EU ETS Reform: The Post-2035 Fight Over International Credits Has Begun

The single largest potential source of future demand for international carbon credits, the EU emissions trading system, is now openly contested ground. Within 48 hours, two opposing moves landed in Brussels. The Irish EU Council presidency, according to a leaked steering note reported by Carbon Pulse, is considering changes to how the bloc’s carbon market responds to the availability of international credits after 2035, while opening discussions on industrial free allocation rules. At the same time, Socialists and Democrats MEP Bruno Tobback tabled amendments to a European Parliament committee opinion that would raise the EU ETS Linear Reduction Factor (LRF) and delete the fallback mechanism linked to the use of international carbon credits. For project developers, credit buyers and investors, the post-2030 architecture of the world’s largest compliance market is being negotiated now, and the role of Article 6 units inside it is the central question.

What the Commission Put on the Table

The starting point is the Commission’s ETS review proposal, presented in July and now the basis for discussions in both institutions. As summarised by Oeko-Institut, the proposal would amend Article 9 of the ETS Directive to replace the current LRF with a two-step factor: 3.7% for 2031-2035 and 1.7% from 2036 onwards. It would also make some free allocations conditional on recipient companies implementing decarbonisation plans.

On international credits, the proposal builds in a staged mechanism rather than an immediate opening. The legislative text requires a Commission report on the development of the international credit market in terms of supply and demand, the potential implications for the functioning and integrity of the EU ETS, and specific sector effects including carbon leakage risk, competitiveness impacts, the risk of mitigation deterrence, and consistency with the EU’s climate neutrality objective. Subject to that report, a derogation could then allow the use of international credits. That conditional pathway is the fallback mechanism Tobback now wants to strike out.

Parliamentary critics attack the proposal from the ambition side as well. Green MEP Marie Toussaint argued in the environment committee that under the Commission’s trajectory the ETS supply cap could reach zero in 2048 instead of 2039, a slower decline than the current framework implies.

The Fallback Mechanism Is the Fault Line

Tobback’s amendments go directly at the two levers that determine scarcity. Raising the LRF tightens the cap faster, shrinking allowance supply. Deleting the Article 6 fallback closes the door to international units entering the system at all, keeping the EU ETS a purely domestic market.

The Council appears to be moving in the opposite direction. The Irish presidency’s steering note, as reported, floats greater flexibility on how the ETS responds to international credit availability after 2035. That framing matters: it suggests member states are thinking about the conditions and volume of credit use, not whether the door should exist. The same presidency is simultaneously managing carbon leakage politics, having agreed on September 17 to increase free allocation to energy-intensive industries by drawing on around 88 million allowances.

Source: CarbonMeld — independent carbon credit market intelligence. Document-based quality scores and assessments across all major registries: carbonmeld.com

Timeline: A Deal Attempt by December

Irish climate minister Darragh O’Brien told the Parliament’s environment committee that Dublin aims to reach agreement among member states on the ETS reform by December, which would allow negotiations with Parliament to begin in early 2027. “It’s ambitious but it’s doable,” he said.

The Parliament side is trying to match that pace. Peter Liese of the centre-right EPP group, the draftsman on ETS reform, committed to “trying” to accommodate the timeline, with Parliament targeting an internal position by the end of the year. Committee opinions, including the one Tobback is amending, feed into that position. The credibility pressure is real: S&D’s Tiemo Wolken questioned how Ireland, projected by its own Environmental Protection Agency to cut emissions by up to 25% by 2030 against a national target of 51%, can push others to raise ambition.

What It Means for Carbon Credit Markets

The stakes for the international credit market are straightforward. If the fallback mechanism survives in something close to the Commission’s form, the EU ETS becomes a potential post-2035 buyer of authorised Article 6 units, with volumes and quality criteria set through the review process. That would dwarf CORSIA as a demand source and reshape price expectations across the authorised-credit segment.

If Tobback’s line prevails, the EU ETS stays closed, and international credit demand continues to rest on CORSIA, voluntary buyers and the smaller compliance schemes that accept foreign units. For developers, the difference between those two outcomes is the difference between planning for a European compliance buyer and not planning for one. For investors, the negotiating text that emerges from Council in December is now the document to price against.

What to Watch

Three markers over the next three months. First, whether the Irish presidency formalises the steering note’s flexibility language into a Council negotiating text, and what conditions it attaches to credit use. Second, the fate of Tobback’s amendments in committee and in the EPP-led draft report, which will show how much support exists for deleting the fallback outright. Third, whether the December deadline for a Council general approach holds, because slippage into 2027 compresses the entire post-2030 legislative calendar and delays clarity for every market that takes cues from Brussels.