European Banking Federation on EU Carbon Credits Consultation

Banking sector calls for carbon credit restrictions in 2040 climate framework

The European Banking Federation has told the European Commission that international carbon credits should play only a minimal role in meeting the EU’s 2040 climate targets. In its formal response to a recent consultation, the EBF argued that credits should be reserved exclusively for emissions that cannot be reduced through direct action. This position places the banking industry at the centre of an intensifying debate about how carbon markets should fit into European climate policy.

The consultation, which closed in January 2026, asked stakeholders how high-quality international carbon credits might contribute to the EU’s goal of cutting net greenhouse gas emissions by 90% from 1990 levels by 2040. However, the banking sector’s response emphasizes that purchasing offsets must never substitute for actual emission reductions. Instead, credits should only address residual emissions where no practical alternatives exist.

This matters because the way the EU structures its 2040 framework will influence corporate climate strategies across Europe. For UK businesses trading with the EU or operating European subsidiaries, these rules will shape reporting requirements, supply chain expectations, and the credibility of offset-based claims. Meanwhile, questions about carbon credit quality continue to generate friction between industry groups, environmental organizations, and policymakers.

Commission consultation addresses carbon market integrity concerns

The European Commission launched its consultation in October 2025 as part of implementing the European Climate Law. That legislation, formally known as Regulation (EU) 2021/1119, established the EU’s binding commitment to reach climate neutrality by 2050. The 2040 target represents a critical milestone on that pathway.

International carbon credits allow organizations to offset their emissions by financing projects that reduce or remove greenhouse gases elsewhere. These might include renewable energy installations, forestry initiatives, or methane capture schemes in developing countries. Voluntary carbon markets have grown substantially in recent years, reaching approximately €2 billion in global transactions during 2025.

Nevertheless, serious concerns about market integrity have emerged. Multiple studies have found that many carbon credits do not deliver the emission reductions they claim. Research published in 2023 by Oxford University’s Smith School suggested that between 85% and 95% of rainforest carbon credits represented what researchers termed phantom offsets. These projects either protected forests that faced no realistic threat or claimed credit for outcomes that would have happened regardless of offset finance.

Consequently, the Commission’s consultation document proposed strict safeguards. Credits would need to come from projects initiated after 2020 and align with Article 6 of the Paris Agreement, which establishes international cooperation frameworks. The consultation also suggested that credits might cover between 10% and 20% of any remaining emissions after domestic reductions, though these figures remain under discussion.

By March 2026, the Commission had received over 300 submissions. According to its summary of responses, approximately 70% of respondents favoured placing significant restrictions on credit use. Banking sector input featured prominently in that majority.

EBF position prioritizes direct emission cuts over offset purchases

The European Banking Federation submitted its response in December 2025. The document states explicitly that emission reduction must always take priority over purchasing carbon credits. Furthermore, any reductions claimed through credits must be both effective and additional, meaning they would not have occurred without offset funding.

The EBF argued that credits should only address residual emissions that cannot be avoided by other means. This framing significantly narrows the potential role of carbon markets compared to some industry proposals. European banks collectively manage approximately €1.5 trillion in assets classified as green or sustainable, according to the European Central Bank’s 2025 climate risk report. Their financing decisions therefore carry substantial weight in determining which decarbonization pathways European businesses pursue.

This position reflects growing awareness within the financial sector that poor-quality offsets create material risks. Companies that rely heavily on questionable credits face reputational damage, regulatory scrutiny, and potential litigation. Several firms faced lawsuits in 2025 over offset-based climate claims that regulators and courts judged misleading.

Moreover, the banking sector operates under the EU’s Corporate Sustainability Reporting Directive, which requires detailed disclosure of climate-related financial information. Banks need clear rules about which carbon credits, if any, meet regulatory standards. Ambiguity creates compliance uncertainty and undermines the credibility of sustainability reporting across the financial system.

