International Carbon Credits Under The Proposed EU ETS Revision And CBAM Implementing Regulations

1. Introduction

On 17 July 2026, the European Commission published its proposal to revise Directive 2003/87/EC (the EU ETS Directive), formally titled “proposal for a directive amending Directive 2003/87/EC and Decision (EU) 2015/1814 as regards driving competitiveness and cost-effective decarbonisation” (document reference 2026/0212 (COD)) (the EU ETS Proposal).¹ In an article published in July,² we have examined the proposal to revamp the EU Emission Trading System (EU ETS) as a whole.

In this article, we will examine one of the features of the EU ETS Proposal in more detail, namely the possibility that would be granted for the Commission to purchase up to 260 million international credits (International Carbon Credits or ICCs). Furthermore, we note that the Commission is also proposing that ICCs may play a role under the EU’s Carbon Border Adjustment Mechanism (CBAM) established under Regulation (EU) 2023/956 of the European Parliament and of the Council of 10 May 2023 establishing a carbon border adjustment mechanism (the CBAM Regulation). The CBAM Regulation is a piece of legislation which complements the EU ETS Directive but which, as we will see, would treat ICCs in a completely different manner, by allowing foreign installation operators to rely on ICCs to (partially) offset their obligations under CBAM. 

As will be described below, both instruments reflect a common institutional caution toward ICCs, but this caution is reflected differently. Understanding the difference matters for ETS-covered operators, for importers into the EU, and for trading partners weighing their own carbon-pricing responses.

2. What are ICCS?

A “carbon credit” or CC is a financial instrument that represent a tonne of CO2 removed or reduced from the atmosphere as a result of an emissions reduction project. CCs may be generated by activities like reforestation efforts, carbon or methane capture projects, wetland management, regenerative agriculture and renewable energy projects.

A carbon credit is an “international carbon credit” or ICC if it is generated outside the jurisdiction where it is being applied (eg for compliance obligations under domestic cap-and-trade systems).

Typically, project developers seeking to sell ICCs will ensure they are generated under an internationally recognised crediting mechanism such as (in the past) the Clean Development Mechanism and Joint Implementation under the Kyoto Protocol and, today, Article 6 of the Paris Agreement.³ For the purchasers of those ICCs, they intend to use them as proof that the purchaser has compensated its carbon footprint by investing in a project that removes CO₂ from the atmosphere (so-called ‘offsetting’). Ideally, the purchaser of the ICCs would seek to use such ICCs as alternatives to its decarbonisation efforts, and to be able to rely on ICCs to demonstrate compliance with national legislation (especially in systems applying a cap-and-trade system like EU ETS).

This practice of offsetting has drawn criticism because it may divert attention and resources away from investments which would reduce emissions, and because poor verification may create risks of greenwashing or double counting of carbon credits.⁴ Furthermore, the EU has its own history with allowing Carbon Credits under EU ETS, which has shaped some institutional scepticism towards allowing their further use.

3. International Credits under the EU ETS

The EU ETS is an allowance-based system in which ICCS are no longer recognised as compliance units under the EU ETS Directive. Historically, in Phases 2 and 3 of the EU ETS (2008–2020), ICCs recognized under the Kyoto Protocol could be used or exchanged within quantitative and qualitative limits, ⁵ covering roughly 1.6 billion tonnes of CO₂-equivalent. The Commission has historically identified this practice as contributing to the allowance surplus that depressed prices, which weakened the price signal (and hence the functioning as a driver for decarbonization) of EU ETS.

 Since then, Article 6 of the Paris Agreement has introduced a framework for international carbon-market cooperation, and the amended Regulation (EU) 2021/1119 of 30 June 2021 establishing the framework for achieving climate neutrality (European Climate Law) now permits high-quality international credits to contribute up to 5% of the EU’s 90% net-reduction target. 

