The European Union (EU) is on the path to significant changes in its climate policy. On 2 July 2025, the European Commission published a legislative proposal to amend the European Climate Law, which has been in force since 2021.This law commits the EU and its member states to achieving zero net greenhouse gas (GHG) emissions by 2050In line with this commitment, the Commission has proposed a new, legally binding interim target for 2040: 90 % net reduction in EU-wide greenhouse gas emissions compared to 1990 levels.

This ambitious target is binding at EU level but does not impose direct obligations on individual Member States. Instead, Member States are bound by existing and future legislative instruments, such as EU Emissions Trading System (EU ETS), which may be revised to implement the objective at Union level.

Key design elements to achieve the goal

The proposal includes several mechanisms to support Member States in achieving the 2040 target in a cost-effective and socially balanced way. These mechanisms include:

• Using international carbon credits – From 2036, a limited share can be used international carbon credits with high integrity (up to 3 percentage points of the target) to meet the 2040 target. These credits must meet strict environmental standards and will not be tradable under the EU ETS.
• Integration of domestic CO₂ removals – The Commission assumes integration of permanent domestic removals – such as direct capture from the air or improved land use practices – to the EU ETSThis would allow Member States and market participants to offset emissions through verifiable and permanent sequestration solutions, although the precise governance and certification rules are yet to be developed.
• Cross-sectoral flexibility – Member States may compensate for underperformance in one sector (for example, transportation or waste) by overfilling in another (e.g. agriculture or land use). This flexibility is designed to take into account national circumstances and support cost-effective decarbonisation pathways across sectors.

Acceptance and next steps

The proposal has been generally welcomed by Member States, with some welcoming its built-in flexibility, while others, including France, have expressed concerns. The European Parliament is expected to be divided, with conservative groups likely to oppose the ambitious target, while social democrats and greens fear that the proposed flexibility could undermine the effectiveness of the target. The proposal will now enter the ordinary legislative procedure, with negotiations in the European Parliament and Council expected to last until 2025. The 2040 target will also inform the next Nationally Determined Contribution (NDC) Union under the Paris Agreement, in preparation for COP30 in Belém, Brazil.

Wider implications for non-EU countries

While the proposal does not directly change carbon trading instruments such as the Carbon Border Adjustment Mechanism (CBAM), its long-term ambition could shape future policy developments in areas including:

• CBAM extensions or similar carbon pricing tools to cover other sectors.
• The growth of voluntary carbon markets, especially for international offset credits.
• A stronger emphasis on land-based carbon removal and natural sinks, as Member States can rely on them to compensate for underperformance in sectors that are more difficult to decarbonise.
• Increased expectations around carbon performance, transparency and ESG alignment, especially for companies operating in the EU or exporting to the EU.

Implementation of the "Clean Industrial Agreement"

In addition to proposing a 2040 climate target, the European Commission has also launched a broad policy package to support industrial decarbonisation while maintaining European competitiveness. Central to this effort is "Clean Industrial Agreement", the EU's strategic framework for reconciling climate action with industrial growth. In a new report entitled "Implementation of the Clean Industry Agreement I" The Commission provides an overview of the initial set of measures taken, the progress made and the next steps in implementing the strategy. Key components include:

• Adoption of the State aid framework of the "Clean Industry Deal" (June 25, 2025) to facilitate public support for investments in clean energy and green technologies.
• Simplifying the Carbon Border Adjustment Mechanism (CBAM), which will exempt 90 % importers and streamline administrative procedures ahead of a broader CBAM review expected later this year.
• Recommendation on tax incentives to support industrial decarbonisation, including instruments such as accelerated depreciation and targeted tax breaks.
• New guidelines on EU rules for renewable energy sources, which help Member States reduce energy costs and accelerate the deployment of clean energy.
• Future initiatives, such as a pilot project Industrial Decarbonization Bank a Action Plan for the Chemical Industry, which will further strengthen the EU's long-term commitment to a sustainable and competitive industrial base.

These steps demonstrate the EU's comprehensive approach to tackling climate change, which includes ambitious targets, flexible implementation mechanisms and strong support for the green transformation of its industrial base. Spring