EU Emissions Trading Could Jeopardize the 2040 Climate Goal

November 3, 2026

Source: E & M powernews

An analysis by the Öko-Institut highlights risks associated with the planned reform of the EU Emissions Trading System. Up to 620 million additional allowances could jeopardize the 2040 climate target.

The European Commission’s proposed reform of the European Emissions Trading System (EU ETS) could make it more difficult to achieve the EU’s 2040 climate target. This is the conclusion of an analysis by the Öko-Institut in Freiburg, commissioned by WWF Germany.

According to the analysis, the planned reduction in the emissions cap alone is not sufficient to ensure compliance with the climate target. Additional emission allowances and surpluses from earlier trading periods could lead to companies emitting more greenhouse gases than is compatible with the climate target.

“When it comes to climate protection, it’s not just how many new emission allowances are issued that matters, but how many are available on the market in total,” says Jakob Graichen, an expert on energy policy and climate protection at the Öko-Institut. Additional allowances could undermine the EU’s 2040 climate target. The reform must therefore establish a binding limit on the total amount of emissions still permitted.

Up to 620 million additional allowances

According to calculations by the Öko-Institut, the supply of allowances in the fifth trading period from 2031 to 2040 could exceed the demand compatible with the climate target by up to 620 million allowances. This would correspond to an additional supply of up to 10 percent. If these allowances are used for emissions in the EU ETS, other economic sectors would have to reduce greenhouse gas emissions by a corresponding amount. Additional use of allowances from the market stability reserve could further widen the gap between actual emissions and the target.

The Institute therefore recommends that all allowances be accounted for within a binding and transparent overall budget. This includes allowances intended to finance permanent CO2 removals from the atmosphere or to support climate-friendly investments through the so-called “Investment Booster.” In the Öko-Institut’s view, additional allowances for CO₂ removals should not be issued until the corresponding removals have actually taken place.

Maintain the reduction of the emissions cap through 2035

The institute also sees a need for action regarding the annual reduction of the emissions cap. The current reduction rate of 4.4 percent should remain in place until 2035. By then, the last major coal-fired power plants are expected to have left the market. At the same time, surplus emission allowances are likely to remain available.

Furthermore, the market stability reserve should continue to absorb 24 percent of the surplus allowances annually. Its thresholds would need to be adjusted more closely to the declining total volume of available allowances. The reserve is intended to balance supply and demand in emissions trading and thus prevent an oversupply from weakening the incentives for emissions reduction.

Coordinate Emissions Budgets Across Sectors

In addition to the design of the EU ETS, the Öko-Institut calls for greater coordination of climate targets across economic sectors. Emissions budgets for emissions trading should be set in conjunction with the budgets for transportation, buildings, agriculture, and other sectors.

Additional CO2 sequestration through forests and other land-use practices cannot reliably close potential gaps in climate protection. The sequestration capacities are associated with considerable uncertainties.
According to the institute’s assessment, international carbon credits under Article 6 of the Paris Agreement should not be used to offset missed emission reduction targets in the EU ETS.

Instead, they could help ensure that climate protection efforts meet their overall targets, for example, if the expected CO2 storage capacities of forests and other natural sinks fail to materialize. This would require strict standards for the quality, crediting, and procurement of climate credits.

The Öko-Institut’s study , “The EU ETS and the 2040 Target,” is available online in English.

Author: Susanne Harmsen