While the EU's 2050 climate neutrality objective and the 55% reduction target for 2030 are already embedded in binding law,2 the 2040 milestone fundamentally reshapes the trajectory of decarbonization, industrial transition, and regulatory architecture within the EU.
The flexibility mechanism accompanying the 2040 target is also significant. The regulation permits the limited use of high-quality international carbon credits from 2036 onward, potentially contributing up to 5% of the 2040 target (Article 1(2), inserting new Article 4(5)(a)).1 This flexibility, while quantitatively modest, introduces structural and legal questions that will influence carbon markets, industrial investment, and corporate governance strategies across the European Union.
The architecture of the 2040 target
The 2040 target is designed as a "net" reduction objective. In practical terms, this means that at least 85% of emissions reductions are expected to be achieved domestically, with the remaining portion potentially addressed through internationally sourced credits, subject to strict eligibility conditions and alignment with the Paris Agreement framework (new Article 4(5)(a)).1 The Climate Law amendment therefore integrates, for the first time at this level of ambition, a calibrated interaction between domestic abatement and cross-border mitigation mechanisms.
This design reflects a deliberate balancing act. On the one hand, it preserves the integrity of domestic decarbonization by requiring most reductions within the EU. On the other, it acknowledges economic and technological realities, particularly for hard-to-abate sectors, by allowing a limited role for international cooperation mechanisms.
The legal and political implications of this balance should not be underestimated. If the flexibility is fully utilized, the effective domestic reduction rate would approximate 85%. The new Article 4(5)(a) requires that the origin, quality criteria, and other conditions concerning the acquisition and use of international credits be regulated in EU law.
Specifically, such credits must be based on credible and transformative activities in partner countries with the aim of achieving climate targets and policies compatible with the long-term temperature goal laid down in the Paris Agreement. They must be subject to robust safeguards, including ensuring integrity; avoidance of double counting; additionality; permanence; transparent governance; and strong monitoring, reporting, and verification methodologies.
The credits must also ensure economic, social, and environmental co-benefits and human rights safeguards, and have a high ambition for the share of proceeds for adaptation and the sharing of mitigation benefits with countries concerned.
When establishing the quality criteria, the European Commission shall consider, where appropriate, complementing the criteria laid down under Article 6(4) of the Paris Agreement to ensure the respect of those safeguards and the highest quality of international credits, in particular regarding permanence and human rights (Article 1(2), inserting new Article 4(5)(a)).
The scope and operational detail of eligible credits will, therefore, depend on further implementing measures to be adopted in EU law, particularly considering ongoing debates surrounding integrity standards and corresponding adjustments under Article 6 of the Paris Agreement.
Implications for the EU Emissions Trading System
The Climate Law amendment does not directly rewrite the EU Emissions Trading System (ETS), yet its interaction with the carbon market architecture is structurally significant. The regulation draws a clear distinction between two parallel mechanisms. Domestic permanent removals are assigned a role within the EU ETS to compensate for residual hard-to-abate emissions (new Article 4(5)(b); Recital (13))—and the specific technologies and legal implications are discussed in the following section.
International credits, by contrast, are framed as contributing to the overall EU-level 2040 climate target, up to 5% of 1990 net emissions from 2036, with no provision for their integration into the ETS cap-and-trade mechanism (new Article 4(5)(a)). The regulation therefore establishes, in substance, two distinct accounting tracks: EU Allowances (EUAs) operating within the regulated trading system, and international credits counted separately towards the 2040 target at EU level.
The practical implications of this architecture for carbon price formation remain to be determined. The ETS continues to function as the core compliance mechanism for major industrial emitters and power generators.3
However, the precise operational mechanics of international credits—including how they will be acquired, verified and accounted for—are left to the future implementing legislation referred to above. Until that framework is adopted, there is inherent uncertainty as to how these two tracks will interact in practice, including any consequences for market liquidity, derivatives pricing, and corporate treasury risk management.
