European Union Law and Climate Change

Executive summary

The European Union has taken significant steps to address climate change, and this is reflected in its legal order. European constitutional objectives reference sustainable development,[1] environmental protection,[2] and combatting climate change.[3] The EU is also bound by international legal obligations – both the EU as a bloc and all of its individual member states are signatories to the Paris Agreement. To meet these ambitions, the EU has implemented a wide range of climate-related legislation and continues to integrate climate change into a broader range of laws and regulations.

Climate change considerations are integral to the Trade and Cooperation Agreement (TCA), which has governed the partnership between the EU and the UK since 1 January 2021. Considered one of the ‘essential elements’ of the TCA, any serious and substantial failure to meet climate change commitments by one of the parties can lead to a fast-track termination or suspension of the entire agreement.[4] This shows that, despite the embedded differences between the two parties and the UK’s relationship with the EU moving significantly toward an international law footing, the UK and the EU share a common objective to address climate change. The TCA’s direct reference to the Paris Agreement, which states that “an act or omission which materially defeats the object and purpose of the Paris Agreement” will breach an essential element of the treaty, is significant.[5]

Despite this common objective, the UK’s relationship with EU law in climate matters remains one of divergence and not complete trust.[6] In relation to future standards, the TCA explicitly requires a level-playing field designed to ensure the perceived fair competition between the two sides.[7] Any divergence in future standards in environmental law can lead to one of the parties taking rebalancing measures, including trade retaliation, if “material impacts on trade or investment between the Parties are arising as a result of significant divergences between the Parties”.[8]

Regardless of the differences between EU and UK law after Brexit, the evolution and development of EU law remain significant for the UK. First, the EU action to drive the net zero transition, particularly in matters of sustainability standards and sustainable finance, remains relevant, especially for UK businesses and financial market actors operating in the EU. Second, the EU boasts itself as a leader and pioneer in climate law, with the UK government replicating some of its innovations such as the EU Emissions Trading Scheme (EU ETS) to address climate change. Third, specific developments of EU law such as the proposal for an EU carbon border adjustment mechanism (CBAM) can impact trade between the EU and non-EU countries including the UK.

Key points in this section:

• Key legislative efforts in the EU such as the European Climate Law and the ‘Fit for 55’ package commit the union to high levels of climate ambition. Due to the EU’s significant diplomatic and regulatory power, these laws are relevant to jurisdictions around the world, and especially to key trading partners such as the UK.
• The EU sets climate-related standards for many goods and services ranging from textiles to food, and UK businesses may need to comply with existing standards and understand forthcoming standards given the importance of exporting to the EU.
• EU rules related to climate change, for example sustainability reporting requirements and climate finance rules, may impact UK-based companies that do business in Europe.
• The UK Emissions Trading System, which was created following the UK’s departure from the EU, may be linked with the EU Emissions Trading System to maximise market efficiency and fulfil obligations under the TCA.
• New policy proposals such as a ‘Carbon Border Adjustment Mechanism’ which would put a price on carbon embedded in imports, could pose financial and administrative burdens to UK-based businesses, but legal and political cooperation between the two parties could help the UK mitigate these potential costs.

How EU law can help drive the net zero transition

European Green Deal

EU law has adopted various initiatives and legislative instruments to reduce emissions and adapt to climate change. The main legislative action taken by the EU is the launch of the European Green Deal (EGD) by the European Commission in 2019. This package is the EU’s response to the global climate emergency, comprising a set of policies with the aim to reduce greenhouse gas emissions and transform the EU into a climate-neutral and resource-efficient economy by 2050 in line with the 2015 Paris Agreement and the 2030 United Nations Agenda for Sustainable Development goals. Even though the EU’s capacity to address the challenge of climate change is constrained by its limited competencies and the global nature of the climate change problem, the EU has been at the forefront of climate regulatory efforts.[9] The EGD project was developed through a variety of measures ranging from the European Climate Law to the ‘Fit for 55’ package to help drive the net zero transition and address climate change.