The EU ETS Proposal does not reverse that policy position at the operator level: the Commission does not suggest to re-introduce international credits as a direct compliance unit as an alternative or equivalent to surrendering allowances under the EU ETS Directive. Operators covered by the EU ETS must continue to surrender EU allowances (EUAs) for their covered emissions, and nothing else.⁶ Instead, the proposal would suggest to implement the European Climate Law’s 2% flexibility at the level of the EU ETS as a whole, through a mechanism in which the Commission, not market participants, acts as the intermediary purchasing ICCs.

The mechanism is set out in a proposed new Article 9b. Up to 260 million allowances from the EU-wide quantity would be set aside and made available to a “facility” for the Commission to fund the purchase of up to 260 million “high-quality, high-integrity international credits” under Article 6 of the Paris Agreement, contributing to the ambition of ETS sectors from 2036 to 2040.⁷ All purchases would have to satisfy the criteria of the European Climate Law. Proceeds from the auctioning of these set-aside allowances would constitute “external assigned revenue” under the EU Financial Regulation and fund the credit purchases.

The Commission’s ICC purchases would create additional bandwidth for the EU’s emissions, which would be expressed through the lower linear reduction factor (the LRF, ie the rate at which allowances are removed from the total pool of EU allowances under EU ETS) of 1.7% from 2036. This would create slower decline in the amount of EUAs. In substance, the Commission proposes to purchase ICCs and to pass on the resulting “headroom” to ETS operators collectively through an increase in the total cap of emissions that would be allowed under EU ETS, rather than allowing each operator to offset its own emissions with ICCs.

The scepticism of the EU Commission towards ICCs is hence reflected in several ways under the EU ETS Proposal:

• First, it is quantitatively capped: a maximum of 260 million tonnes of ICCs and 260 million set-aside allowances would be added over the whole 2036-2040 window.⁸
• Second, it would be time-limited and back-loaded: the scheme would only be applied as from 2036, though a pilot period in 2031-2035 “may be considered” In accordance with Article 4(5)(a) of the European Climate Law.⁹
• Third, and most importantly, the purchase would be conditional on sufficient ICC availability and quality. The Commission would have to report by 31 January 2033 on the development of a high-quality, high integrity international credits market, assessing environmental integrity, accounting robustness and verification, supply and demand, implications for the functioning and integrity of the EU ETS, and sector specific risks including carbon leakage, competitiveness, and “mitigation deterrence” in accordance with the requirements of the European Climate Law.¹⁰
• If ICCs would not be available on acceptable, cost-effective terms, a fallback mechanism would be triggered: the LRF would be reverted back to 2.7% as from 2036, which would realign the EU ETS trajectory with a fully domestic 90% reduction and effectively cancel the international-credit headroom that the Commission may create by purchasing ICCs.¹¹
• Fourth, any set-aside allowances not ultimately used for ICC purchases would be redirected to the Industrial Decarbonisation Bank for industrial decarbonisation projects, ensuring they are not simply released into the market.¹²
• Fifth, the recitals clarify that high credit integrity must be ensured and that “where appropriate”, the rules developed under Article 6.4 of the Paris Agreement may be complemented by the EU.¹³ The specific role and deployment of international credits would be based on an impact assessment (as mentioned in the third point above) but also subject to the development of “Union law setting robust and high integrity criteria and other safeguards”.

As a result, the Commission signals that any potential purchase of ICCs would in any event be contingent on further reliability criteria being established which would go beyond the requirements of Article 6 of the Paris Agreement.

In practice, this design choice would keep the EU ETS insulated from price shocks that may be caused by allowing operators to rely on the ICC market, as operators would continue to trade only EUAs. It would also ensure that any ICCs purchased are of sufficiently high quality and are not double counted, as their quality and availability would be checked by the Commission on the basis of its own, more stringent criteria.

Finally, we note that this facility for the purchase of ICCs is not to be confused with the possibility to integrate domestic carbon removals into the EU ETS.¹⁴ Domestic carbon removals would be subject to a separate, bespoke regime and we will discuss that policy proposal in a future publication.

