In July the European Commission proposed a 2040 EU-wide greenhouse gas (GHG) emission reduction target of 90% against a 1990 baseline: a key milestone between the EU’s 2030 emission reduction target of 55% and its goal of net zero by 2050. We take a closer look at the implications of this target for European investors and industry.
Unlike previous climate targets for 2030 and 2050, the proposed 2040 climate target includes several flexibilities to ease the load on European businesses and investors.
The Commission says these are intended to reflect a more pragmatic approach to implementation, and are fundamentally about making a strong business case for investments in the clean transition. They also serve to make the proposal more politically palatable at a time when Brussels is increasingly focused on Europe’s industrial competitiveness.
The proposed 90% reduction target broadly aligns with our previous ask, supported by 150 investors, businesses and organisations. However, the inclusion of flexibilities is new. Among them is a sensible commitment to integrate domestic permanent carbon removals into future revisions of the EU Emissions Trading System (ETS).
The most notable, and controversial, flexibility is the “possibility for a limited amount of international carbon credits” to count towards the 2040 target. This option, in line with Article 6 (on Crediting Mechanisms) of the Paris Agreement, would only apply from 2036 and would be limited to covering a maximum of 3% of the EU’s 1990 emissions levels.
This limited inclusion of international credits is the result of behind-the-scenes discussions between the EU’s Climate Commissioner, Wopke Hoekstra, and EU member states. It is intended to ensure that the overall 90% target receives sufficient political support.
Ultimately, reducing domestic emissions by less than 90% by 2040 would mean the EU falls short of its scientifically advised trajectory to align with 1.5°C.
Well ahead of 2036, the Commission will publish legislation to establish what carbon credits could be used. This will include ensuring credits come from “credible and transformative activities”, such as direct air carbon capture and storage. Bioenergy with carbon capture in storage in partner countries, whose climate targets and actions align with the Paris Agreement, will also be considered.
Nevertheless, there are risks associated with their use.
The independent European Scientific Advisory Board on Climate Change (ESABCC) strongly opposes using credits to meet the 2040 target, arguing that such credits are often of poor quality and can undermine domestic emission reduction efforts. Ultimately, reducing domestic emissions by less than 90% by 2040 would mean the EU falls short of its scientifically advised trajectory to align with 1.5°C.
To ensure policy certainty, investors will need a well-defined assessment framework to monitor and verify the use and quality of carbon credits by corporations. If applied, international carbon credits should only be used for residual emissions. And any use of carbon credits must be coupled with a strict compliance process to oversee actual emission reductions in partner countries.
We support the proposal’s clear links between the achievement of the 2040 target and the implementation of broader EU policy frameworks, including the Clean Industrial Deal (CID).
The CID is vital in bringing together climate and competitiveness, setting out plans to “create the right conditions for companies to reach common decarbonisation goals”.
Within this, the EU’s focus on ensuring access to affordable clean energy is a necessary precondition that also supports important energy efficiency, security, and independence objectives. All of this is vital to unlocking institutional capital for investment in the transition for 2040 and beyond.
However, the 2040 proposal also shines a new light on a key gap in the EU’s current policy architecture: the lack of sector decarbonisation roadmaps.
As noted in IIGCC’s recent paper, investors can use decarbonisation roadmaps to bridge the information gap between economy-wide targets and individual corporate transition plans for key sectors, informing their independent decision-making and investment processes.
The Commission needs to follow through on its commitment in the CID “to develop sector transition pathways” that better enable informed investment decisions to facilitate the mobilisation of capital towards the transition, as well as support investor stewardship efforts.
To ensure these pathways are credible and decision-useful for investors, there must be opportunities for investors to actively contribute as key stakeholders in their development and integration into relevant policy processes.
European Commission President Von der Leyen made a -90% by 2040 target a headline point of the political guidelines that secured her re-appointment last summer.
Objectively, what’s been proposed is an ambitious goal that, if signed off, would reaffirm Europe’s continued climate leadership on the global stage in advance of COP30 in Belém in November. It would also increase investor certainty about Europe’s trajectory to climate neutrality.
In the near term, the EU institutions hope to finalise the 2040 target on an accelerated timeline early in the autumn. This would allow the EU to submit an updated Nationally Determined Contribution (NDC) for 2035 well ahead of COP30 in Brazil, maintaining climate leadership.
The proposal now needs to be debated and agreed upon by both the European Parliament and EU member states.
Once the target is agreed, the even harder work starts – updating all relevant EU legislation to create a post-2030 policy architecture that is ‘fit for 90’, a process which is expected to kick off in the second half of 2026. We look forward to continuing our work with investors and European policymakers to support this.
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