European Union Framework on Green and Just Transition

Human-driven, uncontrolled climate change highlights the urgent need for global behavioral change. In response, the European Climate Law has established the legally binding target of achieving climate neutrality by 2050. Additionally, it has set a goal to reduce net emissions by 55% by 2030. The European Green Deal outlines the roadmap for the EU to achieve sustainability by 2050.

The European Green Deal

The European Green Deal, introduced in 2019, aims to achieve climate neutrality in the EU by 2050. This means reaching net zero greenhouse gas emissions across EU countries. The primary strategies to achieve this include reducing emissions, promoting green technologies, and preserving the natural environment. The European Green Deal emphasizes a comprehensive and cross-sectoral approach, ensuring all policy areas contribute to the climate neutrality goal. Some of the key initiatives under the European Green Deal include:

FIT for 55

The Fit for 55 package is a set of proposals to update EU laws and introduce new initiatives to align with climate goals set by the Council and the European Parliament. These proposals aim to establish a strong framework for achieving climate targets, ensuring a fair transition, boosting innovation and competitiveness, and maintaining the EU’s leadership in the fight against climate change.

European Emission Trade System 1

The European Union Emissions Trading System (EU ETS), inaugurated in 2005, stands as a cornerstone of the EU’s climate policy and serves as a pivotal instrument for the cost-effective reduction of greenhouse gas emissions. As the world’s first carbon market, it remains one of the largest globally.

The EU ETS operates on a system of allowances, where each allowance permits the emission of one ton of CO2 or an equivalent amount of other potent greenhouse gases, such as nitrous oxide (N2O) and perfluorocarbons (PFCs). Annually, companies in several key sectors are required to monitor and report their emissions, surrendering allowances equivalent to their CO2 emissions. Non-compliance results in substantial fines.

Allowances can be purchased from EU countries through auctions and subsequently traded by companies. To prevent companies from relocating to countries with less stringent climate policies and continuing to emit CO2, certain industries receive a portion of their allowances for free. However, the total number of allowances is capped, limiting the overall emissions from these sectors. This cap is also reduced annually, thereby driving down emissions.

When a company purchases an allowance, the revenue is primarily allocated to funding climate and energy projects across the EU, including the scaling up of green technologies and the modernization of energy infrastructure in lower-income EU countries, with the aim of ensuring a fair green transition.

Until 2024, the EU ETS covered large industries, electricity generation, and aviation within Europe. Emissions from industry and electricity generation have already decreased by 47% compared to 2005 levels, when the ETS was introduced.

The EU ETS is now being expanded and strengthened. By 2030, it aims to reduce emissions by 62% compared to 2005 levels. The system will extend to cover emissions from shipping starting in 2024. By 2026, the “polluter pays principle” will fully apply to aviation. For other sectors, such as steel, cement, and aluminium, free allowances will be gradually phased out by 2034.

Carbon Border Adjustment Mechanism

To combat carbon leakage and ensure fair competition, the EU has introduced the Carbon Border Adjustment Mechanism (CBAM) alongside the Emissions Trading System (ETS). Starting in 2023, this mechanism imposes a tariff on the carbon emissions of imported goods, aligning their carbon costs with those produced within the EU. By doing so, the CBAM addresses the issue of companies relocating to regions with less stringent climate regulations and ensures that imported products bear the same carbon costs as those made in the EU. Importers will need to purchase CBAM certificates, priced based on the weekly average auction costs of ETS emission allowances, to cover the CO2 emissions of their goods.

European Emission Trade System 2

From 2027, a new separate ETS (ETS2) will cover and address the CO2 emissions from fuel combustion in buildings, road transport and additional sectors (mainly small industry not covered by the existing EU ETS). Under the ETS2, fossil fuel suppliers will purchase allowances from auctions and surrender them at the end of each year, equivalent to the emissions from the fuel they sell. Emissions across these sectors will be capped and required to decrease annually.

This will encourage improvements in energy efficiency for houses and offices and incentivize the switch to low-emission transport. However, to facilitate these changes, citizens and businesses will need support to adopt green alternatives. Therefore, EU countries will invest part of their revenue from the new ETS in climate and energy transition projects, promoting a green transition for all. Central to these investments is the Social Climate Fund.

Social Climate Fund

The Social Climate Fund is dedicated to supporting the most vulnerable groups, namely households, micro-enterprises and transport users specially affected by the introduction of the ETS2. Moreover, the fund should particularly target households that are grappling with energy or transport poverty, ensuring that no one is left behind in the green transition process.

To fulfil this objective, the Fund may be employed to finance structural measures and investments in energy efficiency, renovation of buildings, clean heating and cooling systems, and the integration of renewable energy sources, as well as low-emission mobility solutions. Furthermore, Member States will have the discretion to allocate a portion of the resources to temporary direct income support.

