From Voluntary to Mandatory: The EU Locks in Carbon Reporting.

ayshasathar101
Jul 24
4 min read

Updated: Aug 5

Back in the early 2000s, the EU was heavily reliant on fossil fuels. As a result, emissions began to pile up.

By 2005, the EU took a bold step by launching the EU Emissions Trading System (EU ETS), which is the world’s first cap-and-trade carbon market. This system covers around 45% of EU greenhouse gas (GHG) emissions.

The EU ETS set a fixed annual emissions cap. This cap consists of a limited number of annual permits that allow companies to emit a certain amount of carbon dioxide and related pollutants that drive global warming. Companies can trade these allowances.

The Evolution of Emissions Regulation

Over the years, the cap tightened. This change pushed industries to innovate and reduce their emissions.

In 2014, the EU adopted the Non-Financial Reporting Directive (NFRD), which went into effect in 2018. This directive required large public interest entities, such as banks, insurers, and public companies with over 500 employees, to report on their environmental impacts. This includes GHG emissions with Scope 1 and 2 emissions from a double-materiality perspective. Essentially, companies must consider what they do to the planet and how climate risks affect their business.

The Era of Emission Cuts

In July 2021, the EU unveiled the “Fit for 55” legislative package. This initiative is part of the European Green Deal, which was launched in December 2019. The package mandates a 55% reduction in GHG emissions by 2030 compared to 1990 levels.

Key elements of this package include extending ETS coverage to transport and buildings, boosting renewable energy sources, and launching the Carbon Border Adjustment Mechanism (CBAM).

Understanding the Carbon Border Adjustment Mechanism (CBAM)

Starting October 1, 2023, CBAM began a transitional phase. This phase requires importers in heavy industry sectors, such as aluminium, steel, cement, fertilizers, electricity, and hydrogen, to report embedded emissions. CBAM is set to be fully operational from January 2026. It will charge a carbon price on imports to avoid carbon leakage. However, the Omnibus Simplification packages later delayed CBAM rules to 2027.

The CSRD Revolution

On January 5, 2023, the Corporate Sustainability Reporting Directive (CSRD) entered into force. This directive dramatically expands the scope and depth of reporting requirements.

Under the CSRD and European Sustainability Reporting Standards (ESRS), firms must disclose Scope 1, 2, and 3 GHG emissions. They must also explain their methods, scenarios, and sector-specific factors.

For EU Companies

Companies based in the EU are assessed under standard thresholds:

≥ €50 million turnover
≥ €25 million balance sheet total
≥ 250 employees, with at least two thresholds crossed over two consecutive years.

For Non-EU Parent Companies Doing Business in the EU

Under the current CSRD rules, a non-EU parent company must produce consolidated net EU turnover exceeding €150 million across the last two financial years.

CSRD Rollout Timeline: Who Reports When?

2024: First reports (on 2023 data) from entities already under NFRD.
2025: New large EU companies (250+ employees or €40 million+ turnover/assets) file their first year (2024).
2027: Listed SMEs must report (with an opt-out until 2028). With the opt-out rule, you may choose not to report in 2027 but must submit comprehensive reports for FY 2027 by 2028.
2029: Non-EU parent companies with €150 million+ EU turnover or EU branches must report 2028 data.

Achievements by 2023

By 2023, the EU had reduced emissions to 37% below 1990 levels. This reduction occurred even as their GDP grew nearly 70%. This is a powerful sign that economic growth and decarbonization can coexist.

Emissions from ETS-regulated sectors, including power plants, heavy industry, and aviation, shrank by 16.5% in 2023. This was the largest drop since the ETS launched in 2005. That same year, emissions dropped roughly 8%, marking the steepest annual fall since 2020. This decline was largely due to renewables overtaking coal and gas in the power mix.

By January 2024, the first 12 ESRS climate standards will be mandatory. These include Cross-Cutting Standards, Environmental Standards, Social Standards, and Governance Standards.

In early 2025–2026, EU policymakers proposed “Omnibus simplification packages.” These packages aim to ease compliance burdens. They include:

Delaying full CBAM rules to 2027
Exempting small importers (≤50 tonnes per year)
Raising CSRD thresholds to cover only firms with 1,000+ employees or €50 million+ turnover/assets.

These rules reflect the EU’s transition from broad climate ambitions to finely woven regulations. The progression began with carbon trading, followed by mandatory sustainability reporting, and finally border carbon pricing.

This evolution shows that the EU aims not just to legislate sustainability but to make it genuinely sustainable.

As always, it's essential to remember that climate knowledge isn’t reserved for experts. It belongs to everyone.

Concept Writer and Researcher: Aysha Abdul Sathar

Reviewer: Pratiksha More

Also, a quick and exciting update! 4𝐭𝐡 𝐂𝐨𝐡𝐨𝐫𝐭 𝐋𝐚𝐮𝐧𝐜𝐡: 𝐀𝐝𝐯𝐚𝐧𝐜𝐞𝐝 𝐆𝐇𝐆 𝐀𝐜𝐜𝐨𝐮𝐧𝐭𝐢𝐧𝐠 𝐁𝐨𝐨𝐭𝐜𝐚𝐦𝐩

🎟️ Use early bird coupon GHG101 to save your seat