The EU’s 2040 climate target

On 2 July 2025, the European Commission proposed an amendment to the EU Climate Law to establish a legally binding target of reducing net greenhouse gas (GHG) emissions by 90 percent by 2040, compared to 1990 levels. This proposal aligns with the EU’s long-term climate neutrality objective and fulfills its legal obligation under the Climate Law to propose an intermediate target following the first global stocktake under the Paris Agreement. The 2040 target builds on the EU’s current binding 2030 target of at least a 55 percent reduction in emissions and aims to guide the EU towards climate neutrality by 2050. Unlike previous frameworks, the 2040 proposal emphasizes flexibility, cost-effectiveness and pragmatic pathways, considering evolving economic, technological and geopolitical realities.

The proposed 2040 target must still undergo discussion and adoption by both the European Parliament and Council through the ordinary legislative procedure. Once adopted, it is expected to form the backbone of the EU’s updated Nationally Determined Contribution (NDC), which is due by September 2025, ahead of COP30 in Belém, Brazil.

1. Use of international carbon credits (Article 6 of the Paris Agreement)

Starting in 2036, the EU may allow the use of high-quality international carbon credits to offset emissions. The use of these credits is capped at a maximum of three percent of the EU’s net GHG emissions from 1990 levels, ensuring limited reliance on external offsets. Strict regulation at the EU level will define the origin, quality criteria, transparency and acquisition conditions for these credits to ensure environmental integrity is preserved. Importantly, the proposal implies that access to international credits will be limited to member states (i.e., public entities), excluding private companies covered by the EU Emissions Trading System (ETS). This distinction is not yet fully clarified and will require further legal and political scrutiny to determine if and how private sector actors may participate.

2. Integration of permanent carbon removals into the EU ETS

The legislative revision explicitly incorporates permanent GHG absorptions (carbon removals) carried out within the EU territory as a tool for offsetting residual emissions — those emissions that cannot be eliminated even by 2050. This mechanism targets sectors where emission reductions remain technically or economically infeasible, such as certain industrial processes.

The eligible absorptions must comply with the upcoming Carbon Removal Certification Framework (CRCF) and related EU standards to guarantee permanence and additionality. The use of removals is constrained to ensure it supplements, but does not replace, active decarbonization efforts during the transition. Removals outside the EU are excluded from this flexibility under the current proposal.

While carbon removal is not currently included under the EU ETS, the Commission will report by 2026 on how negative emissions could be integrated into emissions trading. Carbon capture and storage (CCS) for fossil emissions is already covered under the EU ETS with the CCS Directive. In line with these developments, the European Commission has initiated a call for public consultation, which explores expanding the ETS scope to include permanent carbon removals and municipal waste incineration, linking carbon markets, and enhancing carbon leakage protection beyond the Carbon Border Adjustment Mechanism (CBAM), reflecting the EU's proactive stance on refining its emissions trading system.

3. Cross-sectoral flexibility and cost-effectiveness

The proposal promotes greater flexibility between sectors, allowing member states to balance emission trajectories by overachieving in some sectors while compensating for underperformance in others. For example, a country may offset limited progress in the land use, land-use change and forestry (LULUCF) sector with overperformance in waste management or reductions in transport emissions.

Recognizing that achieving a 90 percent reduction will require more than regulatory obligations, the Commission has presented a package of enabling policies to support industry and investors. These include the newly adopted Clean Industrial Deal State Aid Framework, which allows member states to provide targeted support for the development of clean technology and industrial decarbonization.

The simplification of the CBAM is another key element, exempting 90 percent of importers from reporting obligations while maintaining the mechanism’s integrity. Later this year, the Commission will present legislative proposals to address export carbon leakage, a critical concern for EU manufacturers competing globally.

Fiscal policy will also play a role. The Commission has issued a Recommendation on tax incentives, encouraging member states to introduce tools such as accelerated depreciation and tax credits to attract private investment into clean technologies. Meanwhile, new guidance has been published to help optimize the use of renewables permitting rules and support Power Purchase Agreements (PPAs) — all aimed at reducing energy costs and improving corporate access to clean electricity.

Other supportive measures include the launch of a pilot for the Industrial Decarbonisation Bank, the upcoming Chemicals Industry Action Plan, and sectoral dialogues to define targeted decarbonization pathways. The revision of the Multiannual Financial Framework (MFF), expected later this month, will further clarify the funding landscape for the transition period leading up to 2040.

The 2040 target, though not yet law, sets a clear direction for future climate action. Companies must recalibrate their decarbonization strategies beyond 2030, reassess investment risks in light of carbon pricing and regulatory trends, and actively pursue opportunities from emerging EU incentives and funding instruments. While the proposed flexibilities provide some relief, they also introduce additional complexity. Businesses need to understand the pricing and verification of removals under the ETS, operationalize cross-sectoral compensation and effectively manage international credits.

In the coming months, the proposal will be negotiated in the European Parliament and Council. It will be crucial to monitor whether the 90 percent target is upheld, how strictly flexibilities are governed, and the establishment of the 2035 target required by COP30. These developments will heavily influence investment certainty and strategic planning in the coming years, shaping the landscape for businesses as they navigate the evolving policy environment.

For more information, please contact Ruth Guerra, Mike Hayes, Weronika Zurawska and Sidharth Kamat.