Environmental groups warn against undermining direct climate action

The banking federation’s cautious stance aligns with concerns raised by environmental organizations and research institutions. More than 50 NGOs and think tanks, including Carbon Market Watch and the NewClimate Institute, sent a joint letter to the Commission in January 2026. That letter warned that allowing extensive use of international credits could seriously undermine the EU’s climate efforts.

These groups pointed to evidence that voluntary carbon markets frequently fail to deliver genuine emission reductions. A 2024 assessment by EU regulators found that approximately 40% of carbon credits examined did not comply with stated quality standards. Projects often overestimated emission reductions, claimed credit for activities that would have happened anyway, or failed to account for leakage, where emissions simply moved to different locations.

Environmental advocates argue that relying on offsets delays the fundamental transformation of European business operations. Real decarbonization requires investing in energy efficiency, renewable power, electric vehicle fleets, and low-carbon manufacturing processes. Purchasing credits, particularly cheap ones of questionable quality, allows companies to postpone those essential investments.

However, some industry voices maintain that international credits serve important purposes. They can channel finance to emission reduction projects in developing countries where mitigation costs remain lower. For certain hard-to-abate sectors such as aviation or cement production, credits might provide the only near-term option for addressing unavoidable emissions while longer-term solutions develop.

What the proposed framework means for UK businesses

Although the UK left the EU, these developments carry direct implications for British companies. Many UK businesses maintain substantial European operations or depend on EU supply chains. Large European customers increasingly require suppliers to demonstrate credible climate commitments. Procurement decisions often favour businesses that can show genuine emission reductions rather than offset-heavy strategies.

Furthermore, regulatory approaches tend to spread across jurisdictions. If the EU establishes strict standards for carbon credit use, similar principles will likely influence UK policy development. The UK government has signalled intentions to strengthen climate disclosure requirements and tighten rules around environmental claims. Understanding how European regulators approach carbon markets provides insight into probable UK directions.

For businesses currently using carbon credits in their net-zero strategies, the EU consultation outcomes suggest mounting pressure to prioritize direct reductions. Credits may remain acceptable for genuinely unavoidable emissions, but companies should expect increasing scrutiny of what counts as unavoidable. Activities that could be addressed through available technology, operational changes, or reasonable investment will face challenge.

The financial implications extend beyond compliance. Businesses pursuing carbon reporting and net-zero certification need strategies that withstand regulatory evolution. Plans built around purchasing large volumes of cheap offsets risk becoming unworkable if standards tighten. Conversely, companies that invest early in direct emission reductions position themselves advantageously as requirements become more demanding.

Supply chain relationships also matter. European manufacturers and retailers increasingly audit their suppliers’ climate practices. UK businesses selling into EU markets may find that customers expect detailed evidence of emission reduction activities, not just offset purchases. This affects sectors from food and agriculture to manufacturing and logistics.

Key developments in the EU carbon credit consultation

• The European Commission consulted on integrating international carbon credits into 2040 climate targets between October 2025 and January 2026, receiving over 300 responses.
• The European Banking Federation argued in December 2025 that credits should only address residual emissions impossible to eliminate through direct action.
• Proposed safeguards include restricting credits to post-2020 projects aligned with Paris Agreement Article 6, with credits potentially covering 10% to 20% of remaining emissions.
• Environmental groups warned in January 2026 that excessive credit use risks undermining genuine decarbonization, citing research showing 85% to 95% of some rainforest credits as ineffective.
• Approximately 70% of consultation respondents favoured significant restrictions on carbon credit use according to the Commission’s March 2026 summary.
• The EU’s 2040 target requires 90% net greenhouse gas emission reductions from 1990 levels, with final guidance on carbon credits expected by mid-2026.
• European banks manage roughly €1.5 trillion in green assets, giving their position on carbon markets substantial influence over corporate financing decisions.

