According to the proposal, Article 6 credits will be permissible from 2036 onwards and can contribute to a maximum of 3% of 1990 emissions. As per the proposal, “Their specific role and deployment would need to be based on a thorough impact assessment and subject to the development of Union law setting robust and high integrity criteria and standards, and conditions on origin, timing and use of such credits.” The proposal explicitly states that these credits will not be accepted within the EU Emissions Trading System (ETS). This aligns with the 2026 market review consultation, which is only exploring the inclusion of carbon removal credits into the ETS and does not list international credits usage in the ETS as a topic. To that end, the proposal explicitly state that the 2040 target includes the “use of domestic permanent carbon removals in the EU ETS”.The proposal of 2040 target will now undergo debate among Members of the European Parliament (MEPs) and the member states, under the Danish Council Presidency.
It was earlier reported that it might be adopted via General Approach at Council already in September. While these discussions over 2040 target may be extensive, the intermediary 2035 target must be submitted to the United Nations before COP30 in November. Ideally, this submission should occur much earlier, as the official deadline was in February. For the target to be approved, both the Parliament and the Council must agree on a common version of the text and officially approve it through a vote.
It remains unclear how the overarching EU-wide 90% target will translate into the EU ETS cap, setting the pathway post-2030. This specific detail will be addressed in a separate legislative proposal, which will follow the adoption of the 2040 target within the next couple of years. Additionally, it is not yet clear whether the 2035 climate target will follow a linear path between 2031 and 2040, or if it will be non-linear. This decision will depend on whether the abatement potential within EU ETS sectors is still considered significant compared to other EU economic sectors, such as road transport and buildings, which are covered by ETS2.
Currently, our Supply & Demand balances assume that the 2030 Linear Reduction Factor (LRF) of 4.4% (90Mt/year) will extend to 2031-2035 for ETS1 as well. This projection results in an 83% reduction in the ETS1 Cap by 2035 compared to 2005 levels (further details available on Vantage). We have not yet included Removals into the ETS Cap. The EU ETS has a default mechanism where, in the absence of a review, existing ETS parameters continue to be applied. An extension of the 4.4% LRF would inevitably lead to the EU ETS Cap reaching 0 (an "Endgame" scenario) by 2039 or by 2045 considering Aviation coverage, as stated in the 2040 target impact assessment from February 2024. To address this, the 2040 proposal includes the use of domestic carbon removal credits to help achieve this target. However, these are likely to face scrutiny from many officials and member states, leading to strict conditions, such as requirements for these credits to be EU-certified and of a specific type or origin. The released proposal seems to prioritize technological removals, such as Biogenic emissions Capture with Carbon Storage (BioCCS) and Direct Air Capture with Carbon Storage (DACCS).
Today's official proposal referred to the impact assessment of the 2040 target, which modeled carbon value pathways for the ETS and non-ETS sectors, reflecting the marginal abatement cost per ton of CO2-eq covered in the respective scenarios. Although this is not a carbon price forecast, the Commission's modeled results of carbon values reaching EUR 290 in 2023-Euro (EUR 450 in nominal terms) by 2040 may provide insight into future carbon price trajectories in the EU ETS.
ClearBlue will closely monitor the upcoming debates concerning the 2040 target and integrate any resulting decisions into our Supply & Demand balances. Any mention of how much the EU ETS will contribute to the EU’s overall economy-wide long-term climate target could cause some market volatility, alongside the ongoing review of EU ETS1 and MSR due by summer 2026.
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