2040 EU Climate Target and Related EU Climate Policy Developments

The European Union remains committed to achieving climate neutrality by 2050, as enshrined in the European Climate Law. That Law set a first intermediate target of at least a 55% net reduction in greenhouse gas (GHG) emissions by 2030 compared with 1990 and required the European Commission to propose a further intermediary target for 2040.

In July 2025, the Commission proposed amending the Climate Law to set a binding 2040 target of a 90% net reduction in GHG emissions (emissions minus removals) compared with 1990, at EU‑economy level. The proposal was flexible across sectors (there are no sector‑specific 2040 targets) and allows limited use of domestic carbon removals and high‑quality international carbon credits to help meet the 2040 goal.

Following negotiations, the EU ministers reached a political agreement in December 2025 on a 90% net‑reduction target by 2040, with up to around 5% of the effort allowed from international credits. The exact balance between domestic action and credits will be set out in the final legal text. Formal adoption of the amending legislation by the Parliament and the Council is pending, but the agreed 2040 framework is generally seen as relatively pragmatic and flexible, consistent with wider EU climate policy developments discussed below.

INTERNATIONAL CARBON CREDITS

Going forward, carbon credits are anticipated to play a bigger role in the EU climate policy. One of the flexibility mechanisms that the EU climate target envisages is high-quality international carbon credits under Article 6 of Paris Agreement starting from 2036.  

Under Article 6, parties can voluntarily pursue cooperative approaches to reach or even increase their climate targets via a few tools, including the Paris Agreement Crediting Mechanism (PACM). The PACM under Article 6.4 of the Paris Agreement effectively establishes the UN-managed carbon crediting mechanism.

The main idea of the PACM is the creation of an international certification system for carbon units with the legitimacy of being developed through the UN’s multilateral system. The PACM is open to public and private participants. The units generated by the PACM are known as Article 6.4 emission reductions, or A6.4ERs. The criteria, standards and conditions on origin, timing, and use of international carbon credits, including A6.4ERs, by the EU are yet to be developed. For more information on the PACM, please refer to our publication COP29 Offers Pathway to a Global Carbon Market. 

The international carbon markets were further developed at the recent COP30, the 30th session of the UN Climate Change Conference, in Brazil. The meeting produced a “mutirão” (collective effort) decision package that moved forward on both the technical and political components of carbon markets and advanced rules for carbon removal. For more information on COP30, please refer to our publication COP30: Key Outcomes for Carbon Markets.

The new EU climate target allows a contribution of international credits toward the 2040 target for up to up to 5 percentage points towards the 90% net‑reduction target (this is a raise from the Commission’s proposal which allowed international credits up to 3% of 1990 net emissions in the original draft). Due to the 1990 baseline, the actual percentage of what international credits can account for is actually much higher.

DOMESTIC CARBON REMOVALS

The 2040 EU climate target envisages building a business case for domestic carbon removals (as such Biogenic emissions Capture with Carbon Storage (BioCCS) and Direct Air Capture with Carbon Storage (DACCS)). This is another flexibility mechanism allowing the use of domestic permanent removals to compensate for residual emissions in hard-to-abate sectors. This indication marks the importance of other developments in carbon removals in the EU, which goes hand in hand with the EU ETS revision discussed below.

EU ETS REVISION

The EU Emissions Trading System (EU ETS) is a market-based method for pricing CO2 emissions through a “cap and trade” system. The cap is converted into tradable allowances, and companies must monitor, report, and trade allowances to match their emissions annually.

Ahead of its review planned for 2026, the Commission launched public consultation on the EU ETS including whether to include permanent carbon removals within the scope of the EU ETS and assess the possibility of linking the EU ETS to other carbon markets.

The EU ETS revision also involves an evaluation of existing measures to prevent carbon leakage for emissions not already covered by CBAM (as defined below).

CARBON BORDER ADJUSTMENT MECHANISM

The CBAM is a climate action tool that aims to prevent “carbon leakage,” whereby companies move production to countries with weaker climate rules than in the EU or import cheaper, high-emission products from such countries. The CBAM ensures the carbon price of imports is equivalent to the carbon price of domestic production. The CBAM currently primarily covers raw materials such as steel, aluminium, cement, and electricity.

