Carbon accounting regulations in Europe

As the climate crisis amplifies, regulatory authorities are tightening requirements on greenhouse gas (GHG) emissions and carbon reporting around the world. In the first of three regional articles on carbon accounting regulations, Enhesa experts Paula Galbiatti Silveira and Marina Dorileo detail the legislation affecting businesses across Europe and the United Kingdom. 

Download the eBook Getting ahead of carbon accounting for further insight on this growing regulatory topic, including: 

• A detailed definition and timeline of carbon accounting 

• The transition from voluntary guidance to mandatory requirements and standards 

• Proactive tips to stay ahead of these changes to meet and exceed compliance

Carbon accounting and reporting in the EU

The EU and its Member States are required to report their GHG emissions, in addition to their climate policies, measures, and progress towards achieving climate targets to the United Nations, as parties to the United Nations Framework Convention on Climate Change (UNFCCC), its Kyoto Protocol, and the Paris Agreement. In this context, EU legislation has been focusing on environmental protection and climate change mitigation, as part of the European Green Deal and the EU’s objective to reduce GHG emissions by at least 55% by 2030 and become climate-neutral by 2050. As a result, it has increased scrutiny into GHG emissions by imposing monitoring, accounting, and reporting obligations on companies, particularly under the Emissions Trading System (ETS) and the Carbon Border Adjustment Mechanism (CBAM).  

Similarly, the evolution of the Corporate Sustainability Reporting Directive (CSRD) enhances climate accounting and reporting obligations providing additional transparency and accountability to climate-related information. However, the regulatory scenario is uncertain and fast changing in view of the current economic and political landscape. With the Omnibus simplification packages, significant changes are proposed to the CSRD and CBAM for companies operating in the EU or placing products on the EU market.
 

EU Emissions Trading System 

The ETS is the world’s first carbon market, launched in 2005, which requires GHG emitters to pay for their emissions while also working toward reducing them.  

It operates on a ‘cap-and-trade’ system in which governments issue emission allowances that can be traded. This means that companies falling under its scope must buy emission allowances to cover their GHG emissions through auctions (or, in certain cases, receive for free). The emission allowances available are limited by a ‘cap’ which is reduced annually to incentivize emission reductions.  

The EU ETS monitors the various sectors and industries most significantly contributing to GHG emissions, comprised of two separate emissions trading systems: 

• ETS1 — Covering greenhouse gases released by stationary installations and industrial activities under Annex I, including oil refineries, steel works, combustion activities, and more 

• ETS2 — Covering carbon dioxide emissions from fuel combustions in buildings, road transport, and additional sectors not covered by ETS1
   

ETS1 

The ETS1 system sets a limit on the total amount of GHG emissions that covered entities are permitted to emit. Annex I activities include:  

• Aviation 

• Oil refineries 

• Combustion installations 

• Bulk organic chemical product exceeding 100 tons per day 

• Glass and glass fiber manufacture with a melting capacity exceeding 20 tons per day 

Companies carrying out the activities listed in Annex 1 must: 

• Have a monitoring plan approved by the Member State authority 

• Annually measure the emissions from relevant activities 

• Report on emissions by 31 March each year 

• Surrender a number of allowances equal to the total emissions generated by 30 September each year 

ETS2 

Applicable as of 2025 and fully operation in 2027, the ETS2 system regulates CO2 emissions from upstream activities, meaning entities releasing fuels for consumption. Applicable entities must: 

• Hold a GHG emissions permit 

• Have an approved monitoring plan 

• Annually monitor emissions corresponding to the quantities of fuels released for consumption 

• Submit by 30 April 2025 the first emissions report for the historical emissions in 2024 

• From 2026, covered entities will need to verify their emission reports by an independent accredited verifier 

• Report yearly by 30 April the emissions of the previous period
   

Carbon Border Adjustment Mechanism 

On 10 May 2023, the European Union adopted Regulation (EU) 2023/956, the Carbon Border Adjustment Mechanism (CBAM), to be applicable from 1 October 2023 to 31 December 2025, and fully operational from 1 January 2026. 

This Regulation places a carbon price on the import of any of the following carbon-intensive products laid out in Annex I from non-EU countries: 

• Cement 

• Iron and steel 

• Aluminium 

• Fertilizers 

• Electricity 

• Hydrogen 

Applicable to EU companies importing these goods for use in their operations or products, the core goal of the CBAM is to prevent carbon leakage by ensuring that importers pay the same price as domestic producers under the EU ETS. Companies are also required to submit a quarterly CBAM report to the European Commission on their total embedded and indirect emissions. 

Iceland, Liechtenstein, Norway, and Switzerland are exempt.
 

