Understanding EU carbon policy, VCM and Double accounting

In parallel of Paris Agreement negociations, the European Union is advancing towards its climate neutrality goals by 2050, employing a diverse framework to implement reduction and removal capacity increases. However, challenges like double counting and the need for corresponding adjustments highlight complexities in aligning EU policies with international standards.

This page gives a summary of the existing (or in development) frameworks in the EU and the gaps that the international standard Riverse faces on the VCM.

EU Climate policies & targets

The European Union is ambitiously advancing towards a greener future with its comprehensive climate and energy policies. Central to these efforts are the Fit for 55 package, the Clean Energy for All Europeans package, and the European Green Deal. These initiatives aim to reduce greenhouse gas emissions by at least 55% by 2030, compared to 1990 levels, setting the stage for a climate-neutral continent by 2050. The "Fit for 55" package includes a series of legislative proposals to ensure EU policies align with these climate goals, encompassing energy, transportation, and housing sectors. The Clean Energy Package focuses on empowering consumers, enhancing energy efficiency, and fostering the adoption of clean energy across the bloc. Meanwhile, the European Green Deal outlines a roadmap for making the EU's economy sustainable by turning climate and environmental challenges into opportunities across all policy areas.

In 2024, the EU commission released its proposition for the 2040 targets (upon which our current criteria are based), launching the political debate for a vote in parliament later this year.

The EU's climate policy frameworks

To achieve these targets, the EU has developed comprehensive climate policy frameworks that include several key mechanisms to reduce and remove GHG emissions in order to reach climate neutrality in 2050:

EU Emissions Trading System (EU-ETS): Compliance EU Carbon policy

The EU Emissions Trading System (EU-ETS) caps over 20 of the most polluting industries, regulating their emissions through a cap-and-trade system. Every year emissions are allocated to each industry by the EU, therefore controlling the reduction of these sectors. The EU ETS focuses on emissions that can be measured, reported and verified with a high level of accuracy (only CO2, N2O and PFCs, not methane!).

It covers the following sectors:

• electricity and heat generation
• energy-intensive industry sectors, including oil refineries, steel works, and production of iron, aluminium, metals, cement, lime, glass, ceramics, pulp, paper, cardboard, acids and bulk organic chemicals
• aviation within the European Economic Area and departing flights to Switzerland and the United Kingdom (and applies CORSIA for all EU based operators)
• maritime transport, specifically 50% of emissions from voyages starting or ending outside of the EU and 100% of emissions from voyages between two EU ports and when ships are within EU ports.
• production of nitric, adipic and glyoxylic acids and glyoxal (for emissions of N2O)
• production of aluminium (for emission of PFCs)

Effort Sharing Regulation: an EU carbon policy for collaboration between countries.

The Effort Sharing Regulation transforms the targets of the Clean Energy Package into binding annual targets for each Member State for the period 2021–2030 in a “fair and cost-effective manner”. It applies for diffuse sectors not included in the EU ETS: buildings, agriculture, waste, small industry, and transport. These sectors account for nearly 60% of EU GHG emissions. This regulation, as well as set objectives, facilitates the exchange of effort between countries. Specific implementation measures include:

• To stimulate additional action in the land use sector, Member States can use up to 131 million credits over each of the 2021-2025 and 2026-2030 periods to comply with their national targets.
• Member States can also buy and sell allocations from and to other Member States. This is an important vehicle to ensure cost-effectiveness. It allows Member States to access emissions reductions where they are the cheapest, and the revenue can be used to invest in modernisation.
• Project-based mechanisms within the EU are a possible way to underpin these transfers (but we don’t know if and how countries use it already).

