Decarbonisation regulation: an international overview

The year leading up to COP27 has seen an acceleration of net-zero policy and regulation across the globe. 

In the second webinar of our Decarbonisation Week series, our panel from Osborne Clarke's Decarbonisation team was joined by Parveen Arora (BTG Legal, India), John Kettle (McCullough Robertson, Australia) and Tom Burton (Mintz, USA) to discuss their respective jurisdictions' approaches to decarbonisation regulation.

Energy regulation in the EU and UK

The EU is guided by global and UN-led initiatives such as the Paris Agreement, which establishes international policy to guide countries in reducing their greenhouse gas emissions. 

The EU has set goals of reducing greenhouse gas emissions by 55% against 1990 levels by 2030 and of reaching net zero by 2050. These targets were set out in the European Green Deal, alongside legislation that aims to help Member States achieve these targets. Regulations include the Renewable Energy Directive (which encourages the development of renewable energy across all sectors), the Energy Efficiency Directive (which assists with meeting the 2030 target) and the EU Emissions Trading System (EU ETS) which caps the amount of greenhouse gas emissions that can be emitted by installations covered by the system. 

The war in Ukraine has exposed the EU's dependency on Russian fossil fuels and Member States are now looking to their domestic resources to provide better energy security. It is hoped that the development of cross-border infrastructure linking the energy systems of Member States will create a more affordable, secure and sustainable energy system across the EU and combat the difficulties that arise from reliance on external sources. In particular, Poland is focusing on its large production of biomass and the potential this has to account for a quarter of its energy consumption. 

Despite Brexit, the UK's regulatory approach largely aligns with that of the EU. The UK government has set a target of net zero by 2050 and the UK's emissions trading system (UK ETS) is largely similar to the EU ETS. 

There are, however, some emerging areas of difference. For example, the UK ETS is diverging from the EU ETS as the UK's intention is to increase the scope to cover additional sectors such as shipping and energy from waste, while also setting different levels of allowances. More recently, the EU has proposed the introduction of a carbon-border adjustment mechanism (essentially an import tax on carbon) which the UK and other jurisdictions are following closely.

Sustainability reporting

The EU and UK are also moving ahead with climate change; environmental, social and governance (ESG); and sustainability reporting requirements. 

The EU has adopted the Corporate Sustainability Reporting Directive which will require businesses to report on a broad range of ESG matters. The directive will come into effect in phases starting from 2024. It is the last pillar of the EU's new sustainable reporting framework and fills the gap in existing rules. It comes hot on the heels of the Sustainable Finance Disclosure Regulation (SFDR), which introduced a sustainability labelling regime for funds and asset managers, and the Taxonomy Regulation, which classifies sustainable economic activities.

In the UK, the government has already pushed ahead with mandatory climate reporting for listed and large private companies under the Taskforce on Climate-related Financial Disclosures (TCFD) framework. Last month it published its consultation on Sustainability Disclosure Requirements (SDR) for the regulated finance sector, which will include sustainability labelling and a taxonomy (covering similar ground to the EU's SFDR and the Securities and Exchange Commission (SEC)'s proposals in the US).

Alongside TCFD and ESG disclosures, many businesses are adopting net zero transition plans. The UK has announced that it will introduce mandatory publication of these plans for certain business, probably from 2023.

India 

The Indian government has set a target of net zero by 2070 and is investing heavily in green hydrogen. New regulations will require all oil refineries to replace 30% of their fossil fuel usage with green hydrogen by 2035. There are also new regulations around ESG targets, and from the 1 January 2023 there will be mandatory ESG reporting obligations for the top 1,000 companies in India by market capitalisation. 

The USA

The Biden Administration succeeded in passing the Inflation Reduction Act earlier this year which has released a once-in-a-generation $369 billion of federal government investment in climate change and energy security programmes. This investment will come in the form of tax incentives and loans and it is hoped that it will stimulate trillions of dollars of private investment into the sector. The USA has also pledged to reduce greenhouse gas emissions by 50-52% against 2005 levels by 2030, a similar goal to the UK and the EU. 

The USA is also – more hesitantly – moving forward with sustainability reporting requirements. By the end of the year, the SEC is expected to finalise its proposal to require TCFD-aligned reporting for US listed companies, coming into effect in phases from 2023.

Australia

A change of government in Australia in May 2022 means that climate change has been at the forefront of recent legislation, John Kettle explained. The new 2022 Climate Change Bill legislates to achieve a 43% reduction in greenhouse gas emissions against 2005 levels by 2030. This follows a similar approach to the EU, UK and America. Australia also has an extensive carbon credit market and the credits are known as ACCUs. ACCUs are issued for every tonne of carbon dioxide that is stored or avoided by a project. 

Is net zero possible?

Although regulation varies across the globe, each jurisdiction the panellists discussed has set ambitious net-zero targets. Although the panellists acknowledged that there is a possibility the targets will not be reached in the specified time frame, Mr Burton likened the optimism around meeting the goals to the glass being more full than ever before. Despite this, all panellists were clear that even if the targets are not reached by the specific dates, huge progress will be made in attempt to achieve them and this will have a significant impact on the world for the better. 

This article was written with the assistance of Trainee Solicitor Hannah Wooderson.