The path to net zero in the EU ETS ends in 2040: What is the gap and what are the options?

The revised EU ETS framework agreed in December last year spells a steep path to zero emissions for the sectors covered by the EU’s flagship climate instrument. With the new linear reduction factor, the cap reaches zero in 2040. Even with the necessary massive abatement in EUs industry sectors, emissions cannot follow suit. Due to the cancellation provision, the Market Stability Reserve will only to a limited degree come to the rescue with additional supply, and the debate on inclusion of carbon credits from outside EUs borders is bound to resurface once EU policymakers start to discuss the Unions 2040 climate target next year. Negative emissions, via direct inclusion of removals in the EU ETS or through carbon removal credits, will have an important role to play in a 2040 timeframe.