Understand EU Policies and Regulations
Environmental Defense Fund
The European Union (EU) has implemented various policies that address climate change, work to reduce greenhouse gas emissions, and promote the transition to a low-carbon economy. Companies that are involved in the EU market should stay informed about these policies and regulations and take steps to manage their climate-related risks and opportunities.
The EU has been at the forefront of global efforts to address climate change with a range of policies and regulations aimed at reducing greenhouse gas emissions. As a result, companies that do business in the EU market may be impacted by these regulations. In particular, companies need to understand the Revised European Union Emissions Trading System (EU ETS), which is a cap-and-trade system aimed at reducing emissions from power generation, industry, aviation, and maritime transport. Additionally, companies should understand the Carbon Border Adjustment Mechanism (CBAM) which applies duties to the import of certain energy intensive products. Companies operating in Europe, including non-EU companies, may be subject to emissions allowances or other requirements under this system.
Another major policy that will impact companies operating in the EU is the new EU Corporate Sustainability Reporting Directive (CSRD). CSRD will require companies to disclose how sustainability (looking at the full Environmental Social Governance (ESG) spectrum) risks and opportunities affect financial performance, as well as the impact of company’s operations on people and the environment. This will extend beyond what many companies are already reporting today, and any company with operations in EU countries (if generating a net turnover in the EU of >€150m) will need to prepare for these new reporting requirements from 2024 (first disclosure due in 2025 with data from 2024).
Even if a company is not covered by the new reporting requirements, they may still feel the impact of these changes down the supply chain indirectly, as they will be part of the scope of affected companies and might receive ESG questionnaires to provide data for their clients. Therefore, it is crucial for companies with significant EU operations to prepare for upcoming regulatory requirements by evaluating how they will be affected by the CSRD and educating their team internally to be prepared for upcoming changes.
Understand the Revised European Union Emissions Trading System (EU ETS)
The EU ETS is a cap-and-trade system that was established in 2005 to reduce emissions from industry and power generation. The EU ETS covers emissions from power generation, industry, and aviation and will soon be expanding to roads and buildings.
In 2021, the EU ETS was revised under the Green Deal to align with the EU’s new target of reducing emissions by 55% by 2030. The revised EU ETS includes a tighter emissions cap as well as new measures to address carbon leakage. Companies that operate in Europe may be subject to emissions allowances or other requirements under this system.
Here are some important things to know about this revision:
- If a company has operations in the EU and is covered under the EU ETS, then it will need to acquire and surrender allowances to cover emissions.
- Industrial sectors covered include:
- Energy-intensive industry sectors, including oil refineries, steel works, and production of iron, aluminum, metals, cement, lime, glass, ceramics, pulp, paper, cardboard, acids and bulk organic chemicals;
- Aviation within the European Economic Area and departing flights to Switzerland and the United Kingdom;
- Maritime transport (new in 2024).
- Companies not operating in the EU may be indirectly impacted by EU ETS and may have to purchase emission allowances if importing goods into the EU to cover production emissions.
Investing in emission reduction measures and measuring and disclosing your company’s carbon footprint can help you comply with carbon pricing and regulatory requirements like EU ETS. Consulting with policymakers will also help you to understand this changing framework.
New EU Corporate Sustainability Reporting Directive (CSRD)
Companies with an EU presence should start preparing for the new CSRD rules requirements.
This rule will impact global companies with operations in EU countries, including non-EU companies if they generate a net turnover in the EU of >€150m. In 2025 (reporting fiscal year 2024), the CSRD will require companies to disclose how sustainability/ESG risks and opportunities affect financial performance, as well as the impact of company’s operations on people and the environment (double materiality).
The new requirements extend beyond what many companies are already reporting, with an estimated 84 total requirements, and will have a much wider scope than existing frameworks such as Non-Financial Reporting Directive (NFRD). This new rule also goes beyond what the Security and Exchange Commission’s (SEC) proposed rule on climate-related disclosures would require, making it likely that the SEC’s proposed rule will not be eligible for standards deemed equivalent.
Though it may be a few years until your company is impacted, companies with significant EU operations should start to prepare for upcoming regulatory requirements. Consider the following actions to start planning now:
- Evaluate how your organization will be affected by the CSRD.
- Educate your team internally to be prepared for upcoming changes.
- Perform an assessment comparing your company’s current reporting with the CSRD’s new requirements—and consider how this relates to the SEC’s proposed climate disclosure rule.
- Establish a reporting process, recognizing double-materiality perspective of the requirements that ask companies to report its financial and impact perspective.
- Stay up to date and communicate with advisors to prepare for future plans.
Even if your business is not covered by the new reporting requirements, you may still feel the impact of these changes down the supply chain indirectly, as you will be part of the scope of affected companies and may receive ESG questionnaires to provide data for your clients.
Potentially New EU Carbon Border Adjustment Mechanisms (CBAM)
The EU is currently considering the implementation of a CBAM, which would impose a carbon price on imported goods based on their carbon footprint. The CBAM would require importers to purchase offsets associated with their imports. Companies that export to the EU may be subject to this mechanism in the aluminum, cement, electricity, fertilizers, hydrogen, and iron and steel sectors. It is quite possible that the CBAM will be expanded and replicated in other jurisdictions during the coming years as countries seek to protect domestic industries which are subject to climate regulation and pricing.
Consulting with EDF’s EU climate policy experts can help your company keep up to date with upcoming changes and find out what you need to do to be prepared for mechanisms such as CBAM.
Fit for 55 Legislative Proposals: Net Zero Industry Act and the Critical Raw Materials Act
The European Commission has recently released two of its long-awaited pieces of legislative proposals from the Fit for 55 package: the Net Zero Industry Act (NZIA) and the Critical Raw Materials Act. With these pieces, the Commission aims to establish a regulatory environment that will boost European industry in areas considered crucial for the EU to reach net zero by 2050.
The NZIA is meant to spur domestic EU production of clean technologies. The main provisions include:
- By 2030, at least 40% of the annual deployment needs for strategic net-zero technologies manufactured in the EU.
- Supporting 8 strategic net zero technologies: i) solar photovoltaic and solar thermal technologies; ii) onshore wind and offshore renewable energy; iii) batteries and storage; iv) heat pumps and geothermal energy; v) electrolyzers and fuel cells; vi) biogas/biomethane; vii) carbon capture and storage (CCS); and viii) grid technologies.
- Proposals for Net-Zero Strategic Projects, Accelerating CO2 capture and storage, facilitating access to markets, Net-Zero Industry Academies, accelerated permitting, Net-Zero Europe Platform and the European Hydrogen Bank.
The CRM Act aims at securing the EU’s supply of CRMs necessary to power the transition. The main provisions include:
- Extract more in Europe – 10% by 2030.
- Refine – 40% in EU by 2030.
- 15% of the Union’s annual consumption of strategic raw materials comes from recycling.
- Provision on joint purchasing of raw materials.
These pieces will need to pass through co-legislators. Stay up to date with these evolving proposals and connect with EDF to learn more on how you can engage.