European Climate Law and the ‘Fit for 55’ package

In June 2021, the EU adopted the European Climate Law which commits the EU to climate neutrality by 2050 and to a 55% net emission reduction by 2030 compared to its 1990 levels, confirming its commitment to become the first climate-neutral continent by 2050. The European Climate Law establishes additional mechanisms to meet these targets, including processes for setting an interim 2040 target and the European Scientific Advisory Board on Climate Change, and also commits to providing sector-specific climate roadmaps. For the EU to deliver on its new climate target, the European Commission proposed the ‘Fit for 55’ package in July 2021. The package includes inter alia proposals for a revision of the EU Emissions Trading System (EU ETS), the introduction of a Carbon Border Adjustment Mechanism (CBAM), and the establishment of a new emissions trading system (ETS 2) for the buildings and transport sector.

UK practitioners should pay attention to the developments happening at the EU level. The EU legislative initiatives set out in the EGD and the ‘Fit for 55’ package, despite being legally binding only in the EU, may have an effect beyond their prescribed territories to help drive the transition to net-zero not only in the EU but also globally as well as in the UK. The EU’s power to export its standards through unilateral regulatory globalisation is widely reported, as seen with the General Data Protection Regulation (GDPR) among others.[10] The EU’s legislative initiatives may feed into the ambition of the UK’s climate policies to implement a similar course of action through the political ties between the two and their shared international commitments within the UNFCCC framework and other international instruments.[11]

Carbon removal solutions

As part of its legally binding commitment to achieve carbon neutrality by 2050, the European Commission has announced that by the end of 2022 it will propose EU rules on issuing certifications of carbon removals. These will be based on robust and transparent carbon accounting rules and requirements to monitor and verify the authenticity and environmental integrity of high-quality sustainable carbon removals.[12] The implications of the carbon removal certifications are still not yet clear for both EU and non-EU industries. In any event, the support for carbon removal solutions is already present in UK climate policy. Seven of the ten points in the UK Ten Point Plan for a Green Industrial Revolution focus specifically on the development of particular technologies (1–4, 6–8) with the fifth implying a technological transition element.[13]

How EU climate policies are impacting the UK

As a major economy with significant diplomatic and regulatory power, EU laws often set standards with which businesses around the world comply, and can influence legislation and regulation abroad.[14] This is particularly the case with regards to climate policy, where the EU has often been a pioneer. Although the UK has left the EU, it will likely continue to be acutely influenced by EU policy due to continuing some EU policies implemented pre-Brexit and in order to ensure a healthy economic relationship with its largest trading partner. While the UK has taken steps to transfer EU law into UK domestic law following Brexit, for example by implementing its own emissions trading system and the Environment Act 2021, it did remove many EU environmental regulations[15] and the retained EU law bill risks further deregulation.[16]

EU initiatives on sustainability standards

UK businesses importing into the EU need to contend with higher sustainability standards in the production and processing of goods and services and an increased need for sustainability reporting for EU importers. The new commitments envisaged by the EGD that UK businesses would need to comply with include more rigorous traceability mechanisms, requirements for substantiating green claims, improvements in packaging design to promote reuse and recycling, as well as new rules on product sustainability, labelling and lifecycles. The EGD further envisages additional requirements for certain sectors such as textiles and agricultural products as included in, inter alia, the EU Strategy for Sustainable Textiles, the EU Code of Conduct on Responsible Food Business and Marketing Practices, the Action plan for integrated nutrient management to reduce pollution from fertilisers, the EU Strategy on algae, the new regulation on Organic Production and Labelling of Organic Products, as well as the new Common Agricultural Policy starting in 2023, for which SMEs exporting to the EU will have to comply with lower use of pesticides and chemical fertilisers as well as better conditions for livestock and more strict labelling regulations.

