November saw progress in Europe’s climate policy agenda, after the EU’s member states reached agreement on a 90% emissions reduction target by 2040, but delayed the start of a planned new carbon market by a year.
After what was reported to be an all-night negotiating session on 5th November, the EU’s 27 Member states managed to thrash out a deal that rubber-stamped the European Commission’s proposed target to cut greenhouse gas emissions by 90% below 1990 levels by 2040.
The move means the bloc’s 2040 climate target is another major step nearer to passing into law, as draft EU legislation needs the backing of both the European Parliament and member states before passing into the statute books.
The 2040 target is a significant milestone on the EU’s road to reach net zero emissions by 2050 – a goal that scientists say is important for avoiding more severe climate impacts.
The backing of the EU’s member states means the EC’s headline legally binding climate target for 2040 remains intact. The member nations also agreed that the EC’s proposed flexibility mechanisms should be included in the legislation to help safeguard the EU’s competitiveness and the need for a just energy transition.
These mechanisms included the use of high-quality international carbon credits for meeting the 2040 target, from 2036 onwards, up to a limit quantified as 5% of EU net emissions in 1990 (this means the EU’s domestic emissions target is effectively a reduction of 85% from 1990 levels by 2040).
The member states also wanted a role for domestic permanent carbon removals to be recognised under the EU Emissions Trading System (ETS) to compensate for residual hard-to-abate emissions – usually considered to be the carbon-intensive heavy industries.
Soon after the EU member states had their say, the European Parliament also backed the 90% target for 2040 on 13th November.
Why does political support matter?
The backing of the EU member states and the Parliament provides clarity and certainty for investors on the long-term direction of climate policy in the European Union and provides a backdrop that will help to guide and align other related energy and climate policies in Europe.
And in a specific carbon market context, the proposed use of high-quality carbon credits to help meet the 2040 target, and carbon removals under the EU ETS, sends a strong demand signal for project developers and investors in the market for project-based carbon credits. These are the kinds of announcements that help to bolster demand for carbon credits by creating eligibility under legally binding carbon markets, which adds to existing corporate demand in the voluntary market.
ETS2 gets pushed back by a year
However, the political horse-trading that enabled EU nations to find agreement on the climate target also meant that other parts of the climate package had to take a set-back.
For example, the European Council introduced a provision to postpone the start of the so-called ETS2 (Emissions Trading System 2) from January 2027 to January 2028.
This is a proposed standalone carbon emissions cap-and-trade system that will regulate CO2 emissions from buildings and road transport (you can read more about that here: EU ETS2 – Europe brings carbon pricing to consumers – Carbonwise).
The ETS2 is seen as controversial by many, because it will for the first time impose an explicit carbon cost on consumers, through the fuels used in home heating systems and petrol or diesel for vehicles.
The new carbon market has prompted concerns over its potential to raise the cost of living further at a time when households are already facing rising costs across the economy.
The debate over the exact details included in the 2040 climate law remains alive and kicking, and the Council presidency will soon start three-way negotiations with the European Parliament and European Commission now that the member states and lawmakers have adopted their own positions on the legislation.
To see an illustration of how carbon trading works in Europe, view our graphic here: How the EU ETS Works – Carbonwise. And to understand the importance of carbon removals, watch our explainer video here: The Bathtub Analogy: The Importance of Carbon Reductions & Removals – Carbonwise.
