EU 2040 Climate Target
Four Things Corporate Leaders Need to Know
- Article
- 10/09/2025
Earlier this year, the European Commission (EC) proposed amending the EU Climate Law to introduce a 2040 target of reducing net greenhouse gas emissions by 90% compared to 1990 levels. Building on the 55% reduction goal for 2030, this new intermediate target marks a pivotal step in Europe’s decarbonization journey, serving as a milestone on the path to climate neutrality by 2050.
While the EC has deemed the target technically and economically feasible, the road ahead will be complex, costly, and politically charged. Many of the more accessible emissions reductions in Europe’s decarbonization journey have already been realized. The next phase will require deeper investments in clean technologies and infrastructure.
To support this transition, the Commission has proposed three flexibility mechanisms aimed at easing the burden on European businesses and investors. These include the use of domestic permanent removals in the EU Emissions Trading System (EU ETS), a possible limited role for international carbon credits, and sectoral flexibility —elements that are still under debate.
While we believe only the first mechanism will have a major impact on corporations, the greatest challenges may lie elsewhere, even if all three of these tools are adopted. Chief among these are addressing the enabling conditions of decarbonization. As it now stands, grid bottlenecks, slow permitting, and interconnection issues threaten to stall renewable energy deployment.
To unpack what this means for business, we spoke with Tine Bax, ENGIE’s Senior EU Public Affairs Manager, who shared insights to help businesses prepare today for the policy landscape of tomorrow. Here are four key takeaways for business leaders and sustainability and procurement teams to keep top of mind:
1. Carbon Removals Will Be Central to ETS Compliance Post-2030
One of the most consequential developments on the horizon for corporate emitters is the potential integration of EU-certified carbon removals into the EU ETS. The EU has introduced the Carbon Removal and Carbon Farming Certification Framework (CRCF), a voluntary system to certify high-quality removals of anthropogenic and biogenic CO₂, explicitly excluding fossil-derived CO₂. These carbon dioxide removals (CDR), achieved through technologies like direct air capture with carbon storage (DACCS) or bioenergy with carbon capture and storage (BECCS), will support voluntary climate claims and be used by Member States to meet national climate targets but are not yet eligible for ETS compliance.
Under current ETS rules, installations that capture and permanently store (part of) their emitted CO₂ are exempt from surrendering allowances, as those emissions are considered mitigated. However, the EC is expected to propose a new ETS framework by mid-2026 that could allow companies to offset a portion of their ETS obligations using CDRs, provided they are certified under the robust, compliance-grade certification system put in place under the CRCF.
This would represent a major shift, moving removals from voluntary climate tools into the compliance domain and paving the way for a compliance-grade marketplace for carbon removal certificates. These certificates, while distinct from EU Allowances (EUAs), could be used within defined limits to offset part of a company’s emissions obligations or traded among ETS participants.
While some large emitters may invest directly in removal technologies, most would likely access these certificates through specialized developers and intermediaries. This creates a growing role for service providers like ENGIE, who can ensure credibility, traceability, and alignment with emerging EU standards. If implemented, this shift would significantly change the ETS, from a system focused solely on reducing emissions to one that also supports the scale-up of permanent carbon removals within a regulated market.
2. Most Flexibility Mechanisms Will Bypass Corporates
Beyond domestic removals, the Commission has proposed two other flexibility mechanisms: the use of international carbon credits and cross-sectoral balancing between EU climate policies. Both require approval through the full EU legislative process—including approval by the Council and the European Parliament—where significant changes or delays are likely. And even if adopted, these mechanisms are unlikely to offer direct benefits for corporate emitters, as they primarily target Member State-level accounting and compliance.
International credits, capped at 3% from 2036, remain highly uncertain due to a combination of legal, environmental, and political issues, including questions about quality, oversight, and the risk of using them as a substitute for domestic action. Their adoption will depend on future EU assessments and the establishment of a global framework under the Paris Agreement. Corporates should not expect this channel to provide meaningful decarbonization opportunities.
At the same time, growing government involvement in carbon credit standards, through initiatives like the CRCF and national standards such as France’s Label Bas Carbone, sends a strong signal to the private sector. This institutional backing helps de-risk credits for companies and further legitimizes their role within credible corporate climate strategies.
