Insight Focus
The EU Commission has proposed a 90% cut to emissions by 2040. Meanwhile, stakeholders discussed integrating carbon credits to ease rising energy costs. Simultaneously, the Commission withdrew its draft “green claims” law, citing concerns over administrative burden.
EU Considers Carbon Credits for 2040 Target
European lawmakers have begun early discussions on the bloc’s 2040 climate target, and initial indications suggest that the EU is becoming more open to the possibility of using carbon credits to help achieve its next major climate goal.
In early 2024, the European Commission tabled its formal proposal for the next-decade strategy, recommending a target of a 90% reduction in greenhouse gas emissions from 1990 levels by 2040.
Source: European Commission
The current 2030 goal is a 55% reduction, and recent reports suggest that the bloc is on track to meet that target. However, the leap from 55% to 90% is seen as extremely ambitious, and many stakeholders believe this goal cannot be achieved solely through internal emission reductions. Instead, they argue, the EU will need to fund emissions cuts elsewhere in the world and use carbon credits from those projects to supplement its own cuts.
The EU’s 2040 plan will consist of two main components: an emissions target for entities covered by the EU’s Emissions Trading System (ETS), and another for sectors of the economy not included in the carbon market.
This latter share is governed by the so-called Effort-Sharing Directive, which sets national targets for each member state that, together with the ETS goal, constitute the whole of the EU’s reduction pathway.
So far, there has been no detailed discussion regarding how many carbon credits might be allowed, or even which sectors might be eligible.
The EU has had a stormy history with carbon credits. Between 2008 and 2020, it allowed around 1.6 billion UN-sanctioned carbon credits to be used for compliance in the EU ETS—a move that reduced demand for the more expensive EU Allowances (EUAs) and created a massive surplus of permits that is still being reduced today.
However, when the 2021–2030 phase of the market was launched, the EU banned the use of carbon credits, pledging instead that all emission reductions would take place within Europe. EUA prices soared to as much as EUR 101/tonne as more ambitious targets combined with a lack of cheaper abatement options.
Source: Investing.com
With the onset of higher energy costs following Russia’s invasion of Ukraine, along with rising inflation and broader cost pressures, many EU lawmakers are now looking to the new UN carbon market as a source of lower-cost emissions abatement.
Carbon credit advocates are hopeful that EU support and legislation will provide a strong boost to the nascent UN market, which more than 190 countries gave final approval to at the UN summit in Baku last year.
This would echo the bloc’s role during the Kyoto Protocol years, when the EU was the only major economy to legislate for the use of UN credits in a domestic market.
EU Commission Withdraws Green Claims Directive
Elsewhere, in a surprise announcement last week, the Commission said it intended to withdraw its proposed legislation on green claims after right-wing groups in the bloc called for the draft laws to be scrapped.
The EU’s Green Claims Directive (GCD), first proposed in 2023, would set down clear rules for companies that claim environmental benefits or improvements from their operations or products. The GCD would be implemented alongside existing consumer protection legislation.
Source: European Commission
Examples of such claims include corporate messaging that a proportion of product packaging is made from recycled plastic, or that a company’s carbon footprint has been reduced by a certain amount.
This latter example often involves the retirement of carbon credits to offset some of a company’s supply chain emissions.
The draft regulation had passed through most procedural stages, and a final version was scheduled to be negotiated between the Commission, the European Parliament, and member states this week.
However, at a press briefing on June 20, a Commission spokesman confirmed that the EU’s executive intended to withdraw the draft directive after the centre-right EPP bloc and the right-wing ECR group raised objections to the text.
The Commission stated that the draft GCD would impose a significant burden on smaller enterprises across the EU, with some insiders suggesting that up to 30 million so-called “micro-enterprises” would be affected by the legislation.
Its withdrawal leaves a significant gap in the Commission’s plans to guide the EU towards a lower-carbon future, as it leaves companies without clarity on what environmental achievements they can legitimately claim.
Lobbyists and environmental groups had urged EU lawmakers to adopt a clear set of rules governing what actions companies can publicly assert they have taken, and it was hoped that the GCD would create a strong precedent for voluntarily retiring carbon credits as part of net-zero strategies.
The Commission has not yet indicated whether the proposed law will be reintroduced in a different form.
