European Union Climate Legislation
The European Union has committed to becoming the first climate-neutral continent through their establishment of a European Green Deal. By 2030, the EU plans to reach at least 55% less net greenhouse gas emissions than in 1990. To achieve this feat, they’ve enacted legislation and regulations spanning various sectors.
Here’s everything you need to know about EU Climate Legislation:
Fit For 55 (1)
The Fit for 55 legislative package is a set of proposals that aim to reduce greenhouse gas emissions by at least 55% by 2030, using 1990 as a baseline. There are two integral pillars to European Climate Legislation within the Fit for 55 package: Effort Sharing Reduction (ESR), EU Emissions Trading System (ETS).
EU ETS (2)
The EU ETS sets a limit on greenhouse gas emissions from energy-intensive industries that are responsible for around 40% of the EU’s emissions through a system of tradable emissions allowances. This is the EU’s most significant policy to reduce carbon emissions through economic incentives. It’s conducted on a cap-and-trade system, so a limit is placed on the amount of greenhouse gas emissions a specific sector can emit each year and tradable emission allowances are created based on this cap and distributed to market participants through free allocation or auctions.
What’s the Legislation Timeline?
- Was reformed in 12/2022 to increase the target to a 62% reduction in emissions from the sectors involved by 2030
What Companies are Affected?
- Power, heat generation, energy intensive industrial sectors, aviation, and the maritime sector
Financial Penalties for Non-Compliance?
- For each ton of emissions for which no allowance is surrendered in due time, there is a penalty of €100. Names of the penalized operators are also disclosed to the public, which can impact their businesses (3)
Effort Sharing Regulation (4)
The EU ESR sets greenhouse gas emissions reduction targets for industries that are not subject to the EU ETS including transport, buildings, and agriculture. These sectors account for almost 60% of total EU GHG emissions. The ESR legislation established targets for emissions reductions through extending carbon allowances to EU member states and to industries, operating on a bank-and-borrow system. The bank-and-borrow system allows countries to bank CO2 allowances when they do not emit their total allocation of emissions and use them in subsequent years. They can also borrow a limited amount from the next year if they emit more than their allowance and buy or sell around 10% of their annual allocated emissions to meet their targets.
What’s the Legislation Timeline?
- Initially adopted in 2018
- In May of 2023, a revised regulation was enacted with a proposal to reduce emissions under ESR by at least 40% by 2030, using 2004 as a baseline, through increasing emission reduction targets (5)
What Companies are Affected?
- Transport, buildings, agriculture within every EU member state
Financial Penalties for Non-Compliance?
- Because this legislation is country-based, these countries are forced to submit action plans if they do not comply with the ESR targets
Carbon Border Adjustment Mechanism (6)
The Carbon Border Adjustment Mechanism was enacted to prevent carbon leakage and the offshoring of emissions through imposing a price of carbon emitted during the production of goods entering the EU. CBAM mirrors the EU ETS, but was enacted to establish harsher carbon emissions prices for foreign producers.
What’s the Legislation Timeline? (7)
- Implemented in October 2023
- Between now and the end of 2025, importers will have to report emissions embedded in their goods subject to CBAM without paying a financial adjustment in a transitional phase, providing stakeholders with some time to prepare for the final system to be put in place
- Permanent system with consequences will be implemented in 2026
What Companies are Affected?
- Cement, iron and steel, aluminum, fertilizers, electricity, and hydrogen
Financial Penalties for Non-Compliance?
- Financial penalties have not been established yet since the legislation is still in its transitional stage
Other Policies in Fit for 55
What You Need to Know:
- Renewable Energy Directive (8)
- Set renewable energy target of share of at least 42.5% renewables by 2030
- Industry-specific ambitions to include more renewable sources of energy in transport, heating and cooling, and buildings
- Energy Efficiency Directive (9)
- Target of a decrease in 11.7% of energy consumption in 2030 compared to forecasted levels
Corporate Sustainability Reporting Directive (10)
The CSRD establishes a requirement that specific companies provide detailed reporting on sustainability issues, basically presenting an Environmental Social Governance Report, as a revision to the non-financial reporting directive (2014).
What’s the Legislation Timeline?
- Compliance by 1 January 2024 for companies already subject to the non-financial reporting directive
- 1 January 2025 for large companies that are not presently subject to the non-financial reporting directive
- 1 January 2026 for listed SMEs, small and non-complex credit institutions and captive insurance undertakings
What Companies are Affected?
