On 5 November 2025, the European Council (Council) agreed its position on amending the European Climate Law (EU Climate Law) to introduce a binding, intermediate 2040 climate target of a 90% reduction in net greenhouse gas (GHG) emissions, as compared to 1990 levels. Following this, the European Parliament (Parliament) agreed its position on 13 November 2025, broadly aligned with the Council.
The Council introduced adjustments to reflect concerns about EU competitiveness and “the need for a just and socially balanced transition”, including by allowing carbon credits to contribute up to 5% of the total 90% reduction, an increase from the 3% that was initially proposed by the European Commission (Commission). This 5% contribution is agreed by the Parliament, which also highlighted the need for “robust safeguards”.
The EU Climate Law (Regulation (EU) 2021/1119), based on the European Green Deal and adopted in 2021, embeds the objective of climate neutrality into binding legislation. Its progressive emissions benchmarks include:
The 2030 target is implemented through the EU’s “Fit for 55” package, which introduces and revises regulations across sectors to align EU law with the 55% reduction goal. For more information on the EU Climate Law and associated revision of EU directives as part of the “Fit for 55” package, refer to this Latham article.
In July 2025, the Commission proposed an amendment to the EU Climate Law, establishing an interim EU climate target for 2040 of a 90% reduction. The Commission’s initial proposal was for international carbon credits to contribute up to 3% of the reduction target, starting in 2036.
According to the positions of the EU institutions, from 2036 it would be permitted to use “high‑quality international carbon credits” to contribute up to 5% of the total 90% reduction target. The Council has indicated that a pilot period from 2031 to 2035 is under consideration in order to assist with the establishment and operation of a high-quality and high-integrity international credits market by 2036 and that the origin, quality criteria, and certain other conditions concerning the acquisition and use of these credits shall be regulated.
In the wider EU context, the increased role of carbon credits is intended to support the achievement of GHG reduction trajectories compatible with the Paris Agreement objective to hold the increase in the global average temperature to well below 2 °C and pursue efforts to limit the temperature increase to 1,5 °C above pre-industrial levels.
The Council also announced a proposed one-year delay to the new EU Emissions Trading System (EU ETS) in relation to buildings, road transport, and further sectors (the so-called “ETS 2”) from 2027 to 2028. This proposal would only affect ETS 2 and would not change the operation or timelines of the existing EU ETS for power, industry, and other covered sectors. The Parliament supported the proposal.
ETS 2 was introduced in the 2023 revision of the EU ETS under the “Fit for 55” package, and is a separate, downstream carbon pricing system designed to cover fuel use in buildings and road transport. It complements the current EU ETS by extending carbon pricing beyond the power and industrial sectors.
The Commission is currently assessing the integration of carbon removal credits into the EU ETS as part of its long-term decarbonisation strategy. In April 2025, the Commission launched a consultation on the integration of GHG removals, the findings of which are expected to be published by July 2026. The Commission has said the inclusion of carbon removal credits could allow the EU ETS to support net-negative emissions and maintain market functionality.
The Council and Parliament also envisage a role for “domestic permanent carbon removals” to compensate for hard-to-abate emissions in the EU ETS as well as enhanced flexibilities within and across sectors and instruments to achieve targets that are as cost-effective as possible.
Parallel to the 2040 target, the Council also agreed to implement a target to reduce emissions between 66.25% and 72.5% by 2035. This goal forms the EU’s Nationally Determined ContributionNDCs are national climate action plans that form part of the Paris Agreement, setting out plans for national emissions reduction. They are presented by each country under the agreement. These are required to be updated every five years (starting from 2020 and every five years thereafter). (NDC) under the Paris Agreement, submitted ahead of COP30 in November 2025, where parties will present new or updated NDCs and assess collective emission reduction progress. This NDC is intended to contribute to the proposed interim climate target for 2040, as well as the route to carbon neutrality by 2050.
Following the Parliament adopting its position, the EU institutions will now begin negotiation on the final details of the text, including the details relating to use of international carbon credits. We note that the positions of the Council and Parliament are already largely aligned.
The updated NDC was submitted to the United Nations Framework Convention on Climate Change and will feed into a report providing an overview of global emissions reduction commitments relating to the Paris Agreement goals.
Latham & Watkins will continue to monitor developments relating to ESG regulatory updates in the EU and globally.
This article was prepared with the assistance of Samantha Banfield and Sofia Hagelqvist at Latham & Watkins.