International Credits in EU Climate Policy: Old Conflicts, New Challenges

Old conflicts and a new political situation

In climate policy, compensation mechanisms were long regarded as ineffective and apparently undermining individual coun­tries’ climate policy ambitions. That assess­ment was confirmed by the negative ex­periences with credits issued under the Kyoto Protocol, which were partly integrated into the EU emissions trading system. During this period, poor-quality credits came to light and cases of fraud were un­covered. Not least as a result of the critical discussions that followed, the European Climate Law (Regulation 2021/1119) limits the achievement of the mitigation targets for 2030 (net reduction of greenhouse gases by 55 per cent compared with 1990) and 2050 (greenhouse gas neutrality) to the ter­ritory of the EU. But with today’s deci­sion-makers focused on the crisis in European industry and the competitiveness of Euro­pean manufacturers, international credits are enjoying a renaissance as an element of EU climate policy, under the slogan of “flexibilisation” and along the lines of “Europe cannot save the climate alone”.

The underlying motives are complex. On the one hand, there are actors who are driv­ing the debate with the aim of weakening the EU’s climate policy ambitions or under­mining their credibility overall by fuelling uncertainty. On the other hand, there are those who see Article 6 as offering the op­portunity to ensure that the existing cli­mate policy architecture is shielded against weakening and more far-reaching reforms. It is their belief that Article 6 allows for new flexibilities that could help stabilise alliances threatening to disintegrate in the current situation. However, whether the current debate on Article 6 ultimately leads to the stabilisation or weakening of climate policy remains com­pletely open. But in view of the huge amount of political atten­tion, a central question arises: Does open­ing up EU climate policy to international credits provide an opportunity to prepare for the final stretch towards climate neu­trali­ty and at the same time achieve that goal more cost-effectively? Or does the current discussion serve, above all, as a strategy to avoid fundamental questions and conflicts? A look at the processes sur­rounding the EU 2040 mitigation target and the challenges and opportunities associated with Article 6 can help contextualise both the debate and the various positions rep­resented in it.

2040 target: International expec­tations and internal EU conflicts

The setting of a mitigation target for 2040 provides an opportunity to shape the next phase of European climate policy. The polit­ical process has been significantly delayed by the European Commission, not least by its president, Ursula von der Leyen. Both this delay and the new focus on inter­national credits as a “flexibilisation option” reflect today’s changed political situation, in which climate policy is under renewed pressure to justify itself. But time is run­ning out to formally adopt a 2040 target – and that is the case for at least two reasons.

First, it was previously planned to use the 2040 target as a reference for establishing the EU’s nationally determined con­tribution (NDC), including an interim target for 2035. However, the official deadline for submitting the NDC was February 2025 (see SWP Comment 14/2024); and it would now require a political tour de force for an agreement on the 2040 target and the NDC derived from it to be reached before COP30 in Belém, Brazil in November 2025. Not only would the member states have to rapidly establish a consensus on both the 2040 target and the NDC; procedural crea­tivity might also be needed – for example, the influence of the European Parliament could, in effect, be limited. Whether the link between the 2040 target and an in­terim target for 2035 can be maintained is both politically and procedurally questionable. Indeed, removing that link could make it easier to submit an NDC well ahead of COP30; at the same time, it poses the risk of a 2035 target being adopted that is not compatible with a net 90 per cent target for 2040. Meanwhile, the delay in the EU pro­cess is being closely monitored at the inter­national level. As a long-standing advocate of the idea that procedural governance mechanisms are an important element of the Paris Agreement, the EU is currently undermining its own claim to leadership. And as a result of the internal blockades within the EU and the failure to meet dead­lines, it could be that in future, other states will be even less in­clined to take deadlines in the UN processes seriously.

Second, the updating of all important climate policy instruments in the EU –EU ETS I/II, the Effort Sharing Regulation (ESR) and the Land Use, Land-use Change and Forestry Regulation (LULUCF) – necessarily builds on the ambition level of the 2040 target. Any further delay in the target pro­cess will push back the time-consuming legislative processes required to revise the policy instruments. Given the significantly narrower majorities in the European Parlia­ment and the fluid majorities in the Coun­cil, it may not be possible to finalise all dos­siers before the 2029 EU elections, creating an environment of major uncertainty until shortly before the start of the new trade and target periods (from 2031 onwards).

