Whistle-stop tour of recent EU sustainability regulatory developments

Recent European Parliament (EP) plenary votes have seen a number of regulatory developments to push the Green Deal forward and achieve a net-zero Europe by 2050.  This article provides an overview of key developments from the round of EP votes in April and other noteworthy developments. 

Timelines vary, but one thing is certain: the current EU (and national) regulation is a clear indicator for every business doing business with the EU to accelerate sustainable business transformation, given impacts on entire global value chains.  In some cases, non-compliance can impede the ability to trade with the EU.      

How well do you know your supplier base?

On 24 April, the EU Corporate Sustainability Due Diligence Directive (CS3D or CSDDD) was approved by the EP which will be phased in from 2027 based on the size of the companies.  Businesses in scope are required to implement due diligence measures across their global chain of activities and own operations to prevent, mitigate and remedy adverse impacts on human rights and the environment. Indirectly, smaller companies operating in the value chains of covered companies across the globe will be affected as a result of contractual requirements imposed on them by covered companies (“trickle-down effect”).

Other adjacent supply chain regulations is the approved EU Forced Labour Regulation, which prohibits the sale, import and export of goods made using forced labor within the three years, and the EU Deforestation-free Regulation (EUDR).  From 30 December 2024, the EUDR will require certain products and commodities being imported into, traded within or exported out of the EU to be accompanied by due diligence statements confirming the deforestation-free and legality status.  

The above regulations point to the need to clearly map, analyze and evaluate global supply chains to protect against adverse environmental impacts. This imperative is not new in the EGD, as demonstrated by the EU Carbon Border Adjustment Mechanism, which requires businesses to take a cross-functional approach and work closely with suppliers, too.

Mission: reduce emissions

With the approved Energy Performance of Buildings Directive in tandem with the Energy Efficiency Directive part of the Fit for 55 package, the EU is aiming for a climate-neutral building sector by 2050.  All new buildings must be zero-emission by 2030, and residential buildings must reduce energy usage by at least 16% by 2030.

Methane is also in the spotlight.  Under the new methane regulation, impacted companies in the energy sector (oil, gas, coal) will be required to monitor, report and verify emissions at the asset-level, and implement leak and detection compliance measures. Venting and flaring will be prohibited. The new regulation impacts not only producers but importers of oil and gas into the EU, and indirectly to the non-EU producers. 

On the transport front, there are new emission-reduction targets on heavy-duty vehicles representing another push toward decarbonization transportation, especially when paired with other Fit for 55 elements, i.e., emission standards for cars and vans, upcoming Emission Trading System (ETS) for roads transport, ETS for maritime, and sustainable aviation fuel targets.

Resolution to reduce pollution

Decarbonization continues with the Zero Pollution Action Plan, which includes targets to reduce pollution at source by improving air, water and soil quality, and generally reducing waste. The revised Industrial Emissions Directive is the main EU instrument regulating air, water and soil pollution from industrial installations. The new rules will see stricter regulations on emissions from industrial large livestock farms.  There will be tougher rules on water usage, waste management, energy efficiency and raw material use.  Other important industrial developments include the new voluntary certification framework for carbon removals and the Industrial Carbon Management Strategy, which looks to support the uptake of carbon capture, utilization, and storage.

It's time for consumers to get circular!

Continuing on combatting waste, recent developments help pave the way toward less e-waste by extending lifecycles of products.  New approved Ecodesign rules will see priority products sold in the EU designed with circularity principles in mind: more reusable, repairable, upgradable and recyclable, likely starting with iron, steel, aluminium, textiles, detergents, lubricants, chemicals etc. Operators will need to report on quantities discarded, and unsold clothing, accessories and footwear cannot be destroyed. 

A key element of the Ecodesign rules is the Digital Product Passport (DPP), which is another nod to supply chain traceability. DPPs will provide standardized information on the lifecycle of all products regulated under the new rules, e.g., materials used, recyclability and repairability, and is aimed at helping consumers make more informed sustainable purchasing decisions. 

The adoption of the Right-to-Repair Directive will make it easier for consumers to assess, compare and access repair services, and encourage repair and refurbishment over repurchasing. The directive sets out the obligations for manufacturers to repair goods and extend a product’s lifecycle through repair.

In March 2024, the EU Green Claims Directive was adopted, complementing the “Empowering Consumers for the Green Transition” Directive, which references improving product information on durability and repairability for consumers, protecting consumers from greenwashing and premature obsolescence, and facilitating repair.  Under the GCD, only businesses that have verified their claims as environmentally-friendly can use such claims in marketing and communications for products sold on the EU market.

The recently adopted revised EU Packaging and Packaging Waste Regulation (PPWR) is part of the solution to combat plastic litter waste whether on land or sea.  The PPWR includes new targets to reduce plastic packaging waste, encourage reuse, refill and recycling.  Additionally, certain single-use plastic packaging and “forever chemicals” (PFAs) will be banned.  The PPWR will help to harmonize national Extended Producer Responsibility schemes across Europe and sets out new labelling requirements.

Financing and funding opportunities

In parallel to the flurry of new rules, the EU has a number of existing financing and funding programmes to help businesses achieve net-zero goals such as Horizon Europe, LIFE and the EU Innovation Fund.  Under the Temporary Crisis and Transition Framework, State Aid funding is available to support investments in production of batteries, electrolysers, heat pumps, CCUS, solar panels, wind turbines.

The recently EP approved EU Net-Zero Industry Act supports the deployment of net-zero technologies i.e., renewable, nuclear, industrial decarbonisation, grid, energy storage tech and biotech.  Under the Act, planning and notification processes will be simplified and timelines will be accelerated in some cases. 

Tying it back to tax

What does the influx of sustainability regulatory developments mean for the tax function?  The tax function has a big role to play:

• Certain regulations will force a re-evaluation of supply chains and operations, resulting in changing business models and associated tax and transfer pricing implications 
• Tax and non-tax incentives should be identified help fund R&D and sustainable product design, materials and processes (e.g., eco-designs, move to EVs, funding for low-carbon or circular technologies)
• In addition to regulation, governments are using taxes to disincentivize negative environmental behaviours (e.g., plastic packaging taxes) that are increasing costs of certain products and operations
• Tax, notably governance, is interwoven with sustainability reporting (e.g., EU Taxonomy, CSRD, GRI)

With so much change, there’s no better time for the tax function to partner with the wider business to understand sustainability strategies and wider business transformation plans.

The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.

With thanks to Charlene Glenister for her support on this article.