Corporate Sustainability Reporting Directive 

In Europe, the CSRD mandates sustainability reporting for enhanced insight into companies’ Environmental, Social, and Governance (ESG) performance and impact. It regulates the quality, comparability, and reliability of sustainability data and climate-related disclosures from businesses. 

In relation to carbon accounting and reporting, all large EU companies that meet at least two of the listed criteria, listed small and medium enterprises (SMEs), and some third-country companies must submit a sustainability report that includes a climate transition plan in addition to sustainability-related information as specified in the European Sustainability Reporting Standards (ESRS).  

Under ESRS E1 on climate change, companies must disclose information, if material, on their gross Scope 1, 2, and 3 GHG emissions, including total GHG emissions, in metric tons of CO2 equivalent (CO2eq). When doing so, companies must also disclose the methodologies and emissions factors used and provide a reference or link to any calculation tools used.
 

Omnibus simplification packages 

Introduced in February 2026, following the European Commission’s competitiveness strategy, the EU’s Omnibus simplification packages propose a number of significant changes to corporate sustainability rules, including to CBAM and CSRD. 

One such proposal aims to delay the full implementation date of CBAM to 2027 instead of 2026, exempt small importers — meaning those importing 50 tons of CBAM goods per year — from CBAM obligations, and simplify rules such as on the authorization of CBAM declarants.  

On 22 May, the European Parliament approved the changes proposed to the CBAM to reduce the administrative burden for SMEs and occasional importers. For the imports covered, changes include on the calculation of emissions. 

Among other proposed changes, the Omnibus package proposes significant changes to the CSRD’s scope and content of requirements, which would impact carbon accounting and reporting. The most significant changes include: 

• Reducing the scope of application to companies with over 1,000 employees and either a turnover above EUR 50 million or a balance sheet total above EUR 25 million 

• Removing several data points and sector-specific standards under the European Sustainability Reporting Standards (ESRS)

Carbon accounting and reporting in the UK

In the past few years, carbon reporting in the UK has accelerated in line with the government’s efforts to address climate change impacts. Several carbon accounting and reporting requirements have since been implemented in the country to further promote sustainability. This includes not only the UK ETS but also the Streamlined Energy and Carbon Reporting (SECR) and the Climate-related financial disclosures.
 

UK ETS 

The UK ETS replaced the UK’s participation in the EU ETS in January 2021 following Brexit. Similar to the EU ETS, it adopts the ‘cap and trade’ approach to reducing emissions and requires activities covered to hold a valid GHG emissions permit or emissions monitoring plan, surrender allowances, and monitor and report GHG emissions by 30 April each year.  

Under ‘The Greenhouse Gas Emissions Trading Scheme Order 2020’ and ‘The Greenhouse Gas Emissions Trading Scheme Regulations 2012’, the UK ETS applies to energy intensive industries, the power generation sector, and aviation listed in Schedule 1 (aviation) and Schedule 2 (installations).
 

UK CBAM 

The UK government has also introduced a consultation to implement the UK CBAM as of January 2027. With the same objective as the EU CBAM, it aims to ensure that carbon intensive products imported face a comparable carbon price to what would’ve been payable to products produced in the UK. UK CBAM goods would include aluminium, cement, fertilizer, hydrogen, iron and steel as those are considered at the highest risk for carbon leakage. 

Concerning the methodology, the UK CBAM would apply, from 2027, a single default value set per product and, after 2027, possibly an alternative approach for default values. The UK CBAM draft was published on 24 April 2025 for technical consultation and will require additional legislation to further specify the requirements and details.
 

Streamlined Energy and Carbon Reporting 

The SECR entered into force on 1 April 2019, with the Companies (Directors’ Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018.  

To widen the scope of energy and GHG reporting, it requires that quoted companies, large unquoted companies, and large Limited Liability Partnerships (LLPs): 

• Share energy use and GHG emissions in tons of CO2eq in their annual directors’ report 

• State the methodologies used to calculate the information 

The SECR further aims to advance energy efficiency efforts and provide transparent data for investors and stakeholders.
 

Climate-related financial disclosures 

The Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022 entered into force on 6 April 2022, amending the Companies Act 2006. 

This revised Regulation mandates the following companies to provide climate-related financial disclosures in their strategic report: 

• Traded companies 

• Banking companies 

• Authorized insurance companies 

• Companies carrying out insurance business satisfying certain conditions 

While it’s not mandatory to measure and report GHG emissions, these companies are required to describe climate risks and opportunities, and identify targets to manage these.

Sustainability reporting across Europe

Sustainability reporting in Europe is increasingly crucial to meet GHG emissions reduction and climate neutrality commitments the EU and the UK established as parties to the UNFCCC and the Paris Agreement. Regulatory authorities across the region are prioritizing monitoring, reporting, and reducing harmful emissions as a significant pathway to climate neutrality, targeting GHG emissions from operations and products within the EU and imported.