EU Council Proposes Delay to EU ETS2, Use of Carbon Credits for 2040 Targets
After a lengthy night of negotiations, climate and environment ministers from European Union member states agreed on the bloc’s 2040 climate targets, though with certain flexibilities that include delaying the EU ETS2 carbon market for upstream emissions and allowing the use of international carbon credits to meet domestic targets.
At a press conference held in Brussels on Wednesday morning, Danish Climate Minister Lars Aagaard and EU Climate Commissioner Wopke Hoekstra announced the agreement reached prior to the United Nations Conference of the Parties (COP30) scheduled for next week in Brazil, which will allow the EU to attend the conference with a plan in hand.
“We now have the three pillars that the [EU] presidency was aiming for,” Aagaard said, referring to the EU’s climate law of reducing greenhouse gas emissions by 90% based on 1990 levels by 2040; a Nationally Determined Contribution (NDC) plan for COP30; and a 2035 mandate to reduce greenhouse gas emissions by a range of 66.25% to 72.5% based on 1990 levels by 2035.
EU ETS2 Delayed to 2028
In the first instance, the European Council proposed delaying the EU’s Emissions Trading System for upstream emissions (EU ETS2) by one year, pushing it to 2028 as part of a compromise meant to garner support from member states, like Poland, that have previously opposed the implementation of the EU ETS2, according to media reports.
This new carbon market, known as the European Union Emissions Trading System 2 (ETS2), will cover the carbon emissions caused by fuel combustion from road transportation, buildings and other small industrial sectors that are not already covered by the original EU ETS.
The EU ETS2 was expected to come online in 2027, though that is now unlikely following Wednesday’s announcement. Prior to the negotiations, a delay to the EU ETS2 was only probable in the case of “exceptionally high energy prices”, according to the European Parliament.
Like the EU ETS, the incoming carbon scheme will operate as a cap-and-trade system, meaning that there will be a limited and dwindling supply of carbon allowances that will incentivize fuel suppliers to decarbonize or pay potentially higher prices in the future for the emissions of the products they sell.
Hoekstra said that the EU is also “adopting measures on the EU ETS2 implementation framework to smoothen [its] launch.”
Earlier this year, the European Energy Exchange (EEX), the energy and commodity exchange platform, said that it would list futures contracts for December and April maturities in the first three years of the EU ETS2 scheme.
An EEX representative told OPIS that the EU Council’s position on the delay was “unfortunate news” but that the exchange “was awaiting a final text and clarity on which provisions would remain in place and exactly which would be delayed.”
“In any case, our contract specifications for the EEX ETS2 Futures account for such scenarios and provide flexibility for dealing with postponements,” the EEX representative told OPIS.
In case of a postponement to the EU ETS2, “all open positions in the affected maturities of the EEX EU ETS2 Futures will be closed and corresponding positions in the corresponding maturities of the EEX EU ETS2 Futures of the calendar year in which the auction first takes place will be opened (position transfer)”, according to EEX.
Tim Atkinson, head of carbon at CFP Energy, an environmental trading and advisory firm, told OPIS that the delay came “as a bit of a surprise”, as the European Commission had, in late October, proposed a market stability reserve mechanism for the EU ETS2 in addition to beginning auctions in 2026 for the same market.
“Whilst we are yet to see the full picture of the one-year delay and what it means for the market, it is a reminder that carbon costs on fuels remains a politically sensitive issue,” Atkinson said.
“However, affected fuel supply companies will still benefit from acting early to understand how ETS2 costs can be forecasted, managed and hedged. In our experience from working with operators under ETS1, proactive carbon risk management allows companies to gain a competitive advantage and avoid rising carbon costs being passed through to end customers.”
2040 Target Eased with Inclusion of International Carbon Credits
Last year, the European Commission proposed a target of reducing greenhouse gas emissions by 90% based on 1990 levels. While climate ministers agreed on the 90% figure, flexibilities were added to allow for the use of international carbon credits for as much as 5% of member states’ reduction targets.
Under this proposal, member states could purchase international carbon credits representing carbon removed from the atmosphere through mechanisms such as Article 6 of the Paris Agreement, which was finalized at COP29 in Baku last year.
Article 6.2 of the Paris Agreement creates a market that allows countries to engage in bilateral deals that trade emissions reductions. The credits generated are known as Internationally Transferred Mitigation Outcomes (ITMOs). Article 6.4 creates a global carbon credit market overseen by the United Nations that involves countries and private sector actors, and was designed to replace and update the Clean Development Mechanism established under the Kyoto Protocol.
The use of international carbon credits has been criticized, especially by the European Scientific Advisory Board on Climate Change. In early June, the advisory body cautioned the EU from using international carbon credits as part of its goals, arguing that it would stymie domestic investments and efforts if EU countries could just opt to buy credits as part of their national strategies.
OIPS previously reported that the scientific board had recommended that any greenhouse gas emissions reduction target would need to be achieved “through domestic action only”, pointing to the deployment of wind and solar energy throughout the bloc. Focusing on domestic action would rule out the use of international carbon credits to meet the 2040 objective as doing so would “risk diverting resources from domestic investments and could undermine environmental integrity”, the board said.
“This is absolutely science-based,” Hoekstra said in response to questions at a press conference on Wednesday. “The planet doesn’t care where we reduce emissions, that’s just the logic of physics here. We just need to reduce them. What we need to do as humanity combined is find the best possible ways at the lowest possible cost, and for Europe there is the additional challenge but also opportunity to do that in a way that helps our businesses and enhances our independence.”
Upcoming Trilogue of EU Bodies
Negotiations are expected to continue between the EU bodies as the European Parliament also adopts its position on the 2040 climate targets.
The European Commission welcomed the Council’s agreement on Wednesday. “The Commission stands ready to help ensure a swift agreement while underlining the importance of maintaining the essence of the proposal.”
Following the Council’s position, the European Parliament will adopt its own position before proceeding into negotiations between the Parliament, member states and the European Commission.
–Reporting by Humberto J. Rocha, hrocha@opisnet.com; Editing by Anthony Lane, alane@opisnet.com
© 2025 Oil Price Information Service, LLC. All rights reserved.