The European Union has agreed to legally binding climate change targets to cut emissions by 90% by 2040, although it postpones a major planned emissions trading scheme.
The European Parliament and EU member states reached a tentative agreement on Tuesday night on targets and changes to EU climate law.
“Today, the EU is demonstrating our strong commitment to climate action and the Paris Agreement. One month after COP30, we have put words into action and set a legally binding target of reducing emissions by 90% by 2040,” EU Prime Minister Ursula von der Leyen said in a statement announcing the agreement on Wednesday.
He added that the agreement represents a “realistic and flexible plan” to make the clean transition more competitive.
“The fact that this new target is legally binding is commendable as it solidifies the EU’s ambition to reach net zero by 2050,” Hortense Bioy, head of sustainable investing research at Morningstar Sustainalytics, told CNBC.
The conference, held on the heels of the 30th Conference of the Parties (COP), brought world leaders together along the Amazon River in Brazil to decide how to implement climate change goals. Brazil, which holds the COP30 Presidency, pushed through a compromise deal to increase climate finance for developing countries, but the document contained no mention of fossil fuels.
No official representative of the United States attended COP30, an unprecedented situation in which U.S. officials were present at the meeting. This comes after President Trump earlier this year withdrew from the Paris Agreement, which limits global temperature rise to 1.5 degrees Celsius above pre-industrial levels.
Louis Fern, principal at Jaguar Land Rover’s corporate venture capital arm, InMotion Ventures, told CNBC: “Today’s news signals long-term certainty that investors need to continue to put significant capital into net-zero technology, giving Europe the opportunity to become a world leader in this space as other countries retreat.”
He said: “The 2040 target will accelerate innovation across critical supply chains, from rare earth materials solutions to next-generation energy storage. Companies now have a clear picture of the regulatory direction. The combination of regulatory certainty and Europe’s commitment to remaining competitive through this transition provides the ideal backdrop for startups to grow, especially those that reduce emissions while delivering better performance at lower costs.”
Bastian Gierl, CEO of renewable energy-focused power company Octopus Energy Germany, added that it was important to “recognize that climate protection is not a burden, but a strategic investment.”
He said climate action is a driver of economic growth, independence, job creation and innovation, noting that this initiative “shows that it is possible to fight climate change while maintaining Europe’s competitiveness”.
Emissions trading and credits
The European Union’s new agreement includes a one-year postponement of the EU Emissions Trading Scheme for buildings, road transport and small-scale industry (ETS2). ETS2 is a new addition to the bloc’s carbon market, designed to incorporate industries not included in the existing scheme launched in 2005.
It was originally scheduled to take effect in 2027, but an update says it will now take effect in 2028. ETS2 monitoring and reporting requirements take effect this year and remain unaffected.
Craig Douglas, a partner at Worldfund, a venture capital firm that supports decarbonization technology startups, said any delay in implementation would be “a serious concern.”
“This legislation is a foundational element of decarbonization, and investment decisions are already made on the basis that they will proceed as planned. Delays or significant changes risk undermining those decisions and could slow overall progress. Our priority is to keep the costs of decarbonization as low as possible, and moving across sectors and including offsets is a prudent approach,” he told CNBC.
The agreement also includes the use of carbon removal credits. One credit represents one ton of carbon dioxide removed from the atmosphere. The EU may use what it calls “high-quality international credit” to meet its new reduction targets, but that will only account for 5% of the effort, with the remainder coming from domestic cuts.
The use of carbon credits by companies has long been controversial following numerous scandals in which carbon credits were found not to represent true emissions reductions. However, in recent years the market has begun to emphasize quality and reliability.
Their inclusion “highlights the need to accelerate the development and expansion of this market,” Bioy said.
For Magnus Drewerys, CEO of carbon credit trading platform Ceezer, this sends three important messages. The first is that net zero requires flexibility, the European Union will be decisive about the quality of its credits, and, despite the second, it intends to actively support global climate action by purchasing international credits.
“The integration of international credits of up to 5% can financially support global climate change mitigation efforts, but in practice it is also a way to reduce the cost of climate change targets, as international credits are consistently provided at significantly lower prices,” he added.
“The real impact remains to be seen. The actual quality and risks of carbon credits are complex, and neither the EU nor the Paris Agreement provides metrics-based guidance to ensure that investments have an impact on climate change.”
