Fit for 2040

The document argues that the EU ETS1 is fit for purpose until 2035, after which a supply-demand mismatch for allowances may emerge. It strongly warns that integrating international carbon credits (Article 6) or carbon removals into the ETS would undermine the carbon price incentive, risk emissions mitigation avoidance, and divert investment away from domestic decarbonisation. For the upcoming ETS2, the brief recommends allowing the market to function for several years before making adjustments due to high price uncertainty. It also cautions against merging ETS1 and ETS2 due to differences in market actor price sensitivity and suggests maintaining national targets beyond 2030 to support the ETS.

• The EU ETS1 is considered fit for purpose until at least 2035, as the mismatch between the supply and demand of allowances is not expected to emerge before that date.
• Including international carbon credits under Article 6 of the Paris Agreement in the EU ETS would destroy the system's integrity, reduce the incentive for domestic decarbonisation, and potentially lead to the use of low-quality, inflated credits.
• Integrating carbon removals into the EU ETS is viewed as a risk that could create a moral hazard, allowing polluters to delay urgent mitigation efforts and potentially undermining the carbon price.
• The new ETS2 system for buildings and road transport should be allowed to operate for several years before any changes are made to its Linear Reduction Factor (LRF) or Market Stability Reserve (MSR) due to significant uncertainty regarding emission levels.
• Merging ETS1 and ETS2 is discouraged because the two systems have different market functioning and the regulated entities have different abilities and willingness to pay, which could delay climate action.
• To maintain the EU's carbon budget after 2035, any weakening of the Market Stability Reserve or Linear Reduction Factor to increase allowance supply must be offset by increased ambition in non-ETS sectors, particularly agriculture.

APA

Scott, E. (2025). Fit for 2040. Carbon Market Watch. https://carbonmarketwatch.org/wp-content/uploads/2026/06/Fit-for-2040-Policy-Brief_FINAL-1.pdf

Chicago

Scott, Eleanor. Fit for 2040. Carbon Market Watch, 2025. https://carbonmarketwatch.org/wp-content/uploads/2026/06/Fit-for-2040-Policy-Brief_FINAL-1.pdf.

Wikipedia

{{cite report |last1=Scott |first1=Eleanor |title=Fit for 2040 |publisher=Carbon Market Watch |date=June 2025 |url=https://carbonmarketwatch.org/wp-content/uploads/2026/06/Fit-for-2040-Policy-Brief_FINAL-1.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{scott2025fit, author = {Scott, Eleanor}, title = {{Fit for 2040}}, institution = {Carbon Market Watch}, year = {2025}, month = jun, url = {https://carbonmarketwatch.org/wp-content/uploads/2026/06/Fit-for-2040-Policy-Brief_FINAL-1.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }