The European Union is facing a major decision that could redefine global carbon markets. After twelve years, the EU is once again looking to international carbon credits to help meet its target reduction of net emissions by 90 % by 2040 compared to 1990 levels. However, their effectiveness critically depends on ensuring environmental integrity, equitable sharing of benefits and compliance with the Paris Agreement.

The proposed change to EU climate rules aims to create a legally binding commitment to cut emissions by 90 % by 2040. The European Commission is proposing flexibility that would allow limited offsetting of EU emissions from 2036 – up to 3 times the EU levels in 1990 – through the purchase of international carbon credits under Article 6 of the Paris Agreement. While the EU is already developing domestic standards for carbon removal, for example under the Carbon Agriculture Regulation, this 3 % limit represents a significant contribution – almost one third of the proposed target by 2040, with potential costs exceeding €10 billion.

The use of international carbon credits is a double-edged sword for the EU. They can offer a more cost-effective path and support a just transition in the global South, but they also raise concerns about the transfer of finance and jobs outside the EU, which could undermine public support. The EU could become the largest sovereign buyer international carbon credits between 2029 and 2040, exceeding the demand of other actors such as CORSIA, Japan or Singapore.

The Commission proposal outlines three fundamental procurement principles that are key to success:

• 1. Environmental integrity: Past experience with the Kyoto Protocol has shown problems with environmental integrity, with many credits failing to deliver real climate action. The EU should remain open all types of carbon credit projects, not just artificial removal, to ensure sufficient supply and affordable options. Managing the risks of credit underperformance, including private sector innovations such as ratings and insurance, is key.
• 2. Sharing the benefits: International credits can support valuable mitigation activities in the Global South, such as job creation and biodiversity protection. It is crucial that a significant proportion of the revenues go to local communities with transparent reporting. The EU should proactively engage the European private sector (by providing investments, technology and services) to ensure domestic benefits and manage perceptions of job displacement.
• 3. Alignment with the Paris Agreement: Article 6 of the Paris Agreement is intended to incentivise countries to take action beyond their Nationally Determined Contributions (NDCs). The EU must ensure that the purchase of credits leads to real, additional emission reductions beyond the NDCThis requires individual assessment of projects, not automatic exclusion of entire countries or sectors.

The EU is at a crucial juncture in exploring carbon credits as a cost-effective tool for decarbonisation. To maintain its climate leadership, it must strike a balance between ensuring the real impact of the credits, maximising social and economic benefits at home and abroad, and controlling costs. It is recommended that policymakers focus on broad principles, avoid premature restrictions and work out detailed implementation in consultation with the private sector and stakeholders from the Global South. JRi

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