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 enacted the Fit for 55 legislative package. The EU has also been enacting legislation that requires public and large companies, both in the EU and beyond, to report their carbon emissions. 

EU Climate Legislation, at a glance

• Corporate Sustainability Reporting Directive

  • In July 2023, required that specific companies provide detailed reporting on sustainability issues, publishing basically an Environmental Social Governance Report

  • Applicable to all public and large companies in the EU or those generating a net turnover of €150 million in the EU and which have at least one subsidiary or branch in the EU

  • Three stages of implementation

    • 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

• Fit for 55 

  • Legislative package intended to reduce greenhouse gas emissions by at least 55% by 2030, using 1990 as a baseline

  • includes the EU Emissions Trading System (ETS), Effort Sharing Reduction (ESR), and Carbon Border Adjustment Mechanism (CBAM)

• EU ETS

  • Cap-and-trade system where a limit is placed on GHG emissions from specific sectors each year

  • Created tradable emissions allowances and distributed to market participants

  • Forces corporations to mitigate their emissions (w/in allowances) or be subject to financial penalties by purchasing more

  • Applicable to the power, heat generation, energy intensive industrial sectors, aviation, and the maritime sector

  • Revised in 2021 to reflect an overall target of a 62% reduction in emissions from the sectors involved by 2030

• EU ESR

  • Establishes bank and borrow system, similar to ETS but for the transport, buildings, and agriculture sectors

  • Emission allowances can be banked and used in the future or borrowed from subsequent year allowances

  • In May of 2023, revised regulation was enacted with a proposal to reduce emissions under ESR by at least 40% using 2004 as a baseline. 

• CBAM

  • 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

  • Mirrors the EU ETS for foreign producers, but with harsher carbon emissions prices

  • 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

  • CBAM encompasses cement, iron and steel, aluminum, fertilizers, electricity, and hydrogen