Allowing international credits to account for up to 5% of the European Union’s 2040 target creates demand for internationally transferred mitigation outcomes (ITMOs) under the Paris Agreement, but uncertainties remain both on the overall volume of credits that will be allowed and which ones the EU will consider “high quality.” With the trilogue concluded on 9 Dec, the Council and the Parliament reached common ground on the amendment to the Climate Law to include a legally binding 2040 climate target, which will set the direction for the EU’s demand for international carbon credits.
For over a decade, the European Union has attempted to achieve its climate targets solely through domestic mitigation measures. EU regulators have generally opposed letting offsets account for any part of the bloc’s climate targets since the end of the second commitment period of the Kyoto Protocol. From 2013 to 2020, the EU emissions trading system (EU ETS) allowed covered entities to offset some of their emissions with credits from the Protocol’s flexible mechanisms – primarily CERs from the Clean Development Mechanism (CDM). After many project types were deemed environmentally problematic, EU regulators applied progressively tighter quality restrictions: they made credits from, e.g. HFC-23 destruction projects and large hydro projects ineligible. After 2021, international credits were no longer permitted at all. Partly because of the quality concerns, partly because the large volume of offsets contributed to oversupply of compliance units in the EU ETS and thus brought the price of EUAs down to the extent that the EU carbon market was not effective at achieving decarbonisation.
Now, as Europe is facing a dual energy and competitiveness crisis, political priorities have changed – the EU is adopting ambitious new climate targets, and policymakers are seeking flexibility in meeting them. The Council presidency and the Parliament have now agreed on an amendment to the Climate Law to include a legally binding 2040 climate target – see our analysis here. This follows the positions adopted by both institutions last month, when the European Parliament and the Council of member states (the two legislators) adopted amendments to the Climate Law to enshrine a target of 90% emission reduction below 1990 levels by 2040, similar to what the EU Commission had proposed earlier. The co-legislators’ versions allow for up to 5% of the target to be reached with climate change mitigation achieved outside the EU (up from 3% in the Commission proposal), starting in 2036. Opening for international credits to contribute toward Europe’s 2040 target creates real demand for those units, as the EU’s climate law is – in contrast to companies’ voluntary “net zero” or “carbon neutral” targets – legally binding and enforced.
The negotiators will now take the provisional agreement back to the Parliament and the Council for final approval, potentially as early as next week, with the Parliament’s plenary beginning on 15 December and the Environment Council meeting on 16 December (or, alternatively, another Council configuration). Once the amended Climate Law is formally adopted, the Commission will prepare the implementing legislation, including an impact assessment and table a concrete proposal on international credit use.
Our previous analysis assesses how various interpretations of the legal wording can lead to very different outcomes as regards volumes of credits counting towards the 90 percent reduction target in 2040. We argue that the EU could require from 237 Mt to well over 1 Gt of credits outcomes by 2040. As expected, the trilogue did not bring further clarity on the maximum volume, and the amended climate law text masks real differences, and probably intentionally pushes decisions on credit volumes out in time; in short, that jury is still out. The same is true for the decision whether credits should be allowed for use in the EU ETS. The Parliament wording to ban use in the EU ETS did not make it to the final Climate Law amendment, and this controversial issue is thus left for next year’s ETS review process.
These aspects aside, the trilogue appears to have brought the Council and the Parliament positions closer on credit quality. The final text has not yet been publicly circulated, but the press release indicates that co-legislators have agreed to introduce additional safeguards to guide the Commission in drafting future rules on international credit use under the post-2030 climate framework. Where appropriate, the Commission will be required to consider complementing the Paris Agreement’s criteria when establishing these rules, suggesting space for EU-specific quality requirements.
The following outlines the key considerations for defining credit quality; namely, what “high-quality” may entail and which types of international credits could qualify for use under the EU’s 2040 target
The Council position of the climate law amendment brought into the trilogue gives no hints as to the type of credits the EU would allow after 2035, stating merely that “the origin, quality criteria and other conditions concerning the acquisition and use of any such credits shall be regulated in Union law.”
The Parliament version, on the other hand, has more detailed language on what constitutes “high-quality” credits. It uses the term “safeguards” three times in one sentence with references to ensuring integrity, avoidance of double counting, additionality, permanence, transparent governance and human rights, among other factors.
