Can flexibility save or sink the EU 2040 climate target?

The European Commission’s long-awaited proposal, released in July 2025, sets a headline ambition of reducing net greenhouse gas emissions by 90% compared to 1990 levels. While this figure was broadly anticipated, the controversy lies in the policy architecture behind it particularly the introduction of three “flexibility mechanisms”: the use of international carbon credits from 2036, the inclusion of permanent removals in the EU ETS, and broad cross-sectoral flexibility without fixed sub-targets for emission reductions, land-based sequestration, or engineered removals.

The proposal had originally been expected in mid-2024 but was delayed until after the EU elections, drawing criticism that the timing was politically calculated to avoid pre-election scrutiny.

One of the most debated choices is the Commission’s decision to define the target as a single net emissions figure, without breaking down how much of that reduction must come from cutting fossil emissions versus absorbing carbon through removals. As policy analyst Eve Tamme noted, this structure ignores the advice of the EU’s own scientific advisory board, which had recommended separating gross reductions, land-based sinks, and technological removals to ensure clarity and accountability.

According to the Oeko-Institut, this lack of separation could result in actual emissions reductions reaching only 80% by 2040 far short of what a “domestic 90% target” would imply while the remaining gap is filled by removals and international carbon credits. Critics argue that this opens the door to creative accounting and undermines the environmental integrity of the target. Supporters, meanwhile, say that flexibility is essential to manage costs, preserve political cohesion across Member States, and allow for innovation in removals and market mechanisms.

To explore the implications of this shift and the future of climate flexibility in EU policy, I sat down with Andrea Bonzanni, Policy Director at IETA, the global trade association for companies involved in carbon markets and climate finance.

Andrea, let’s start from the foundation of the debate. The Commission chose to present the 2040 target as a single net number, without specifying how much must come from actual emissions cuts. Doesn’t that blur the line between reducing carbon and simply moving it around? And given the recommendations from the Scientific Advisory Board and groups like the Oeko-Institut, do you think this approach helps or hurts the credibility of Europe’s climate ambition?

Andrea Bonzanni: The EU has boldly and successfully cut emissions since the EU2020 target agreed in 2008, but cutting emissions to close to zero is incredibly more challenging. The 2040 target proposed by the Commission confirms the deep cuts over this decade imposed by the EU Green Deal and charts a path for the following decade.

I am surprised to see so many experts and academics not focusing enough on implementation, on feasible tools and pathways to meet the ambitious objectives we have ahead of us. The scientific consensus tells us we need to both reduce and remove emissions at unprecedented rates, and that it should be done by all sectors, in all nations, on all continents. It is of limited benefit to global temperatures if the EU achieves net zero emissions in isolation. To meaningfully mitigate and adapt to climate change, Europe should use the limited leverage it still has to deploy clean technologies through partnerships, standards and commercial agreements – if used well, this can be an additional trade and industrial policy tool. Far from hurting its credibility, Europe will act as a genuine leader on climate. I believe this awareness is slowly emerging. For instance, one of the key architects of the Paris Agreement, Laurence Tubiana, recently called for a “green foreign policy.” But some critics seem stuck in a weird “climate neutrality in one country” vision.

Let’s talk about the most headline-grabbing element: the inclusion of international carbon credits. The EU proposes allowing up to 3% of emissions in 2040 to be covered using Article 6 credits. That may sound small, but over time it could add up to more than a billion tonnes of demand between 2036 and 2049, effectively making the EU one of the world’s largest offset buyers.

Does this scale of demand align with the original purpose of Article 6, which was meant to enhance ambition through cooperation? Or does it risk overwhelming an already fragile system and undermining credit quality? And in your view, should the EU clearly commit now to limiting these credits to removals only, rather than allowing avoidance credit?

Andrea Bonzanni: Again, I find it paradoxical that so many headlines focus on a potential 3% to be met with international carbon credits, instead of the action needed to achieve the rest of the 90% target. According to European Environment Agency, we only reduced emissions by about 30% since 1990. There has also been confusion around the numbers – while the text of the proposal is not crystal clear (and it can still be amended throughout the EU legislative proposal), demand over the 2036 to 2040 period should be around 150 million tonnes cumulatively, and there is currently no indication of EU policies post-2040. This will still make the EU the world’s largest buyer of carbon credits, but these volumes will hardly overwhelm the market. Quite the contrary, they may provide a lifeline to many high-quality projects that are struggling in the current low price / low volume market.

My back of the envelop calculation points to a market size over € 10 billion over five years, about € 2 billion a year. These funds will finance real emission abatement projects in the Global South, but it is a far cry from the € 300 billion a year pledged by rich countries at COP29, let alone from the € 1.3 trillion a year identified as what’s needed to finance a just transition.

The EU has an opportunity to create a financing mechanism that unlocks carbon reductions and removals where they are most cost-effective and where they deliver additional economic, social and environmental benefits. If successful, it should be scaled up over the years, not treated as a lack of ambition only because it is less expensive than some alternatives. Economic efficiency should be welcome, not stigmatised.

