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Understanding the EU's Green Transition Framework - The corporate green transition series

The European Green deal is the EU's blueprint for a sustainable economy by 2050. It sets the agenda and provides the overarching framework for the policies that aim to make Europe climate neutral by 2050. What does this mean? By 2050, the amount of greenhouse gases (GHGs) emitted by all sources within the EU should be equal to or less than the amount removed from the atmosphere through a combination of natural carbon sinks (like forests) and man-made carbon capture technology.

This pursuit of climate neutrality through net zero emissions is part of a worldwide effort under the Paris Agreement, which seeks to limit global warming to well below 2 degrees Celsius, compared to pre-industrial levels. To ensure it reaches this goal, the EU passed the European Climate Law (a key legislative component of the European Green Deal) [1], turning the idea of a net zero emissions target into a legally binding requirement for all member states by 2050. 

For businesses in and beyond Europe, this shift in regulations is set to redefine the structure of costs, particularly across manufacturing and supply chain operations. The ability to understand rapidly emerging (and publicly available) sustainability-related market data will offer companies the chance to assess their peers’ strategies, benchmark themselves against the broader European market and set clear, data-driven targets to ensure practical steps have been taken to manage financial impacts stemming from forthcoming regulations.

On the surface, the Green Deal may focus on emission reduction and corporate environmental footprints, however, it presents rising risks for companies exposed to energy, commodity and currency markets. Understanding the impact of this evolving landscape and responding prudently is not only crucial for regulatory compliance but also for safeguarding and enhancing future financial stability.


The Fit for 55 Package and its impact on industrial corporations

The Fit for 55 Package [2] is a set of legislative proposals and policy adjustments specifically designed to achieve the targets defined in the European Climate Law, under the broader ambitions of the European Green Deal. As the name suggests, it is targeted towards helping the EU achieve a 55% reduction in net GHG emissions by 2030, guiding emissions toward the 2050 climate neutrality goal.


Figure 1: EU-27 GHG emissions, EDGAR database [3]

Figure 2: Historical emission reduction performance, EDGAR database [3]


For industrial corporates operating in the EU, understanding these policies is important for planning future growth and ensuring business sustainability. The following existing measures and reforms resulting from the Fit for 55 proposals are likely to impact corporations in the energy and industrial sectors the most:


The EU Emissions Trading System:


The EU Emissions Trading System (EU ETS) serves as a key mechanism for regulating GHG emissions from Europe's major industries. Businesses within the system are allocated, and may also purchase, emissions permits—known as EU Allowances (EUAs)—which grant them the right to emit a specified amount of GHGs. Exceeding this allowance results in substantial fines, ensuring compliance and incentivising corporate emissions management.


This system establishes a dynamic market for trading EUAs, based on each company's need to balance their emissions with allowances. As the total number of permits in circulation is systematically reduced each year, the EU ensures a steady decline in overall emissions.

Companies that expect not to have enough EUAs must either cut back on their emissions or buy allowances from the market. For a given EUA price, some companies will find it cheaper to reduce emissions than others and will sell their EUAs. Others might opt to purchase additional EUAs to match their emissions, especially if their emissions reduction processes involve complex and costly modifications to their manufacturing operations. This mechanism encourages cost-efficient reductions in emissions across the system and creates an EUA price that clears the market across the EU.

As part of the Fit for 55 reforms, the annual emissions cap will undergo an accelerated reduction, decreasing by 4.3% from 2024 to 2027, followed by a 4.4% reduction from 2028 to 2030. This will result in a 5-year compounded allowance reduction of 23% by 2030.


In Article #2 of the Corporate Green Transition series, we discuss the EU ETS and its impact on key industrial sectors.



Carbon Border Adjustment Mechanism (CBAM): 

CBAM aims to level the playing field for EU producers that pay for emissions (through measures like the EU ETS) by imposing a carbon price on imports from outside the EU based on their carbon content. Currently, the cross-border tariff is limited to a list of goods related to the Cement, Aluminium, Fertiliser, Electricity, Hydrogen, Iron and Steel sectors.


This mechanism protects against carbon leakage, which happens when EU businesses move production to countries with less stringent emission rules to avoid paying for their emissions, or when EU companies are undercut by cheaper imports that don't factor in the environmental cost of production.


The introduction of CBAM is set to re-arrange the cost structure of importing goods from various countries, incentivising the sourcing of materials from less carbon-intensive suppliers.

For some goods, this shift could make it more cost-effective to adjust supply chains to favour intra-European sources over international ones.


In Article #3 of the Corporate Green Transition series, we discuss the EU CBAM and its impact on key industrial imports.


Energy Directives:


The Renewable Energy Directive (RED) [4] sets an overall renewable energy target of at least 42.5% share of renewables in EU energy consumption, binding at EU level by 2030. In addition, the Energy Efficiency Directive (EED) raises the energy efficiency target, making it binding for EU countries to collectively ensure an additional 11.7% reduction in energy consumption by 2030, compared to the 2020 reference scenario projections [5].


Policies will aim to support these figures by developing a power sector based largely on renewable sources and fully integrated, interconnected and digitalised EU energy market [6].


