• A 90% net emissions reduction target (vs. 1990 levels) by 2040 would be implemented.
• International carbon credits would be introduced, which could be used by member states and companies to cover up to 3% of that target.
• Use of credits would be allowed from 2036 onwards, aligning with the Article 6 mechanism of the Paris Agreement. The origin, quality criteria and other conditions concerning the acquisition and use of any such credits shall be regulated in union law.
• Oversight would be provided by a U.N. supervisory body, with further restrictions and quality filters to be defined at EU level.
• There would be an increased emphasis on carbon storage, including both natural sinks and long-term storage, which were not clearly defined in the previous version.

This represents a policy shift—from “purely domestic reductions” toward a hybrid approach that blends internal action with international offsets.

Business impacts

• Cost flexibility: For emissions-intensive sectors (e.g., cement, chemicals, aviation), international credits may lower overall compliance costs—especially when domestic decarbonization is technically or financially challenging.
• Compliance strategy: Companies could integrate offsets into their long-term GHG reduction plans, pending national transposition and sector-specific rules.
• Market signals: The proposal acknowledges that certain technologies (e.g., carbon removals, CCS) are not yet scalable in every member state. Allowing credits introduces market-based support for those transitions.

Emerging risks

• Legal uncertainty: The upcoming UNIDROIT Principles on carbon credits aim to clarify ownership, transferability, collateralization, and treatment in insolvency—but they won’t be finalized before end-2026.
• Voluntary carbon market scrutiny: As legal claims related to carbon offsetting grow globally, due diligence, contract structuring, and integrity verification become crucial. Multiple climate-related cases have been filed globally in recent years—many targeting greenwashing and misrepresented offsets.
• Reputational pressure: relying on credits—particularly those with short-lived or unverified climate benefits—may trigger scrutiny and undermine the credibility of companies’ climate narratives.
• Regulatory backlash: Some EU member states and scientific advisers argue the inclusion of offsets undermines the Climate Law, which was built on the principle of domestic reductions. There may be challenges ahead regarding legal consistency and credibility.

Sector watchlist

The carbon credit ceiling may particularly affect:

• Transport and agriculture—where decarbonization is slower and credits may offer temporary relief.
• Industrial manufacturing—for whom international offsets may serve as a bridge while cleaner technologies scale.
• Energy and utilities—needing to balance net-zero targets with long-term asset strategies.
• Financial services and investors—who will increasingly assess carbon portfolios against evolving rules for credit legitimacy.

Final thoughts

The European Commission’s proposal signals a strategic evolution in Europe’s climate architecture—combining climate ambition with pragmatic flexibility. For companies and investors, the next 18 months will be critical to anticipate legal, operational, and reputational implications before the 2036 activation.

Whether this flexibility will fuel innovation or delay structural change remains to be seen—but the legal framework being built around it will define how resilient and investable it becomes.

Stay informed, stay strategic. The regulation is coming—now is the time to assess exposure, revisit compliance plans, and evaluate how carbon market dynamics will shape business decisions going forward.

The European Commission’s proposal will now be submitted to the European Parliament and the Council for negotiation and adoption under the ordinary legislative procedure. It will also work with the Council Presidency to finalize the EU’s Nationally Determined Contribution (NDC)—including an indicative 2035 figure—for submission to the UNFCCC ahead of COP 30. The timeline for post-2030 climate and energy proposals, supporting the 2040 target, will be set out in the Commission’s 2026 Work Programme.