Cross-sectoral flexibility allows Member States to shift targets between sectors—such as land use and transport—to cover their nationally determined contributions. However, for corporate buyers, these mechanisms are unlikely to have immediate strategic impact.
3. Technology Pathways Will Depend on Cost and Maturity
ENGIE’s modelling diverges from the EC’s assumptions in several key areas, largely due to different views on technology costs and regulatory readiness. While the Commission is bullish on DACCS and domestically produced green hydrogen, these technologies remain costly and are either too immature (DACCS) or lack supportive regulation (H2) for large-scale deployment by 2040. Instead, imported e-fuels and targeted carbon capture and storage (CCS) for heavy industry are expected to play a larger role.
This underscores the need for sector-specific strategies: low-heat industries may prioritize electrification, while high-heat or process-intensive sectors should explore removals, CCS, or alternative low-carbon fuels. Companies should begin mapping their emission profiles and identify the technologies best suited to their decarbonization plans.
4. Grid Infrastructure and Permitting Are Major Bottlenecks
Even with lofty ambitions to scale renewables, systemic barriers persist. Renewable capacity is growing but progress is slowed by permitting delays, grid congestion, and limited interconnection capacity. The current grid cannot integrate the available renewables at scale, while demand continues to rise. Without urgent upgrades, the EU’s climate targets risk becoming unattainable
“Setting ambitious climate targets is important, but without the right enabling conditions, progress will stall. We must urgently prioritize an enabling framework that incentivises clean electrification and energy infrastructure development, and unleashes the potential of hydrogen to decarbonise industries.”
Tine Bax – ENGIE Senior EU Public Affairs Manager
“This is probably the biggest challenge,” Bax says. “Setting ambitious climate targets is important, but without the right enabling conditions, progress will stall. This is our main message. We must urgently prioritize an enabling framework that incentivises clean electrification and energy infrastructure development, and unleashes the potential of hydrogen to decarbonise industries.”
This is especially critical for companies planning electrification or green hydrogen adoption, which requires large renewable energy inputs. Corporate advocacy for faster permitting and infrastructure modernization could be a powerful lever.
Meanwhile, renewable and low-carbon gases will remain necessary to ensure energy security, providing flexible backup when wind or solar generation falls short. This underscores the importance for corporates of planning not only clean energy procurement, but also for energy system resilience by anticipating infrastructure risks (e.g., grid congestion, outages, price volatility), diversifying supply strategies, and building flexibility into their decarbonization roadmaps.
What Should Corporates Do Now?
While many of the EU’s 2040 mechanisms and the broader policies are still taking shape, the direction is clear: carbon targets will tighten, and the cost of inaction will rise. Forward-thinking companies have a unique opportunity to engage early, securing long-term offtake agreements, partnering with trusted suppliers, or investing in removal projects. Early action strengthens climate leadership, signals commitment to Net Zero goals, and delivers reputational advantages.
Start by assessing exposure to ETS obligations and identifying hard-to-abate emissions. Build a sector-specific roadmap—electrification for low-heat industries, removals and low-carbon energy for energy-intensive sectors—and secure financing through EU and national programs, the ETS Innovation Fund, and sustainable loans.
Explore opportunities in the removals space. The first and most accessible option is to purchase certified credits. Companies should also start considering whether to support project developers or invest directly in removal technologies.
Monitor the Carbon Border Adjustment Mechanism (CBAM), which aims to prevent carbon leakage but faces ongoing uncertainty—especially for trade-exposed businesses. Finally, advocate for faster permitting and grid upgrades, applying grassroots pressure on local representatives to make sure the enabling conditions for the energy transition are in place.
Partnering with an experienced supplier can help companies navigate complexity, source high-quality removals, and anticipate regulatory shifts. As Anne Idiart, Carbon Credits Solutions at ENGIE Supply & Energy Management, concludes: “I would advise companies to stay engaged with ENGIE. We will be among the first to identify the issues and opportunities.” The road to 2040 may be uncertain, but companies that act now will be best positioned to lead in the coming decade.