Carbon Border Adjustment Mechanism (CBAM): the EU carbon policy... outside of EU!‍

The Carbon Border Adjustment Mechanism (CBAM) seeks to prevent carbon leakage by imposing a carbon price on imports of certain goods from outside the EU.  It aims to ensure – in full compliance with international trade rules – that the emissions reduction efforts of the EU are not offset by increasing emissions outside its borders through the relocation of production to non-EU countries (where policies applied to fight climate change are less ambitious than those of the EU), or through increased imports of carbon-intensive products.

The first pilot phase 2023-2026 includes:

• Application to sectors that are carbon intensive and at most significant risk of carbon leakage:  cement, iron and steel, aluminium, fertilisers, electricity and hydrogen
• During this period, importers of goods in the scope of the new rules will only have to report greenhouse gas emissions (GHG) embedded in their imports (direct and indirect emissions), without the need to buy and surrender certificates

Land Use, Land Use Change, and Forestry (LULUCF) Regulation: the EU carbon policy to protect lands and forests.‍

The Land Use, Land Use Change, and Forestry (LULUCF) Regulation Governs how land use and forestry contribute to the EU's climate objectives, aiming for sustainable land management practices. To help reach climate neutrality, for the first time, the revised LULUCF regulation has a separate land-based net carbon removals target of 310 million tonnes of CO2 equivalent by 2030.

Here are details on the two phases:

• Phase 1 from 2021 to 2025: Stays close to the LULUCF Regulation (EU) 2018/841. The revision does not affect the current “no debit” rule according to which each Member State shall ensure that accounted emissions from land use are compensated by at least an equivalent amount of accounted removals.
• Phase 2 from 2026 to 2030: This phase enlarges the territorial scope to cover all managed land and introduces the EU-wide target of -310 Mt CO2 equivalent of net removals by 2030. This represents an increase of about 15% in the EU’s net removals compared to current levels and reverses the declining trend in net removals seen in recent years. This phase significantly simplifies compliance rules, moving from accounting benchmarks to reported emissions and removals, and building on more accurate and more precise data monitoring, such as through the increased use of geographical data and remote sensing.

Carbon Removal & Carbon Farming (CRCF): the EU policy to define carbon credits

The Carbon Removal & Carbon Farming (CRCF) Regulation: Currently under definition, it aims to establish standards for certifying carbon removals. This framework should be available in 2026 and come into application before 2030. In February 2024 the Parliament and Council agreed on the framework, which will account for 4 different types of activities:

• permanent carbon removal (storing atmospheric or biogenic carbon for several centuries)
• temporary carbon storage in long-lasting products (such as wood-based construction products) of a duration of at least 35 years and that can be monitored on-site during the entire monitoring period
• temporary carbon storage from carbon farming (e.g. restoring forests and soil, wetland management, seagrass meadows)
• soil emission reduction (from carbon farming)

Here is more information on the CRCF mechanism:

• The adopted text established that a unique registry should be created
• An expert group will develop tailored certification methodologies for different types of carbon removal activities (but not at a methodology level)
• It remains unclear how it will coexist with EU-ETS, but it most likely will allow industrials to buy a part of their allocations from the CRCF.

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EU climate policy VS Paris Agreements

At the international level, the EU has translated the above into an ambitious **Nationally Determined Contribution (NDC)** but has not yet set up processes or clarified how its policies work in the Paris Agreement (PA) global picture.

Context on climate neutrality: why EU carbon policies exist

EU countries are generally against the concept of carbon neutrality at a different scale than planet or region. In other words, “offsetting” emissions of a product, a service or a company, do not allow to declare it “net-zero” or “climate neutral”.

• The recent adopted regulation on Empowering consumers for the green transition gives precise rules about product declaration:
• "It is particularly important to **prohibit the making of claims, based on the offsetting** of greenhouse gas emissions, that a product, either a good or service has a neutral, reduced, or positive impact on the environment in terms of greenhouse gas emissions. Such claims should be prohibited in all circumstances and added to the list in Annex I to Directive 2005/29/EC as they mislead consumers by making them believe that such claims relate to the product itself or to the supply and production of that product, or as they give the false impression to consumers that the consumption of that product does not have an environmental impact. Examples of such claims are ‘climate neutral’, ‘CO2 neutral certified’, ‘carbon positive’, ‘climate net zero’, ‘climate compensated’, ‘reduced climate impact’ and ‘limited CO2 footprint’.

