A Pragmatic Guide to Achieving Europe's 2040 Climate Goals
Picture two people staring at the same problem from different sides of the table: a finance minister in a European capital and a CFO of a steel or cement group. Both have a spreadsheet open. Both are trying to work out what a 90% cut in emissions by 2040 really means for debt, jobs, competitiveness, and long term decarbonisation strategy.
That target has moved beyond political speeches. The provisional agreement to amend the EU Climate Law makes a legally binding 90% reduction in greenhouse gas emissions by 2040 compared with 1990 levels, as a milestone on the way to 2050 climate neutrality. At least 85% of those cuts must be domestic, with a small role for high quality international credits.
The ambition is real, but the execution gap is just as stark. By the end of 2023, the EU had already reduced emissions by 37% and is on track for its “Fit for 55” 2030 goal, yet the world still needs a 17.2% annual decarbonisation rate compared with the 2.5% achieved in 2022.
So the question for governments and corporates is not “is 90% the right number?” It is far more practical: what needs to happen in the next 3 to 5 years in policy, capex and procurement so that this EU climate law looks like a credible decarbonisation plan and business strategy rather than a distant aspiration?
From Headline Target to Industrial Strategy: A Pragmatic Reading of the EU 2040 Climate Deal
What 90% by 2040 really means for policymakers and boards
The most important shift is simple but profound: the 90% cut now defines a hard compliance horizon. Under the deal, the EU commits to at least 85% domestic reductions and allows up to 5% through high quality international carbon credits from 2036. Investors and lenders already treat that as a boundary for asset lives and technology choices.
That long term certainty is not just an environmental signal. It is an industrial strategy tool. As one investor put it, today’s news provides the long term certainty needed to keep deploying capital into net zero technologies, accelerating innovation across critical supply chains. For finance ministries, that is permission to back green industrial policy. For boards, it is a prompt to lock in capex programs, offtake contracts and supply chain commitments that assume rising carbon prices and tightening standards.
If you sit on an industrial board, this is no longer about squeezing a few percentage points of efficiency. In our own work with heavy industry clients, we see that the real constraint is not the vision. In boardrooms we work with, the decisive factor is usually the sequencing of three streams: near term retrofits that deliver quick emissions wins, medium term pilots for breakthrough processes, and long term bets on entirely new asset classes aligned with EU climate timelines. It is the order in which you decide what to run to end of life, what to retrofit, and where to pilot new processes.
Flexibility with Discipline: Credits, ETS2 and Sectoral Trade Offs
A second message from the deal is that pragmatism is now explicitly recognised as necessary. The package includes flexibilities: a phased introduction of international credits, domestic carbon removals for hard to abate sectors, and a delay to the new emissions trading system for buildings and road transport (ETS2) from 2027 to 2028 after political resistance. That delay, highlighted in coverage of the agreement, is a reminder that social pacing matters if you want policies to survive elections.
Activists are right to worry that international credits could become a way to offshore emissions cuts. That is why the cap at 5% and the insistence on “high integrity” markets are crucial. Used well, these credits are not loopholes. They are cost optimisation tools that keep the transition politically viable while preserving a strong signal for domestic decarbonisation.
From our work with policymakers and industrial clients, one pattern stands out: many strategies still assume perfect policy execution. They ignore the risk that ETS2 might be delayed again, or that public backlash could slow specific measures. In several national strategies we have reviewed, stress testing against alternative policy timelines has shifted investment decisions by five to ten years, materially changing asset stranding risk. For regulators, the practical question is which sectors genuinely need flexibility because technologies are immature, and where delay simply locks in higher long term costs.
If you are on a corporate leadership team, the question is slightly different: where does your current strategy quietly rely on cheap offsets or future removals rather than concrete capex and procurement decisions in the next 3 years? Credits should be your final lever after you have exhausted credible internal abatement, not the first line in your net zero slide deck.
Beyond Electric Utopias: Technology Neutral decarbonisation Pathways for Heavy Industry and Transport
Why electrification alone will not get Europe to 2040
Electrification is essential, and there is broad consensus on that point. The risk is treating it as the only answer. As former Spanish foreign minister Ana Palacio argues, EU frameworks are increasingly built around a single technological solution: electrification, at the expense of diversity, innovation and resilience.
Look at road transport. There are around 249 million cars in the EU out of more than 1.3 billion worldwide, and fleet turnover is slow. Even with aggressive EV adoption, a huge stock of combustion vehicles will still be on the road well into the 2030s.
For industry, the picture is starker. Process emissions from cement and steel cannot be solved by electrification alone. Cement accounts for around 6.5% of global CO₂ and steel around 7%, and both sectors are emissions and capital intensive. They require new chemistries and process routes, not just cleaner power inputs. For example, moving from traditional clinker based cement to alternative binders, or from blast furnace routes to direct reduced iron with low carbon hydrogen, involves multi decade capital cycles that must be aligned with 2040 and 2050 milestones.
