EU ETS Requirements & Compliance Risks
The European Union’s Emissions Trading System (EU ETS) is a market-based mechanism established in 2005 to reduce greenhouse gas emissions. It sets a cap on total emissions and allows companies to buy and sell emission allowances within that cap. Over the years, the EU ETS has undergone several reforms to increase its effectiveness. The latest reforms are part of the EU “Fit for 55” package, aimed at reducing net greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels.
One of the most significant changes includes a requirement for companies to develop and implement net-zero plans to continue receiving free allocations under the EU ETS. Failure to meet this requirement could lead to major financial repercussions.
The Regulatory Requirement for Net Zero Plans
The European Commission has proposed that companies must develop and submit credible Climate Neutrality Plans (CNPs)—referred to as net-zero plans—to continue receiving free allowances under the EU ETS. Companies that fail to implement energy efficiency measures, maintain emissions below a certain benchmark, or develop net-zero plans could lose 20% of their free allowances.
Key Components of a Credible Net Zero Plan
A credible net-zero plan must outline the company’s strategy for reducing emissions in line with the EU’s climate goals, specifically targeting net-zero emissions by 2050. To be credible, the plan must set out the measures and investments that will be needed to achieve climate neutrality by 2050. What you don’t measure you can’t improve, the plan should also provide intermediate targets to measure progress, starting by December 2025 at the latest and covering every five years thereafter. The plan should provide an estimate of how each measure impacts the reduction of greenhouse gas emissions.
For more detailed content and format requirements of CNPs, visit www.cnps.org.
New EU ETS Requirements: Focus on Direct Emissions
Under the EU ETS regulation, companies receiving free allocations must develop net-zero plans focused on direct emissions—those from sources owned or controlled by the company, such as factory emissions and on-site energy generation.
Companies can also voluntarily choose to address indirect emissions as part of their broader sustainability strategies to demonstrate comprehensive climate action and meet stakeholder expectations.
Financial Impact of Non-Compliance
Companies that fail to develop or adhere to net-zero plans risk losing free emissions allowances. This loss could lead to:
- Increased costs: Without free allowances, companies will have to purchase allowances on the market, which could be financially punitive.
- Operational re-evaluation: To reduce emissions and costs, companies may need to rethink their entire operation, including supply chains, and explore energy-efficient technologies.
- Upfront investments: While transitioning to energy-efficient solutions may require significant upfront costs, long-term savings will result from the reduction in the need for purchased allowances.
In addition, non-compliance could force companies to engage more closely with suppliers to ensure sustainability alignment, mitigating risks and costs associated with non-compliance.
Implementation Timeline
The exact timeline for submitting net-zero plans will be set out in the final regulatory framework. However, companies are encouraged to start aligning their strategies immediately to avoid the risk of losing free allocations.
Impact on Procurement Functions
The introduction of net-zero plans will significantly impact the procurement function within affected companies.
- First, procurement teams must find out about and understand low-carbon technologies. They must gather data on available technologies and energy sources compatible with the company’s existing systems.
- Second, supplier collaboration will become more important than ever. Procurement professionals must work closely with suppliers to ensure long-term partnerships that align with sustainability goals.
- Third, procurement must evaluate suppliers based on sustainability criteria, alongside others, and incorporate these criteria more rigorously when selecting suppliers, focusing on their emissions, energy efficiency, and adherence to environmental standards.
- Fourth, procurement must source innovative low-carbon products and services that help reduce emissions and contribute to a lower overall carbon footprint.
Achieving these goals requires action across the entire procurement value chain from supplier evaluation and selection through supply chain collaboration, contract management and performance monitoring, regular audits and certifications to verify emissions data and maintain transparency, as well as rigorous control of the procure-to-pay processes to ensure compliance.
How JAGGAER Can Help in Achieving Compliance
JAGGAER solutions give you enhanced visibility into carbon emissions management and reduction, together with other environmental, social and governance (ESG) practices across your supply chain. At every stage of your source-to-pay process, JAGGAER solutions allow you to:
- Request, analyze, and validate ESG data from both potential and existing suppliers.
- Access, extract, and visualize this data to create custom ESG dashboards aligned with company targets.
JAGGAER works with specialist data providers, ESG consultancies and implementation partners to help you on your journey to net zero. With better visibility and analysis of sustainability in your supply chain, your company can make more informed decisions, prioritize strategic actions, meet regulatory targets, and enhance its corporate reputation.