The proposal from the Commission seems to take a narrow approach –the QA document accompanying the Commission legislative proposal from July states that international credits must "come from credible and transformative activities, such as direct air carbon capture and storage (DACCS) and Bioenergy with carbon capture and storage (BioCCS) in partner countries whose climate targets and action align with the Paris Agreement temperature goal.” This indicates that credits from DACCS and BioCCS projects will feature prominently in early eligibility discussions, as they are assumed to be of high quality.
Amid the references to quality in the various texts leading to the final amendment agreement, we discern three key distinctions:
Both the Parliament’s and the Council’s texts clearly state that international credits are “under Article 6 of the Paris Agreement.” That means they are internationally transferred mitigation outcomes (ITMOs) and therefore come with attributes other credits do not: they require corresponding adjustments to the Paris target of the country they were generated in, to account for the fact that Europe will be using them toward its target instead.
Corresponding adjustments are “proof” or acknowledgement in each Party’s greenhouse gas accounting and reporting that the country in which mitigation took place will not count that mitigation toward its stated Paris Agreement target because the buyer of that mitigation is doing so. Also, a 5% share of the proceeds from each ITMO transaction goes to the Paris Agreement Adaptation Fund. At least 2% of the proceeds must be cancelled (rather than used toward any entity’s target) to deliver overall mitigation in global emissions (OMGE).
Many of the credits currently being bought by private sector entities to meet company climate targets, such as “net zero” commitments or making events/travel “carbon neutral”, are not ITMOs because they have not been correspondingly adjusted – these would not be allowed to meet the EU 2040 target.
Article 6 of the Paris Agreement has two ways of transferring ITMOs. Under Article 6.2, parties can work out a deal amongst themselves whereby one sponsors certain mitigation activities in another, then gets to count that mitigation toward its own target while the party in which the activity takes place gets its many co-benefits (including foreign investment by the buyer country), but foregoes claiming the mitigation outcomes in its reporting on progress toward its Paris target. Although the Parliament text does not mention 6.2 specifically, it refers to “credible and transformative activities in partner countries whose climate targets and policies are compatible with the targets of the Paris Agreement.” We interpret this as opening for the EU to pay for mitigation in countries outside the EU under Article 6.2, with the resulting ITMOs applied toward the 2040 EU target during 2036-2040.
Article 6.4 describes the Paris Agreement Crediting Mechanism (PACM), the successor to the Kyoto Protocol’s CDM, under which countries host projects whose mitigation in the form of ITMOs is made available to buyers (including, but not limited to, other parties to the Paris Agreement) via transfer among registries. The PACM is governed by a Supervisory Body that sets standards for eligible offset credit methodologies (see our recent analysis here). The Parliament’s version of the amended climate law explicitly mentions Article 6.4 credits. Some stakeholders had assumed the EU’s legal text would state that credits generated under the PACM would be the only type of credit mentioned as allowed for compliance with the 2040 target – but officials from member states have confirmed that no quality framework has been agreed upon. In fact, the Parliament’s amended text states that “the Commission shall consider setting stricter criteria than those laid down under Article 6.4 of the Paris Agreement.” The word “strict” is not defined in the text.
The Parliament’s version of the text references the use of international credit purchases in the context of diplomacy and foreign relations. It mentions ensuring environmental integrity of credits “while promoting the EU’s technological leadership,” as well as safeguards “to prevent the funding of projects contrary to the strategic interests of the Union” (Amendment 14, Article 4, paragraph 5). Whether this implies a geographical filter, i.e. ban on credits generated in countries with which Europe’s geopolitical interests do not align, remains to be seen. Although the Council version of the amended text does not explicitly include such geopolitical considerations, they are not new or unique to the Parliament’s version: the European Commission had outlined a diplomatically targeted approach to international credits in its 2 July proposal by emphasising that credits should come, e.g. only from countries whose climate targets are aligned with the Paris Agreement.
The agreed amendment to the Climate Law specifies that international credits may only start counting toward the 2040 target from 2036 onward, a provision not included in the Commission’s original proposal. Both co-legislators had already introduced this timing in their respective positions, with the Recitals and Article 4a referring to a possible pilot phase in 2031–2035 “to initiate a high-quality and high-integrity international credit market.” December 9’s provisional agreement maintains this structure. It does not imply that any credits generated in this period could be used toward the 2040 target.
