Our EU Sustainability: State of Play series focuses on regulatory developments and policy initiatives emerging from Brussels. In this series, we explore EU sustainability frameworks and their intersection with other areas of EU law.
EU sustainability regulations continue to play a key role in shaping the direction of international ESG frameworks. Latham’s European ESG Practice tracks these EU-driven developments closely by drawing on our connections with EU regulators, our presence in Brussels, and our broader European platform.
The European Green Deal (Green Deal), adopted by the European Commission (Commission) in December 2019, represents the EU’s flagship strategy for transforming its economy and regulatory environment to achieve climate neutrality by 2050. As a policy roadmap, the Green Deal sets out a vision for a sustainable, resource-efficient, and competitive economy, aiming to decouple economic growth from resources usage and environmental degradation. It encompasses an array of initiatives, including clean energy, sustainable industry, building renovation, biodiversity, sustainable mobility, and the circular economy.
Two legislative cornerstones relating to climate and the energy transition flow from the political commitments outlined in the Green Deal: (i) the European Climate Law (EU Climate Law), which embeds the pledge of climate neutrality by 2050 into binding legislation, and (ii) the EU’s Fit for 55 package, which introduces and revises regulations across sectors to align with a net greenhouse gas (GHG) emissions reduction of at least 55% by 2030, as compared to 1990 levels.
The EU’s Clean Industrial Deal (CID), a parallel, industry-specific policy agenda, outlines actions for decarbonisation of production in line with the Green Deal targets, with a focus on energy-intensive industries and the clean-tech sector.
This article examines the following key legal instruments and regulatory developments shaping the EU’s path towards climate neutrality:
The EU Climate Law, an EU regulation adopted in 2021, operationalises the commitments made under the Green Deal and anchors them in binding legislation, offering the overarching statutory architecture for the EU economy-wide transformation towards climate neutrality.
The EU Climate Law intends to provide:
Objectives and Targets
The EU Climate Law sets out progressive emissions benchmarks. First, it establishes the objective of achieving net zero GHG emissions by 2050 for Member States as a whole. It also sets out an interim target for 2030, requiring at least a 55% reduction in net GHG emissions compared to 1990 levels. This interim target has driven the revision of existing EU Directives on renewable energy, energy efficiency, and emissions trading discussed further below, raising their ambition to align with the new climate objectives.
Furthermore, in July 2025, the Commission proposed an amendment to the EU Climate Law, which would establish an EU climate target for 2040 of a 90% reduction in net GHG emissions, compared to 1990 levels. The proposal is accompanied by an updated impact assessment exploring technology availability, social impacts, and fiscal effects.Note the Commission details further “flexibilities” that it will consider in designing future legislative instruments to achieve the 2040 climate target. These include a “limited” role for “high-quality international credits” starting from 2036. See this press release for more information. The proposal has been submitted to the European Parliament (Parliament) and the European Council (Council) for discussion and adoption under the ordinary legislative procedure.
Notwithstanding its economy-wide orientation, the EU Climate Law recognises that certain pillars of the transition remain Member State-specific. National Energy and Climate Plans (NECPs) continue to serve as the principal instrument for transposing EU-wide targets into national trajectories. Member States are required to develop and regularly update NECPs, reflecting progressively higher levels of ambition over time. In addition, the Effort Sharing Regulation allocates binding annual emissions limits among the Member States for sectors outside the EU Emissions Trading Scheme (e.g., agriculture, waste, buildings, road and domestic maritime transport, and small industries).
Announced in July 2021, the Fit for 55 package is a collection of more than a dozen legislative proposals (many now enacted) that recalibrate existing energy, transport, land-use, and fiscal instruments to the target of 55% emissions reduction by 2030, as compared to 1990 levels.
Central features include the revision and broadening of the EU Emissions Trading Scheme (EU ETS), the creation of the EU’s Carbon Border Adjustment Mechanism (EU CBAM), amendments to the EU Renewable Energy Directive (RED) and Energy Efficiency Directives (EED), and targeted sectoral files in transport, buildings, and land use. Each instrument is calibrated through detailed impact assessments aiming to deliver a fair, cost-efficient, and technologically feasible emissions pathway.
For an overview of the Fit for 55 package of proposals, see Appendix 1.