All these measures and investments must be compiled into national Social Climate Plans, developed through public consultations. Member States are mandated to submit these plans to the European Commission by June 2025. The Commission will distribute payments to Member States contingent upon the successful attainment of the milestones and targets delineated in the plans.

To finance these initiatives and investments aimed at supporting the most vulnerable groups, the Social Climate Fund will consolidate revenues from the auctioning of allowances under the ETS2, along with allowances from the existing EU ETS. However, the SCF provisions establish a maximum of 65 billion Euros and that Member-States will have to support 25% of the cost of their plans.

Just Transition Mechanism

The Just Transition Mechanism (JTM) is a crucial tool to ensure that the green transition is fair and inclusive, leaving no one behind. It addresses the social and economic impacts of the transition by focusing on the regions, industries, and workers facing the greatest challenges. The mechanism operates through three pillars:

• Just Transition Fund: This fund supports the most affected regions by the transition towards climate-neutrality. It finances upskilling and reskilling workers, investing in SMEs and new firms, fostering research and innovation, promoting environmental rehabilitation and clean energy, providing job-search assistance, and transforming existing carbon-intensive installations.
• Just Transition Scheme under the InvestEU programme: This scheme supports projects in regions with approved just transition plans or those essential for the transition. It includes infrastructure projects that enhance connectivity in these regions.
• Public Sector Loan Facility: This instrument aids regions most affected by the green transition, particularly coal and carbon-intensive areas. It supports communities reliant on these industries and funds projects that address the social, economic, and environmental challenges of the transition.

EU Waste Framework Directive

The EU Waste Framework Directive sets the principles and definitions for waste management in the EU, emphasizing the “polluter pays” principle and “extended producer responsibility” to protect health and the environment. It introduces a five-step waste hierarchy: prevention, reuse, recycling, recovery, and disposal as a last resort.

In 2023, the European Commission proposed revisions to increase recycling rates, reduce waste, and improve hazardous waste management. These changes aim to align waste practices with the EU’s environmental and climate goals, promoting a sustainable and circular economy. The amendments include stricter recycling and waste reduction targets, measures to prevent waste, and the promotion of secondary raw materials. Accurate data collection and reporting are emphasized to monitor progress and ensure compliance, creating a more efficient waste management system that supports the EU’s environmental and economic goals.

Energy performance of buildings directive

The Energy Performance of Buildings Directive (EPBD) sets the framework for improving the energy efficiency of buildings within the EU, aiming for a fully decarbonized building stock by 2050. The directive emphasizes reducing energy consumption and greenhouse gas emissions from buildings, which are significant energy consumers in Europe. The revised directive entered into force in 2024 and introduced several changes:

• Minimum energy performance standards for non-residential buildings based on national thresholds to trigger the renovation of buildings with the lowest energy performance. This also includes the possibility of Member States deciding on the penalties to apply for non-compliance (article 9+ article 34).
• Enhanced standard for new buildings to be zero-emission and the calculation of whole life-cycle carbon for new buildings.
• National Building Renovation Plans – to set out the national strategy to decarbonise the building stock and how to address remaining barriers, such as financing, training and attracting more skilled workers. The first draft of the plans shall be submitted by December 2025.
• Increased reliability, quality, and digitalisation of Energy Performance Certificates with energy performance classes to be based on common criteria.
• Introduction of building renovation passports to guide building owners in their staged and deep energy renovations.
• One-stop-shops for the energy renovations of buildings for homeowners, small and medium-sized enterprises, and other stakeholders.
• Etc

Support to people and regions affected by climate events

The EU has launched the EU strategy on adaptation to climate change which is the plan to address the unavoidable effects of climate change and achieve climate resilience by 2050. It has four main objectives: to enhance adaptation intelligence, speed, and systemic integration, and to strengthen global cooperation in addressing climate change impacts.

Moreover, responding to the increasing frequency of extreme weather events, causing widespread damage to communities, the Commission has outlined how the EU can proactively address these climate risks and enhance climate resilience, stepping up support for Member States and affected individuals.

Solidarity in disaster response is present with the EU Solidarity Fund providing €2.1 billion to 13 Member States since 2019 for climate disaster recovery. Through NextGenerationEU, the EU also finances national projects aimed at mitigating climate change. The EU Civil Protection Mechanism aids countries in Europe and beyond during climate-related emergencies.

Finally, in response to the extreme climate events of 2024, the EU proposes augmenting resources to support affected areas by utilizing cohesion policy funds. The RESTORE proposal, which includes amendments to the ERDF/Cohesion Fund Regulation and the ESF+ Regulation for 2021-2027, aims to alleviate financial burdens on local, regional, and national budgets, provide immediate assistance to affected individuals, and mitigate territorial disparities.