So treating electrification as the only answer is not just a technical mistake, it is a financial one. It encourages one way bets in infrastructure and underinvests in the portfolio of options that could de risk the transition.
A portfolio approach: hydrogen, fuels, AI and process innovation
For governments and corporates, the alternative is not chaos. It is structured technological neutrality: fix the objectives, allow multiple pathways. Palacio calls for exactly that, warning against regulatory determinism and arguing that innovation comes from diversity, not uniformity.
In practice, a portfolio approach means combining levers rather than setting them up as ideological rivals:
Electrification where it is efficient and grid ready.
Renewable and synthetic fuels to decarbonise the existing vehicle fleet and segments of heavy transport.
Hydrogen and derivatives where they make sense for high temperature heat and specific industrial processes.
Process innovation in materials, including low clinker cements and alternative steel routes.
Across our advisory work, the most resilient transition roadmaps assign indicative roles and timelines to each lever, rather than asking a single technology to shoulder all of the emissions reduction by 2035 or 2040.
AI is a critical enabler across that portfolio. The world needs a far steeper industrial decarbonisation trajectory, and Harnessing AI for Industrial decarbonisation highlights just how wide the gap is between the required 17.2% annual reduction and the 2.5% actually achieved. In our own AI for industry work, we see how quickly “unknown options” emerge once process engineers and data scientists sit together: from novel material recipes to fine tuned operating conditions that cut emissions without new concrete pours or major outages.
If you could not bet everything on electrification, which three other levers would you prioritise today? For policymakers, that question should translate into technology agnostic standards, performance based subsidies, and competitive tenders. For boards, it should trigger a hard look at R&D portfolios and partnerships, particularly in collaboration with emerging markets that will build the bulk of new industrial capacity. In practice, this can mean piloting low carbon materials with MENA based producers now, rather than waiting for fully mature options from traditional suppliers.
Turning EU Climate Law into Balance Sheet Reality: Policy, Procurement and Climate Finance
Use regulation and procurement to unlock demand, not just compliance
There is a subtle but dangerous trap in the 2040 debate: treating the target primarily as a compliance obligation. If that mindset dominates, ministries will focus on box ticking regulations and corporates will look for the cheapest way to stay within the rules, often at the expense of long term competitiveness.
Our experience in the UAE shows why that is risky. As part of the Industrial Deep Decarbonisation Initiative, Nexus researchers analysed green building regulation and procurement. They found that while frameworks like Estidama and Al Sa’fat are well established, embodied carbon is still largely unregulated, Environmental Product Declarations are underutilised, and policies focus mainly on the construction phase rather than full lifecycle performance. One practical implication was that low carbon materials with better lifecycle performance struggled to compete in tenders focused on upfront price, despite offering lower total cost of ownership when carbon and operating costs were considered. The recommendation was to introduce mandatory carbon thresholds, broader use of EPDs, and lifecycle based rules.
The lesson for Europe’s climate innovation agenda is straightforward. Green building codes and voluntary labels will not deliver the 2040 target if public procurement keeps rewarding lowest upfront cost. Governments control vast construction and infrastructure budgets. Tightening green public procurement, setting embodied carbon limits for key materials, and requiring EPDs in tenders can flip the demand signal quickly.
We have seen this in practice. In one procurement reform project, a public client moved from generic “green” criteria to precise embodied carbon benchmarks for concrete and steel. Within 18 months, local suppliers had retooled mixes and processes to stay competitive. Crucially, the client paired stricter embodied carbon benchmarks with clear procurement roadmaps, giving suppliers visibility on future standards so they could justify the investment. The regulation did not just avoid emissions, it created a market for better products.
If you work in a procurement agency or infrastructure ministry, it is worth asking: what signals are your tenders sending today about climate innovation and decarbonisation?
Financing the transition: from fintech enablers to CBAM aligned strategies
Even the best designed regulations will fail without sufficient capital. BloombergNEF estimates that the world needs around 5.6 trillion dollars per year in transition investment between 2025 and 2030. Yet capital is already flowing back to traditional energy and voluntary alliances like the Net Zero Banking Alliance have collapsed.
In that context, the EU’s 2040 target offers something valuable: clarity. But clarity alone does not move climate finance. Market design and financial tools must catch up. That is why we focus on both project economics and enabling mechanisms. At a recent roundtable co hosted with the Dubai International Financial Centre Authority, we explored how fintech can unlock and incentivise climate innovation. Topics ranged from data platforms that make emissions and performance transparent for lenders, to blended finance structures that crowd in private capital for early stage climate tech. For example, we discussed how standardised emissions data feeds can shorten due diligence cycles for industrial decarbonisation projects and make smaller ticket transactions bankable at scale.