The CID, announced in February 2025, can be viewed as the industrial implementation arm of the Green Deal. While not embodied in a single legislative act, the CID is articulated through a set of communications, delegated regulations, and financial support programmes (e.g., the Innovation Fund and the Important Projects of Common European Interest framework) that collectively aim to anchor heavy industry within the EU while aligning production with climate objectives.
The CID sets out six pillars that form the basis of the strategy:
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Affordable energy |
Boosting demand for clean products |
Financing the clean transition |
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Circularity and access to materials |
Acting on a global scale |
Skills and quality jobs |
The Commission estimates that over €100 billion will be mobilised by the CID to support EU clean manufacturing. The CID is also linked to the Net-Zero Industry Act,For more information on the Net Zero Industry Act, refer to this Latham article. which is intended to provide a legal framework for supporting industrial decarbonisation. The CID therefore seeks to integrate industrial policy levers and legal frameworks with the EU’s emissions reduction objectives, whilst aiming to preserve the EU’s competitiveness and promoting the clean transition.
The EU ETS is the world’s largest and most established carbon market, serving as the cornerstone of the EU’s climate policy since its launch in 2005. Operating on a “cap-and-trade” principle, the EU ETS sets a declining cap on the total amount of GHGs that can be emitted by covered sectors, which includes power generation, energy-intensive industries, aviation, and, as of 2024, maritime transport. Companies must hold allowances for each tonne of CO2 (or equivalent) they emit, with allowances distributed through a combination of free allocation and auctioning. The system incentivises emission reductions by allowing companies to trade allowances, rewarding businesses that cut emissions and increasing costs for those that do not. The EU ETS framework is established by the ETS Directive and further detailed in related delegated and implementing acts.
Revision of Fit for 55 Package
A 2023 revision of the EU ETS under the Fit for 55 package significantly increased the system’s ambition: the cap will now decline faster, targeting a 62% reduction in emissions from covered sectors by 2030, as compared to 2005. The reforms also (i) phase out free allowances for sectors at risk of “carbon leakage” (i.e., EU emissions reduction measures causing production to shift to countries with more lenient climate regulations), (ii) expand the system to maritime transport, and (iii) introduce a separate ETS (ETS2) for buildings, road transport, and additional sectors. Revenues from the EU ETS are increasingly earmarked for climate action, innovation, and social support through mechanisms like the Social Climate Fund (for more detail, see Appendix 1).
Future Integration of Carbon Removal Credits
Looking ahead, the EU is considering the integration of carbon removal credits into the EU ETS as part of its long-term decarbonisation strategy. As the cap approaches zero in the late 2030s, the Commission has said that the inclusion of high-quality, verifiable carbon removals — such as direct air capture, bioenergy with carbon capture and storage (CCS), or nature-based solutions — could allow the EU ETS to support net-negative emissions and maintain market functionality. The Commission launched a public consultation in April 2025 to gather input on the integration of GHG removals, which seeks to assess the potential impacts and design considerations for such integration, with a report expected by July 2026.
This consultation follows the Council approving a framework for carbon removals in November 2024, a regulation establishing the first EU-level certification framework for permanent carbon removals as well as carbon farming, and carbon storage in products. This voluntary framework aims to facilitate and encourage high-quality carbon removal and soil emissions reduction activities across the EU and could be a step towards integrating carbon removals into the EU ETS.
The EU CBAM, a central part of the Fit for 55 package, is a climate policy and regulatory instrument applying a carbon cost to certain carbon-intensive goods imported into the EU, designed to ensure such costs are equivalent to those paid by EU producers under the EU ETS. The EU CBAM’s principal objective is to mitigate carbon leakage, while supporting the EU’s climate objectives and incentivising third-country producers to adopt low-carbon technologies.
The EU CBAM applies to imports of specific carbon-intensive goods — currently cement, iron and steel, aluminium, fertilisers, electricity, and hydrogen — entering the EU from non-EU countries.On 1 July 2025, the Commission released a call for evidence regarding the potential to expand the EU CBAM scope to cover certain downstream products, including a broader range of steel and aluminium-intensive downstream products. For more information, see this Latham article. Under the system, importers must report the embedded GHG emissions in their products and, from 2026, purchase and surrender EU CBAM certificates equivalent to the carbon price that would have been paid if the goods were produced under the EU ETS. Embedded GHG emissions are defined in the EU CBAM as direct emissions released during the production of goods, and indirect emissions from the production of electricity that is consumed during the production process.See Regulation (EU) 2023/956. The legal framework for the EU CBAM is established by the EU CBAM Regulation and further detailed in related delegated and implementing acts.
