Greenhouse Gas (GHG) Emissions Management

On 14 July, as part of the 'Fit for 55' package, the Commission published a legislative proposal for a revision of the EU Emissions Trading System (ETS), to align it with the target of a 55 % reduction of EU net greenhouse gas (GHG) emissions by 2030, compared to 1990 levels. These comprehensive amendments are integral components of the EU's broader "Fit for 55" package, which aims to achieve climate neutrality by 2050. Directive (EU) 2023/959 amend Directive 2003/87/EC concerns the ongoing phase 4 of the ETS (2021-2030). It consists of five main elements: 1. a reduced cap and more ambitious linear reduction factor for GHG emissions, 2. revised rules for free allocation of allowances and the market stability reserve 3. extension of the ETS to maritime transport 4. a separate new ETS for buildings and road transport 5. increase of the Innovation and Modernisation Funds and new rules on use of ETS revenues Unlike the existing EU ETS, which operates downstream, ETS2 regulates emissions upstream by requiring fuel suppliers to monitor, report, and surrender allowances for their emissions. It will be fuel suppliers, rather than end consumers such as households or car users, that will be required to monitor and report their emissions. These entities will be regulated under the ETS2, which means they will be required to surrender sufficient allowances to cover their emissions. Regulated entities will purchase these allowances at auctions. The ETS2 cap will be set to bring emissions down by 42% by 2030 compared to 2005 levels. Key Revisions and Expansions: 1/ Enhanced Emission Reduction Targets: -> The directive increases the emission reduction target for sectors covered by the EU ETS to 62% by 2030, relative to 2005 levels. This is a substantial rise from the previous target of 43%. ​ 2/ Inclusion of Maritime Transport: -> Starting in 2024, the EU ETS will encompass greenhouse gas emissions from maritime transport, with a two-year phase-in period. This inclusion aims to address emissions from ships, a sector previously excluded from the ETS. ​ 3/ Creation of a New Emissions Trading System (ETS2): -> A separate emissions trading system, known as ETS2, has been established to cover CO₂ emissions from fuel combustion in buildings, road transport, and additional sectors, primarily small industries not covered by the existing EU ETS. ETS2 is set to become fully operational in 2027. ​ -> In ETS2, fuel suppliers will be responsible for monitoring and reporting emissions, and they will need to purchase allowances through auctions to cover these emissions. ​ -> The cap for ETS2 is designed to achieve a 42% reduction in emissions by 2030 compared to 2005 levels. ​ 4/ Establishment of the Social Climate Fund (SCF): -> A portion of the revenues generated from ETS2 will be allocated to the SCF, aimed at supporting vulnerable households and micro-enterprises in transitioning to greener alternatives. Member States are mandated to utilize the remaining ETS2 revenues for climate action and social measures. ​ 5/ Adjustments to the Market Stability Reserve (MSR): -> The directive amends Decision (EU) 2015/1814 concerning the MSR to ensure the stability of the carbon market, addressing issues like surplus allowances and market imbalances. ​ 6/ Inclusion of Municipal Waste Incineration: -> The Commission will assess the potential extension of the EU ETS to cover emissions from municipal waste incineration from 2028. 🔗 EP, EC