As a requirement to help countries provide their national contribution towards these EU targets, companies might face higher operational costs due to the need for investments in new energy-efficient technologies, retrofitting existing equipment, and potentially changing manufacturing processes. Although these are likely to be high upfront costs, they are quickly becoming crucial for compliance and companies are likely to benefit from reduced energy costs in the long run.


In our Corporate Green Transition Series, we look at a variety of sector-specific case studies to analyse the impacts of EU policies on industry dynamics. These examinations provide insights into how different sectors are navigating the complexities of transitioning towards more sustainable operations in response to the EU's environmental regulations. Beginning with the cement sector, we explore the relationship between EUA prices, sectoral performance and import patterns.



Sector Study: Manufacture of Cement and Lime

The link between EUA prices and import patterns is evident in the European cement industry, which is significantly impacted by both ETS and CBAM. The European Cement Association, Cembureau, observed a 300% increase in cement imports from non-EU countries over five years, up to 2021, a trend closely tied to rising EUA prices [7].



Figure 3: EU Carbon Permits Price Data,


However, the implementation of CBAM is set to overhaul the current economic advantage of importing cheaper non-EU products, potentially ending the possibility of carbon arbitrage. Companies that previously outsourced their manufacturing to avoid inclusion into the EU ETS, relying on imports and effectively exporting their emissions outside Europe will soon need to re-evaluate their supply chains.


The carbon cost that historically did not exist for imports is now starting to be priced in and previously advantageous cost structures of importing from certain countries may be significantly altered. As a result, companies that depend on imports may encounter substantial cost hikes from as early as 2026, unless they act now.




Figure 4: EU Cement Production and Import, EU Transaction Log and WieldMore Research


Our analysis, depicted in Figure 2, compares European onshore cement production covered by the EU ETS [8] against imports within the sector that will be impacted by CBAM [9].

Our analysis leverages emissions data from the EU ETS Transaction Log to gauge production activity across the EU's domestic industries. Below we discuss how this approach can reveal significant insights when interpreted with appropriate validation:

Each year, the EU awards a portion of free emissions allowances to sectors covered by the ETS, based on several criteria. One key criterion is the efficiency of the top 10% of factories in each sector, which is evaluated by their emissions per standardised unit of production output. These leading factories, representing the highest efficiency in the sector, typically qualify for free allowances covering 100% of their emissions.

The quantity of free allowances a factory receives for the production of a certain amount of goods directly correlates with the minimum emissions achievable for that production volume across the sector in the specified year. Thus, the "allocation ratio"—free allowances as a percentage of total emissions—reflects the factory's operational efficiency compared to the sectors most efficient factories.

If the reduction in sectoral emissions was due to an uptick in efficiency, we would notice the allocation ratio trend upwards. Conversely, we have observed the gap between sector emissions and free allocations widening in recent years, with a notable decrease in the allocation ratio from 97% in 2018 to 90% in 2022, supporting our view of a downturn in production output among European cement producers. This downturn in production is further evidenced by a decrease in the number of operational factories within the EU ETS during these years.


Figure 5: Manufacture of cement and lime in the EU ETS, EU Transaction Log


Interestingly, the sectors free allocations are high, annually covering more than 90% of emissions over the past 5 years, undoubtedly, to mitigate carbon leakage risks.


The considerable amount of free allocations might imply that cement production costs are minimally affected by the price volatility of EU Emissions Allowances (EUAs). However, a detailed analysis reveals that, despite these generous allocations, the cement sector's payable emissions total emissions minus free allocations — still represent a substantial financial burden. In 2022, the cost of these payable emissions in the ETS-regulated cement manufacturing sector exceeded €900Mn [10].


As the European Union progresses with Fit for 55 policies, resulting in a decrease in the proportion of free EUA allocations, the financial impact from payable emissions is only expected to escalate: Even if the cement sector emissions within the EU ETS reduce at 7% (the highest annual rate of reduction seen in the last 5 years), the cost of payable emissions between 2023 and 2030 is expected to amount to €6.8Bn.



Figure 6: Forecasted cumulative sectoral EUA costs and CBAM inflicted free allocation reduction, EU Transaction Log and WieldMore Research


The forecast analysis in Figure 6 above incorporates the following assumptions to reflect what we believe to be a best-case scenario:


1. Cement sector emissions within the EU ETS continue to reduce at 7% (the highest annual rate of reduction seen in the last 5 years


2. Free allocations maintain their coverage of emissions at 2022 levels before commencing a gradual reduction, aligning with EU directives on the CBAM phase-in from 2026 to 2034.


3. The carbon price follows the trajectory of the EU Allowance (EUA) futures curve as observed in March 2023.


In this scenario, on an annual basis, emissions costs are projected to constitute more than 5% of the total revenues of the European Cement sector [11], averaging €2 million in payments per factory participating in the ETS each year. This trend underscores a vital consideration for companies across industrial sectors, highlighting the growing significance of sustainability expertise—such as managing production and supply chain emissions—as a concrete factor influencing financial stability.




[3] Emissions Database for Global Atmospheric Research (EDGAR). Accessed: 

[6] Communication from the Commission on The European Green Deal. Accessed:  

[8] EU Transaction log: Manufacture of Cement and Lime. Accessed:  

[9] CBAM linked CN codes in the cement sector mapped from UN Comtrade database. Accessed: and

[10] EU Transaction log and WieldMore ETS Database. Accessed: 





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