The Climate Law amendment also formally postpones the operation of ETS2—the extension of emissions trading to buildings, road transport and additional sectors—by one year, from 2027 to 2028 (Article 2; Recital (12)).1 Recital (13) further indicates that the current EU ETS trajectory should be revised to take into account the 2040 target, including a slower phase-out pathway for free allocation of allowances from 2028 onwards to support decarbonization, investment, and employment while minimizing the risk of carbon leakage.
The cumulative effect is a carbon pricing ecosystem of increasing complexity, with implications not only for operational compliance but also for corporate financial planning, carbon cost hedging, and the valuation of carbon-related assets and liabilities on company balance sheets.
Carbon removals and industrial strategy
Perhaps the most strategically significant aspect of the 2040 framework is its increasing reliance on carbon removals. The new Article 4(5)(b) provides for the role of domestic permanent removals under the EU ETS to compensate for residual hard-to-abate emissions.
Recital (13) specifies that such removals include biogenic emissions capture with carbon storage (BioCCS) and direct air capture with carbon storage (DACCS), while ensuring the environmental integrity of the EU ETS, including the possibility to store CO₂ outside the EU subject to the existence of international agreements and conditions equivalent to those laid down in EU law. Recital (10) further provides that incentives for the inclusion of domestic permanent carbon removals in the EU ETS will be developed in the context of the upcoming review of Directive 2003/87/EC.
Separately, the EU has advanced a Carbon Removal Certification Framework (CRCF), aimed at establishing methodologies and standards for high-quality removal activities.4 The integration of permanent removals into the climate architecture signals that decarbonization alone will not suffice; permanent or long-duration carbon storage is expected to play an expanding role.
The regulation treats nature-based removals differently. Article 4(5)(d) acknowledges the realistic contribution of carbon removals to the overall emission reduction effort but expressly flags the uncertainties of natural removals, requiring that possible shortfalls would not be at the expense of other economic sectors.
Article 4(5)(e) sets out a separate obligation to maintain, manage, and enhance natural sinks in the long term; protect and restore biodiversity; and take into account differences in forest age structure, natural variability and the impacts of climate change and natural disturbances in the land use, land-use change, and forestry (LULUCF) sector.
Recital (10) reinforces this distinction, noting that natural removals have specific characteristics—such as forest age structure, proportion of organic soils, natural variability and uncertainties related to the impacts of climate change—that distinguish them from technological removals. The two categories therefore operate under fundamentally different risk profiles and regulatory frameworks within the amended Climate Law.
The legal implications for businesses involved in carbon removal activities are significant. For permanent technological removals (BioCCS, DACCS), the key questions will center on the design of the EU ETS integration—including eligibility criteria, monitoring, and verification requirements, long-term storage liability allocation, and the regulatory framework for cross-border CO₂ transport and storage outside the EU.
For nature-based removals, the principal risks relate to permanence, natural variability, and the possibility that shortfalls in natural sinks could trigger an adjustment of the 2040 target itself under the biennial review mechanism (amended Article 11, new point (g)).
In either case, the legal structuring of removal projects, long-term offtake agreements, and risk allocation between counterparties will require careful attention as the implementing framework develops.
International credits and Article 6 of the Paris Agreement
The new Article 4(5)(a) also contemplates a pilot period from 2031 to 2035 to initiate a high-quality and high-integrity international credit market. From 2036, those credits may formally contribute to the EU-level 2040 accounting framework, subject to the safeguards set out in the Architecture section above.
The origin, quality criteria, and all other conditions concerning the acquisition and use of such credits shall be regulated in EU law. Recital (13) adds that, in operationalizing the use of international credits, the European Commission should take into account the need to ensure a level playing field across member states and the opportunity to support strategic EU partnerships in line with the interests of the EU.
