The European Green Deal: A deep dive into EU Climate Legislation

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 Regulation (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 penalised 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 2005 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, so importers pay the same carbon price on those goods as EU producers covered by the ETS.

What's the Legislation Timeline? (7)

• Implemented in October 2023
• Until the end of 2025, in a transitional phase, importers reported the emissions embedded in their goods subject to CBAM without paying a financial adjustment
• The definitive system, in which importers pay for embedded emissions through CBAM certificates, began on 1 January 2026

What Companies Are Affected?

• Cement, iron and steel, aluminium, fertilisers, electricity, and hydrogen

Financial Penalties for Non-Compliance?

• Importers that fail to surrender enough CBAM certificates face a penalty in line with the EU ETS excess emissions penalty

Other Policies in Fit for 55

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?

• Companies already subject to the non-financial reporting directive reported from financial year 2024; those below the new thresholds keep reporting for 2025 and 2026 unless their Member State exempts them
• The Omnibus I amendments, published in the EU Official Journal on 26 February 2026, narrowed the scope; other in-scope companies first report for financial year 2027, in 2028
• Non-EU groups in scope first report for financial year 2028, in 2029

What Companies Are Affected?

• EU companies with more than 1,000 employees and more than €450 million net turnover; listed SMEs are no longer in scope
• Non-EU groups with more than €450 million net turnover in the EU and an EU subsidiary or branch with more than €200 million net turnover

Financial Penalties for Non-Compliance?

• Compliance is ensured through third party, independent certifiers, but unclear what the financial implications are currently

Conclusion

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. Companies in scope need to measure and reduce their carbon footprint.

For the supply chain share of that footprint, DitchCarbon ranks suppliers by how much acting on each would move it and gives each one a reduction plan, including a contract clause with a date and a reporting cadence.

Sources

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/