The EU’s return to international carbon credits

Twelve years after phasing out the use of carbon credits towards its climate goals, the EU is now considering reintroducing them. A proposed amendment to EU climate law would set a legally binding target to cut net greenhouse gas emissions by 90% by 2040, compared to 1990 levels.

Importantly, the European Commission is looking to introduce some flexibility for how carbon credits can be used to achieve the target:

The fine print of how the EU implements its new policy on international credits is crucial. In the best-case scenario, it would demonstrate how domestic climate targets can be met more cost-effectively by supporting high-impact projects primarily in the Global South.

In the worst case, it risks repeating past mistakes while undermining ambitions for an integrated global carbon market.

The 3% limit for international credits based on EU 1990 net emissions translates to almost one-third of the proposed 2040 target (around 460 million tonnes of carbon dioxide equivalent) – a significant contribution.

If the EU reaches the full 3% by 2040, it could retire about 140 million credits that year, with a potential cumulative total of 300-400 million credits by 2040, costing €10 billion or more (at €30 per credit).

How does this compare with other demand sources for international carbon credits?

Utilizing international carbon credits could be a double-edged sword for the EU. On the one hand, it could represent a more cost-effective pathway, reducing the cost on European industry while supporting a just transition in the Global South.

On the other hand, many may feel that the EU is funding international projects at the expense of domestic green investment.

Public perception could also extend to international carbon trading being of limited impact and benefit to local communities, resulting in overall criticism that may deter other countries from participating.

The draft amendment and Commission briefings outline three core principles for procurement: environmental integrity, benefit sharing and Paris Agreement alignment. However, their success depends highly on how they implement them.

Many Kyoto-era carbon credits failed to deliver real, additional climate action, which is the main reason EU policy moved away from international credits.

In other policy areas, such as the Emissions Trading Scheme, the EU has only shown a willingness to consider engineered carbon removals with geological storage (i.e. methods where carbon accounting can be measured to a high degree of accuracy).

However, if the EU relies solely on engineered removals to meet its international credit needs, supply will likely fall considerably short of demand, costs will remain high and more affordable options, such as afforestation, mangrove restoration and clean cooking, will be overlooked.

The EU should remain open to all types of carbon credit projects, recognizing that environmental integrity risks are driven primarily by project-specific factors. It should implement risk management strategies against credit underperformance.

Private-sector innovations, such as carbon credit ratings and insurance, could manage underperformance risks, ensuring only the highest-quality credits are used.

International carbon credits also support valuable mitigation activities in the Global South – creating jobs, protecting indigenous communities and achieving biodiversity gains.

Critically, a fair portion of the revenue generated by the sale of credits should accrue to local communities and be evident through transparent reporting.

However, the EU must manage perception risks that international credits are “offshoring” jobs and growth. To ensure domestic benefits, the EU must engage the European private sector as investment, technology and service providers – the benefits yielded here could be significant depending on the EU’s procurement approach.

The EU must scrutinize benefit-sharing at the project level to ensure a fair transition and consider mechanisms to proactively engage Europe’s private sector and deliver domestic economic benefits. Transparent and regular reporting is crucial for demonstrating impact at home and abroad.

The intention of Article 6 is to incentivize countries to deliver emissions reduction or removal activities beyond their nationally determined contributions (NDCs) by enabling them to sell the mitigation outcomes as credits to other countries.

The risk is whether these activities are truly “additional” to a country’s NDC. For the EU, buying credits must mean funding reductions or removals that would not otherwise be delivered under a country’s NDC plan; otherwise, the EU risks delivering limited overall net benefit.

The EU shouldn’t rely only on the guardrails provided in Article 6 to ensure carbon credits are additional to NDC targets. Nor should it take an overly strict approach by automatically excluding entire countries or sectors it sees as “high risk.” It should assess each project and target those most likely to deliver real, additional emissions cuts beyond NDCs.

The EU is exploring carbon credits as a cost-effective tool to support decarbonization amid a crucial moment for global emissions. While maintaining climate leadership, the EU must balance: ensuring credits deliver real emissions impact, maximizing social and economic benefits domestically and abroad, and controlling costs.

Given the limited time and complexity of the considerations that must be balanced, we encourage legislators and policy-makers to avoid premature restrictions on credit types or strict criteria for environmental integrity, benefit sharing or Paris alignment at this stage.

Governments should first focus legislation on broad guiding principles rather than detailed rules; then, develop detailed implementation through a consultative, multi-year process.

Finally, they should ensure meaningful involvement of the private sector and Global South stakeholders in shaping the approach.