Implementation Timeline
The EU CBAM entered its transitional reporting phase on 1 October 2023, running until 31 December 2025. During this period, importers are required to submit quarterly reports detailing the volume of covered goods imported and their associated direct and (for some sectors) indirect emissions, but are not yet required to purchase certificates.
From 1 January 2026, the definitive regime begins, where only authorised EU CBAM declarants may import covered goods, and must annually surrender certificates corresponding to the embedded emissions in their imports.
The scope of the EU CBAM is expected to expand over time, with a review scheduled before the end of 2025 to consider including additional products and emission types, such as organic chemicals, polymers, and further downstream goods.
Broader European Context: The UK CBAM
The EU CBAM is the first mechanism of its kind to be implemented at scale and has already influenced climate and trade policy discussions worldwide. The United Kingdom (UK) CBAM, is set to begin application in 2027, covering a similar range of sectors. Further, in May 2025, EU and UK leaders committed to working towards linking their respective ETSs, which would involve ensuring carbon allowances from either ETS are valid under the other, therefore granting UK and EU exporters mutual exemptions from their respective CBAMs.
Next Steps: EU CBAM Simplification and Potential Extension
On 25 February 2025, the Commission launched its first Omnibus Package on sustainability (the Omnibus),For more information on the Omnibus proposal, as well as the EU-US Trade Framework which includes reference to CBAM, refer to this Latham article. which contains a set of legislative proposals designed to streamline certain sustainability legislation, reduce administrative burdens, and enhance economic competitiveness. For more information on the Omnibus, refer to this Latham article.
The Omnibus included a proposal to simplify and strengthen the EU CBAM. The key element of the Commission’s proposal is the introduction of a mass-based de minimis threshold, exempting importers from EU CBAM obligations whose annual imports of relevant goods do not exceed 50 tonnes. This change seeks to reduce the administrative burden for small and occasional importers, removing about 90% of importers from compliance requirements, while still ensuring that 99% of embedded emissions remain covered by the mechanism.
The Council and Parliament reached an agreement on this EU CBAM simplification proposal on 18 June 2025, retaining essential elements of the Commission’s proposal. Parliament adopted the revision on 10 September 2025 and the Council on 29 September 2025, which will be published in the EU’s official journal and will come into force on the third day following that of its publication.
Alongside the Omnibus simplification proposal, there have been several recent developments regarding the EU CBAM. On 1 July 2025, the Commission released a call for evidence regarding the potential to extend the scope of the EU CBAM to include certain downstream products, intending to address the risk of carbon leakage shifting to later stages of the supply chain. Further, the Commission has reaffirmed its commitment for a general review of the EU CBAM before the end of 2025, alongside proposals to “strengthen” the mechanism and announcements of potential new measures to support EU producers. For more information on recent EU CBAM-related developments, see this Latham article.
The EU adopted the EU Methane Strategy (Methane Strategy) in October 2020 in the context of its climate objectives under the Green Deal. The strategy sets out a comprehensive approach to reduce methane emissions across the energy, agriculture, and waste sectors, with a particular focus on the energy sector’s mitigation potential and the availability of cost-effective abatement technologies. The strategy seeks to curb temperature increases and improve air quality, and also supports the Global Methane Pledge,The Global Methane Pledge was launched at COP26 by the EU and the United States, and now counts 159 participating countries. Participants agree to take voluntary actions to contribute to a collective effort to reduce global methane emissions at least 30% from 2020 levels by 2030. For more information, see this page: https://www.globalmethanepledge.org/#about. under which the EU and its partners commit to reducing global methane emissions by at least 30% from 2020 levels by 2030.
