The European Commission announced its proposal for the European Union’s 2040 Climate Targets on July 1, 2025, aiming for a 90% reduction in greenhouse gas emissions compared to 1990 levels. This ambitious target is part of a proposed amendment to the European Climate Law, which introduces several key mechanisms to support its achievement. Notably, the amendment allows for the international use of Article 6 credits to meet up to 3% of the EU’s 1990 emissions. It also proposes the integration of domestic carbon removals into the European Union Emissions Trading System (EU ETS). If adopted, these changes are expected to significantly influence demand for international carbon credits under Article 6.
Proposed Targets
The amendment proposed to the European Climate Law sets the target to reduce greenhouse gases emissions in the European Union by 90% by 2040, relative to 1990 levels. Through this amendment, the goal becomes legally binding, forcing EU member states to accelerate their climate actions. To facilitate progress toward this objective, the proposal outlines two mechanisms for incorporating carbon offsets:
- Amendment 2a proposes to allow limited contributions from international Article 6 credits toward achieving the 2040 targets. Under the proposal, these credits could be used starting in 2036 and would be capped at 3% of the EU’s 1990 greenhouse gas emissions. Additionally, the amendment states that the origin, quality, and other relevant conditions for their acquisition should be governed by EU law.
- Amendment 2b specifically addresses the inclusion of domestic permanent removals in the EU ETS. It further states that such removals should be used to compensate for residual emissions from hard-to-abate sectors.
Article 6 Current State
This announcement is expected to significantly impact demand for Article 6 credits. Two key components are particularly relevant: Article 6.2, which enables countries to directly trade emission reductions toward their Nationally Determined Contributions (NDCs) via Internationally Transferred Mitigation Outcomes (ITMOs); and Article 6.4, also known as the Paris Agreement Crediting Mechanism (PACM), which establishes a UN-supervised global carbon market.
The landscape around Article 6.2 is rapidly evolving due to bilateral agreements being created. Currently, 98 bilateral agreements have been agreed between 60 different countries. Of these, 31 have been formally signed, while 56 are covered by Memoranda of Understanding (MoUs). Article 6.4 is also gaining momentum, with methodologies under development and critical issues such as overcrediting and risk management are being addressed.
A Boost in Credits Demand
As of now, Sweden is the only EU member country to have signed bilateral agreements under Article 6.2. Notably, the ITMOs utilized by Sweden are excluded from its NDC. However, the country’s Biennial Transparency Reports (BTRs) indicate that the ITMOs will contribute to its domestic targets or voluntary offsetting commitments. Sweden’s estimated cumulative demand for ITMOs through 2030, representing the entirety of projected demand within the EU, is expected to reach 20 million tonnes.
The proposal specifies that up to 3% of the EU’s 1990 emissions level can be offset using Article 6 credits. Given the EU’s 1990 emissions of approximately 4.7 billion tonnes, this translates to an annual demand of around 140 million tonnes of Article 6 credits starting in 2036. In other words, this would represent a roughly 28-fold increase in demand for such credits from within the EU.
With the proposed inclusion of domestic removals into the EU ETS, carbon removal activity within the EU is expected to increase substantially. This is especially relevant for technological removals, such as Biogenic Carbon Capture and Storage (BioCCS) and Direct Air Carbon Capture and Storage (DACCS), which appear to be prioritized under the proposal.
Mounting Opposition
The proposal has faced criticism from several environmental organizations. Three core areas of concern have emerged regarding the inclusion of international credits in the EU’s climate framework.
Critics have cited historical issues with credit quality, both avoidance and removal-based, including risks of overcounting and reversals. Others have raised concerns about the principle of offsetting itself, warning that it may undermine domestic decarbonization efforts. Finally, there is opposition to the broader concept of international credit trading, with concerns that it may disproportionately benefit developed nations at the expense of developing ones.
In response, the commission sought to mitigate these risks by grounding its approach in assessments from the Intergovernmental Panel on Climate Change (IPCC) and the European Scientific Advisory Board on Climate Change (ESABCC).
Expected Advancements
While the proposal could mark a significant advancement for the voluntary carbon market (VCM), additional progress is needed before its full impact can be realized. The proposal has been submitted to the European Parliament and the Council for debate and adoption. If approved, NDCs will be expected to align accordingly. Adoption would also substantially increase demand for Article 6 credits.
A decision from the European Commission on the Green Claims Directive is also anticipated and could further influence market developments.