Although many of these EU initiatives enter into force in the coming two years, UK companies may need to understand the targets and ambitions of the EGD to be prepared to comply with higher environmental standards.[17] The EU, being the biggest exporter and importer of goods and services worldwide, is an extremely influential player in international trade and the adoption of any rules on its imports will undoubtedly impact UK businesses.[18] From the overall picture of EU proposals and initiatives, it is clear that SMEs exporting to EU buyers will need to provide increased information about how their goods are produced. This may mean putting in place traceability systems for collecting information from suppliers about production and labour practices.Whilst this is likely to increase short-term costs for UK businesses importing to the EU, in the long term it might increase competitiveness in a sustainable global market.

EU sustainable finance and corporate law

Following the adoption of the Action Plan on Financing Sustainable Growth published by the European Commission in March 2018, UK businesses must comply with various EU legislative initiatives to reorient capital flows toward sustainable investment. The Action Plan’s primary focus is on financial markets and as such will have an impact on UK companies and investors in the European financial and capital markets. The Plan resulted in three regulations that bind UK corporate actors in different ways in the EU financial market. An important concept in this legal framework is sustainable finance: taking ESG considerations into account when making investment and corporate decisions.

UK financial market participants and financial investors must be transparent about whether, and how, they integrate sustainability risks in their investment policy and about the sustainability of their financial products.[19] In order to achieve this, the Sustainable Finance Disclosure Regulation provides a legally binding definition for the term ‘sustainability risk’ to which UK financial market participants would need to comply. New EU climate-related benchmarks will provide some level of comparability, improve transparency, and facilitate alignment with investors’ strategies on sustainability risks.

UK companies operating in the EU are equally subject to ESG rules. For their economic activities to qualify as environmentally sustainable, UK financial market participants who are offering financial products in the EU must provide information as to how their economic activities contribute substantially to at least one of the environmental objectives listed in the Taxonomy Regulation without significantly harming any of the other ones. Technical criteria for climate change mitigation and adaptation objectives have been adopted in the Climate Delegated Act and entered into force from 1 January 2022. In relation to this, the EU has proposed new EU Green Bonds Standards that any UK issuers operating in Europe can comply with to raise funds on capital markets for green financial products and projects aligned with the EU Taxonomy. Furthermore, UK large companies and companies registered in regulated markets in the EU will be required to publish regular reports on the social and environmental impacts of their activities under the Proposal for a Corporate Sustainability Reporting Directive adopted on 21 April 2021, which would amend the existing reporting requirements of the Non-Financial Reporting Directive.  Additionally, on 23 February 2022, the European Commission published a Proposal for a Directive on Corporate Sustainability Due Diligence, which introduces a ‘director’s duty of care’ for directors of certain companies similar to section 172 of the UK Companies Act 2006. Companies operating in Europe will be required to integrate due diligence into their policies, identify actual or potential adverse environmental and human rights impacts of their activities, and prevent, mitigate or minimise these, as well as publicly communicate how they are fulfilling these obligations.[20]

The relationship between the EU ETS and the UK ETS

The EU ETS was launched in 2005 as the first and largest cap and trade carbon market in the world and currently covers approximately 45% of the EU GHG emissions arising chiefly from the energy, power, and aviation sectors.[21] Following Brexit, the UK ETS replaced the UK’s participation in the EU ETS on 1 January 2021. The UK ETS framework replicates the EU ETS and is equally divided into phases with Phase 1 running between 2021 – 2025 and Phase 2 from 2026 – 2030. The ETS Registry is administered by the Environment Agency (EA), which records free allowances, annual verified emissions, allowance transfers and allowance surrenders. Where breaches occur, the EA can issue enforcement notices and non-compliance can result in the imposition of a civil penalty.

UK practitioners should be aware of the EU’s legislative initiatives to reach carbon neutrality by 2050 considering the same commitment was made by the UK government in the UK’s Net Zero Strategy. Considering that the UK ETS replicated the EU ETS, the EU’s proposals to revise the ETS Directive are of interest to the UK market of carbon allowances. In the ‘Fit for 55’ package, the Commission proposed a further tightening and one-off reduction of the ETS cap on the total number of allowances as well as extending the scope of the ETS to the maritime sector. The ETS proposal also establishes a new, separate ETS 2 for road transport and building emissions, which is to be operational under full auctioning from 2026 onwards.

