Opinion

New rules and frameworks in global carbon policies

Read on for developments in carbon policy coming out of the US, UK and EU

6 minute read

Stephen Vogado

Senior Analyst, Carbon Policy

Stephen focuses on carbon policy, taking a data-driven approach to help clients navigate the energy transition.

View Stephen Vogado's full profile

Our Carbon Policy in Brief report highlights the latest need-to-know events from the carbon industry. Read on for our pick of this year’s big carbon policy developments so far and sign up to receive more carbon related content.  

SEC approves climate rules but drops Scope 3 requirement  

After a two year process of public consultation, the US Securities and Exchange Commission (SEC) has finally published rules mandating climate-related disclosures for 6,000 public companies. Following significant industry and political pushback, the final rules do not include Scope 3 emissions requirements.  

Other changes also mean that Scope 1 and 2 emissions reporting is now only required by large companies but only if they consider emissions financially material. Additionally, the proposed requirement to describe board members’ climate expertise has been removed. 

The rules will mean qualifying companies must disclose financially-material climate risks, their transition plan to reduce climate-related risks and any internal price of carbon used by the company in assessing and managing those risks. Companies must also separately disclose their plans for using offsets and credits against their decarbonisation targets.  

Although the final rules are less ambitious than the SEC’s earlier proposal, they were instantly challenged by opponents in courts. A month after releasing them, the SEC paused the implementation of the rules to maintain an orderly the legal process, while asserting it will ‘vigorously defend’ the rules in court. Regardless, they still represent a crucial first step in broadening mandatory climate-related disclosures in the US.  

Most US energy and natural resource companies already provide voluntary basic Scope 1 and 2 disclosures, and the standardisation of reporting will make comparisons between operators easier, will formalise information and increase transparency for investors in the US. 

But the exclusion of Scope 3 will leave a blind spot in investors’ understanding of a company’s overall climate risk and will put it at odds with the EU’s mandatory European Sustainability Reporting Standards (ESRS). From 2029 onwards, large companies with significant operations in the EU will have to report Scope 3 emissions. 

Other countries such as Australia, Brazil and the UK are advancing their own mandatory disclosure standards, so US companies will increasingly need to report value-chain emissions in the international arena even if it remains optional within the US. 

UK publishes consultation on carbon border adjustment mechanism  

The UK has opened a public consultation on the introduction of a UK carbon border adjustment mechanism (CBAM).  

The mechanism aims to cut the risk of carbon leakage by equalising carbon prices between domestic and foreign products. The UK CBAM would impose taxes based on the embedded emissions of imported products, ensuring a carbon price is paid regardless of the originating country.  

The proposed UK CBAM will cover goods for seven sectors: aluminium, cement, ceramics, fertiliser, glass, hydrogen, and iron and steel. Both direct and indirect emissions will be covered, with two potential options for determining the CBAM liability: using actual emissions data within the goods, or default values set by the UK government. The rate payable for emissions will be set for each sector. 

The UK CBAM aims to achieve the same goal as the EU equivalent, but there are some differences. 

  • The UK CBAM is planned to be introduced on 1 January 2027 - one year after the EU CBAM. 
  • The UK CBAM adjusts the registration threshold, embedded emissions calculation, and provides liability pricing, simplifying some of the EU CBAM's obligations. 
  • The UK’s CBAM liability will be set quarterly and will take into account current domestic carbon policies to calculate an effective price. The EU CBAM rate is tied directly to the EU ETS price.  

A consultation published in 2023 has already scoped out a potential UK CBAM so it is unlikely significant changes will result from this consultation. 

The US rejects federal carbon tax, again  

The US House of Representatives has recently voted to pass a resolution “expressing the sense of Congress that a carbon tax would be detrimental to the United States economy”. 

Despite existing sub-national carbon pricing, no federal regime is in place. The resolution was introduced in January 2024, highlighting the harm of a carbon tax on the prices of energy and goods, American families, domestic industries and global competitiveness. Its bipartisan passage signals strong opposition to national carbon taxation. 

The resolution advocates pro-growth solutions and domestic energy development. But achieving clean energy goals amid supply chain challenges and rising costs will be challenging. Whether to introduce penalties on emissions in tandem with such pro-growth solutions will be at the discretion of state governments. 

It also makes it extremely challenging to advance other carbon tax-related legislation, such as the: 

  • Clean Competition Act which imposes a carbon price on imports and domestic goods on emissions thresholds
  • Market Choice Act which replaces fuel excise taxes with a carbon tax on emissions, including border tax adjustments
  • Prove It Act of 2024 which assesses emissions from domestic and foreign products, and paves the way for a carbon tax
  • Foreign Pollution Fee Act, which imposes an emission-intensive tax on imported goods compared to US-produced goods.

The first three all include a domestic carbon pricing component. With the inclusion of goods like solar panels and critical minerals, the Foreign Pollution Fee Act leans towards protectionism, rather than toward mitigating climate change. It gives no credit for carbon prices paid in the exporting country, potentially penalising foreign producers twice while ignoring domestic emissions. If enacted, the Act would likely violate WTO rules, bringing complaints or retaliation measures from other countries. 

The EU hopes its new carbon removal framework can help it to scale a domestic market  

European Parliament approved the Carbon Removal Certification Framework (CRCF) settings, which will position the EU as a likely leader in the emerging carbon removal market. 

The EU already has the world’s most advanced and highly-priced compliance carbon market and the CRCF aims to certify carbon dioxide removal to offset hard-to-abate emissions. It will contribute to the EU’s nationally determined contribution (NDC) under the Paris Agreement. 

The CRCF will facilitate private finance for nascent carbon removal technologies and sustainable farming solutions in activities like: 

  • permanent carbon removal, such as bioenergy with carbon capture and storage or direct air carbon capture and storage projects 
  • temporary carbon storage in long-lasting products, i.e. wood-based construction materials  
  • temporary carbon storage from carbon farming, restoring forests and soil, wetland restoration and seagrass meadows  
  • soil emission reduction with soil management practices, for example, no tilling and cover crop practices and a reduced use of fertiliser. 

The scope was extended from previous versions to include soil emission reductions. As these are not technically carbon removals, this could question the legitimacy of a removal framework, as could the wide range of storage years, from five years (carbon farming) to thousands of years (permanent storage). 

The CRCF is a voluntary standard but may be limited given the potential high costs to the EU for removal units and the higher prices compared to current carbon offset costs.  

However, the CRCF has been referenced in the Green Claims Directive and is expected to play a key role in the EU's transition to net zero. Adoption of the CRCF is expected by the end of 2024 but finalising the methodologies means that units will not hit the market until 2026.  

If you want to receive more carbon policy and market content straight to your inbox, fill in the form above.