4. International credits under CBAM

CBAM is designed as the mirror image of EU ETS for non-EU goods which are imported into the EU and which fall in scope of CBAM. As free allocation is being phased out for EU ETS sectors which are covered by CBAM (currently cement, iron and steel, aluminium, fertilisers, electricity and hydrogen),^{15 i}mporters of such goods into the EU must purchase CBAM certificates whose price is pegged to those of EUAs under EU ETS, to cover the emissions embedded in their imported goods. The intent of CBAM is to mitigate the risk of “carbon leakage”, as operators covered by EU ETS would be incentivized to move their carbon-intensive activities to non-EU jurisdictions and to import the manufactured goods into the EU.

To avoid such operators from having to pay the costs of carbon twice (once in their own jurisdiction, once upon importing the goods into the EU), Article 9 of the CBAM Regulation allows an importer to claim a reduction in the CBAM certificates to be surrendered to reflect the “carbon price paid in the country of origin” for the declared embedded emissions in their goods.¹⁶

However, the current definition of what counts as a “carbon price effectively paid” is rather narrow. Under Article 3(29) of the CBAM Regulation, this is defined as “the monetary amount paid in a third country, under a carbon emissions reduction scheme, in the form of a tax, levy or fee or in the form of emission allowances under a greenhouse gas emissions trading system, calculated on greenhouse gases covered by such a measure, and released during the production of goods.”

This definition can be criticised as it effectively requires foreign jurisdictions to adopt cap-and-trade systems similar to EU ETS, or other forms of taxes, levies or fees specifically imposed by their national carbon emissions reduction schemes, in order for exporters from those jurisdictions to be entitled to a reduction of the CBAM Certificates to be surrendered when importing their manufactured goods into the EU.

One particular point of concern was that certain jurisdictions rely on other decarbonisation pathways such as the reliance on carbon capture or ICCs in order to meet their objectives under the Paris Agreement. For such jurisdictions, the operators would be unable to claim a reduction on the amount of CBAM Certificates to be surrendered, as these types of costs would not qualify as “carbon prices effectively paid.”

To partially address such criticism, the Commission has opened the door to recognising ICCs under CBAM in two pending proposals: first, under a proposal for a regulation amending the CBAM Regulation itself regards the extension of its scope to downstream goods and anti-circumvention measures,¹⁷ and second, under the working draft of the Article 9 implementing regulation which was published on 13 May 2026 for stakeholder feedback.¹⁸ 

The wording in the first document, namely the proposal to amend the CBAM Regulation itself, remains high level. The recitals merely state that, in order to facilitate the application of the CBAM Regulation, the EU may in the context of the Implementing Regulation for accounting the carbon price paid abroad, consider the ICCs under Article 6 of the Paris Agreement.¹⁹ Accordingly, Article 9(5) of the CBAM Regulation (which empowers the Commission to adopt an implementing regulation on carbon prices effectively paid in third countries) would be amended by adding, inter alia, that “the Commission is also empowered to regulate the conditions for deducting carbon credits under Article 6 of the Paris Agreement.”

The second document, namely the draft implementing regulation, is more instructive and detailed. The draft takes a restrained approach to ICCs, as the possibility for importers to deduct such costs from the amount of CBAM certificates to be surrendered, would be tempered by three cumulative conditions:²⁰

• First, only a carbon price paid under a binding domestic compliance regime, consistent with the definition of “carbon price” in Article 3(29) of the CBAM Regulation, would qualify for deduction. Stand-alone reliance on ICCs, divorced from any domestic compliance obligation, would not.²¹ Carbon credits (either domestic or international carbon credits) would be taken into account “where the obligation to pay a carbon price allows for the purchase of carbon credits, [...] based on the evidence of the carbon price effectively paid for the specific carbon credits used to meet that obligation.”