In response to these initiatives, the UK has made some changes to its trading system. The GHG ETS (Amendment) Order 2022 came into force in April 2022 with changes addressing penalties, the UK ETS Registry enforcement powers including powers of entry and inspection for the regulator, and the introduction of surrender and revocation notices. In relation to this, the UK ETS Authority is developing a new digital permitting, monitoring, reporting and verification (PMRV) system to replace the existing one. Besides, as part of its plans to deliver the net-zero transition, the UK government committed to consult on extending the UK ETS to the two-thirds of emissions that are not currently included, for which they consider the inclusion of road transport and heating to align with the EU ETS 2. Despite the common elements between the UK ETS and the EU ETS, any strategy for linking the two trading systems should consider their differences. In particular, the UK ETS decreased the cap compared to its share had the UK remained in the EU ETS, imposing a stricter emissions reduction target compared to the EU’s system already in place. The initial cap for the UK ETS during 2021 was 156 million allowances, 5% lower than the UK’s share of the EU ETS cap.

Emissions trading systems may be ‘linked’ in order to increase market size and efficiency. Linking agreements can take many forms, but generally allow for credits or allowances to be sold between systems with similar designs. Under the TCA, the EU and the UK have explicitly agreed to cooperate on carbon pricing and ‘give serious consideration to’ linking the UK ETS and the EU ETS.[22] Doing so may give UK companies more abatement options through access to a larger market and avoid administrative costs, including potentially being exempt from carbon border tariffs described below. As electricity in Northern Ireland remains subject to the EU ETS, linking these systems may also mitigate some political and legal issues relating to the Good Friday Agreement. Given the legal requirement to consider this option, it is a somewhat likely future development in EU and UK climate cooperation.

Proposal for the EU’s Carbon Border Adjustment Mechanism

The EU’s Carbon Border Adjustment Mechanism (CBAM) if adopted would have incredible policy and legal implications for UK importers. The CBAM aims to discourage carbon leakage by imposing a certain charge on imports of certain goods that do not have the same level of environmental protection as those in the EU based on their carbon content at the price of carbon determined by the EU ETS system through the system of auctions.[23] Importers will either be charged on the basis of the default value or based on the actual emissions embedded in the imports. This should create a common and uniform framework to ensure an equivalence between the carbon pricing policy applied in the EU’s internal market and the carbon pricing policy applied in the UK from which goods are imported into the EU.[24]

Under the CBAM, UK importers will buy carbon certificates corresponding to the carbon price that would have been paid if products had been produced under the EU’s carbon pricing rules. Likewise, once the UK producer shows proof that it has already paid a price for the carbon emitted during production in a country outside the EU, it does not have to pay the corresponding costs. However, this will not happen until 2025. To provide legal certainty and stability, the CBAM will be phased in gradually and will initially cover only products in five sectors (cement, iron and steel, fertilisers, aluminium, and electricity) imported into the EU. During the three-year transition period from 1 January 2023 until 31 December 2025, UK importers of these products would only be subject to a reporting obligation, rather than incurring a direct financial burden. What is important for SMEs exporting products to the EU is that there is no guarantee that other goods will not be included at a later stage. In terms of opportunities for non-EU SMEs, there are concerns that CBAM will increase the cost of agricultural production in Europe, thereby making imports of food more competitive and attractive.

The UK as an EU trading partner will need to have decarbonisation measures and an ETS in place by 2030 under the current CBAM proposal. While directly linking the EU ETS and the UK ETS could take some time, the UK should be considering the potential impacts the CBAM could have on UK industry. With an effective carbon price that is currently broadly equivalent, the UK could attempt to negotiate CBAM free access to the EU market, by achieving EU recognition of its monitoring, reporting, and verification (MRV) processes and alignment of free allowance distribution approaches. However, it is not clear whether the CBAM proposal will be adopted considering the negative global responses to the measures and the alleged issues of compatibility with WTO law and with the principle of common but differentiated responsibilities.[25]

[1] Treaty on European Union, Article 3(3).

[2] Treaty on the Functioning of the European Union, Article 11.