Further Green Deal measures:

• The European Industrial Strategy outlines the EU’s long-term vision for industrial policy. It aims to strengthen the resilience of the single market, address the EU’s strategic dependencies, and accelerate green and digital transitions.
• The Green Deal Industrial Plan aims to scale up manufacturing capacity for net-zero technologies and products to meet Europe’s climate targets.
• The Critical Raw Materials Act ensures the EU has a secure, diversified, affordable, and sustainable supply of critical raw materials, while increasing domestic capacities.
• The Net-Zero Industry Act boosts the manufacturing of net-zero technologies in the EU, enhancing their resilience and competitiveness.
• EU biodiversity strategy for 2030 – comprehensive long-term plan to protect the environment and restore ecosystems. It aims to restore Europe’s biodiversity by 2030 with specific measures and commitments. After the COVID-19 pandemic, the strategy also seeks to strengthen our societies’ resilience to future challenges, including climate change, wildfires, food shortages, and disease outbreaks.

• Farm to fork strategy- The Farm to Fork Strategy aims to make food systems fair, healthy, and environmentally friendly. It aims to achieve a neutral or positive environmental impact, help with climate change efforts, reverse biodiversity loss, ensure everyone has access to safe, nutritious, and sustainable food, keep food affordable while supporting fair economic returns, competitiveness, and fair trade.
• Circular economy action plan-The EU’s Circular Economy action plan includes initiatives throughout the whole life cycle of products. It focuses on product design, promotes circular economy practices, supports sustainable consumption, and aims to prevent waste and extend the use of resources in the EU economy.

European Sustainable Finance Framework

Sustainable finance refers to the process of considering environmental, social, and governance (ESG) factors when making investment decisions in the financial sector. This approach promotes long-term investments in sustainable economic activities and projects:

• Environmental factors include climate change mitigation, adaptation, biodiversity preservation, pollution prevention, and the circular economy.
• Social factors address issues like inequality, inclusiveness, labor relations, investment in people and communities, and human rights.
• Governance involves the management structures, employee relations, and executive compensation of institutions, ensuring that social and environmental considerations are included in decision-making processes.

EU Taxonomy Regulation

The EU Taxonomy Regulation is a classification system that helps identify which economic activities are environmentally sustainable. The system was created to provide clarity and certainty for investors and decision-makers and bases itself on six environmental objectives: Climate change mitigation, climate change adaption, sustainable use and protection of water and marine resources, transition to a circular economy, pollution prevention and control, protection and restoration of biodiversity and ecosystems.

For an economic activity to be considered sustainable, it must comply with four components:

1. The investment must make a significant contribution to achieving one or more of the EU’s stated environmental objectives: (Article 9 of the Taxonomy Regulation).
2. The investment must do no significant harm to any of the 6 objectives to which is not aligned with (Article 17 of the Taxonomy Regulation).
3. The investment must comply with minimum ESG safeguards (Article 18 of the Taxonomy Regulation).

The investment must comply with technical screening criteria (Articles 10-15 and 19 of the Taxonomy Regulation).

European Green Bonds Regulation

The European Green Bonds Regulation created the European Green Bond Standard (EUGBS), a voluntary standard for green bonds. It was designed to help scale up and enhance the environmental ambitions of the green bond market. This standard aligns with EU taxonomy, considering that the projects financed by these bonds must meet the criteria established in the taxonomy and therefore be considered environmentally sustainable.

The relationship between EU taxonomy and the EUGBS intends to help investors identify and support sustainable projects and reduce the risk of greenwashing.

Corporate Sustainability Reporting Directive

The Corporate Sustainability Reporting Directive (CSRD) came into effect in 2023. It updated and strengthened the rules for companies to report on social and environmental information. The new rules ensure investors and stakeholders have the necessary information to assess companies’ impacts and financial risks related to sustainability.

The Directive is applicable to:

• Large companies (Those meeting at least two of the following criteria: more than 250 employees, €40 million in net turnover, or €20 million in total assets).
• Listed small and medium-sized enterprises listed on EU regulated markets.
• Non-EU companies: Those generating over €150 million in the EU market and having at least one subsidiary or branch in the EU.

In this context, companies within the Directive’s criteria must follow the European Sustainability Reporting Standards (ESRS). The first reports following this new set of rules will be published in 2025, related to the 2024 financial year.

Regulation on the transparency and integrity of Environmental, Social and Governance rating activities

ESG ratings assess a company’s and other actors’ performance in the Environmental, Social, and Governance areas. These ratings help investors understand how well a company is managing risks and opportunities related to these factors, which can impact long-term financial performance.

The Regulation on the transparency and integrity of Environmental, Social, and Governance (ESG) rating activities, adopted by the European Parliament and Council in November 2024, aims to enhance the transparency, integrity, and reliability of ESG ratings. It introduces common standards for ESG rating providers, ensuring that their methodologies, data sources, and operations are transparent and consistent. This regulation is designed to improve investor confidence and the overall quality of ESG ratings, supporting the sustainable finance market.