EDITORIAL: Carbon market awaits EU's upcoming 2040 GHG goal for potential Article 6 boost

Quantum Commodity Intelligence - The UN intersessional climate talks are underway in Bonn — the main discussions ahead of the main COP30 meeting in Brazil later this year. With rules for operationalising Article 6's carbon markets agreed in Baku at COP29 last year, the Bonn talks are not expected to have too much focus on carbon trading. But away from the UN another intergovernmental process could have more than a significant impact.

On July 2, the European Commission, the EU's executive arm, is due to unveil the 27-member bloc's greenhouse gas reduction target for 2040 in an update to the its binding Climate Law — touted to be a 90% cut from 1990 levels.

This law is the overarching, but relatively general, commitment that essentially dictates overall targets on which much more detailed legislation, such as the EU Emissions Trading Scheme (ETS), must align.

Several member states are backing Germany's position that project-based UN carbon credits should be allowed to help meet the 2040 goal; support that could be crucial in tilting the bloc into a reversal of its longstanding policy to prohibit the use of these carbon credits to meet its climate goals.

France and Italy are among the countries said to be majorly considering supporting the new German government coalition's proposal to allow carbon credits generated under Paris Agreement's Article 6 carbon market mechanisms to meet 3% of emissions cuts required by 2040.

Central European countries including Poland and Hungary are also said to be particularly keen that UN-backed international offsets be used for compliance with a 90% target, given what they see as unacceptably high costs of domestic abatement in their power and heavy industrial sectors that are still heavily reliant on fossil fuels.

"There is still a lot of discussion to be had at EU member state level, more countries are supporting the use of offsets, but there are still many countries who are very much against it," said one Brussels-based source, who has been briefed on the various views of member states and the European Commission.

Opponents

Nordic countries are said to be on the other side of the spectrum, with Denmark, which on July 1 assumes the six-month rotating EU presidency, having already come out strongly against offset use.

Sweden, which is the only EU member state that so far has signed advanced deals to buy Article 6 credits, is also said to be sceptical of an EU-wide valve for international credits without clear accounting and safeguards and rules in place first.

To the south of the sceptical Scandinavian contingent, the Netherlands is also thought to be unsold on a relaxation of offset rules at EU level.

Various sources also highlight a gap between the broad principle of carbon credit use and the finer details that in the longer term will be of crucial importance to developers and project-based carbon markets.

These details include the types of sectors that credits from Article 6 markets could be sourced from, the timeframe within which these credits be used, and which of the EU's market mechanisms or emitting sectors these offsets would be allowed to be counted against.

There is still major uncertainty around the potential use of Article 6 credits. Some suggest that it will be the EU's agriculture and Land Use, Land-Use Change, and Forestry sectors which would be first in line, given the difficulties of using the credits in other sectors.

Using international credits for abatement in the EU ETS for the power sector and industrial emitters, or in future emissions trading that covers transport and buildings, known as ETS2, is complex because these markets are subject to highly detailed EU laws.

These laws on emissions trading are not due to be reopened for proposed changes until July 2026 — with actual implementation of updates unlikely until 2028, a timeframe that would exclude offset use in the near term.

But, even if the required majority of EU countries are convinced to back carbon credit use over the next few weeks, an impact assessment setting out conditions on offset use would unlikely materialise until the EU institutions start to review the entire suite of the bloc's climate policies from next July.