The European Union has agreed to a legally binding climate target to cut emissions 90% by 2040, even as it pushes back a planned critical emissions trading scheme.
The European Parliament and EU Member States came to a provisional agreement on the target and an amendment of the EU Climate Law on Tuesday night.
“Today, the EU is showing our strong commitment to climate action and the Paris Agreement. One month after COP30, we have turned our words into action – with a legally binding target of 90% emissions reduction by 2040,” EU chief Ursula von der Leyen said in a statement announcing the deal on Wednesday.
She added that the agreement represents a “pragmatic and flexible plan” to make the clean transition more competitive.
“The fact that this new target is legally binding is commendable, as it cements the EU’s ambition to achieve net zero by 2050,” Hortense Bioy, who heads up sustainable investing research for Morningstar Sustainalytics, told CNBC.
It is hot on the heels of the 30th Conference of the Parties (COP), which saw world leaders gather at the edge of the Brazilian Amazon to decide on how to implement climate targets. Brazil’s COP30 presidency pushed through a compromised deal to boost climate finance for developing nations but the text did not include references to fossil fuels.
No official U.S. delegates attended COP30 marking an unprecedented absence of U.S. officials at the conference. It comes after Trump at the start of this year withdrew the country from the Paris Agreement to limit global temperature rise to 1.5 degrees Celsius above pre-industrial levels.
“Today’s news provides the long-term certainty that investors needed to continue deploying capital into net zero technology at scale, giving Europe the opportunity to become the global leader in the sector while others retreat,” Louis Fearn, principal at Jaguar Land Rover’s corporate venture capital arm InMotion Ventures, told CNBC.
“The 2040 target will accelerate innovation across critical supply chains, from solutions for rare earth materials to next-generation energy storage, as businesses now have clear visibility on where regulation is heading. The combination of regulatory certainty and Europe’s commitment to maintaining competitiveness through this transition provides the ideal backdrop for startups to thrive, especially those that cut emissions while delivering better performance at lower costs,” he said.
Bastian Gierull, the chief executive of renewables-focused utility Octopus Energy Germany, added it’s important to “recognise that climate protection is not a burden, it is a strategic investment.”
Climate action is a driver of economic growth, independence, job creation and innovation, he said, noting the commitment “shows we can fight climate change while keeping Europe competitive.”
Emissions trading and credits
The European Union’s new deal includes a one-year delay to the application of the EU Emissions trading system for buildings, road transport as well as small industries (ETS2). The ETS2 is a fresh addition to the bloc’s carbon markets, designed to incorporate industries not included by the existing scheme which was launched back in 2005.
It was due to come into force in 2027 but will now be 2028, per the update. Monitoring and reporting requirements for ETS2 came into force this year and will be unaffected.
Any delay of its implementation “would be a serious concern,” according to Craig Douglas, partner at venture capital firm World Fund, which backs decarbonization technology startups.
“This legislation is a foundational element for decarbonisation — investment decisions are already being made on the assumption that it proceeds as planned. Any postponement or significant change risks undermining those decisions and could slow progress overall. Our priorities should be to keep cost of decarbonation as low as possible, moving between sectors and including offsets is a sensible approach,” he told CNBC.
The deal also includes the use of carbon removal credits. One credit represents one metric ton of carbon dioxide removed from the atmosphere. There is the potential to use what the EU describes as “high-quality international credits” to reach the fresh reductions target, although they can only make up 5% of efforts, with the rest coming from domestic removals.
The use of carbon credits by companies has long been controversial, given a slew of scandals that found they do not represent genuine emissions reductions. However, the market has shifted to focus on quality and reliability in recent times.
Their inclusion “highlights the need to accelerate the development and scaling of this market,” Bioy said.
For Magnus Drewelies, the CEO of carbon credit trading platform Ceezer, this sends three key messages: net zero needs flexibility, the European Union will be firm on the quality of credits, and, despite the second point, it is willing to support global climate action by buying international credits.
“The integration of up to 5% of international credits can support global climate mitigation efforts financially— but in reality it is also a way to reduce the cost of the climate target, with international credits coming at significantly lower prices consistently,” he added.
“The real effect will remain to be seen — the actual quality and risk of carbon credits is complex — and neither the EU nor the Paris Agreement provides any metric-based guidance to ensure that investments turn into reliable climate impact.”