[3] Treaty on the Functioning of the European Union, Article 191.

[4] Trade and Cooperation Agreement, Articles 764(1) and 772.

[5] Ibid. Article 772.

[6] Steve Peers, ‘So close, yet so far: The EU/UK Trade and Cooperation Agreement’, (2022), 59, Common Market Law Review, Issue 1, pp. 49-80.

[7] Trade and Cooperation Agreement, Article 355.

[8] Ibid. Article 411.

[9] ‘Editorial Comments: The European Climate Law: Making The Social Market Economy Fit For 55?’, (2021), 58, Common Market Law Review, Issue 5, pp. 1321-1340.

[10] Anu Bradford, The Brussels Effect: How the European Union Rules the World, (2020), Oxford University Press.

[11] Edoardo Chiti, ‘Managing the ecological transition of the EU: The European Green Deal as a regulatory process’, (2022), 59, Common Market Law Review, Issue 1, pp. 19-48.

[12] European Commission, ‘European Green Deal: Commission proposals to remove, recycle and sustainably store carbon’ (European Commission Web Site, 15 December 2021). https://ec.europa.eu/commission/presscorner/detail/en/IP_21_6687.

[13] Aleksandra Čavoški, ‘The European Green Deal and technological determinism’, (2022) 24, Environmental Law Review, Issue 3, pp. 201-213.

[14] Anu Bradford, The Brussels Effect: How the European Union Rules the World (New York, 2020; 

online edn, Oxford Academic, 19 Dec. 2019), https://doi.org/10.1093/oso/9780190088583.001.0001. 

[15] The Climate and Energy (Revocation) (EU Exit) Regulations 2021

[16] ClientEarth, ‘Recent Government Announcements Risk a ‘Perfect Storm’ for Environmental Degradation’ (ClientEarth Communications, 4 October 2022). <https://www.clientearth.org/latest/latest-updates/opinions/recent-government-announcements-risk-a-perfect-storm-for-environmental-degradation/>.  

[17] https://www.cbi.eu/market-information/eu-green-deal-how-will-it-impact-my-business#how-does-the-european-green-deal-impact-imports-to-europe.

[18] Rafael Leal-Arcas, Teemu  Alex Hast, Lucas  Sperka, Aarushi  Mittal, Hannah  Kasak-Gliboff, Kaushal  Prakash, ‘Green Bills for Green Earth: How the International Trade and Climate Regimes Work Together to Save the Planet’, (2022), 31, European Energy and Environmental Law Review, Issue 1, pp. 19-40.

[19] Regulation (EU) 2019/2088 on sustainability-related disclosures in the financial services sector (SFDR Regulation).

[20] Autentika Global, ‘The European Due Diligence Act’ (CBI, 1 July 2021). https://www.cbi.eu/news/european-due-diligence-act.

[21] Andreas Johansson, Alexander Derelius, ‘Legitimacy and Consistency of Free Allocation in the EU ETS: The Role of Substitutes in Product Benchmarks’, (2022), 31, European Energy and Environmental Law Review, Issue 3, pp. 163-174.

[22] Trade and Cooperation Agreement, Article 392(6)

[23] Rafael Leal-Arcas, Teemu  Alex Hast, Lucas  Sperka, Aarushi  Mittal, Hannah  Kasak-Gliboff, Kaushal  Prakash, ‘Green Bills for Green Earth: How the International Trade and Climate Regimes Work Together to Save the Planet’, (2022), 31, European Energy and Environmental Law Review, Issue 1, pp. 19-40.

[24] Han Kogels, ‘Good Intentions and a Call for Higher Speed on the Bumpy Road to Carbon Neutrality’, (2022), 31, EC Tax Review, Issue 1, pp. 1-5.

[25] See for e.g., Rafael Leal-Arcas, Manuliza Faktaufon, Anna Kyprianou, ‘A Legal Exploration of the European Union’s Carbon Border Adjustment Mechanism’, (2022), 31, European Energy and Environmental Law Review, Issue 4, pp. 223-240.