The regulation establishes a Carbon Border Adjustment Mechanism (CBAM) to prevent the risk of carbon leakage for specific goods containing embedded greenhouse gas emissions that are imported into the European Union (EU). It complements the EU Emissions Trading System (EU ETS) by applying similar rules to the imports covered under the regulation and replaces certain elements of the existing system to account for the extent to which EU ETS allowances are allocated for free. CBAM aims to mitigate this by leveling the playing field between EU producers, who are subject to strict environmental regulations, and foreign manufacturers. Key Objectives of CBAM: 1/ Equalizing Carbon Costs: CBAM ensures that the carbon emissions associated with the production of certain goods imported into the EU are priced equivalently to those produced within the EU. This discourages companies from relocating production to countries with more lenient environmental standards. 2/ Encouraging Global Emission Reductions: By imposing a carbon cost on imports, CBAM incentivizes non-EU countries to adopt cleaner industrial processes, aligning with global climate goals. Scope: -> Product Coverage: Initially, CBAM targets carbon-intensive sectors such as cement, electricity, fertilizers, iron, steel, aluminum, and hydrogen. The list may expand over time to include additional products. Mechanism Details: -> CBAM Certificates: Importers must buy certificates equivalent to the amount of carbon emissions embedded in their products. This mechanism mirrors the EU ETS, where domestic producers purchase allowances for their emissions. -> Exemptions: Countries with carbon pricing mechanisms equivalent to the EU's may be exempt from CBAM, provided their climate policies align closely with EU standards. CBAM is anticipated to: -> Prevent Carbon Leakage: By equalizing carbon costs, CBAM reduces the incentive for companies to relocate production to countries with lax environmental regulations. -> Promote Global Climate Action: Encouraging non-EU countries to implement robust carbon pricing and cleaner production methods contributes to global emission reduction efforts. -> Support EU Climate Goals: CBAM complements the EU's broader climate strategy, including the European Green Deal and the "Fit for 55" package, aiming to reduce net greenhouse gas emissions by at least 55% by 2030. In summary, the Carbon Border Adjustment Mechanism represents a strategic approach by the EU to combat carbon leakage, promote fair competition, and drive global efforts toward a sustainable and low-carbon economy. *UPDATE: The European Commission's "Simplification Omnibus" package, introduced in February 2025, proposes significant changes to the Corporate Sustainability Reporting Directive (CSRD) to reduce administrative burdens and enhance competitiveness. Key proposed changes: 1/ Introduction of a Mass-Based De Minimis Threshold -> Importers of certain CBAM goods—specifically iron and steel, aluminium, fertilizers, and cement—are exempted from CBAM obligations if their annual imports are below 50 tonnes. -> This change shifts the threshold from a previous value-based limit (€150 per shipment) to a mass-based criterion, aiming to simplify compliance for small importers. -> The exemption is designed to exclude approximately 90% of importers while still covering around 99% of embedded emissions. 2/ Simplification of Compliance Procedures -> The process for obtaining CBAM declarant authorization is streamlined. -> Calculations for embedded emissions are simplified, reducing the reporting burden on importers. -> Management of CBAM financial liabilities is made more straightforward, facilitating easier compliance. 3/ Adjustment of Compliance Deadlines -> While the CBAM's full entry into force remains scheduled for January 1, 2026, the sale of CBAM certificates is postponed to February 1, 2027. -> This delay provides importers with additional time to adapt to the new requirements. 4/ Enhanced Measures Against Circumvention -> The Commission proposes strengthening anti-abuse provisions and developing a joint anti-circumvention strategy in collaboration with national authorities. -> These measures aim to ensure the effectiveness and integrity of the CBAM framework. 5/ Future Review and Potential Expansion -> A comprehensive review of the CBAM is planned for later in 2025 to assess the possibility of extending its scope to additional goods, including downstream products and indirect emissions. -> The Commission will also explore support mechanisms for EU exporters facing competitive risks due to carbon pricing. 🔗 EP, EC

Directive 2003/87/EC, established by the European Parliament and the Council on October 13, 2003, introduced the European Union Emissions Trading System (EU ETS), a cornerstone of the EU's strategy to combat climate change by reducing greenhouse gas (GHG) emissions in a cost-effective and economically efficient manner. ​ Key Features of the Directive: -> Cap-and-Trade Mechanism - The EU ETS operates on a 'cap-and-trade' principle, setting a maximum limit on the total GHG emissions allowed from covered installations. Within this cap, companies receive or purchase emission allowances, which they can trade as needed. This system incentivizes companies to reduce emissions - those that can do so at lower costs may sell their excess allowances to others facing higher reduction expenses. ​ -> Scope of Application - Initially, the directive targeted large emitters of CO₂ in the power and heat generation sectors, as well as energy-intensive industries such as cement, steel, and paper production. -> Emission Allowances and Allocation - Companies are required to monitor and report their emissions and surrender a corresponding number of allowances annually. The total number of allowances issued is reduced over time to decrease overall emissions. Allocation methods have evolved, with a growing emphasis on auctioning allowances rather than free allocation, aligning with the 'polluter pays' principle. ​ Evolution and Amendments: Since its inception, Directive 2003/87/EC has undergone several amendments to enhance its effectiveness and align with evolving climate goals:​ - Phase 3 (2013-2020): Introduced a centralized allocation system and a single EU-wide cap on emissions, replacing the previous system of national caps.​ - Phase 4 (2021-2030): Aims for a 62% reduction in GHG emissions by 2030 compared to 2005 levels. Notable revisions include a steeper annual reduction in the cap and the inclusion of maritime transport emissions. ​ Impact and Significance: The EU ETS stands as the world's first and largest international emissions trading system, covering approximately 45% of the EU's GHG emissions. It serves as a model for carbon markets globally and plays a critical role in the EU's commitment to achieving climate neutrality by 2050. ​ By establishing a market-driven approach to emission reductions, Directive 2003/87/EC has effectively integrated environmental considerations into economic decision-making, demonstrating the EU's leadership in addressing global climate challenges.​ 🔗 EC, EP

