The European Union's Emissions Trading Scheme (EU ETS) allows firms to fulfill part of their emission reduction requirements within the UN's Clean Development Mechanism (CDM). Through the CDM firms can meet some of their climate obligations by investing in carbon reduction projects in developing countries. These reductions have to comply with the principle of ‘additionality', meaning that the reductions which are achieved would not have been realized without the incentive provided by the foreign investment.

However, the CDM has been criticized because the additionality principle has been abused – firms in developed countries have been able to evade their climate commitments, because credits have been granted for un-qualified projects. As a result the EC's January 2009 proposal for a global agreement to replace the Kyoto Protocol suggests an overhaul of the CDM in order to ensure that credits are only obtained by firms which finance projects that are leading to concrete additional reductions. Climate Action Commissioner Connie Hedegaard said: “The CDM has been successful in some aspects but has also given rise to criticism, e.g. with regard to environmental integrity… the CDM therefore needs a major overhaul”. Hedegaard added that the EU executive is currently in the process of preparing an impact assessment to help design the restrictions.

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