For European treasuries and corporate finance teams, similar climate finance thinking is needed. How do you use guarantees, green bonds, transition finance and digital tools to lower the cost of capital for genuinely transformative projects, particularly in heavy industry and the built environment?
Trade matters as well, and the Carbon Border Adjustment Mechanism will increasingly align the carbon cost of imports with the EU ETS. Nexus analysis argues that CBAM is a huge opportunity for MENA heavy industry, not just a threat, because it rewards producers who decarbonise and maintain access to the EU market. In our work with MENA based manufacturers, we see CBAM driving earlier investments in low carbon fuels, process efficiency and alternative materials, anchored in long term supply agreements with European buyers. For European corporates, that means a choice: you can either treat CBAM as a reason to disengage from higher emitting regions, or as a framework to partner with suppliers on joint decarbonisation strategies and secure low carbon supply.
In a world of real macroeconomic and political headwinds, perfection is not an option. What is realistic is disciplined sequencing, piloting and learning. The point is to use the 2040 EU climate law as a backbone for industrial, procurement and climate finance decisions that create both climate and financial value.
For us at Nexus Climate, that is the essence of a practitioner led approach: treating climate policy as an industrial and investment challenge, not just a moral one. If you are re-writing your 2030 to 2040 plan in light of the new EU climate law, our team can help pressure test your assumptions and uncover additional value creation pathways, particularly for heavy industry, built environment and cross border value chains exposed to CBAM. Contact us to pressure test your plan in a confidential discussion and identify concrete decarbonisation opportunities.
FAQ
How does the EU’s 2040 climate target relate to the existing EU climate law and Fit for 55?
The 2040 target is an amendment to the existing EU Climate Law, which already makes climate neutrality by 2050 legally binding. Under the new agreement, the EU commits to a 90% net reduction in greenhouse gas emissions by 2040 compared with 1990 levels, with at least 85% of cuts delivered domestically and up to 5% via high quality international carbon credits under Article 6 of the Paris Agreement. This builds on the “Fit for 55” package, which aims for a 55% reduction by 2030 and includes measures such as a strengthened Emissions Trading System (ETS) and complementary regulations across sectors. Together, these frameworks create a sequenced pathway from 2030 to 2050, rather than leaving the 2040 number as a standalone target.
What does the 2040 target mean for heavy industry and hard to abate sectors?
Heavy industries such as steel, cement and chemicals are central to Europe’s decarbonisation solutions for meeting the 2040 goal, because they are both emissions intensive and capital intensive. The revised climate law anticipates that residual emissions from these sectors will be covered by domestic permanent removals under the EU ETS, after cost effective abatement options are deployed. At the same time, mechanisms like the Carbon Border Adjustment Mechanism (CBAM) will increasingly expose imported high carbon products to EU level carbon prices. For industrial players, this means shifting from incremental efficiency improvements to full technology and process transitions, while working with policymakers on carbon pricing, infrastructure and offtake frameworks that keep them competitive. In practical terms, this often involves mapping plant by plant transition timelines against EU climate law milestones and stress testing them under different carbon price scenarios.
How can organisations balance decarbonisation with financial value creation?
Balancing climate ambition with financial performance requires treating decarbonisation solutions as an investment thesis rather than a pure compliance cost. The 2040 target provides long term regulatory certainty that investors value, since it clarifies which technologies and business models will be viable. Organisations can respond by mapping marginal abatement costs and prioritising no regret measures with fast payback, using green procurement and long term offtake contracts to derisk low carbon projects, and leveraging tools such as blended finance and fintech enabled platforms to crowd in capital. Nexus Climate’s work on climate finance and industrial decarbonisation shows that well structured projects in heavy industry and the built environment can attract capital when risk, policy and demand are clearly articulated.
Is reliance on international carbon credits compatible with credible decarbonisation?
Under the 2040 framework, international credits are strictly limited: up to 5% of the overall reduction from 2036, with the rest coming from domestic cuts and removals. The EU has emphasised high integrity standards, reflecting past concerns that many credits did not represent real, additional emissions reductions. Used within these boundaries, credits can reduce transition costs and support mitigation in other regions without undermining the core requirement to decarbonise within Europe. For corporates, this means credits should complement, not substitute, a robust internal abatement strategy and should be selected according to rigorous quality criteria.
Where does Nexus Climate focus within the EU climate and decarbonisation agenda?
Nexus Climate focuses on turning high level climate innovation and EU climate targets into executable strategies, particularly for industrial decarbonisation, climate finance and AI enabled solutions. The team works with governments on policy and procurement design, and with corporates and investors on market entry, technology roadmapping and capital mobilisation. The team brings practitioner experience from green procurement research, CBAM opportunity advisory for heavy industry, and programmes on harnessing AI for industrial decarbonisation. Organisations adjusting their strategies in light of the EU’s 2040 target can contact Nexus Climate to explore tailored support.
