EU Carbon Emissions Regulation: Turn Compliance into Impact

The EU carbon emissions regulation framework translates its net-zero ambition into concrete, enforceable requirements for businesses. These policies work together to lower greenhouse gas emissions, foster clean technology, and ensure companies contribute to climate goals. This requires auditable data, supply chain transparency, and integrating carbon risk into financial decision-making.

The EU carbon emissions regulation framework includes:

• European Green Deal
• EU Emissions Trading System (ETS)
• Carbon Border Adjustment Mechanism (CBAM)
• Corporate Sustainability Reporting Directive (CSRD)
• Forest, Land, and Agriculture (FLAG) Guidance
• Science Based Targets initiative (SBTi)

The European Green Deal is the EU's strategic roadmap to become the first climate-neutral continent by 2050. Its core objectives are to cut greenhouse gas emissions by at least 55% by 2030 (compared to 1990 levels), promote clean technology, and advance a circular economy.

Is the European Green Deal Legally Binding?

Yes, the European Climate Law makes the EU’s 2050 climate-neutrality goal legally binding and embeds the 2030 emissions reduction target into law. The European Green Deal itself is not a single piece of legislation but a comprehensive strategy delivered through a mix of binding and non-binding instruments—such as regulations, directives, and funding programs, including the Fit for 55 legislative package. As these measures come into effect, businesses face enforceable obligations, including audits and potential penalties, alongside access to incentives and financial mechanisms designed to accelerate the green transition.

How Does The European Green Deal Affect Industries?

The European Green Deal has implications for all industries, driving businesses to adopt new practices around 

• energy consumption, 
• emissions tracking, 
• and supply chain management. 

The EU Emissions Trading System (ETS) is a cornerstone of EU climate policy. It is a "cap-and-trade" program that sets a declining limit on emissions from sectors like power generation and heavy industry. Companies must hold tradable allowances for every tonne of CO₂ they emit, creating a carbon price that drives investment in low-carbon technology.

Is the EU ETS Mandatory?

Yes, the EU ETS is mandatory for operators in covered sectors. They must monitor, report, and verify their emissions annually and surrender an equivalent number of allowances. Failure to comply results in significant financial penalties and the obligation to cover the allowance shortfall.

Is the ETS a Tax?

No, the ETS is a market-based pricing mechanism, not a tax. The carbon price is determined by the supply of allowances and the demand from emitters. This system encourages cost-effective emissions reductions rather than imposing a direct levy.

The Carbon Border Adjustment Mechanism (CBAM) is an EU regulation that places a carbon price on imports of certain goods from outside the EU to ensure fair competition. It requires importers to report embedded CO₂ emissions and purchase CBAM certificates, aligning foreign producers with the EU’s climate standards.

What Does CBAM Aim to Achieve?

The Carbon Border Adjustment Mechanism (CBAM) is designed to prevent "carbon leakage," where EU companies move production to countries with less stringent climate policies. It ensures that imports of carbon-intensive goods face a carbon price equivalent to that of EU-produced goods, leveling the playing field.

Which Products Fall Under CBAM?

CBAM currently targets imports of carbon-intensive goods, including:

• Iron and steel
• Cement
• Fertilizers
• Aluminum
• Electricity
• Hydrogen
• Selected downstream products

Coverage, calculation rules, and data requirements are evolving through implementing legislation, with scope expected to broaden over time as the mechanism matures.

The Corporate Sustainability Reporting Directive (CSRD) modernizes and expands previous non-financial reporting rules. It requires in-scope companies to publish detailed, assured sustainability information according to the European Sustainability Reporting Standards (ESRS), covering environmental, social, and governance (ESG) topics.

Is the CSRD Mandatory?

Yes, the CSRD is a mandatory EU carbon emissions regulation with phased implementation timelines. Affected companies must collect, verify, and report extensive sustainability data, including Scope 1, 2, and 3 GHG emissions, transition plans, and risks, as part of their management reports.

Which Companies Does the CSRD Apply To?

The CSRD directive applies to:

• Large EU companies meeting EU size criteria,
• EU-listed SMEs (with certain phase-in relief), and
• Non-EU companies with substantial EU activity (meeting EU turnover and presence thresholds).

It’s important that you always confirm your status against the latest applicability thresholds, exemptions, and effective dates.

The Forest, Land, and Agriculture (FLAG) guidance addresses emissions and removals from land use, forestry, and agriculture. These sectors are both significant sources of greenhouse gases (e.g., deforestation, livestock) and crucial carbon sinks. The guidance promotes sustainable land management and agricultural practices.

What Is FLAG in Emissions Accounting?

