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.

1. https://www.consilium.europa.eu/en/policies/green-deal/fit-for-55-the-eu-plan-for-a-green-transition/
2. https://tracker.carbongap.org/policy/eu-emissions-trading-system/
3. https://climate.ec.europa.eu/eu-action/eu-emissions-trading-system-eu-ets/monitoring-reporting-and-verification-eu-ets-emissions_en
4. https://ec.europa.eu/commission/presscorner/detail/en/qanda_21_3543
5. https://climate.ec.europa.eu/eu-action/effort-sharing-member-states-emission-targets/effort-sharing-2021-2030-targets-and-flexibilities_en
6. https://tracker.carbongap.org/policy/carbon-border-adjustment-mechanism/
7. https://taxation-customs.ec.europa.eu/carbon-border-adjustment-mechanism_en
8. https://www.consilium.europa.eu/en/infographics/fit-for-55-how-the-eu-plans-to-boost-renewable-energy/
9. https://www.consilium.europa.eu/en/infographics/fit-for-55-how-the-eu-will-become-more-energy-efficient/
10. https://www.consilium.europa.eu/en/press/press-releases/2022/06/21/new-rules-on-sustainability-disclosure-provisional-agreement-between-council-and-european-parliament/