Mandatory Net-Zero Regimes

Mandatory Net-Zero Regimes

Global efforts to deal with climate change have accelerated in the 30 years since the 1994 United Nations Framework Convention on Climate Change, with the historic Paris Climate Agreement marking an important step-change, triggering the broad adoption of net-zero emission commitments. World leaders pledged to set long-term goals to substantially reduce global greenhouse gas (GHG) emissions to hold global temperature increase to well below 2°C above pre-industrial levels and pursue efforts to limit it to 1.5°C above pre-industrial levels. If this could be achieved, the United Nations recognises that this would significantly reduce the risks and impacts of climate change.

But what progress has been made since the historic signing of the Agreement in December 2015? Have national governments stuck to their promises and enacted far-reaching GHG emission reduction laws to ensure their countries reach the Agreement’s ambitions? Or is support wavering amidst growing geopolitical turmoil? This briefing from Freshfields’ Legal and EU Regulatory and Public Affairs teams looks at approaches adopted across different jurisdictions towards creating mandatory net-zero regimes and what this means for businesses operating in these markets.

European Union

The European Union (the EU) has embedded in law a commitment to achieving net-zero emissions by 2050. The European Green Deal, presented in 2019, includes legislative and non-legislative initiatives covering climate, energy, agriculture, industry, environment and oceans, transport, finance and regional development, research and innovation. At the heart of the Green Deal is a commitment by the 27 EU Member States to turn the EU into the first climate neutral continent by 2050 – a legal requirement under the EU Climate Law. EU Member States have since adopted a number of new intermediate targets to help achieve this goal, including a 2030 GHG reduction target of at least 55% by 2030 and a renewable energy target of at least 42.5% binding at EU level by 2030. Most of the original European Green Deal initiatives announced have now been adopted and have started to apply.

The EU is now turning its attention to boosting the manufacture and use of key technologies that will enable Europe to reach the ambitious targets. Last year, the EU unveiled a new Net Zero Industry Act (NZIA) to speed up the roll-out of EU-produced net-zero technologies whilst boosting industrial competitiveness in Europe (see our previous blog post on the topic). The NZIA sets a headline target for net-zero manufacturing capacity in the EU to be sufficient to meet 40% of the EU’s annual deployment needs for technology by 2030. The new Regulation lays down rules for improving permitting procedures for a long list of strategic technologies ranging from solar PVs and battery technologies to carbon capture and storage (CCS). A provisional agreement on the Regulation was adopted in early February 2024 by the European co-legislators and should become law in the coming months.

Reporting under the recently introduced Corporate Sustainability Reporting Directive (CSRD) is designed to (among other sustainability objectives) support net-zero efforts by mandating collection of reliable data on companies’ targets and actions towards achieving net-zero. In addition, despite the EU’s recent refusal to adopt CSDDD in the form proposed, several national duty of care laws across Europe may require companies take appropriate measures in relation to negative ESG impacts, including in relation to GHG emissions.

United Kingdom

The UK committed to reaching net zero by 2050 in 2019, building on legally binding GHG emission reductions originally adopted in the Climate Change Act 2006. To deliver on this ambition, the government continues to identify and strengthen a variety of policies, actions and measures to support the economy to transition. 

The Government published its Net Zero Strategy in 2021, setting out the Government’s plan for the UK to be an early leader in emissions reduction through a green industrial revolution. Following the hearing of a claim by ClientEarth where the High Court found the strategy to be lacking, the Government revised its strategy in March 2023, Powering up Britain: Net Zero Growth Plan. Its focus is to decarbonise the economy by reducing the UK’s reliance on imported fossil fuels and replacing it with cleaner and cheaper energy, generated in the UK. The Government’s plan identifies significant support for energy generation projects, including funding for (i) an offshore wind investment scheme which aims to encourage investment in UK port infrastructure projects, (ii) a new nuclear body, Great British Nuclear, to lead delivery of the UK’s new nuclear projects beyond Sizewell C, including significant direct financial support for small modular reactor technologies and (iii) establishing industrial clusters to enhance energy efficiency and create opportunities for CCUS and hydrogen technologies.

In September 2023, the Prime Minister announced that the UK had overdelivered on reducing its emissions and so the government had the flexibility to take a more “pragmatic, proportionate, and realistic approach to reaching net-zero,” and so delayed and softened certain measures identified in its strategy documents. Given the UK’s upcoming election, it is possible that if Labour were to come into government, the UK net-zero strategy could change.

To date, corporate reporting by large companies has also been a key mechanism to promote transparency of private sector contributions to the UK’s carbon footprint. Building on energy use disclosures mandated from 2010, the SECR regime began requiring listed and large companies to disclose emissions annually in 2018. Since 2021, premium-listed companies have been required to make disclosures consistent with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), widely adopted for disclosures related to financial risk and opportunity of climate for companies. The application of this disclosure framework (with some minor alterations) has now been extended to include all large UK companies and LLPs from this year. Climate disclosure frameworks are likely to be replaced by expanded requirements in the forthcoming UK Sustainability Disclosure Framework, to cover climate and sustainability more generally.

Later this year, we expect the FCA to mandate listed companies to adopt the Transition Plan Taskforce’s (TPT) recommendations for reporting on climate transition plans. This will require transparency of comprehensive plans to reduce emissions and adapt to climate change, in accordance with any adopted targets.

In our practice across the EU and UK, our coordinated teams advise on a range of low-carbon projects supporting the energy transition, and a number of clients in developing their climate strategy (and associated disclosure regimes related to climate). Our teams would be more than happy to support you on your energy transition and climate journey and discuss any aspects with you. Please feel free to contact your usual Freshfields contact or one of the key contacts below if you have any questions.