After 30 years of voluntary schemes failing to slow carbon emissions, governments are closing loopholes and tightening regulation. What options do businesses have as they transition to new carbon reporting environments?

This is the first is a series of 7 articles for businesses seeking to comply with carbon reporting regulation:

1. Business Threats & Opportunities in Carbon Reporting’s Mandatory Era
2. Carbon Reporting Basics for Busy Business Executives
3. Carbon Reporting’s Compliance Scramble: Leaders and Followers
4. Data Challenges for Accurate Carbon Reporting
5. Carbon Reporting’s Ecosystem Solution: See Through Carbon
6. Ecosystem Pilot vs Business Start-up: Spot the Difference
7. See Through Carbon Pilot Participation: Risks & Rewards

Regulatory Stimulus: EU Green Deal et al 

EU environmental regulation

In 2020, the EU approved a set of interlocking environmental policies aimed at making the EU climate neutral by 2050, collectively known as the Green Deal.

Green Deal policies collectively mark the end of the Age of Voluntary. Businesses and consultancies are now adapting to carbon reporting’s Mandatory Era.

The Green Deal’s suite of directives and regulations is complex and ambitious. They assemble an array of regulatory levers, all designed to speed up carbon drawdown. 

The Green Deal legislation timetables when specific types of companies and sectors fall under this regulation over the next few years.

Individual businesses must check their own countdown to compliance with their legal team, but a good rule of thumb is:

the bigger your businesses, and the more energy-intensive the products you use, the sooner you will have to comply, but the Green Deal will soon apply to any business based in, or trading with, the EU.

EU Green Deal’s Goal and Approach

Since the first ‘carbon credit’ was issued in 1988, the Age of Voluntary has incentivised companies to pay relatively small sums to commercial ‘offsetting’ schemes offering ‘carbon credits’ in order to continue business as usual. 

Conceived as an elegant market-based solution, carbon trading has ballooned to a trillion-dollar industry that has failed in its core mission of reducing overall emissions. Its ‘offsetting’ schemes, usually involving poor countries planting trees, have been comprehensively discredited.

After three wasted decades of allowing business to tinker with this voluntary system, and with the consequences of global heating becoming current, rather than future, problems, governments are now transitioning to carbon reporting’s Mandatory Era.

The EU legislation is intended to drive down carbon emissions by replacing failed voluntary schemes with regulations that:

• close greenwashing loopholes
• require rigorous reporting
• start with the biggest/most carbon-intensive businesses, and will in time embrace all SMEs too
• are enforced with escalating penalties for non-compliance

Broadly speaking, governments are moving carbon accounting from a greenwashing branch of Public Relations, to something more resembling financial accounting.

Carbon Taxes, Carrots and Sticks

In the corporate world, financial accounting has two key functions:

• For businesses, it’s a way to measure the ‘wealth’ of any given entity.
• For governments, it’s their key tool to incentivise desirable outcomes (by permitting tax breaks or awarding subsidies) or deterring undesirable outcomes (by imposing taxes or punitive fines).

Now that governments are pushing carbon accounting to converge with financial accounting, what are the consequences for businesses?

The EU has adopted a ‘carrot’ approach of rewarding carbon reporting that reflects physics, rather than PR. This emphasises accurate, reliable, consistent reporting, enabling detailed carbon reduction plans which result in real-world, measurable, emissions reduction. 

The Age of Voluntary has bequeathed a chaotic starting point. There’s currently great disparity in how different countries, even within Europe, balance legacy Emissions Trading Systems (ETSs) with carbon taxes. 

For example, even in late 2024, a tonne of carbon emissions would ‘cost’ a business less than €1 if ‘traded’ in Ukraine, and more than €100 in Switzerland. 

In financial terms, such blatant obvious opportunities for arbitrage would never be permitted. Convergence with financial accounting rigour implies ironing out such freakish disparities.

When it comes to balancing the ‘carrot’ of ETSs, with the ‘stick’ of carbon taxes, it’s a mixed picture. EU countries have so far taken different approaches, in the same way that national governments operate their own national budgets under the umbrella of broad EU rules.

The Green Deal regulation therefore mainly addresses accurate reporting. Without universal, comprehensive, reliable, verifiable, auditable reporting rules, future decisions on balancing ETS carrots with carbon tax sticks are meaningless, and leave governments with no mechanism to deliver the carbon-reducing reduction their electorates are increasingly demanding.

When Carbon Reporting 2.0 is established, governments can apply familiar carrots and sticks to encourage desirable behaviour, and deter undesirable behaviour.

The transition from Age of Voluntary’s Carbon Reporting 1.0 to the Mandatory Era’s Carbon Reporting 2.0 will be chaotic, presenting particular challenges to multinational companies that operate or trade in different regimes.

For example, Singapore is an early adopter of the carbon tax ‘stick’ approach’, with a timetabled escalating tariff of of per-tonne carbon taxes clearly laid out for years to come. This might work in relatively small environments with a highly-compliant culture like Singapore’s, but is unproven in bigger environments with a looser application of regulations, like India. 

The Green Deal’s approach recognises that carbon tax’s biggest inherent risk is preserving the greenwash-era incentive of manipulating carbon footprints to appear as small as possible, to evade tax. Rather, at the critical first step, the Green Deal emphasises rewarding early compliance using accurate figures.

Carbon accounting’s transition from 1.0 to 2.0 is likely to be rapid and messy, but the destination, at least, is clear, as well as the means of getting there. Both carrot and stick approaches are predicated on accurate reporting, using consistent methodologies.

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Next: Carbon Reporting Basics for Busy Business Executives

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FAQs on the STC Ecosystem

For more details on See Through Carbon’s 7 Pilots, visit www.seethroughcarbon.org

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See Through Carbon is a part of the See Through Network, a global network of experts in a range of backgrounds and experience including carbon accounting, AI, IT, business, academia, filmmaking, advertising, marketing, branding and storytelling, with the common goal of:

Speeding Up Carbon Drawdown by Helping the Inactive Become Active

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