International credits in the next phase of EU climate policy

Impetus for the debate on the 2040 mitiga­tion target has recently come from Ger­many: the prominent mention of this target in the coalition agreement of the new German government has created new momentum in the preliminary negotiations in Brussels. Not only is it remarkable that Germany, a large and influential EU member state, has committed itself to supporting a net 90 per cent target; the conditionalities set out in the coalition agreement are also significant. The focus is on the planned use of Article 6 credits: the agreement states that it should be possible to meet up to 3 per cent of the 2040 target through “certified and perma­nent projects [...] in non-European partner countries for the economically viable reduc­tion of residual emissions”. Although this discussion has been imminent for some time, many stakeholders have largely ignored it, often referring to the European Climate Law, which, as noted above, states that the existing 2030 and 2050 targets will have to be achieved within the European Union, that is, without international credits.

Once the Commission’s proposal has been published and the ordinary legislative procedure initiated, the question of how the 2040 target should be drawn up will take centre stage. Two elements frequently discussed as flexibilisation options are particularly relevant for the upcoming debate. The first is whether and to what extent international credits can be used to achieve the target. The second addresses the role of CDR and whether its contribution to achieving the target should be limited. In the debates expected during the legislative process, three target designs will serve as centres of gravity for positioning (see Table 1, p. 2), whereby compromise options are also conceivable.

The European Science Advisory Board on Climate Change (ESABCC) recommends setting separate 2040 targets for gross emission reductions and carbon dioxide re­movals. Unlike the German coalition, how­ever, the ESABCC calls for a 90–95 per cent emission reduction to be achieved within the EU. It thereby positions itself against Article 6 as a flexibilisation option and against the emerging debate about whether it should be permissible for a 90 per cent target to be achieved proportionately through the use of international credits.

If international credits and carbon re­movals are to be integrated into the target design, the establishment of separate tar­gets would send the clearest political signal. The precise target values are less important than a clear separation from gross emission reductions so that quantified demand for CDR and Article 6 credits can be institutionalised. This would have an impact on both areas, for which investment security is essential but has so far been lacking. How­ever, a very detailed target design would require extensive political negotiation pro­cesses and compromises. The time pressure and the tense climate policy situation argue in favour of ensuring the other options are included in strategic planning, too. Not least, the smaller majorities in the Euro­pean Parliament and Council could be the reason why there will be no further con­cretisation during the current legislative processes.

Furthermore, it is to be expected that, as part of the legislative process to supplement the 2040 target in the European Climate Law, attempts will be made to implement further changes to the Regulation. Member states and stakeholders that are sceptical about the ambition level of the Climate Law are likely to advocate that, for example, the target design for 2050 should be revised as well – possibly to include international credits. Such an initiative would come as little surprise in the current political cli­mate. Nevertheless, changing the target design along these lines would be not only controversial within the EU but also prob­lematic vis-à-vis the Paris Agreement. That is because Article 6 provides for the use of the international credits “to allow for higher ambition” in the signatory countries’ mitigation efforts. A possible way out could be to adopt a more specific target for net negative emissions after 2050, as the current wording leaves many questions still unanswered.

Fundamental challenge: Additionality

Apart from the issue of whether and how international credits should be included in the target design, there is another main challenge: the additionality of the certified mitigation projects that are implemented. The Paris Agreement has fundamentally changed the institutional setup for inter­national offsetting. Unlike under the Kyoto Protocol, which stipulated binding reduc­tion targets only for industrialised countries, all signatory states are now obliged to submit NDCs. This alters the relationship between the countries that purchase credits and the host countries (those in which the certified projects are implemented): if cred­its from a host country are counted towards the target achievement of a purchasing country (as so-called Internationally Trans­ferred Mitigation Outcomes or A6.4 Emis­sion Reductions), there is a risk that the achievement and/or ambition level of the host country’s climate targets will be under­mined (through overselling).