In December 2025, the Commission proposed that in 2026 the EU will tighten CBAM by extending its scope to selected steel‑ and aluminium‑intensive downstream products. In parallel, the Commission plans a temporary support scheme for EU producers most exposed to carbon leakage, aiming to reward cleaner producers worldwide and maintain fair competition. CBAM, which already prices embedded emissions in imports of basic materials (aluminium, cement, electricity, fertilisers, hydrogen, iron and steel), is to be extended to 180 steel‑ and aluminium‑intensive downstream products with high carbon‑leakage risk.

CERTIFICATION OF CARBON REMOVALS

The EU Carbon Removals and Carbon Farming Regulation (CRCF) provides a voluntary regulatory framework for the certification of permanent carbon removals, carbon farming, and carbon storage in products. The CRCF aims to facilitate investment in innovative carbon removal technologies, address greenwashing, and create trust in carbon removals by setting strong requirements and credible verification for certified activities.

A public consultation on draft technical rules for verification under the CRCF closed on 1 July 2025. The Commission has since adopted Implementing Regulation (EU) 2025/2358 on verification and scheme governance and is now finalising delegated acts that will define detailed certification methodologies for different types of carbon removal activities.

NATURE-BASED CARBON CREDITS

The Commission has also launched the Roadmap towards Nature Credits to incentivise private investments in nature-based carbon removal or carbon offset projects in the EU (such as restoring wetlands or extending forest areas). Nature credits will set up financial incentives for investing in nature-positive actions and provide a standardised format for such investments. A common EU perspective will complement existing local pilots and initiatives on nature credits, help them to gain credibility, raise investor interest, and scale up nature credit markets.

EU CLEAN INDUSTRIAL DEAL

Earlier this year, the EU adopted the Clean Industrial Deal, a roadmap aiming to bring together climate action and competitiveness under one overarching growth strategy for the EU industry. The implementation of the Clean Industrial Deal will be instrumental to reaching the 2040 climate target as it introduces mechanisms and incentives to drive decarbonisation and competitiveness of the EU industry. For more information, see our publication on the EU Clean Industrial Deal.

The EU has also recently published a communication Delivering on the Clean Industrial Deal I wherein authorities reported on implementation progress.

COMPATIBILITY WITH THE EU COMPETITION RULES

The Commission recently issued guidance on compatibility with the EU competition rules of a sustainability agreement for reducing CO2 emissions in European ports, aimed at accelerating the transition from diesel to electric equipment to reduce CO2 emissions. Requested by a terminal port operator, the guidance assessed the joint purchasing and setting technical specifications for electric container-handling equipment in European ports.

The Commission found no concerns with the proposed agreement provided that it includes safeguards allowing independent purchasing by port terminal operators, capping pooled demand to prevent anti-competitive effects, and limiting the exchange of sensitive information to what is necessary.

The guidance is issued under the revised Notice on Informal Guidance of 2022, which allows businesses to seek informal guidance from the Commission on the application of EU competition rules to novel or unresolved questions.

The EU also has in place specific guidelines on the antitrust assessment of sustainability agreements, namely the Horizontal Guidelines, which contains a section on sustainability agreements. The Commission is currently in the process of updating its Merger Guidelines, among others, to include sustainability and clean tech considerations in the merger assessment. For more information, please refer to our publication European Commission Launches Merger Guidelines Review.

WHAT COMES NEXT

In 2026, EU climate policy will pivot from target‑setting to implementation as the EU translates its 2040 net-90% target into actionable frameworks. Key developments expected in 2026 include the design of post-2030 climate packages, focusing on ETS and sectoral regulations, and the integration of carbon removals. The EU ETS review will address carbon removal integration and cap adjustments. CBAM will expand its scope to include more products and enhance anti-circumvention measures. Additionally, the CRCF will advance methodologies for carbon removal activities, while the Nature Credits Roadmap will lay groundwork for nature-positive credits, setting the stage for a biodiversity market.