FLAG refers to sector-specific accounting for land-based emissions (e.g., livestock, manure management, fertilizer use, soil carbon changes, deforestation) and removals (e.g., afforestation, reforestation, improved forest management). Because these dynamics differ from energy and industrial sources, FLAG often requires sector-specific methodologies, activity data, regional factors, and time-bound treatment of biogenic carbon flows.

The Science Based Targets initiative (SBTi) provides a framework for companies to set greenhouse gas reduction targets that align with the Paris Agreement's goal of limiting global warming to 1.5°C. It ensures corporate climate action is credible, measurable, and scientifically sound.

How Can Companies Set Science-Based Targets?

Companies typically follow these steps to set science-based targets:

• Commit to set a science-based target.
• Develop targets covering Scopes 1, 2, and—where material—Scope 3, using sectoral and, when relevant, FLAG guidance.
• Submit targets for SBTi validation.
• Disclose progress publicly on an annual basis.
• Take action to implement decarbonization measures and update targets as methodologies evolve.

Is Compliance With the SBTi Mandatory?

Compliance with the SBTi is voluntary. However, setting a science-based target is increasingly seen as a best practice for credible corporate climate action. It is also often expected by investors, customers, and regulators as proof of a company's commitment to decarbonization.

Beyond the core policies, a range of additional EU regulations support the fight against climate change.

Sustainable Finance Disclosure Regulation (SFDR)

What Is the Sustainable Finance Disclosure Regulation?

The SFDR requires financial market participants and financial advisers to disclose how they integrate sustainability risks, principal adverse impacts, and ESG characteristics/objectives into their investment products and processes. It forms part of the EU’s broader sustainable-finance framework alongside the EU Taxonomy, which classifies environmentally sustainable economic activities.

Who Needs to Comply with the SFDR?

EU-based asset managers, institutional investors, and financial advisers must meet SFDR disclosure requirements. 

Does SFDR Apply to Non-EU Firms?

Potentially. Non-EU firms can fall under SFDR where they market financial products in the EU or otherwise become in scope through EU-facing activities. Applicability depends on the firm’s structure, distribution channels, and the nature of products offered.

EU Taxonomy Regulation

What Is the EU Taxonomy Regulation?

The EU Taxonomy Regulation is a classification system that establishes a common framework to determine which economic activities can be considered environmentally sustainable. It sets out criteria for assessing whether an activity makes a substantial contribution to one of six defined environmental objectives, such as climate change mitigation or adaptation, while avoiding significant harm to any of the others.

Why Is the EU Taxonomy Regulation Important?

The EU Taxonomy Regulation brings clarity, consistency, and comparability to sustainable finance and corporate disclosures. It guides capital toward activities aligned with EU climate and environmental objectives, and underpins reporting under CSRD and disclosures under SFDR—helping companies and investors demonstrate which portions of their activities are Taxonomy-eligible and Taxonomy-aligned as the EU intensifies its focus on sustainable finance.

Fit for 55 Package

Fit for 55 is the legislative package designed to achieve the EU's 2030 goal of cutting emissions by at least 55%. It includes laws that reform the EU ETS, introduce CBAM, and set higher targets for renewable energy and energy efficiency across the economy.

The EU is actively working to reduce the administrative burden of its climate regulations, particularly for smaller businesses, while maintaining its core climate ambitions.

The "Simplification Omnibus" Proposal

The European Commission has introduced the "Simplification Omnibus" proposal to streamline reporting rules. Key proposed updates include:

1. Corporate Sustainability Reporting Directive (CSRD): The proposal suggests limiting CSRD requirements to companies with over 1,000 employees, exempting approximately 80% of businesses currently obligated under the directive.
2. Corporate Sustainability Due Diligence Directive (CSDDD): Proposed changes involve delaying the directive's implementation by a year to 2028 and narrowing its scope to direct suppliers only, reducing the compliance burden on companies.
3. Carbon Border Adjustment Mechanism (CBAM): The proposal plans to exclude about 90% of importers from the carbon border fee, focusing only on those importing goods exceeding 50 metric tons annually.

What Is the Goal of the Simplification Omnibus Proposal?

The EU’s Simplification Omnibus proposal seeks to reduce administrative burdens while ensuring sustainability efforts remain impactful. By cutting reporting obligations by 25%, European businesses could save up to €40 billion, allowing them to redirect resources toward meaningful emissions reductions. At the same time, the Clean Industrial Deal proposes a €100 billion investment to support clean manufacturing and simplify state aid rules for energy-intensive industries—helping companies decarbonize where it truly counts.

While regulatory streamlining aims to enhance efficiency, companies must remain committed to real carbon reduction. A lighter reporting load does not mean a free pass on sustainability. Businesses should seize this opportunity to:

• focus on direct emissions reductions, 
• cleaner supply chains, 
• and innovative green technologies. 

