On 2 July 2025, the European Commission published a legislative proposal to amend the European Climate Law. In force since 2021, the Climate Law commits the EU and its Member States to achieving net-zero greenhouse gas (GHG) emissions by 2050. It also requires the Commission to propose a legally binding intermediate target for 2040. In this context, the Commission has now proposed a new EU-wide target: a 90% net reduction in GHG emissions by 2040 compared to 1990 levels.

The 90% reduction target in the amended Climate Law is binding at the EU level but does not impose direct obligations on individual Member States. Instead, Member States are bound through existing and future legislative instruments, such as the Emissions Trading System (EU ETS), which, along with other relevant measures, may be revised to implement the Union-level target, as explicitly set out in the proposed new Article 4(4).

Key Elements of the Proposal

The proposal incorporates several mechanisms aimed at supporting Member States in achieving the 2040 target in a cost-efficient and socially balanced manner. These include:

• Use of international carbon credits – Beginning in 2036, a limited share of high-integrity international carbon credits (up to 3 percentage points of the target) may be used to meet the 2040 objective. These credits will need to meet strict environmental standards and will not be tradable within the EU Emissions Trading System (EU ETS).
• Integration of domestic CO₂ removals – the Commission foresees integrating permanent domestic removals – such as direct air capture or improved land use practices – into the EU ETS. This would allow Member States and market actors to offset emissions using verifiable and durable sequestration solutions. The precise governance and certification rules remain to be developed.
• Cross-sectoral flexibility – Member States may offset underperformance in one sector (such as transport or waste) with overachievement in another (such as agriculture or land use). This flexibility is designed to accommodate national circumstances and encourage cost-effective decarbonisation pathways across sectors.

The proposal has garnered a generally positive reception from Member States, with some welcoming its built-in flexibility, although others, including France, have expressed concerns. The European Parliament is expected to be divided, with conservative groups likely to oppose the ambitious target, while Social Democrats and Greens are concerned that the proposed flexibilities may undermine the target’s effectiveness.

Next Steps

The proposal will now enter the ordinary legislative procedure. Deliberations in the European Parliament and the Council are expected to continue into 2025, with significant implications for the EU’s post-2030 climate framework. The 2040 target will also inform the Union’s next Nationally Determined Contribution (NDC) under the Paris Agreement, in preparation for COP30 in Belém, Brazil.

Broader Implications for Non-EU Operators

While the proposal does not directly amend carbon trading instruments such as the Carbon Border Adjustment Mechanism (CBAM), its long-term ambition may shape future policy developments in areas including:

• Expansion of CBAM or similar carbon pricing tools to cover additional sectors currently excluded.
• Growth in voluntary carbon markets, particularly for international offset credits, potentially increasing commercial opportunities for investment in non-EU carbon markets.
• Stronger emphasis on land-based carbon removals and natural sinks, as Member States may rely on these to offset underperformance in harder-to-decarbonise sectors.
• Heightened expectations around carbon performance, transparency, and ESG alignment, especially for companies operating in or exporting to the EU.

Delivering on the Clean Industrial Deal

Alongside its 2040 climate target proposal, the European Commission has launched a wide-ranging policy package to support industrial decarbonisation while preserving European competitiveness. At the heart of this effort is the Clean Industrial Deal, the EU’s strategic framework for aligning climate action with industrial growth.

In a new Communication titled “Delivering on the Clean Industrial Deal I,” the Commission provides an overview of the initial set of measures adopted, progress achieved, and the next steps in the rollout of the strategy. Key components include:

• Adoption of the Clean Industrial Deal State Aid Framework (25 June 2025), designed to facilitate public support for investments in clean energy and green technologies.
• Simplification of the Carbon Border Adjustment Mechanism (CBAM), which will exempt 90% of importers and streamline administrative procedures ahead of a broader CBAM review expected later this year.
• A recommendation on tax incentives to encourage industrial decarbonisation, including tools such as accelerated depreciation and targeted tax credits.
• New guidance on EU renewables rules, helping Member States lower energy costs and accelerate the deployment of clean power.
• Forthcoming initiatives, such as the pilot of an Industrial Decarbonisation Bank and the Chemicals Industry Action Plan, which will further reinforce the EU’s long-term commitment to a sustainable and competitive industrial base.

We continue to monitor developments in EU climate law and their legal and commercial implications for industry stakeholders.