The European Climate Law and its Implications

At Autran Group, we deem it critical that our clients have a thorough understanding of the latest legislative developments. As the European Union is an institution whose laws and regulations materially affect the way in which all businesses present within its borders operate, we have, with this article, begun the “Risk Report” section of our website. Both potential and current clients will now be able to access reports on the latest geopolitical, legislative and regulatory events on our website.

Overview

Regulation (EU) 2021/1119, also known as the European Climate Law, was adopted on 30 June 2021, and entered into force on 29 July 2021. This Regulation establishes a legally binding framework for achieving climate neutrality in the European Union by 2050, whilst simultaneously setting an intermediate binding target of a net domestic reduction in greenhouse gas emissions of at least 55% by 2030, compared to 1990 levels. The Regulation amends both Regulation (EC) No 401/2009 and Regulation (EU) 2018/1999, and creates the institutional architecture necessary to monitor, assess, and adjust the Union's climate mitigation and adaptation efforts in accordance with the Paris Agreement. Climate neutrality, as defined within this legal framework, refers to the achievement of net zero greenhouse gas emissions for EU Member States collectively. This would, in theory, be achieved primarily through the reduction of emissions, investment in clean technologies, and environmental protection measures. While the establishment of legally binding targets represents a significant departure from earlier non-binding frameworks, questions remain as to whether the institutional mechanisms enshrined within the Regulation possess sufficient enforcement capacity to compel Member State compliance in the absence of accountability provisions.​

The European Climate Law is, in essence, the legislative embodiment of the European Green Deal, which represents the European Union's comprehensive strategy for transforming European economy and society towards sustainability. The Regulation was developed following extensive analysis and stakeholder consultation, beginning with the Commission's strategic vision for a climate-neutral EU published in November 2018. A high-level public conference held on 28 January 2020 provided a forum for open stakeholder debate on the proposed legislation, with nearly 1,000 contributions received during the public feedback period.​

The fundamental purpose of the Regulation is threefold: first, to set a long-term direction for meeting the 2050 climate neutrality objective through all policies in a socially fair and cost-efficient manner; second, to establish an ambitious 2030 target that places the European Union on a responsible path to climate neutrality; and third, to create a robust system for monitoring progress and taking further action when necessary. The law aims to provide predictability for investors and other economic actors whilst ensuring that the transition to climate neutrality is irreversible. Moreover, the Regulation pursues the long-term temperature goal set out in Article 2(1) of the Paris Agreement and provides a framework for achieving progress in pursuit of the global adaptation goal established in Article 7 of the Paris Agreement.​

Material Articles of the Regulation

The most material articles of the European Climate Law are arguably Article 2, on the Climate Neutrality Objective, Article 4, which sets out the 2030 and 2040 climate targets, and Article 5, which sets out obligations for Member States in relation to achieving the aforesaid targets and mitigating the effects of climate change.

Article 2(1) sets out the fundamental commitment of the Regulation by stipulating that "Union-wide greenhouse gas emissions and removals regulated in Union law shall be balanced within the Union at the latest by 2050, thus reducing emissions to net zero by that date". This provision further adds that "the Union shall aim to achieve negative emissions thereafter", thereby acknowledging the necessity of carbon removal beyond mere emission neutrality. Article 2(2) obligates both Union institutions and Member States to "take the necessary measures at Union and national level, respectively, to enable the collective achievement of the climate-neutrality objective", whilst expressly recognising "the importance of promoting both fairness and solidarity among Member States and cost-effectiveness in achieving this objective". The climate neutrality objective applies to all anthropogenic emissions and removals of greenhouse gases listed in Part 2 of Annex V to Regulation (EU) 2018/1999, as specified in Article 1(3), thereby creating a comprehensive framework that encompasses the entirety of the Union's regulated carbon footprint. It ought to be noted, however, that the provision does not articulate specific pathways or mechanisms through which negative emissions shall be achieved, nor does it establish binding interim benchmarks between 2050 and the commencement of the negative emissions phase, thereby leaving considerable ambiguity regarding the practical implementation of this long-term objective.​

Article 4(1) establishes that "the binding Union 2030 climate target shall be a domestic reduction of net greenhouse gas emissions (emissions after deduction of removals) by at least 55% compared to 1990 levels by 2030". The provision further specifies that "the relevant Union institutions and the Member States shall prioritise swift and predictable emission reductions and, at the same time, enhance removals by natural sinks". In order to ensure adequate mitigation efforts, Article 4(1) limits "the contribution of net removals to the Union 2030 climate target" to 225 million tonnes of CO2 equivalent, whilst simultaneously establishing that "the Union shall aim to achieve a higher volume of its net carbon sink in 2030". This cap on carbon removal contributions reflects a policy decision to prioritise actual emission reductions over reliance on natural sinks, though critics have argued that the 55% target itself remains insufficient to align with the Paris Agreement's 1.5°C temperature goal, with non-governmental organisations suggesting that substantially more ambitious reductions are required to meet this threshold.​

