A debate on 5 May in the European Parliament Environment Committee showed there is interest in using international carbon credits as a flexibility measure towards reaching the EU’s 2040 climate target. The discussion in Europe reflects a broader shift toward the application of carbon credits to achieve decarbonization goals on the part of governments, where, in recent years, private sector entities have been the main actors in that space on a voluntary basis. Several European countries have introduced initiatives involving use of international carbon credits, highlighting the increasing overlap among carbon crediting structures: the so-called Voluntary Carbon Market, the aviation emission offsetting program CORSIA, and cooperative emission-cutting among Parties to the Paris Agreement under its Article 6 all share various attributes and increasingly have standards in common as well as some of the credits themselves. The extent to which this convergence continues will depend on the degree to which mandatory government-run emission reduction programs like the EU ETS involve international carbon credits.
Fifteen years ago, carbon credits were transacted in much larger quantities and at much higher prices than today. Trading of carbon credits has been around for decades, but has evolved over the years as the nature and source of demand for international offsets changed.
The “original” global offset market was the result of flexibility mechanisms of the Paris Agreement’s predecessor, the Kyoto Protocol, under which only rich countries had binding emission reduction obligations. They could pay for greenhouse gas reducing projects in poor countries and apply the amount of climate change mitigation that those achieved toward their Kyoto targets – the credits generated by this Clean Development Mechanism (CDM) were called Certified Emission Reductions (CERs). They were transacted in large quantities and – especially in the Kyoto Protocol’s first compliance period from 2008-2012 – at high prices. CERs sold as high as EUR 25/t in 2008, and in subsequent years accounted for a significant chunk of global carbon markets’ traded volume: over 2 billion CERs changed hands in 2011 and over 3 billion in 2012. Last year, less than 130 million international carbon credits changed hands, many at less than USD 1/t.
Europe was arguably this carbon credit market’s main “motor:” firms subject to carbon caps under the EU ETS were allowed to meet a portion of their compliance obligation with CERs, and this constituted the bulk of demand for those units.
That is why this week’s European parliament debate is significant: the EU ETS remains the most mature and liquid carbon pricing system in the world, with the highest allowance prices and deeply embedded market infrastructure. As the European Commission proposes a 90% emissions reduction target for 2040, debate has intensified over whether to incorporate flexibility through carbon removals and international credits.
Until recently, it seemed carbon credit use was off the table for the EU, as the CDM and use of CERs “fell out of favour” in Europe over the last decade because their abundance in the Kyoto Period contributed to the oversupply that caused European allowance prices to crash. Moreover, the types of CDM projects generating the most CERs were not contributing to sustainable development in poor countries. The EU effectively banned CER use as of 2013 by limiting it to credits from very few project types that produced limited volumes.
Although it has been the “elephant in the room,” the idea of allowing carbon credits to account for part of the EU 2040 targets is becoming more pronounced. Backing for the use of carbon credits to meet climate goals is emerging even from traditionally sceptical governments. In Germany, the CDU-SPD coalition proposes allowing the use of carbon removals and up to 3% of non-EU climate credits. France is reportedly open to considering the use of international credits in the context of the EU’s 2040 target as well. If agreed, this would mirror the Kyoto-era use of CDM credits, but with an important distinction: UN-backed credits under Article 6.4 of the Paris Agreement will be subject to corresponding adjustments, ensuring a net global reduction in emissions – read more on corresponding adjustments here.
In the past decade’s post-Kyoto carbon credit void, what had previously been considered small-scale “retail offsetting” on the part of companies and other entities to back claims of being “carbon neutral” or “net zero” grew more international, and gathered more players as big name corporations including fossil fuel companies pledged to cut their emissions voluntarily as part of the global effort to mitigate climate change. The carbon credit standards involved in these voluntary markets – including Verra, Gold Standard, ACR, and Climate Action Reserve (CAR) – became more prevalent, their methodologies often based on or similar to those applied for CDM projects. A major surge in corporate carbon neutrality and net zero pledges around 2019-2021, which in retrospect seems to have been a passing trend, caused rapid growth in trading of the credits these voluntary standards issued in those years – read more about this in the context of carbon credit retirement here. This, in turn, made for expectations of growth similar to the rapid rise of CER transactions in the Kyoto Period. That growth has not yet materialized.
In recent years, international carbon credit transactions have consisted of units issued by the above-named standards being bought and retired by private sector players – but with the UNFCCC hammering out the next version of the CDM in the form of Article 6.4 credits, the latter process is coming to a head. Parties have nailed down the logistics and methodologies of that system in recent climate talks. Such methodologies in turn overlap with those of Verra, Gold Standard, ACR, CAR, and other voluntary market standards, blurring the lines between and among carbon credit “markets.”
Last year’s COP29 in Baku set the foundations for the trading of Article 6.4 credits, including among entities like corporations that are not Parties to the Paris Agreement. CORSIA continues to tighten eligibility standards, with the requirement for corresponding adjustments quickly becoming a bottleneck for supply, pushing projects toward Paris-aligned pathways. Meanwhile, carbon removals are gaining institutional traction with Article 6.4 now including methodologies for removals, while the EU’s Carbon Removal Certification Framework (CRCF) has been in force since December 2024. Institutions such as the Integrity Council for the VCM (ICVCM), the Article 6.4 Supervisory Body, and ICAO are converging, at least nominally, on definitions of “high-quality” credits.
Despite these developments, concrete demand for international carbon credits of all kinds remains limited. The mere signal that there could be even very limited demand from the participants in the world’s biggest carbon market by volume – the EU ETS – has major implications for both the expansion of carbon credit trading worldwide and the convergence of the various contexts in which it is done.
However, the 5 May European Parliament debate showed that European lawmakers are sharply divided on carbon credit use. Some argued that introducing flexibility through international credits could compromise the environmental integrity of the EU ETS, depress EUA prices, the EU’s legally binding domestic mitigation target, and redirect investment away from domestic mitigation. Others, however, supported the cautious inclusion of high-integrity, correspondingly adjusted credits as a politically viable pathway toward achieving an ambitious but fair transition.
Even without formally allowing firms covered by the EU ETS to use credits to meet compliance obligations, the mere “institutional buy-in” from European regulators displayed in the discussions around meeting 2040 targets grants Article 6.4 credits a degree of regulatory legitimacy that influences how they are perceived by both compliance and voluntary market participants. How much such recognition could expand potential demand for carbon credits remains to be seen.
Any future inclusion of Article 6.4 credits within the EU ETS is expected to involve defined limitations such as credit vintage, project type, and methodological requirements. While Article 6.4 credits are issued under the Paris Agreement, their recognition and use differ across jurisdictions based on national regulatory standards and procurement frameworks, evident in the current approaches taken by countries such as Singapore and Switzerland.
Furthermore, the UN process around the carbon credits in question remains slow. The Article 6.4 Supervisory Body has approved only a handful of transitional projects, including cookstove distribution in Myanmar and initiatives targeting fossil gas leaks, but these remain limited in scale. To date, only two new methodologies have been formally submitted to the Methodology Expert Panel, on removals and ammonia production for industrial use. Progress on key methodologies such as landfill gas management is incremental at best.
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