• EU lawmakers approved a binding 90% emissions reduction target for 2040, tightening the pathway to climate neutrality by 2050.
• From 2036, up to five percentage points of reductions may come from international carbon credits, with strict governance safeguards.
• Launch of ETS2, covering buildings and road transport fuels, postponed to 2028 amid competitiveness and cost concerns.

Brussels Locks In A Tougher 2040 Climate Target

Brussels moved decisively this week to reshape Europe’s climate trajectory, as lawmakers approved amendments to the EU Climate Law that commit the bloc to cutting net greenhouse gas emissions by 90% by 2040 compared with 1990 levels. The vote passed with 413 in favour, 226 against and 12 abstentions, anchoring a new intermediate milestone between existing 2030 targets and the EU’s 2050 climate neutrality goal.

The revised law strengthens the EU’s regulatory framework at a time when policymakers are balancing industrial competitiveness, rising energy costs and geopolitical pressures with long term climate commitments. For investors and corporate leaders, the measure signals a clearer trajectory for carbon pricing, technology deployment and capital allocation across heavy industry, energy and transport sectors.

Carbon Credits Allowed But Under Tight Governance Rules

A key change introduces limited flexibility for member states through the use of international carbon credits. From 2036, up to five percentage points of net emissions reductions can be achieved through high quality credits sourced from partner countries. This allowance is two percentage points higher than the European Commission’s initial proposal.

However, lawmakers imposed strict conditions designed to preserve environmental integrity and avoid political backlash. Credits may only be used in sectors that fall outside the EU emissions trading system and must originate from countries whose climate policies align with the Paris Agreement. Safeguards were also added to prevent funding projects that could conflict with EU strategic interests.

The revised law also recognises domestic permanent carbon removals as a tool to offset hard to abate emissions within the ETS framework. By embedding flexibility across sectors and instruments, policymakers aim to keep decarbonisation costs manageable while maintaining industrial competitiveness, an issue that has become central to European economic policy debates.

ETS2 Delay Reflects Cost And Competitiveness Concerns

One of the most closely watched decisions involves the expansion of the EU’s carbon market. The launch of ETS2, which will apply carbon pricing to fuel combustion in buildings and road transport, has been postponed by a year to 2028.

The delay reflects mounting political sensitivity around household energy costs and business competitiveness. While the policy remains a cornerstone of the EU’s climate strategy, the shift gives governments additional time to deploy social support measures and adapt infrastructure before the expanded carbon market takes effect.

For corporate leaders, the postponement does not eliminate regulatory risk but instead extends the timeline for compliance planning, investment in electrification and efficiency upgrades, and engagement with future carbon pricing exposure.

RELATED ARTICLE: EU Plans Stricter Controls On Plastic Imports In 2026

Built In Review Mechanism Keeps Policy Dynamic

The amended law introduces a formal review process requiring the European Commission to assess progress every two years. These evaluations will consider updated scientific data, technological developments, industrial competitiveness and energy price trends, as well as the availability of carbon removals across the EU.

If progress falls short or economic pressures intensify, the Commission retains the authority to propose further amendments, including adjustments to the 2040 target or additional policy measures. This dynamic governance structure reflects growing recognition that climate policy must remain adaptive amid rapid changes in technology, geopolitics and financial markets.

What Executives And Investors Should Watch

For C suite leaders and institutional investors, the revised climate law tightens expectations around long term decarbonisation strategies while offering calibrated flexibility. The limited use of international credits, combined with continued expansion of carbon pricing mechanisms, reinforces the importance of credible emissions reduction plans and resilient supply chains.

Industries exposed to ETS compliance will face increasing pressure to deploy low carbon technologies, while sectors outside the carbon market may see new opportunities linked to verified climate projects in partner countries.

As the Council moves toward final endorsement and the law prepares to enter force after publication in the EU Official Journal, Europe is signalling that climate policy will remain central to its economic identity. The 2040 target places the EU among the most ambitious regulatory jurisdictions globally, shaping not only regional investment flows but also international carbon markets and corporate climate strategies far beyond its borders.

Follow ESG News on LinkedIn