The Corporate Sustainability Reporting Directive (CSRD) is a directive by the European Union that replaces the Non-Financial Reporting Directive (NFRD), significantly expanding the scope and depth of corporate sustainability reporting requirements. It requires companies to report on the impact of their activities on the environment and society and mandates the audit of the reported information to ensure reliability and transparency. This directive is part of the EU’s broader goal to integrate sustainability into corporate governance and align with the European Green Deal objectives​. Scope of Application: -> CSRD applies to all large EU companies, all listed companies (except micro-enterprises), and non-EU companies operating within the EU. This includes companies meeting certain size thresholds under Directive 2013/34/EU​​ -> Small and medium-sized enterprises (SMEs) may opt into voluntary reporting based on future standards​​ Double Materiality Principle: Companies are required to report on the financial risks and opportunities arising from sustainability issues and their impact on society and the environment. This approach is central to the European Sustainability Reporting Standards (ESRS)​​ Reporting Standards (ESRS): Companies must comply with European Sustainability Reporting Standards (ESRS). These cover general requirements, disclosures, and topic-specific issues, such as climate change (E1), biodiversity (E4), and business conduct (G1). The ESRS were developed by EFRAG based on stakeholder input​​​ Streamlined Reporting: CSRD aims to reduce reporting burdens by phasing in requirements and ensuring compatibility with existing regulations like the Taxonomy Regulation and Sustainable Finance Disclosure Regulation (SFDR)​​ Alignment with International Standards: ESRS are aligned with global frameworks like the GRI Standards and ISSB to ensure interoperability and reduce redundancy​​ Materiality Assessment: Companies must perform a robust materiality assessment, identifying significant sustainability impacts, risks, and opportunities across their operations and value chains​​ Digital Reporting and Assurance: Encourages the use of digital taxonomies to facilitate seamless data integration and emphasizes external assurance of sustainability data to enhance reliability​​ *UPDATE: The European Commission's "Simplification Omnibus" package, introduced in February 2025, proposes significant changes to the Corporate Sustainability Reporting Directive (CSRD) to reduce administrative burdens and enhance competitiveness. Key proposed changes: 1/ Reduced Scope of Applicability To applicable only to companies with over 1,000 employees and either: -> €50 million in net turnover, or -> €25 million in total assets. 2/ Delayed Reporting Deadlines -> Second-wave companies: Reporting postpone from 2026 to 2028. -> Third-wave companies: Reporting postpone from 2027 to 2029. 3/ Simplified Reporting Standards (ESRS) Revisions to the European Sustainability Reporting Standards include: -> Reduction in required data points -> Elimination of sector-specific standards -> Prioritization of quantitative over narrative disclosures 4/ Voluntary Reporting for Smaller Companies Companies with fewer than 1,000 employees are no longer mandated to report but can opt to do so using a simplified voluntary standard developed by EFRAG 5/ Assurance Requirements Maintained at Limited Level The anticipated shift from limited to reasonable assurance has been removed. Companies will continue with limited assurance, reducing compliance costs.​ ​The European Commission's "Stop-the-Clock" proposal, part of the broader Omnibus Simplification Package, intend to agree on postponement of the directive. 🔗 EP, EC, EFRAG

The European Climate Law is a pivotal piece of legislation that enshrines the European Union's commitment to achieving climate neutrality by 2050. Adopted in July 2021, it establishes a legally binding framework to guide the EU's climate policies and actions. Key Objectives: -> Climate Neutrality by 2050: The law sets a legally binding target for the EU to achieve net-zero greenhouse gas emissions by 2050, aligning with the European Green Deal's overarching goal. -> 2030 Emission Reduction Target: It establishes an intermediate target of reducing net greenhouse gas emissions by at least 55% by 2030, compared to 1990 levels. -> Adaptation Strategies: The law emphasizes the need for adaptation strategies to enhance resilience to climate change impacts, ensuring that both mitigation and adaptation are integral to EU climate policy. Key Provisions: -> Long-Term Emission Reduction Trajectory: The law outlines a pathway for greenhouse gas emission reductions from 2030 to 2050, providing a clear direction for member states and stakeholders. -> Monitoring and Reporting: It establishes mechanisms for tracking progress, including the submission of national energy and climate plans and annual greenhouse gas inventories, to ensure transparency and accountability. -> Review Mechanism: The law includes provisions for periodic reviews to assess progress and, if necessary, adjust policies to stay on course toward the 2050 climate neutrality goal. Implications for Companies: -> While the European Climate Law primarily targets member states, its provisions have significant implications for companies operating within the EU: -> Regulatory Environment: Companies will face an evolving regulatory landscape as member states implement policies to meet the 2030 and 2050 targets. This may include stricter emissions standards, carbon pricing mechanisms, and incentives for sustainable practices. -> Market Opportunities: The transition to a climate-neutral economy presents opportunities for businesses in renewable energy, energy efficiency technologies, and sustainable products and services. -> Risk Management: Companies will need to assess and manage risks associated with climate change, including physical risks to operations and supply chains, as well as transitional risks related to policy changes and market shifts. The European Climate Law is a regulation, meaning it is directly applicable in all EU member states without the need for national transposition. This ensures uniform implementation across the EU, providing a clear and consistent framework for climate action. 🔗 EP, EC, IEA