• Second, the draft recognises that most carbon price mechanisms allow operators to meet part of their obligation by purchasing carbon credits for domestic mitigation activities and issued under the standards chosen domestically. In those situations, no additional qualitative or quantitative criteria would be imposed to the evidence of effective payment.
• Conversely ICCs would be recognised only if they are authorised and issued under Article 6.2 or Article 6.4 of the Paris Agreement.
• Third, even if ICCs would qualify for deductibility under CBAM, their contribution would be capped at 10% of the reported and confirmed emissions under the third-country mechanism where the carbon price is effectively paid.

The draft also confirms that any rebate or other compensation reducing the carbon price actually borne will be netted off, so that only the genuine monetary cost incidence is credited.²²

Furthermore, and indirectly, the reliability of the ICCs would be verified by the accredited verifiers who must check whether the carbon price has effectively been paid, before those costs can be deducted from the amount of CBAM certificates to be surrendered.

As a result, although the Commission opens the door to deductibility of ICCs under CBAM, there remains a certain amount of reluctance and the possibilities are restricted.

This caution did not emerge in a vacuum. When the Commission proposed the amendment to the CBAM Regulation in December, the EU Parliament's ENVI rapporteur called the discussion "premature and counterproductive", and the Council's 29 April 2026 compromise text dropped explicit mention of Article 6 altogether. Commentators²³ point out that the institutional experiences with ICCs as well as a temporal mismatch under CBAM are the source of such scepticism: Article 6 authorisations occur now, but the corresponding adjustments cannot be verified until NDC periods close in 2030 or 2035, well after annual CBAM obligations fall due.²⁴

5. Assessment of this Difference

The proposed reforms of both the EU ETS Directive and the CBAM Regulation (in particular the draft implementing regulation on carbon prices effectively paid) risk introducing discrepancies between the treatment of EU operators, who cannot rely on ICCs to comply with their obligations under EU ETS, and non-EU operators within CBAM’s scope, whose do have such possibilities (if allowed under a domestic, compulsory system) but whose ability to deduct carbon costs remains limited.

This raises a number of questions.

First of all, the Commission’s draft implementing regulation under CBAM reveals a tension that the draft cannot entirely bridge. On the one hand, the Commission is wary of ICCs and their reliability, considering its history under EU ETS and criticism levelled against the reliability or trustworthiness of ICCs. On the other hand, the EU should respect the choices by other jurisdictions to meet their nationally determined contributions under the Paris Agreement by incorporating ICCs into their national regimes, and it would be patronising to impose carbon costs twice on non-EU operators who operate in such regimes. The compromise, namely to allow the deduction of ICCs up to a 10 % limit, is inconsistent. If the Commission is so sceptical of their reliability, why would it allow the deductibility of ICCs at all? Or, conversely, if the Commission admits that ICCs which satisfy the requirements of Articles 6.2 and 6.4 of the Paris Agreement are sufficiently reliable to allow their deductibility, why limit this to 10% of the compliance burden under domestic law where that installation operator is operating under CBAM, if the domestic carbon pricing regime does not include such a limit? The current approach essentially signals: “We do not trust your ICCs, but we will allow you to rely on them a little bit”.

Second of all, and more generally, this illustrates another point of tension between EU ETS and CBAM. Whereas carbon costs under CBAM are intended to align with those under EU ETS to enable a level playing field (and, in turn, avoid carbon leakage and allow the phasing out of free allowances under EU ETS), in practice, some differences are maintained. Any such differences risk undermining the Commission’s insistence that CBAM is fully compliant with international trade rules, in particular the World Trade Organisation’ (WTO).

Therefore, we expect that the treatment of ICCs under both EU ETS and CBAM will continue to be hotly debated in 2026 and possibly beyond, hopefully with some manner of closer alignment at the end. In the meantime, the diverging proposals are bad news for both EU industries – who are uncertain as to which prices EUAs will have over the coming years and may postpone their decarbonisation and investment plans – and for non-EU installation operators and exporters – who are currently already subjected to compliance obligations under CBAM but do not know which costs they will be able to deduct from their obligations to surrender CBAM certificates, and who currently do not even have any legal basis to deduct their carbon prices effectively paid abroad in the absence of any implementing regulation while this draft is being debated.

