The 2021 European Climate Law sets the legally binding target of reaching net-zero emissions by 2050 and also defines the intermediate steps necessary to achieve the goal of climate neutrality.
In the 2021 Climate Law, the Commission proposed an intermediate target for 2030, which proposes to reduce emissions by at least 55% compared to 1990 levels (known as the “Fit for 55 Package,” which was proposed in 2021 and completed in 2023).
The law also includes a process for setting a 2040 climate target.
In February 2024, the Commission presented a communication and a detailed impact assessment that launches the process of setting a 2040 climate target for the entire Union, aiming to achieve 90% reductions by this date.
Incorporating International Carbon Credits
In July 2025, the Commission officially consolidated this target through an amendment to the climate law itself. The target to be included in the climate law is therefore a 90% reduction in emissions by 2040 compared to 1990 levels. The proposal was submitted to the European Parliament and the Council to be discussed and adopted according to the ordinary legislative procedure.
The Commission’s proposal follows an impact assessment by the IPCC and the European Scientific Advisory Board on Climate Change, as well as a series of consultations held among the Union’s Member States and stakeholders.
One of the interesting new features of the Commission’s proposal is the possibility of using a share of international carbon credits as a European strategy for decarbonizing the economy, an action that, for the first time, gives official status to the voluntary carbon market, allowing for a strong push for the sector’s expansion.
In this new Communication, the Commission continues to consider domestic reductions within the Union, through national policies, as the core of European climate policy (as clearly stated in the February 2024 Communication). However, it also includes the possibility of a limited use of high-quality international carbon credits from partner countries with climate targets and actions in line with the Paris Agreement goals.
The Commission proposes that, starting from 2036, a limited contribution equal to 3% of Europe’s 1990 net emissions could be used to achieve the 2040 target. With this addition, the Union aims to strike the right balance between domestic action and international cooperation. These international credits must therefore come from credible activities that contribute to real emission reductions and environmental protection, such as Direct Air Carbon Capture and Storage (DACCS) and Bioenergy with Carbon Capture and Storage (BioCCS).
The proposal, therefore, recognizes the importance of flexibility: flexibility in economic tools and strategies to achieve climate goals and flexibility in reduction targets between sectors. Member States can thus compensate for a lack of emission reductions in hard-to-decarbonize sectors, such as land use, by exceeding targets in other sectors, for example, in energy, waste, and transport.
Industrial, Energy, Transport, and Agriculture Strategies
The industrial sector is heavily involved in the 2040 strategy. It also provides for the accounting of all “permanent CO2 removal” activities implemented in the European Union within the ETS system. This is also an important new feature introduced by the Commission, as it allows for an expansion of the ETS and ensures an essential role for activities based on improving the absorption capacity of soils and forests, and industrial activities that will use technologies like Carbon Capture and Storage (CCS) and Carbon Capture and Utilization (CCU) activities (a process where CO2 is put back into the system, no longer as waste, but as a resource).
However, at least in the medium term, the costs of so-called “permanent removals”, the emissions removed from the atmosphere through the activities mentioned above, will remain higher than the current price of ETS allowances, and this will necessitate incentive policies for such activities and a rigorous and reliable European certification framework. The publication emphasizes the need to distinguish between reductions and removals, to prevent excessive use of removal activities at the expense of actual emission reductions.
The energy sector is at the heart of the Commission’s new climate strategy. As in the 2021 Climate Law, the July proposal calls for a drastic reduction in the use of fossil fuels, with an 80% drop as a target by 2040. The expansion of renewable sources and energy efficiency is essential; the electrification of the economy becomes crucial, and space is also given to nuclear power as a low-emission source. The Commission’s proposal, however, supports the importance of massive infrastructure investments and the development of CCS technologies. Energy security and decarbonization are the two main goals of the Commission’s publications, in order to support the Union during peak demand and free it from the threats of Russian suppliers.
The transport sector will also play an important role in the Union’s decarbonization. The sector, along with the residential heating sector, will be subject to compliance under the Emissions Trading System Two (a significant expansion of the ETS1 to include more sectors under the scheme). In this context, the Union has already increased subsidies for pioneering projects in the electric vehicle battery sector under the Innovation Fund. Electrification, enhancing sustainable mobility, and strengthening regulatory and fiscal tools are all instruments the Commission suggested in the July publication to incentivize the transition in the transport sector. There is also much discussion of the issue of the social costs of decarbonization in the transport and heating sectors, and a very careful assessment of policy impacts and the provision of compensation measures is suggested.
The agricultural sector, for its part, will have to balance the needs of food production and decarbonization. The publication, in particular, recognizes the importance of the sector through practices that increase natural CO2 removals, such as sustainable soil management and so-called “carbon farming” (agricultural practices that capture CO2 and store it in soils or vegetation). The Commission’s proposal is therefore ambitious, but some criticisms have emerged.
Critiques and Concerns
The main concerns are the absence of distinct targets for the various decarbonization practices and also the fact that the possible inclusion of removals in the ETS could compromise the system’s effectiveness. Furthermore, the use of international carbon credits as a potential European strategy, albeit in a small part compared to national reductions, could weaken Europe’s domestic reduction commitment and encourage carbon leakage. Finally, the cross-sectoral flexibility for reductions could lead to uncertain policies at the sectoral level and, consequently, to an inefficient overall reduction of emissions.