The regulation does not, however, address the practical complexities of the Article 6 market that will determine whether this mechanism functions effectively. Article 6 implementation remains legally complex: host countries may limit exports of credits to preserve their own nationally determined contributions, and the integrity of accounting across jurisdictions is not yet fully resolved at international level.5
If European demand for high-quality credits increases from the pilot period onward—and in particular from 2036 when credits may formally count towards the 2040 target—jurisdictions with significant mitigation potential are likely to become focal points for project development and capital flows.
For businesses, two timelines are therefore relevant. The pilot period from 2031 to 2035 will shape the emerging market infrastructure and quality standards for international credits. From 2036, those credits may formally contribute to the EU-level 2040 accounting framework. In both phases, the legal structuring of credit procurement, due diligence on credit quality and integrity, compliance with the safeguards set out in EU law (once adopted), and the management of counterparty and sovereign risk in host countries will be critical.
The fact that the full eligibility criteria, operational mechanics and interaction with other instruments are left to the future implementing legislation referred to above means that the regulatory framework is still being built—and businesses should monitor the European Commission's implementing proposals closely.
Supply chains, trade, and CBAM
The 2040 trajectory also reinforces the logic of the Carbon Border Adjustment Mechanism (CBAM).6 Recital (8) calls for the effective implementation and extension of CBAM to downstream goods, the introduction of anti-circumvention measures and, notably, action to address export carbon leakage—recognizing that the risk of carbon leakage is not limited to imports but extends to EU producers' competitiveness in export markets.
This is reinforced by the new Article 4(5)(m), which requires the post-2030 legislative framework to reduce the risk of carbon leakage, in particular for SMEs and industrial sectors most exposed to carbon leakage, including in relation to exports, so as to ensure fair competition.
For businesses, the practical implications are significant. A tighter domestic decarbonization pathway, combined with the extension of CBAM to downstream goods and the focus on export carbon leakage, will intensify scrutiny of embedded emissions across global supply chains.
Exporters into the EU will face increasing pressure to measure, report, and reduce carbon intensity. European producers, meanwhile, will need to manage the competitive impact of carbon costs on their export activities. Carbon risk therefore extends beyond regulatory compliance into trade strategy, supply chain governance and commercial contracting practice.
Financial regulation, disclosure, and litigation risk
Regulation (EU) 2026/667 does not directly address corporate disclosure or sustainability reporting obligations, nor does it reference the Corporate Sustainability Reporting Directive (CSRD) or the EU Taxonomy. However, the connection between the Climate Law amendment and the sustainable finance framework is implicit and unavoidable.
The new Article 4(5)(a) establishes demanding quality criteria for international credits—including integrity, additionality, permanence, human rights safeguards, and strong monitoring, reporting and verification methodologies—with the detail to be regulated in future EU legislation.
Companies that rely on international credits as part of their transition strategies will need to consider how those credits are treated under their CSRD reporting obligations and EU Taxonomy alignment assessments,7 particularly regarding the quality, permanence, and risk profile of those credits.
The absence of an express cross-reference to the sustainable finance framework in the regulation is itself notable. It means that the interaction between the Climate Law amendment and corporate disclosure obligations will depend on how the European Sustainability Reporting Standards (ESRS) and Taxonomy delegated acts evolve to accommodate the 2040 target and the new international credit mechanism.
Until that alignment is clarified, companies face a gap between the substantive requirements of the Climate Law amendment and the reporting framework through which they must communicate their climate strategies to investors and stakeholders.
If credits relied upon by a company subsequently fail the integrity or human rights safeguards mandated by Article 4(5)(a), or if the implementing legislation imposes stricter eligibility criteria than anticipated, the consequences could extend beyond regulatory non-compliance to securities disclosure liability or claims of greenwashing—particularly in the context of expanding climate litigation across Europe. Directors and senior management should therefore ensure that net-zero commitments and carbon credit strategies are grounded in defensible assumptions, aligned with the safeguards set out in the regulation, and disclosed transparently.