The EU maintains its net-zero goals, and industry leaders must continue driving tangible progress rather than seeing these changes as a rollback of environmental responsibility.

CBAM Simplifications

On 10 September 2025, the European Parliament approved targeted amendments to the Carbon Border Adjustment Mechanism (CBAM) as part of the “Omnibus I” simplification package, aimed at reducing administrative burden and enhancing EU competitiveness. The revisions introduce a de minimis mass threshold to ease obligations for SMEs and occasional importers, without compromising climate objectives. Approximately 90% of importers will be exempt under the new rules, while around 99% of total CO₂ emissions from CBAM-covered goods will remain within scope—supported by reinforced safeguards against misuse.

Some Key Changes:

1. New de minimis threshold (50 metric tons/year): Imports up to 50 t per importer per year would be fully out of CBAM scope, replacing the previous negligible-value exemption.

2. Certificate purchase timing: Buying CBAM certificates would start in February 2027 (not 2026). Costs are deferred, not avoided: importers must still purchase certificates retroactively for goods imported in 2026.

3. Certificate management: The quarterly minimum holding requirement falls from 80% to 50%, giving companies more flexibility to optimize CBAM costs.

4. CBAM declaration deadline: The annual filing deadline moves to end-October, allowing more time to collect and verify emissions data.

5. Recognition of third-country carbon prices: Declarants may deduct CO₂ prices paid in third countries other than the country of origin, improving fairness and flexibility.

6. Authorized CBAM representative: Companies may appoint a CBAM representative dedicated to CBAM administration (independent of customs filings), enabling leaner processes and clearer accountability.

7. Process simplifications: Rules for authorization, embedded-emissions calculation, verification, and the financial liability of authorized CBAM declarants are streamlined.

As EU climate regulations evolve, companies need robust systems to ensure EU emissions compliance. Carbmee provides a comprehensive platform that integrates emissions tracking, supply chain transparency, and automated reporting to help your organization meet its climate and regulatory obligations.

Environmental Intelligence Solution (carbmee EIS™): Monitor emissions across your entire value chain in real time. This enables you to stay compliant with complex regulations like the EU ETS, CBAM, and FLAG while identifying reduction opportunities to meet SBTi targets.

Automated ESG Reporting: Streamline your data collection and reporting processes for CSRD and other disclosures. Our tools help you generate audit-ready reports that meet the stringent ESRS requirements, saving time and reducing complexity.

Supply Chain Emissions Management: Gain deep insights into your Scope 3 emissions. Our platform helps you achieve transparency across your supply chain, enabling collaboration with suppliers to reduce your collective carbon footprint.

Book a free demo with our experts and future-proof your business today!

What Are the Main Compliance Challenges for Businesses under the EU Carbon Emissions Regulation? 

Businesses face several key challenges in complying with EU carbon emissions regulations, including the complexity and volume of overlapping requirements such as the EU ETS, CBAM, CSRD, and the EU Taxonomy. Each regulation demands accurate, auditable data—often across global supply chains—making emissions tracking, classification, and reporting particularly difficult, especially for Scope 3. Companies must also adapt quickly to evolving technical criteria, assurance standards, and digital reporting formats (e.g. ESRS), while managing potential financial penalties and reputational risks for non-compliance. Limited internal expertise, siloed data systems, and supplier engagement add further pressure to achieve full regulatory alignment.

What Tools Can Help Companies Track and Report Carbon Emissions Effectively?

Companies need robust, integrated systems to comply with evolving EU climate regulations. Carbmee’s Environmental Intelligence Solution (EIS™) offers real-time emissions tracking across the entire value chain, automated ESG reporting for CSRD, and deep Scope 3 transparency. The platform simplifies compliance with frameworks like EU ETS, CBAM, and FLAG—while enabling supplier collaboration and targeted emissions reduction.

What Is the Difference Between the EU ETS and CBAM?

The EU ETS is a cap-and-trade system that puts a price on emissions produced within the EU. CBAM is a border mechanism that puts a comparable carbon price on specific carbon-intensive goods imported into the EU, ensuring a level playing field.

Which EU Carbon Emissions Regulation Applies to Non-EU Companies Doing Business in Europe?

Several EU carbon emissions regulations apply to non-EU companies with significant operations, sales, or supply chains linked to the EU market. Notably, the Carbon Border Adjustment Mechanism (CBAM) imposes carbon pricing and reporting requirements on importers of carbon-intensive goods, regardless of origin. The Corporate Sustainability Reporting Directive (CSRD) also applies to non-EU companies generating over €150 million in annual EU turnover and having at least one EU subsidiary or branch. Additionally, non-EU financial market participants may fall under the Sustainable Finance Disclosure Regulation (SFDR) when offering investment products within the EU.