6. Conclusion

The development of both EU ETS and CBAM, and the treatment of ICCs under those two regimes, are relevant for a wide host of persons:

• EU installation operators covered by EU ETS;
• EU importers importing goods covered by CBAM;
• Non-EU exporters and installation operators for goods covered by CBAM;
• Project developers selling ICCs;
• Even non-EU jurisdictions seeking to align their carbon pricing regimes with CBAM to allow deductibility of costs by operators established within their jurisdiction;

Each of these should keep a close eye on the following dates and areas to monitor:

• The trilogue on the ETS revision (targeted for political agreement in Q1 2027), during which the ICC provisions, CBAM factors and scope may still shift.
• Finalisation of the CBAM Article 9 implementing regulation (following the 13 May 2026 working draft), including whether the requirement that the ICCs form part of a compulsory regime, the 10% cap, the Article 6.2/6.4 confinement, and the difference in treatment between domestic carbon credits and ICCs survive;
• The Commission’s 31 January 2033 report on the international credit market, which will determine whether the ETS facility proceeds or the fallback LRF of 2.7% applies from 2036;
• The separate legislation that will set the quality and integrity criteria for ICCs eligible under the Article 9b facility.
• Whether a 2031–2035 ETS pilot phase for ICCs is introduced;

Both EU ETS and CBAM mechanisms will continue to evolve in parallel and, as noted in our article in July, changes to one necessarily require recalibration of the other.

Footnotes

1 European Commission, proposal for a directive amending Directive 2003/87/EC and Decision (EU) 2015/1814, 2026/0212 (COD), 17 July 2026; press release IP/26/1596 available here, legal text available here.

2. “The revision of the EU Emissions Trading System”, 26 July 2026, available here. 

3. See, for example, the explanations provided by the Commission here and by civil society here. 

4. See for example the criticism by Carbon Market Watch here. 

5. Kyoto Protocol, Articles 6 and 12; Commission Regulation (EU) No 389/2013, Articles 59-61.

6. EU ETS Proposal, proposed new Article 9b. 

7. EU ETS Proposal, Article 9b(1)-(2). 

8. Article 9b; 260 Mt cap. 

9. See supra note 5. 

10. EU ETS proposal, Article 9b(3)-(5). 

11. EU ETS Proposal, Article 9b(4)

12. EU ETS Proposal, Article 9b(5) 

13. EU ETS Proposal, recital 30. 

14. EU ETS Proposal, Article 9c. 

15. Explained in more detail in “The revision of the EU Emissions Trading System”, 26 July 2026, available here. 

16. Article 9 of the CBAM Regulation (Regulation (EU) 2023/956); see C. Fischer and M. Mehling, “Recognizing Third-Country Carbon Prices Under the European CBAM: Options to Close the Price Gap,” MIT CEEPR Research Commentary RC-2026-04, June 2026. 

17. Proposal COM(2025) 989 on the extension of its scope to downstream goods and anti-circumvention measures. 

18. European Commission, draft Commission Implementing Regulation on the carbon price paid in a third country under Article 9 CBAM Regulation, 13 May 2026 (recitals 8, 12, 13, 14; Article 8; Annex I, section 3.3.4), available here. 

19. Proposal COM(2025) 989 on the extension of its scope to downstream goods and anti-circumvention measures, recital (21). 

20. Ibid, Recitals 11, 12 and 13, read in conjunction with section 3.3.4 of Annex I. 

21. Draft Commission Implementing Regulation on the carbon price paid in a third country, Recitals 11 and 12. 

22. Ibid, recital 21, rad in conjunction with Articles 3(2) and 8. See also section 3.4 of Annex I. 

23. That retreat does not settle the outcome, since the Commission acts under powers conferred by Article 9 of the CBAM Regulation and may adopt the implementing act regardless: the co-legislators' positions guide but do not bind it.  

24. Fischer & Mehling, MIT CEEPR RC-2026-04, p.4. 

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