Methane Regulation: Key Provisions
Building on the Methane Strategy, the EU adopted the Methane Regulation on the reduction of methane emissions in the energy sector, which entered into force on 4 August 2024. The EU-wide legislation specifically targets methane emissions from the energy sector, covering oil, fossil gas, and coal, as well as biomethane once injected into the gas network. The regulation introduces mandatory requirements for measurement, reporting, and verification (MRV) of methane emissions, drawing on the Oil and Gas Methane Partnership (OGMP) 2.0 framework. Operators are required to conduct regular leak detection and repair (LDAR) surveys, promptly repair detected leaks, and report on their mitigation actions. The regulation also bans routine venting and flaring of methane, allowing these practices only in emergencies or unavoidable circumstances, and sets strict efficiency standards for any flaring that does occur.
A notable feature of the regulation is the extension of its scope to include methane emissions from imported fossil fuels. From 2027, importers of oil, gas, and coal will be required to ensure that their supply chains comply with EU-equivalent MRV standards. By 2030, such imports will also be subject to maximum methane intensity values, to be set by the Commission.
The Methane Regulation establishes a public methane transparency database and performance profiles for countries and companies, enhancing transparency and enabling informed purchasing decisions. Additionally, the Commission will implement a global methane monitoring tool and a rapid alert mechanism for “super-emitting” events, using satellite data to identify and address major methane leaks both within and outside the EU.
Current Status of the Methane Regulation
The Methane Regulation is directly applicable in all Member States. National authorities are now responsible for monitoring and enforcing compliance, with the Commission overseeing implementation and supporting Member States through technical guidance and harmonised standards.
The regulation’s requirements are being phased in: operators must submit LDAR programmes and begin regular surveys within six months, while reporting and verification obligations will phase in over the next two years. For imports, the first MRV requirements apply to new contracts from January 2027, with methane intensity limits for imports coming into effect in 2030. The Commission is currently developing the necessary secondary legislation, including detailed methodologies for methane intensity calculation and equivalence assessments for third-country MRV systems.
The Renewable Energy Directive (RED) is the centre-piece of EU legislation promoting renewable energy deployment. RED II was adopted on 11 December 2018 as part of the “Clean Energy for All Europeans” package and entered into force on 24 December 2018. It brought the existing 2009 framework into the 2021-2030 period, setting new EU-wide and sectoral targets and updated sustainability rules for bioenergy.
RED III is the outcome of the Fit for 55 and REPowerEU negotiations. Fit for 55 included a revision of RED II to raise the 2030 renewables target and introduce sector-specific measures. The REPowerEU negotiations launched in May 2022 in response to the energy crisis following Russia’s invasion of Ukraine, and the negotiations further increased renewables ambition by proposing to accelerate the clean energy transition, reduce dependency on Russian fossil fuels, and streamline permitting for renewables. REPowerEU called for a higher renewables target (45% by 2030), faster permitting, and new measures for hydrogen, biomethane, and energy efficiency.
Following provisional political agreement on 30 March 2023, the amending directive was published on 31 October 2023 and entered into force on 20 November 2023. Member States were obligated to transpose the majority of provisions by 21 May 2025.
The following list sets out a comparison of the key innovations and strengthened requirements introduced by the revised RED III relative to its predecessor, highlighting major shifts in ambition, sectoral coverage, regulatory frameworks, and sustainability standards.
For a regulatory comparison between RED II and RED III, see Appendix 2.
Impact of RED III on EU Member States and Businesses
The implementation of RED III marks a significant shift for both Member States and businesses and seeks to drive an even more rapid acceleration in the deployment of renewable energy and reshaping of the regulatory and investment landscape across the EU.
Impact on EU Member States
Impact on Businesses Present in the EU
Key Examples of Infrastructure Projects Affected by RED III
The EED has been the EU’s principal legislative instrument for cutting energy demand since its adoption in 2012. It translated the EU’s “energy efficiency first” principle into binding measures, requiring Member States to implement a mix of renovation, auditing, metering, and end-use savings schemes capable of delivering a 20% reduction in energy consumption by 2020.For more information, refer to: Energy Efficiency Directive. A first amendment in 2018 raised the 2030 indicative target to 32.5% and extended the annual energy‐savings obligation, which was further adjusted following the adoption of the Green Deal and Fit for 55 roadmap.
The recast EED, in force since October 2023, constitutes a full recast. It makes the 2030 target for final energy consumption legally binding at the EU level (mandating a collective 11.7% reduction compared with the 2020 reference scenario) and codifies “energy efficiency first” as a cross-sectoral legal obligation for policy-making and major investments. The revised EED sits alongside, and is structurally interlinked with, RED III. Whereas RED III accelerates the decarbonisation of the supply side, the EED controls demand, ensuring that renewable capacity is not squandered by avoidable consumption. Both instruments require consistency through the integrated NECPs.