Transitional flexibility and structural decarbonization
The 2040 framework reflects a carefully calibrated compromise between ambition and flexibility. The Climate Law amendment itself builds in a structured review process through the new Article 4(8): from March 6, 2027 and every two years thereafter, the European Commission shall assess and report on the implementation of the intermediate targets and decarbonization trajectories, taking into account the latest scientific evidence, technological advances, and evolving challenges to and opportunities for the EU's global competitiveness. That assessment may be accompanied, where appropriate, by legislative proposals (new Article 4(8)).
The review mechanism has particular significance in relation to natural removals. Under the amended Article 11, new point (g), if the European Commission finds that the estimated level of net natural removals for 2040 is significantly diverging from what would be required to achieve the 2040 intermediate target—including where that divergence is due to natural disturbances—it shall propose, where appropriate, measures at EU level, including, if necessary, an adjustment of the 2040 intermediate target.
Any such adjustment is expressly limited: it must correspond to, and remain within the limits of, the possible shortfalls, and the European Commission must ensure that such shortfalls will not be at the expense of other economic sectors. The 2040 target is therefore "binding" but not immutable—it is subject to a bounded adjustment mechanism tied specifically to natural removal shortfalls.
The 2050 climate neutrality objective remains unchanged. What the biennial review mechanism introduces is uncertainty not about the destination, but about the trajectory. Businesses must plan for net zero by 2050 regardless, but the intermediate milestones and the regulatory instruments used to reach them may shift. The European Commission's first assessment under the new Article 4(8), due by March 6, 2027, will provide an early indication of whether and how that trajectory may be recalibrated.
Conclusion
Regulation (EU) 2026/667 does more than set a numerical target. It establishes a more intricate carbon governance architecture—one that integrates domestic abatement, carbon removals, limited international cooperation through high-quality credits, and enhanced flexibility across sectors and instruments (new Articles 4(3), 4(5)(a), 4(5)(b) and 4(5)(c)).
As set out above, the biennial review mechanism means the trajectory towards 2050 may shift, even as the destination remains fixed. Any adjustment of the 2040 target is bounded by the scale of natural removal shortfalls and must not be at the expense of other economic sectors (amended Article 11, new point (g)).
While the regulation itself focuses on target-setting, emissions trading and the conditions for international credits, the practical legal implications extend further—spanning regulatory compliance, carbon market structuring, trade and supply chain law, disclosure obligations, dispute risk, and board-level governance.
Footnotes
1. Regulation (EU) 2026/667 of the European Parliament and of the Council of March 11, 2026 amending Regulation (EU) 2021/1119 as regards the setting of an EU intermediate climate target for 2040, OJ L 2026/667, 18.3.2026. ELI. See also Council of the European Union, "2040 climate target: Council and Parliament agree on a 90% emissions reduction," December 10, 2025.
2. Regulation (EU) 2021/1119 of the European Parliament and of the Council of June 30, 2021 establishing the framework for achieving climate neutrality and amending Regulations (EC) No 401/2009 and (EU) 2018/1999 (“European Climate Law”), OJ L 243, 9.7.2021, p. 1. ELI. See also European Commission, European Climate Law and 2030/2050 targets.
3. European Commission, EU Emissions Trading System (ETS).
4. European Commission, Carbon Removal Certification Framework (CRCF): Carbon Removals and Carbon Farming - Climate Action - European Commission
5. UNFCCC, Article 6 of the Paris Agreement overview: Key aspects of the Paris Agreement | UNFCCC
6. Regulation (EU) 2023/956 of the European Parliament and of the Council of 10 May 2023 establishing a carbon border adjustment mechanism, OJ L 130, 16.5.2023, p. 52. ELI. See also European Commission, Carbon Border Adjustment Mechanism (CBAM).
7. European Commission, Corporate Sustainability Reporting Directive (CSRD).