The pilot period is therefore likely intended to function as a testing ground rather than an early procurement window. It would involve, e.g. assessing administrative readiness and building partnerships with host countries. It would likely facilitate capacity building rather than credit volume accumulation. In any case, credit use is foreseen only a decade from now, starting from 2036. The EU submitted its nationally determined contribution (NDC, a party’s “target” under the Paris Agreement) for 2035 last month, and it does not include the use of international credits toward achieving the goal of bringing the bloc’s emissions between 66.25-72.5% below 1990 levels by 2035.
A factor complicating the role of a potential pilot phase between 2031 and 2035 – and for that matter all trading of mitigation units under the auspices of the Paris Agreement – is the “no banking rule,” an important element of the pact that distinguishes it from the Kyoto Protocol. Unlike the Kyoto Protocol, which allowed credits to be purchased at one time and “used” (applied toward a target) in later years, the Paris Agreement clearly states that ITMOs must be “used” in the same NDC implementation period that the underlying mitigation occurred. The idea is that this better embodies the cooperation between parties that the Paris Agreement is supposed to facilitate: all countries have targets set to be achieved in their NDC periods. If one party pays for mitigation to occur in another party, that mitigation and its use (toward the buyer party’s NDC) should occur in the same NDC implementation period and not be banked indefinitely.
For trading purposes, this concept renders the usable life of an ITMO as long as the implementation period of the NDC in which the mitigation occurs. However, there is no concrete definition of what constitutes an implementation period: parties’ NDCs refer to the implementation of policies aimed at lowering emissions, but few define a specific timespan labelled as an implementation period. The EU’s NDC, submitted on 5 November 2025, refers to information about the NDC of Europe for the timeframe 2026-2035, but does not call that timespan an “implementation period.”
The EU intends to use international credits only during 2036–2040. By then, countries in which international credits are generated will have moved into their implementation periods aligned with the 2040 NDC, meaning mitigation occurring in those years can be authorised, correspondingly adjusted by the host and buyer countries, and used by Europe before 2040.
Whether and how mitigation that occurred outside the EU before 2036 could be used toward the 2040 target remains unclear. This is a problem for all cases of cooperative approaches under Article 6: if parties do not have clearly defined implementation periods – or the buyer’s and seller’s implementation periods are not the same – they cannot ensure that ITMOs are issued /created and used within the same implementation period as required. Enforcement of the “no banking rule” therefore makes for an extreme throttling of international carbon trading activity. Veyt is following this issue and will share more information as soon as it becomes available.
The governance architecture for how the EU will acquire and account for international credits remains undefined. Neither the Council text nor the Parliament text specifies whether units will be purchased centrally by the Commission, procured directly by Member States, or handled through a “central bank” type entity or another hybrid model.
A central EU procurement platform, an idea supported by some Member States such as Italy, could ensure equal access and reduce administrative complexity, but would require strong governance and, crucially, dedicated funding. A centralised model implies that common EU funds or new budgetary instruments would need to be attached to credit purchases. A decentralised approach, in which each Member State negotiates its own Article 6.2 cooperative agreements or acquires Article 6.4 units independently, would create uneven capacities across the Union and likely favour larger states with greater negotiating resources as smaller Member States face disproportionate administrative burdens. The Parliament’s text refers to this, and to geopolitical considerations in terms of which countries to buy ITMOs from: “In operationalising the use of international credits, the Commission should take into account the need to ensure a level playing field across Member States and the opportunity to support strategic EU partnerships.”
The EU’s new flexibility comes at a time when international credit supply under Article 6 is limited. The volume of ITMOs Article 6.2 cooperative approaches involved so far is low, and no credits have yet been generated under the PACM. Supply from transitioning CDM projects is similarly narrow: while 14 projects have been formally registered for transition, none have issued credits to date, see our database here. Only two projects, both in Myanmar, have so far received letters of authorisation, with vintages covering 2021–2026 and one extending to 2035. Combined, both projects are expected to generate annual emission reductions of only 46,000 tonnes of CO2.
Although some CDM activities could eventually migrate into Article 6.4, few host countries have completed transition approvals, and corresponding adjustment procedures remain bottlenecks. Host-country capacity adds another constraint: only a small number of developing countries have operational registries or clear processes for authorising transfers, and many face difficult decisions about whether to export mitigation outcomes or retain them for their own NDC compliance.
Early Article 6 pilots suggest a long lead time between cooperation agreements and the issuance of the first units; two to three years is a typical interval. Given the no-banking rule described above, projects generating credits to meet Europe’s demand will have to get started well before 2036 in order to have ITMOs during the time period they can be used.
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