It is true that such conflicting goals can be mitigated through methodologies, trans­parency requirements and accounting rules. However, given the growing political pressure on industrialised countries to meet their climate targets, it would be inadvis­able to rely solely on the effectiveness of those measures. Institutionalising demand for Article 6 credits in the EU’s target archi­tecture would simultaneously increase the incentive and step up the pressure to design methodologies and projects in such a way that a large number of credits become avail­able at an early stage. This could have a negative impact on the quality of the pro­jects – including their additionality – and encourage overselling by the host countries.

Why the debate is still important

Despite such risks, it makes sense strategically to initiate an open debate on inter­national credits right now – and not in the mid-2030s, when there will be no time left for a step-by-step approach and corrections. There are three arguments supporting this assertion.

First, reforms at EU level take years – that applies not only to the legislative pro­cess but also to implementation and the development of incentives. A timely dis­cussion would allow governance structures to be established in an orderly manner and quality standards to be developed, including mechanisms and time buffers for re­adjustments in the event of undesirable outcomes.

Second, active EU involvement in the implementation of Article 6 sends a strong political signal for strengthening the pro­cesses associated with the UN Framework Convention on Climate Change (UNFCCC). Not least at a time of geopolitical tension and growing scepticism towards multilateral mechanisms – as exemplified by the withdrawal of the United States from the Paris Agreement – the EU can continue to play a leading role here. In addition, the international trade in carbon credits re­mains important for many countries of the Global South; and those countries will play a bigger role when it comes to further developing the UNFCCC.

Third, the debate on Article 6 offers the opportunity to address the issue of residual emissions. The function of Article 6 does not have to be reduced to that of a classic compensation mechanism that serves to lower domestic ambitions. Rather, it can serve – through suitable conditionalities – to promote technology: for example, the global technological ramp-up for durable CDR such as Direct Air Carbon Capture and Storage, which has limited upscaling poten­tial in the EU. Countries with abundant supplies of renewable energy would be better suited for the deployment of these technologies. Moreover, the additionality of the durable CDR projects would be obvious and the design of complex and bureaucratic verification systems and processes – such as those used for (re)afforestation projects – much more straightforward. Nonetheless, care would have to be taken to ensure that CO₂ storage facilities and other neces­sary infrastructure do not have a negative impact on local populations.

Drawing up positive lists for certain types of project is not a new approach in the use of international credits, but those lists have already proved their worth in previous mechanisms and can have im­por­tant steering effects. If the 3 per cent under discussion were to be interpreted as a quan­tity that applied to the durable re­moval of CO₂ in partner countries, the EU could seize the opportunity to create demand and thereby play a key role in shaping both the emerging market and the quality standards. This would provide a counterbalance to the low-quality credits that would force their way onto the market. In addition, it would be much easier to integrate permanent CDR credits into European instruments than is the case with less durable removal methods – the latter would have to be safeguarded against reversibility at considerable bureau­cratic expense. Thus, a narrower interpretation limited to permanent CO₂ removals would be more likely to support the stabili­ty and credibility of the policy instruments than a broader interpretation that allowed for the use of all credits.

The last mile – for now

Around twenty years before the target of net zero greenhouse gas emissions is due to be met in Germany (and around twenty-five years in the EU), it is time to orient climate policy instruments towards what is – at least for now – the last mile. Inevitably, there are politically difficult decisions that will have to be made. Issues that have long been ignored – such as carbon management and international credits – are in­creasingly featuring in the climate policy debate and imminently awaiting far-reach­ing resolutions. Depending on the outcome of the decisions taken, the current climate policy architecture could be undermined; but, at the same time, the upcoming re­forms could safeguard the existing instru­ments. In any case, the political pressure is unlikely to decrease in the coming years – on the contrary. The establishment and design of the 2040 mitigation target, to­gether with the follow-up legislative pack­age for implementation, are vital for the prospects of EU climate policy. Following are two overarching recommendations for the upcoming legislative processes.