France Draws Red Line: Article 6 Credits Must Be Excluded from EU ETS Compliance

While the carbon market reels from Italy’s shock demand to suspend the EU ETS and the subsequent 24% crash in EUA prices to €60/t, a quieter but legally critical battle is being fought in the Council of the European Union.

On February 23, 2026, France formally submitted a request for "clarification" regarding the role of Article 6 credits in the EU’s 2040 climate framework. Despite initial market rumors suggesting France was seeking flexibility, the text of the intervention reveals the opposite: Paris is attempting to build a legal firewall.

France’s statement explicitly demands confirmation that while international credits may count toward the national 2040 target, they must remain permanently excluded from corporate compliance within the EU ETS.

For traders and compliance officers, this distinction is the difference between a tightened market with a hard domestic cap and a flooded market diluted by international paper. France is effectively drawing a red line against the "Kyoto-ization" of Phase 4.

The 'Clarification' is a Firewall

The confusion stems from the December 2025 political agreement on the European Climate Law. To appease industrial heavyweights like Germany, the Council agreed that "high-quality international credits" could contribute up to 5% of the 1990 baseline toward the EU’s 90% reduction target for 2040.

With the 1990 baseline at 4,649 MtCO₂e, this 5% allowance theoretically opens the door for ~230 million tonnes of Article 6 credits to enter the EU system between 2036 and 2040.

France’s intervention addresses the critical ambiguity: Where do those credits go?

If those 230 million credits were fungible with EU Allowances (EUAs), they would effectively lift the ETS cap, crashing the price signal required for industrial decarbonization. France’s position is that these credits must be purchased by Member States to meet Effort Sharing Regulation (ESR) targets or the aggregate EU NDC, not by industrial operators to offset smokestack emissions.

By demanding this clarification now, before the Commission publishes its implementation proposal in summer 2026, France is preempting the industrial lobby’s push to turn the 2040 target into a backdoor for cheap offsets.

The Ghost of the CDM

Paris’s hardline stance is rooted in the trauma of EU ETS Phases 2 and 3 (2008–2020), when the system was the world’s largest buyer of Clean Development Mechanism (CDM) credits.

The numbers from that era are damning. Over 1 billion tonnes of international credits were surrendered, many of which—particularly HFC-23 destruction projects—offered dubious environmental integrity. Analysis showed HFC-23 projects generated revenues 78 times higher than their operational costs, creating perverse incentives to manufacture waste gas just to destroy it.

The influx of these credits kept EUA prices suppressed for a decade, delaying European industrial innovation. Since 2021 (Phase 4), the EU has operated a "domestic only" market. France’s current maneuver is designed to protect the asset value of the EUA against a repeat of the 2013 price collapse.

The Accounting Nightmare: Corresponding Adjustments

Beyond market economics, France is highlighting a technical impossibility regarding Article 6 "Corresponding Adjustments" (CAs).

Under the Paris Agreement, if a country transfers a mitigation outcome (ITMO), it must adjust its own inventory upward while the buyer adjusts downward.

• Scenario A (State-to-State): The EU buys a credit from Brazil. Brazil adds 1t to its inventory; the EU subtracts 1t from its 2040 target. The math works.
• Scenario B (ETS Integration): An EU steelmaker buys a Brazilian credit instead of an EUA. The steelmaker surrenders it for compliance.
  • The EU government has already counted the steelmaker’s physical emissions under the ETS cap.
  • If the credit is also used to meet the 2040 target, the EU faces a dual-accounting paradox: the emissions are "covered" by the cap, yet "offset" by the credit.

As the Institute for Agricultural and Trade Policy (IATP) noted in 2025, without a strict separation, the EU risks a "double counting" scandal where corporate claims and national targets overlap. France’s request effectively argues that you cannot run a hard cap-and-trade system alongside an offsetting mechanism without compromising the integrity of both.

The Geopolitical Split: Protectionism vs. Flexibility

France’s move must be read against the chaotic backdrop of February 2026. The EU climate consensus is fracturing into three camps:

1. The Suspensionists (Italy, Hungary): Arguing that the ETS is "industrial suicide," Italy has requested a full market suspension. They view the 2040 targets and current prices as economically unviable.
2. The Flexibilists (Germany, Poland): While not seeking suspension, they want maximum flexibility to lower costs, including the use of Article 6 credits within the ETS to act as a "price valve."
3. The Purists (France, Nordics): France, supported by Sweden and Finland, argues that diluting the ETS with international credits destroys the investment case for low-carbon tech.

There is a cynical element to France’s position. With a grid powered largely by nuclear energy, French industry is less exposed to direct carbon costs than the coal-heavy German or gas-reliant Italian sectors. By keeping the ETS tight and excluding cheap international credits, France maintains a competitive advantage over its neighbors who are still struggling to decarbonize their power supplies.

Implications for the Voluntary Carbon Market (VCM)

For VCM participants, France’s "clarification" is a double-edged sword.

If France wins and the firewall holds, the VCM loses access to the world’s deepest liquidity pool (the EU ETS). However, it also prevents the VCM from being cannibalized by compliance demand. If Article 6 credits were allowed into the ETS, the price of high-quality removal credits would likely converge with EUAs (currently ~€60), but the market would shift entirely toward the lowest-cost credits that meet minimum compliance criteria, wiping out premium voluntary projects.

By keeping Article 6 out of the ETS, France preserves a distinct lane for the VCM: one focused on corporate "beyond value chain mitigation" claims rather than regulatory compliance.

What to Watch

• Summer 2026 Legislative Proposal: The Commission is due to publish the amendment to the European Climate Law. Look for the specific article referencing the "5% contribution." Does it specify Member State use only?
• The Article 6.4 Supervisory Body: With the first UN-backed credits issued in Feb 2026 (and immediately facing over-crediting allegations), the perceived quality of these credits will determine if Germany pushes back against France.
• EUA Price Support at €55: If prices break below €55 due to Italian pressure, the Commission may be forced to offer a "relief valve." France’s firewall might be traded away in exchange for preserving the ETS itself.

The Bottom Line: France is trying to lock the door before the horse bolts. For ETS operators, this signals that despite the current price crash, the long-term supply of allowances will likely not be diluted by international offsets. The cap remains the cap.