- All public and large companies in the EU
- For non-EU companies, those generating a net turnover of €150 million in the EU and which have at least one subsidiary or branch in the EU
Financial Penalties for Non-Compliance?
- Compliance is ensured through third party, independent certifiers, but unclear what the financial implications are currently
The EU will soon impose economic consequences if companies do not comply with their carbon emissions targets. Not only is the EU requiring companies to report their emissions through the Corporate Sustainability Reporting Directive, they also are explicitly restricting carbon emissions through allowances in the EU Emissions Trading System and imposing prices on emissions in the Carbon Border Adjustment Mechanism. Your company needs to act now to mitigate their carbon footprint. DitchCarbon empowers procurement teams to reduce emissions with insights into the emissions of all of your suppliers. We include tailored action items on how each of your suppliers can mitigate their emissions including terms you can include in contracts to enforce emissions mitigation. We help you understand and reduce your carbon footprint to maintain accordance with EU regulations.
- https://www.consilium.europa.eu/en/policies/green-deal/fit-for-55-the-eu-plan-for-a-green-transition/
- https://tracker.carbongap.org/policy/eu-emissions-trading-system/
- https://climate.ec.europa.eu/eu-action/eu-emissions-trading-system-eu-ets/monitoring-reporting-and-verification-eu-ets-emissions_en
- https://ec.europa.eu/commission/presscorner/detail/en/qanda_21_3543
- https://climate.ec.europa.eu/eu-action/effort-sharing-member-states-emission-targets/effort-sharing-2021-2030-targets-and-flexibilities_en
- https://tracker.carbongap.org/policy/carbon-border-adjustment-mechanism/
- https://taxation-customs.ec.europa.eu/carbon-border-adjustment-mechanism_en
- https://www.consilium.europa.eu/en/infographics/fit-for-55-how-the-eu-plans-to-boost-renewable-energy/
- https://www.consilium.europa.eu/en/infographics/fit-for-55-how-the-eu-will-become-more-energy-efficient/
- https://www.consilium.europa.eu/en/press/press-releases/2022/06/21/new-rules-on-sustainability-disclosure-provisional-agreement-between-council-and-european-parliament/
Most businesses that decide to act on their net-zero targets reach the same point of friction. Buying carbon credits has meant tracking down brokers, sitting through sales calls, and requesting a quote just to learn a price, sometimes with limited proof of what you are buying.
The earnings calls that quietly reframed climate from sustainability question to operating risk.
Three earnings calls in the last 18 months tell the story without any help from a press release.
Hershey, May 2024: cocoa price exposure compresses margin, and the company attributes part of the cost shock to West African weather. Olam, July 2024: coffee climate exposure quantified in the annual report. JBS, January 2025: supply chain climate disclosures expanded materially in response to investor pressure and regulatory expectation. None of these companies issued the announcement as climate news. They issued it as financial news. The climate-linked supply chain risk did not arrive with a sustainability framing; it arrived as a P&L line.
You are probably reading this article because you suspect the same thing is happening to your business. This piece walks through what is showing up on which earnings calls, how procurement and finance leaders are quantifying the exposure, and what serious corporates are doing about it before the regulator asks.
Where climate risk has already appeared in earnings
The pattern is consistent across resource-intensive sectors. A weather event compresses supply, the price spikes, the cost flows through the income statement, and the analyst on the call asks whether the event is anomalous or structural. Increasingly, the honest answer is the second one.
Cocoa is the cleanest example. The 2023 to 2024 West African harvest fell sharply on the back of erratic rainfall and disease. Cocoa futures more than tripled. Companies with concentrated West African sourcing absorbed the cost; companies with diversified sourcing absorbed less. The exposure was not climate as ESG topic. It was climate as cost of goods.
Coffee follows the same pattern. Brazilian and Vietnamese harvests have moved on weather more sharply across the last several seasons. Roasters with long-tenor supplier relationships and origin diversification have managed the volatility; roasters with spot-market exposure have not. Wheat, sugar, palm oil, beef: the same dynamic in different commodities, a pattern the IPCC AR6 Working Group II report projects will intensify across agricultural systems through mid-century.
What this means: climate risk is no longer a footnote in the 10-K. It is a line item the CFO has to explain on the call.
