Do international carbon credits fight climate change?

BRUSSELS - The European Commission has proposed an EU climate target for 2040 that for the first time allows countries to count carbon credits bought from developing nations towards the EU goal.

Here is what that means, and why the EU move on July 2 faced criticism from campaigners and some scientists.

What are carbon credits?

Carbon credits, or offsets, involve funding projects that reduce CO2 emissions abroad in place of cuts to your own greenhouse gas emissions.

Examples include forest restoration in Brazil, or converting a city’s petrol buses to electric. The buyer counts “credits” for those emission reductions towards its climate goal, and the seller gets finance for their green project.

Proponents say the system generates much-needed funding for CO2-cutting efforts in developing nations and lets countries work together to cut emissions around the world.

However, the reputation of CO2 credits has been dented by a string of scandals in which credit-generating projects failed to deliver the climate benefits they claimed. 

Why is the EU buying them?

The European Commission proposed allowing up to 3 percentage points of the EU’s 2040 target – to cut net emissions by 90 per cent from 1990 levels – to be covered by carbon credits bought from other countries.

The EU’s existing climate targets require countries to meet the goals entirely by cutting emissions at home.

The bloc’s executive commission said in 2024 that it hoped the EU could agree a 90 per cent emissions-cutting target for 2040, with no mention of carbon credits.

Tumultuous geopolitics and the economic woes of European industries have since stoked political pushback, with governments from Germany to Poland demanding a softer target.

In response, the Commission said it would add flexibilities, and landed on carbon credits as a way to retain a 90 per cent emissions-cutting goal while reducing the domestic steps needed to reach it.

EU countries and the European Parliament must negotiate and approve the goal.

What are the risks?

The EU plan was welcomed by countries including Germany, which had pushed to include carbon credits in the goal, and by carbon credit project developers as a boost for climate finance.

But environmental campaigners said the EU was shirking domestic CO2-cutting efforts and warned against relying on cheap, low-value credits. 

The EU’s climate science advisers had also opposed buying credits under the 2040 target, which they said would divert money from investments in local clean industries.

The EU banned international credits from its own carbon market after a flood of cheap credits with weak environmental benefits contributed to a carbon price crash. 

To try to address the risks, the Commission said it would buy credits in line with a global market and rules for trading carbon credits which the UN is developing. These include quality standards aimed at avoiding the problems that unregulated credit trading has faced in recent years.

Brussels will also propose rules in 2026 on specific quality standards for the carbon credits the EU buys. 

How much will it cost?

The EU does not yet know. Carbon credit prices today can be as low as a few dollars per tonne of CO2, up to more than US$100 (S$127), depending on the project.

EU emissions records suggest the bloc would need to buy at least 140 million tonnes of CO2 emissions to cover 3 per cent of the 2040 target, roughly equivalent to the Netherlands’ total emissions in 2024.

One senior Commission official said the bloc was determined not to hoover up cheap junk credits.

“I don’t think that would have any additional value. The credits we see currently on voluntary carbon markets are very, very cheap, and that probably reflects a lack of high environmental integrity,” the senior official said. REUTERS