Article 4(3) mandates that "at the latest within six months of the first global stocktake referred to in Article 14 of the Paris Agreement, the Commission shall make a legislative proposal, as appropriate, based on a detailed impact assessment, to amend this Regulation to include the Union 2040 climate target". This proposal must take into account the conclusions of the assessments provided for in Articles 6 and 7, as well as the outcomes of the global stocktake. Article 4(4) requires that when making its legislative proposal for the 2040 target, the Commission shall publish "the projected indicative Union greenhouse gas budget for the 2030-2050 period, defined as the indicative total volume of net greenhouse gas emissions (expressed as CO2 equivalent and providing separate information on emissions and removals)". Article 4(5) establishes an extensive list of considerations that the Commission must take into account when proposing the 2040 target, including "the best available and most recent scientific evidence", "the need to ensure a just and socially fair transition for all", "cost-effectiveness and economic efficiency", and "fairness and solidarity between and within Member States", amongst numerous other factors. While the enumeration of considerations in Article 4(5) appears comprehensive, the Regulation does not establish a hierarchy amongst these factors, nor does it mandate how conflicts between competing objectives ought to be resolved, thereby potentially allowing the Commission considerable discretion in balancing economic imperatives against climate ambition.​

Article 5(1) obligates the relevant Union institutions and Member States to "ensure continuous progress in enhancing adaptive capacity, strengthening resilience and reducing vulnerability to climate change in accordance with Article 7 of the Paris Agreement". Article 5(2) mandates that "the Commission shall adopt a Union strategy on adaptation to climate change in line with the Paris Agreement and shall regularly review it" in the context of the reviews provided for in Article 6(2). Article 5(3) requires that "the relevant Union institutions and the Member States shall also ensure that policies on adaptation in the Union and in Member States are coherent, mutually supportive, provide co-benefits for sectoral policies, and work towards better integration of adaptation to climate change in a consistent manner in all policy areas".​

Article 5(4) obligates Member States to "adopt and implement national adaptation strategies and plans, taking into consideration the Union strategy on adaptation to climate change" and based on "robust climate change and vulnerability analyses, progress assessments and indicators, and guided by the best available and most recent scientific evidence". Article 5(5) requires that "by 30 July 2022, the Commission shall adopt guidelines setting out common principles and practices for the identification, classification and prudential management of material physical climate risks when planning, developing, executing and monitoring projects and programmes". These provisions collectively ensure that the climate neutrality objective permeates all sectors of Union policy whilst simultaneously addressing the imperative of climate adaptation. Nevertheless, the Regulation provides limited guidance on how to measure progress in adaptation or what constitutes sufficient adaptive capacity, thereby creating potential implementation challenges for both the Commission in its assessment role and Member States in developing their national strategies.

Industrial Consequences and Likely Future Developments

The European Climate Law has far-reaching implications for virtually all sectors of the European economy, though certain industries face particularly significant transformations. These implications necessitate substantial investment in (and constitutes an opportunity for companies who specialise in) decarbonisation technologies, including carbon capture and storage, hydrogen production, and renewable energy infrastructure. It is important to note that concerns have also been raised regarding the extent to which proposed emissions reduction strategies rely upon carbon capture and storage technologies, as said technologies remain largely unproven at commercial scale, and their efficacy in achieving substantial emissions reductions within the required timeframes remains subject to considerable uncertainty.

The transport sector faces considerable challenges, as additional emission reductions must be achieved through the increased use of e-fuels in road transport, international aviation, and maritime transport; similarly, the construction sector may be compelled to accelerate decarbonisation efforts, particularly through the increased deployment of heat pumps and slightly higher renovation rates, as well as the expansion of grid-based decarbonised heat supply.

Industrial sectors will soon need to contend with the need for profound technological transformation, including the adoption of hydrogen and e-fuels, as well as the implementation of technical carbon sinks and negative emissions technologies. The agricultural sector, whilst not expected to contribute significant additional reductions beyond current trajectories, must nevertheless align its practices with climate neutrality objectives, as must the waste management sector.​ While the Climate Law's requirement for strong coherence across Union policies with the climate neutrality objective means that all sectors must integrate climate considerations into their strategic planning and operations, it is critical to note that this law also presents several opportunities for those seeking to be pioneers in transforming their respective sectors, now that the guidelines for further regulation have been set out by this law.​

Disclaimer: This article does not constitute legal advice in any form whatsoever. The author is not a lawyer, and any statements within this article should only be construed as his opinion on the matter at hand. To better understand the implications of new legislation on your business, kindly seek out counsel from qualified lawyers within your jurisdiction that specialise in European law.

Takamaro H. is one of the two founders of Autran Group. Having previously lived in seven countries, he brings a global perspective to our firm; one which is vital in being able to understand the implications of the constant state of flux that our world finds itself in. He is personally invested in the intersection of law and business, and regularly researches novel developments in the legal field.​