The three commodity exposures that hit margin first
For most companies with material Scope 3 exposure, three exposures dominate the near-term P&L risk.
- Concentrated single-origin sourcing in a climate-vulnerable region. If your tier-one supply for any material commodity sits in one geography, you have a concentration risk that climate amplifies. Diversification across origins is the obvious hedge, but it takes years to build and requires relationships you cannot acquire by tender.
- Supplier financial fragility under climate stress. Smallholder farmers, who supply a large share of the global cocoa, coffee, and palm oil market, do not carry the balance sheets to absorb yield shocks. When yields collapse, they exit. When they exit, your supply base shrinks, and the surviving suppliers raise prices. The risk is structural, not cyclical.
- Logistics and storage exposure to extreme weather. Hurricane disruptions to Gulf shipping, drought-driven Panama Canal restrictions, flooding in European inland waterways: each of these has moved input costs in the last three years, a pattern documented in Munich Re’s natural catastrophe data. The exposure shows up as a one-quarter event in the financial press but accumulates over time on the cost line.
TCFD and ISSB disclosure changes
The disclosure architecture has now caught up with the risk. The Task Force on Climate-related Financial Disclosures, whose recommendations are now embedded in the ISSB’s IFRS S2 climate standard, requires companies to disclose climate-related risks across physical and transition categories, with quantification where possible.
For physical risk specifically (the climate-linked supply chain risk you are reading about), the disclosure must address both acute exposures (extreme weather events) and chronic exposures (gradual changes in temperature, precipitation, and growing seasons). The disclosure must address the time horizon over which the risk is material, the parts of the value chain exposed, and the financial impact under different scenarios.
The CSRD imposes similar requirements under European law, with double materiality (both financial and impact materiality) embedded in the assessment. The practical effect: your auditors and your investor relations team now need a defensible answer to the climate-linked supply chain risk question, and the answer needs to be quantified.
What procurement and finance can do now
Three actions matter near-term.
Map your exposure. Most companies do not have a clear view of which tier-one and tier-two suppliers sit in which climate-vulnerable geographies. Without the map, you cannot quantify the risk, and without the quantification, you cannot disclose it credibly. The map is the foundation, and World Resources Institute climate risk research provides useful public tooling to start.
Diversify and deepen, in that order. Diversification across origins reduces concentration risk, but the deeper move is to invest in the resilience of the suppliers you already have. Regenerative practices, agroforestry, soil health interventions: these reduce yield volatility under climate stress and protect your input cost trajectory.
Embed the climate spend inside procurement, not outside it. Treating climate risk as a sustainability cost line subordinates it to the ESG budget. Treating it as a procurement and resilience investment puts it in the budget that matters, which is the cost-of-goods budget that the CFO defends quarterly.
Nature-based supply chain investments are the asset class designed for exactly this purpose. They sit inside the value chain, they reduce climate-linked supply risk, they generate verifiable Scope 3 reductions, and they produce the documentation an auditor and a regulator can both test.
If you are quantifying climate-linked supply chain risk in advance of the next earnings cycle or the next disclosure period, the carbon and sustainability experts at Carbon Credit Capital can help you map your exposure and structure a Dual-Value Model response that addresses reduction, resilience, and disclosure-readiness in a single program. Schedule a consultation.
More and more small and medium-sized businesses are hearing the same question from their larger customers: What is your carbon footprint? That question now travels down entire supply chains, and it arrives next to tender requirements, certification criteria, and rising customer expectations.
-
Climate Change1 year ago
Guest post: Why China is still building new coal – and when it might stop
-
Greenhouse Gases2 years ago嘉宾来稿：满足中国增长的用电需求 光伏加储能“比新建煤电更实惠”
-
Greenhouse Gases1 year ago
Guest post: Why China is still building new coal – and when it might stop
-
Climate Change2 years ago嘉宾来稿：满足中国增长的用电需求 光伏加储能“比新建煤电更实惠”
-
Climate Change2 years ago
Bill Discounting Climate Change in Florida’s Energy Policy Awaits DeSantis’ Approval
-
Renewable Energy11 months agoSending Progressive Philanthropist George Soros to Prison?
-
Greenhouse Gases1 year ago
嘉宾来稿：探究火山喷发如何影响气候预测
-
Carbon Footprint2 years agoUS SEC’s Climate Disclosure Rules Spur Renewed Interest in Carbon Credits