The recast EED also draws on the REPowerEU plan: energy savings are treated as a security-of-supply measure that reduces reliance on imported fossil fuels.
Expected Impact of the Recast EED
The recast EED embeds robust social safeguards. A quantified share of the required savings must arise from measures targeting vulnerable customers, people affected by energy poverty, and residents of social housing. Revenue from the extension of the EU ETS to buildings and transport is channeled into the Social Climate Fund to offset potential cost impacts.
If fully implemented, the Commission projects that the recast EED will avoid approximately 150 billion m³ of gas consumption between 2025 and 2030 and place the EU on a trajectory consistent with doubling the global rate of energy-efficiency improvements to 4% per year under the “Global Pledge” announced at COP28.
Data Centre Sustainability Rating Scheme
Data centres represent a significant and rapidly increasing share of electricity consumption in the EU. Article 12 of the revised EED therefore introduces a monitoring and disclosure regime whereby operators of EU data centres with an installed IT power demand of at least 500 kW must, for the first time, report annually on key performance indicators (KPIs) covering:
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Total energy and water consumption |
Power usage effectiveness (PUE) and water usage effectiveness (WUE) |
Temperature set points and cooling efficiency |
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Use of renewable electricity |
Energy reuse (waste-heat) factor |
Incoming/outgoing data traffic and installed ICT capacity |
These requirements are set out in the Delegated Regulation, which establishes a common rating scheme for data centres. The data collected will be used to calculate standardised sustainability indicators, such as PUE and WUE, and will be published in aggregated form at national and EU levels, with individual data centre information remaining confidential.
Secondary Legislation and Guidance Under the Recast EED
The recast EED is supported by a comprehensive set of non-binding recommendations and secondary legislation to ensure consistent implementation across the EU. These include guidance on integrating the “energy efficiency first” principle into policy and permitting, templates for national contributions and gap-filling, interpretations for public-sector consumption, building renovation, and green procurement, as well as detailed instructions for calculating annual energy savings. Additional recommendations address energy audits, consumer provisions, heating and cooling, energy services, and national financing frameworks.
Furthermore, the Commission is authorised to adopt future delegated acts to refine the data centre rating scheme, set minimum performance thresholds, update KPIs, and standardise Member States’ progress reporting formats.
Although the instruments above represent some of the most notable EU frameworks regarding emissions and energy transition, additional measures create a complex policy ecosystem. For example:
For a comprehensive overview of the Fit for 55 package and its legislative proposals, see Appendix 1.
The EU’s climate and energy transition framework has rapidly evolved into one of the world’s most ambitious regulatory landscapes. With the EU Climate Law enshrining climate neutrality by 2050 and a binding 55% net emissions reduction by 2030, the EU has set a clear long-term direction for all sectors of its economy. The Fit for 55 package has translated these targets into a suite of interlocking legislative measures, including economy-wide carbon-pricing (EU ETS, EU CBAM), energy-system reform (RED III, EED), and sector-specific instruments (ReFuelEU Aviation, FuelEU Maritime, Methane Regulation). Together, these instruments seek to drive decarbonisation, accelerate the deployment of renewables, and embed energy efficiency and emissions reduction across industry, transport, buildings, and agriculture. The regulatory framework is further reinforced by monitoring, reporting, and governance mechanisms seeking to ensure that Member States and market actors remain aligned with the EU’s climate objectives.
Looking ahead, the EU’s climate and energy policy landscape will continue to develop in response to both implementation challenges and contrasting ambitions. Upcoming developments include the formal adoption of the 2040 climate target, if approved by the Parliament and Council, providing a new milestone on the EU’s path to 2050 climate neutrality. Additionally, the ongoing revision of NECPs, the acceleration of clean technology deployment, and the integration of climate adaptation measures will be central to driving the next phase of the EU’s energy transition.
This article was prepared with assistance from Samantha Banfield at Latham & Watkins.
Latham’s European ESG Practice has experience advising on a broad range of EU sustainability and international ESG topics. If you have questions about this article, please contact one of the authors listed below or the Latham lawyer with whom you normally consult.