I disagree with a dogmatic “removals only” approach to carbon credits. The scientific consensus tells us that we should prioritise reductions over removals, why should that not apply to the carbon market? The potential for high-quality, additional, measurable emission reductions in developing countries is huge, and carbon credits can help unlock much-needed investment. The bias against nature and land-based solutions is also damaging. Surely, there are technical challenges to ensure that carbon sinks are monitored and preserved over time, but disqualifying entire sectors from receiving carbon finance will only make things worse.

Zooming out a bit, we’ve seen a wider shift in the EU political climate over the past year. The Green Claims Directive has been paused, and the Omnibus review of the Fit for 55 package has raised concerns about rollback. In this context, many see the new flexibility mechanisms less as thoughtful tools and more as political concessions.

Can these mechanisms still earn the confidence of the public and the market? Or are they at risk of being perceived from the outset as loopholes? What needs to change to ensure they actually reinforce integrity rather than compromise it?

Andrea Bonzanni: We are a political animal and the EU has the political system that it has. It is undeniable that achieving climate goals is causing economic and social strains across Europe. One could spend years arguing whether all grievances are justified, but it will not change political realities. This is of course one of the main reasons why the Commission has structured its new climate package with these “flexibility mechanisms”, has withdrawn the Green Claims Directive, and may amend various elements of the Green Deal. But these moves should not be cynically seen as loopholes – they are tools to make the goals more palatable to European businesses and public opinions, whose buy-in is necessary to stay the course.

I expect discussions on the 2040 target in the right-leaning European Parliament to be very tough, but the demands of political groups will have to be addressed. These are the real threats to Europe’s climate ambition, not intra-sector flexibility, the use of carbon removals, and international credits.

Another big change is the introduction of permanent removals, like DACCS and BioCCS, into the EU ETS. Some argue this is an overdue evolution that brings carbon removals into the heart of EU climate policy. Others warn it could weaken the ETS cap and allow polluting sectors to delay hard transformation by buying removals instead.

Is the ETS the right place to bring removals into the system? Or would a dedicated removals framework offer more clarity and avoid undermining the core cap-and-trade logic?

Andrea Bonzanni: The EU is expected to implement unprecedented emission cuts, so there is no defined playbook on how to get there. The EU ETS has been a cornerstone of EU climate policy and has been based on the “polluter pays” principles, that is, emitters shall buy allowances equal to their emitted GHGs. After over a decade of low prices and repeated policy interventions, it is perceived as a successful tool that guarantees a reliable price signal for energy and industrial decarbonisation. But soon after 2040 (or even earlier according to some analysts) there will no longer be allowances to be traded. Other mechanisms will be necessary to put a price on carbon and reliance on removals is something the Commission is experimenting with. Overall, I believe this is positive. However, if only a small subset of costly removals is allowed, I do not expect the measure to have a material impact initially; it will only matter once the cost of removals dramatically drops or allowance prices skyrocket.

There is little doubt that carbon removals must be part of the recipe – all credible net zero scenarios point to this. We need additional measures to support removals in the short-term (possibly something similar to the feed-in tariffs that helped renewable electricity climb the learning curve 15-20 years ago).

At the same time, if we want to preserve a liquid ETS price signal, we may need to open the EU ETS to more technologies and solutions, such as cheaper nature-based removals or even some selected high-quality reductions.

Finally, we’re entering a phase where the EU may become a major buyer of international credits, while companies particularly in hard-to-abate sectors—are also ramping up their own carbon credit strategy. If the EU enters the market at scale, how do you see this affecting the broader global carbon market? Could it drive new investment and demand in the Global South, or risk crowding out corporate buyers and straining supply chains for high-integrity credits?

Andrea Bonzanni: The needs to invest in the transition are so vast that crowding out should not remotely be a concern. I expect the involvement of the EU to create an enabling environment for the carbon market supply chain. Project developers, service providers and financiers will scale and be able to supply high-quality credits for both the compliance and voluntary markets. At the same time, corporates will grow more confident about the quality of credits and the robustness of carbon markets. In my view, credits between the two market segments will be differentiated by accounting properties, as credits used for voluntary corporate targets can be counted towards the host country climate goals, while those the EU plans to use for its own climate goal will require an adjustment in the host country’s emission inventory. This is a technical carbon emission accounting and reporting discussion, but one with significant implications for the future of climate action.

Thank you, Andrea, for your valuable contribution. I remain confident that despite the current geopolitical uncertainty we are entering a new era for carbon markets, where more and more countries will use them not only to meet their climate goals, but to raise their ambition and accelerate decarbonization.

As the EU moves toward legislating its 2040 climate trajectory, the real test won’t be the target itself but how it’s delivered. Flexibility, if used with discipline, can help manage complexity and cost. But if left vague or politically convenient, it risks eroding trust and weakening long-term impact.

This conversation is just one piece of a much broader puzzle and I hope it brings clarity to a debate that is far from over.

This article is also published on the author's blog. illuminem Voices is a democratic space presenting the thoughts and opinions of leading Sustainability & Energy writers, their opinions do not necessarily represent those of illuminem.