon credits from developing nations to meet a limited share of their emissions reduction goals.

According to a draft proposal reviewed by Reuters, the EU aims to achieve a legally binding target of reducing net greenhouse gas emissions by 90% from 1990 levels by 2040. This ambitious target is designed to keep the bloc on track for its overarching goal of net zero emissions by 2050.

The draft proposal reflects significant pressure from several member states, including France, Germany, Italy, Poland, and the Czech Republic, which has led to the inclusion of flexibilities that soften the strict 90% emissions reduction requirement for European industries.

Notably, up to 3 percentage points of the 2040 emissions reduction target can be met through carbon credits purchased from other countries via a U.N.-endorsed market. These credits, which will be phased in starting in 2036, are intended to reduce the burden on domestic industries while still contributing to global emissions reductions.

The EU plans to introduce legislation setting robust criteria and standards to ensure the integrity, origin, timing, and use of these credits.

This move comes amid growing climate challenges, with Europe being the fastest-warming continent and recently experiencing severe heatwaves and wildfires.

While the European Commission frames its climate agenda as a driver of economic growth, competitiveness, and security, some member states and lawmakers express concerns that industries already facing high energy costs and U.S. tariffs may struggle under stricter emissions regulations.

The draft emphasizes that decarbonization is essential not only for environmental reasons but also as a catalyst for economic growth when aligned with industrial and trade policies.

However, the inclusion of international carbon credits has drawn criticism from the EU’s climate science advisers, who warn that reliance on foreign credits could divert investments away from local industries and may not always deliver the promised environmental benefits.

Carbon credits typically come from projects such as forest restoration in Brazil, but some have failed to meet their climate goals.

The 2040 target and its provisions will require negotiation and approval by EU countries and the European Parliament, with a mid-September deadline looming for submitting a new 2035 climate target to the United Nations, which is expected to be derived from the 2040 goal.

Bringing international credits back into the EU 2040 architecture creates fresh demand for high-integrity Article 6 supply - and forces both project developers and corporate liability holders to think harder about credit quality, additionality, and reputational exposure. It's an area where our climate-action and responsible-investment teams have been building portfolio-level views for clients navigating this repricing.