What's Happening?
The European Commission has released a review of the EU Emissions Trading System (ETS), proposing the integration of 260 million tonnes of international credits to meet its 2040 climate targets. The review aligns with the European Climate Law, aiming
for a 90% reduction in greenhouse gases by 2040. The proposal includes a domestic reduction target of 85%, with the remaining gap to be filled by international credits starting in 2036. This move is seen as optimistic given the slow progress of international carbon markets under the Paris Agreement. The proposal also suggests a centralized authority to auction additional allowances to fund domestic carbon dioxide removal (CDR) credits.
Why It's Important?
The integration of international credits into the EU ETS could significantly impact global carbon markets by creating a demand for high-integrity credits. This move may encourage international collaboration and investment in carbon reduction technologies. However, the proposal's reliance on untested assumptions about the cost-effectiveness of international credits poses risks. If international credits prove more expensive than domestic reductions, it could undermine the EU's climate leadership and stifle market development. The proposal's success depends on the establishment of a robust legal framework and the operationalization of the Article 6.4 Paris Agreement Crediting Mechanism.
What's Next?
The EU Commission plans to conduct a report by 2033 to assess the availability and cost-efficiency of international credits. If the report does not confirm a positive outlook, the use of international credits may be restricted. This decision will influence the future of the EU ETS and its reliance on international credits. The proposal also calls for further political clarity and the development of a legal framework for international credits, expected by the end of the year. Stakeholders, including CDR developers and international carbon market participants, will be closely monitoring these developments.
