The European Union (EU) has long made the reduction of CO2 emissions a basic criterion for funding, with its Taxonomy on Sustainable Activities de facto often taking precedence over other policy benchmarks to which entities seeking Commission money must contribute. However, recent moves to reduce the burden of climate accounting rules are showing the limits of this trajectory, both in terms of geopolitical pressures and internal political divisions.
Two important frameworks are set to continue to be phased in this year: The Corporate Sustainability Reporting Directive (CSRD) and Corporate Sustainability Due Diligence Directive (CSDDD). They will first apply to large companies only, both European and foreign firms with significant presence in the EU. Industry groups have warned, however, that smaller businesses will also be indirectly affected.
Recently, officials met with businesses to discuss amending sustainability laws effective soon, following a Competitiveness Compass report that stressed reducing regulatory burdens while advancing decarbonization. The report found that Europe has been lagging for 20-years compared to other major economies in productivity growth. Proposals to ameliorate the situation include reducing the scope of companies subject to emissions reporting and carbon border taxes so as to affect fewer companies under the Carbon Border Adjustment Mechanism (CBAM), an EU policy instrument which was introduced as part of the bloc’s Green Deal.
Geopolitically, the EU’s partial change of course aims to maintain competitiveness with respect to economies with more flexible regulations. Indeed, there is a global trend towards deregulation, as the U.S. is reconsidering climate disclosure rules. In Europe, this is largely fuelled by pressures on purchasing power resulting from higher fuel costs, both due to regulation and sanctions on Russian oil.
Politically, this risks undermining the political class of the EU’s credibility, given its Paris Agreement commitments and the degree to which the Green Transition has been built up as a major plank of its “soft power.” Politicians like Italian PM Giorgia Meloni and others, representing a more sceptical orientation towards environmental regulation, often articulated this as an attack on the Brussels’ status quo. Conversely, environmental groups, progressive lawmakers, and member states like Denmark oppose changes, may be expected to push for a harder-line on climate goals.
The EU’s reconsideration of climate accounting rules represent a step towards realpolitik for a bloc whose economic competitiveness has been eroding for decades.