Regulatory trajectory points toward stricter carbon market standards

The Commission plans to issue formal guidance by mid-2026. Based on consultation responses, that guidance will likely impose tight restrictions on credit use. Switzerland’s approach, implemented in 2023, offers a potential model. Swiss regulations cap carbon credits at 5% of climate targets and require rigorous verification of additionality and permanence.

If the EU adopts similar limits, the market for low-quality offsets will shrink considerably. Conversely, demand for high-integrity credits meeting strict standards could increase. BloombergNEF forecasts that a well-regulated voluntary carbon market might reach €50 billion by 2030, but only if credibility improves substantially.

For businesses, this regulatory trajectory reinforces the need to focus on operational decarbonization. ESG compliance and carbon reporting services increasingly emphasize measurable emission reductions tied to specific activities: switching to renewable energy contracts, upgrading heating systems, electrifying vehicle fleets, or redesigning manufacturing processes.

The distinction between residual and avoidable emissions will likely become central to compliance frameworks. Residual emissions are those remaining after a business has implemented all technically and economically feasible reduction measures. These might include process emissions from chemical reactions in manufacturing or long-haul aviation where alternatives remain undeveloped. Avoidable emissions are those that could be eliminated through existing technology and reasonable investment.

Determining which category applies requires detailed operational analysis. Businesses should expect regulators and auditors to scrutinize claims that certain emissions cannot be reduced. This makes thorough carbon footprint assessment and reduction planning essential, not just for compliance but for defending strategic decisions about where offsets might legitimately apply.

Implications for corporate net-zero strategies and procurement

The banking federation’s position signals that financial institutions will increasingly question offset-heavy climate strategies when making lending and investment decisions. Banks assess climate risk as part of standard due diligence. Companies relying extensively on carbon credits face higher perceived risk if regulatory changes could invalidate those offsets.

This affects access to green finance products, which typically offer better terms than conventional lending. European banks have committed substantial capital to supporting the transition to a low-carbon economy. However, that finance flows preferentially to businesses demonstrating genuine operational transformation rather than accounting exercises.

Procurement represents another pressure point. Public sector contracts in the EU increasingly incorporate climate criteria. The UK government’s Procurement Policy Note 06/21 requires suppliers bidding for major contracts to publish carbon reduction plans. Similar requirements exist across European public procurement. As standards for carbon accounting tighten, procurement evaluators will look more closely at whether suppliers achieve reductions through operational changes or offset purchases.

Private sector supply chains are moving in the same direction. Major European retailers and manufacturers set emission reduction targets that encompass their supply chains. They ask suppliers to report emissions and demonstrate reduction trajectories. Suppliers that can show investment in efficiency, renewable energy, and process improvement score better in these assessments than those buying offsets.

Consequently, businesses should review their net-zero strategies in light of probable regulatory developments. Strategies should prioritize direct emission reductions achievable through capital investment, operational changes, and sustainable procurement practices. Carbon credits, if used at all, should address only those emissions genuinely resistant to current reduction approaches.

Where to find authoritative information on carbon markets and climate policy

The European Commission’s consultation page provides access to submitted responses and consultation documents at the EU better regulation portal. This resource includes technical annexes explaining proposed methodologies for assessing credit quality.

The European Banking Federation published its full response on its media centre, offering detailed insight into financial sector perspectives on carbon market integrity and climate risk.

For ongoing coverage of carbon market developments and regulatory changes, Carbon Pulse provides specialized reporting on emissions trading and offset markets across multiple jurisdictions.

The UK government’s guidance on environmental claims and carbon reporting appears on the gov.uk website, including resources on Procurement Policy Note 06/21 and upcoming climate disclosure requirements. The European Central Bank publishes regular assessments of climate-related financial risk, available through its financial stability publications.

These sources offer technical detail and policy updates that help businesses track regulatory evolution and adjust their climate strategies accordingly. Understanding both EU and UK developments provides the clearest picture of where compliance requirements and market expectations are heading.