In general, we could say that EU countries are in favor of a carbon contribution approach, and thus don’t mind double accounting.

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European Union policies on the Voluntary Carbon Market (Article 6.4)

The EU's position on the Voluntary Carbon Market (VCM) emphasizes the importance of high-integrity carbon credits to support ambitious climate action and the Sustainable Development Goals. It stresses the need for transparency, quality, and credible claims to rebuild trust in the VCM, urging organizations to prioritize emission reductions across their value chain and ensuring that the use of carbon credits supplements, rather than substitutes, their own emission reduction measures. Recommendations include calculating and publicly disclosing emissions, establishing Paris Agreement-aligned climate targets, buying high-quality credits, and reporting progress annually. The EU supports integrity initiatives and standards aligned with the Paris Agreement goals to enhance the VCM's credibility.

EU policy gaps with Paris agreements

The Paris Agreement has some components that are not aligned with the EU's climate policy and outlooks, such as:

• All Article 6.2 units, whatever their use, need to be adjusted
  • → Need to establish a net emissions balance and report adjustments – should be part of the Implementation of Biennial Reporting Framework
  • → Most likely relevant to MS proposals going beyond EU compliance targets
• Article 6.4 units may be adjusted for “other purposes” but only when authorised→ the EU is likely to reject offset claims/Climate Neutrality, OR might set expectations that there should be an adjustment for these claims
• Article 6.4 credits may been visaged by MS (Results based finance, Additional voluntary targets)→ Need to define a set additional baseline within or different from CRCF
• Can an Article 6.4ERs be used to reduce the carbon footprint associated with a product for the purposes of calculating the number of CBAM units required from an importer? Not as CBAM is defined now.

Source: ICAP

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The Challenge of Double Counting between different carbon policies

Double counting becomes a significant issue when emission reductions or carbon removals are counted more than once towards climate targets. This can occur when the same reduction or removal is claimed by both the entity generating the reduction and by another entity, such as a country under its NDC or a company under its net-zero commitments.

At COP28, efforts were made to adopt rules for carbon offset trading, especially for removals under Article 6.4 of the Paris Agreement. But as the EU is negotiating similar rules for its CRCF, concerns have been raised that the EU's approach may allow for double counting of carbon credits, undermining the integrity of climate action efforts.

To Go further - EU’s double standards on double counting

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EU's small steps toward Corresponding Adjustments

The EU's stance on Article 6.4 emphasizes the need for clarity on how carbon credits can be used and shared between buyers and the host country, to ensure that emission reductions contribute to the host country's NDC without undermining its climate action (i.e. EU is in favor of CA).

However, the Council's and the European Parliament's positions on the CRCF have raised concerns about double counting. While there's a nominal commitment to avoiding double counting, the legislative texts do not explicitly prevent CRCF certificates from being used in multiple registries, including national, corporate, and voluntary markets.

The European Parliament's position suggests that all removals and reductions under the CRCF should contribute solely to the EU's NDCs and not to third countries' NDCs. It also states that a certified unit should not be claimed by more than one entity at any point in time, aiming to prevent double counting.

Hence, it remains unclear on the possible use of CRCF certified units…

Conclusion

As the EU continues to refine its climate policy framework, addressing the challenge of double counting and ensuring corresponding adjustments are crucial for maintaining the integrity and effectiveness of its climate action. While the current legislative proposals for the CRCF mark progress, explicit measures to prevent double counting and ensure that each carbon credit contributes genuinely to emission reductions are essential. The EU's ability to navigate these challenges will be a key factor in achieving its ambitious climate targets and setting a precedent for global climate action.