Core Emissions Reduction Drivers in the European Union: A Way Forward

Kelvin Egbor

Governments worldwide are steering their economies toward decarbonization, resource efficiency, and broader sustainability goals. Major initiatives such as the U.S. Inflation Reduction Act (IRA), Japan’s Green Growth Strategy, and China’s 14th Five-Year Plan exemplify large-scale investments in the global Net Zero transition. However, this transition is at a critical juncture. Some nations are reassessing commitments, and the challenge lies in balancing national policy shifts with the realities of existing infrastructure, raising concerns that 2030 and 2050 emissions targets may be missed unless decarbonization efforts are accelerated. Recent analysis highlights that several EU countries are significantly off track in meeting their 2030 emissions reduction targets under the Effort Sharing Regulation (ESR). Germany and Italy are projected to miss targets by 10% and 7.7%, respectively, while France risks falling short due to policy setbacks and rising energy demand. Overall, national plans fall below the EU’s 40% emissions reduction goal, potentially forcing non-compliant countries to purchase carbon credits.

The European Union has positioned itself as a global leader in climate policy, implementing some of the most ambitious regulations. However, EU member states are no longer in complete alignment, with geopolitical and economic pressures influencing their approaches. This moment is equally pivotal for the global oil and gas industry, particularly in Europe, where stronger policies may be necessary to maintain leadership in the Net Zero transition. While significant progress has been made, if Europe is to set the benchmark, regulations may need to become even tougher and more widespread. Companies operating in Europe, regardless of their domestic emissions policies, should proactively future proof their strategies in anticipation of stricter regulatory environments. Ensuring that climate policies are both socially equitable and economically sustainable will be key to meeting long-term targets.

Energy Transition in the EU

Europe’s oil and gas industry is at a pivotal moment, undergoing a transformative shift as companies strive to reduce greenhouse gas (GHG) emissions. The pressure to reduce emissions is intensifying, fuelled by a flurry of regulatory pressures, market dynamics, stakeholder expectations, and rapid technological advancements. Over the past few decades, the EU has made significant strides in combating climate change, cutting emissions by 37% by 2023 compared to 1990 levels. This progress stems from technological advancements, renewable energy adoption, reduced reliance on carbon-intensive fuels, improved energy efficiency, and a shift toward greener economies. According to the European Environment Agency (EEA), without these innovations, GDP growth and population increases would have driven emissions up by 40% and 6%, respectively. However, carbon leakage remains a concern, as stricter climate policies in one region can drive industries to relocate to countries with weaker regulations, offsetting emissions reductions. Research from the IMF and OECD estimates carbon leakage rates between 13% and 25%, meaning that for every 100 tons of CO₂ reduced in the EU, 13 to 25 tons are emitted elsewhere.

Figure 1: 1Total EU-27 GHG emissions (1990-2023) and linear projections for 2030 and 2050 targets. Source: EEA; Eurostat.

Looking ahead, the bar is being set even higher. The EU aims to cut emissions by 55% by 2030 compared to 1990 levels, with the ultimate goal of achieving climate neutrality by 2050. This will require an additional 25% improvement in energy efficiency, reducing emissions by 16%, and further adoption of clean energy sources to contribute an additional 13% reduction. Energy-related emissions are expected to decline faster than those from other sectors. In 2023, the European Union's power sector emissions decreased by a record 19%, driven by a 26% drop in coal generation and a 15% reduction in gas generation. In contrast, other sectors have experienced more modest emissions reductions. Specifically, the EU's agricultural and transport sectors in the same year saw minimal emissions decreases of 2% and 1%, respectively.

Below, we explore a few of the primary drivers shaping the future of energy and emissions reduction in Europe.

Tackling Methane Emissions: A Crucial Step

Methane is a powerful greenhouse gas that has gained increasing attention on the global stage. The International Energy Agency (IEA) reports that methane concentrations experienced the largest annual increase on record between 2020 and 2021 and a continued rise in 2022. In response, the EU introduced the EU 2024/1787 Methane Regulation, aimed at reducing methane leaks in the energy sector (oil, gas, coal) by at least 30% by 2030. Companies are now required to implement leak detection and repair (LDAR) programs, adhere to stricter reporting standards, and limit flaring and venting. Non-EU energy suppliers must meet similar methane reduction standards to continue exporting to the EU.

To learn more about the EU Methane Regulation, refer to Envana's European Union Methane Regulations & CBAM Overview.

Fit for 55: A Bold Agenda for Change

The Fit for 55 package is a bold and far-reaching regulatory framework aimed at reducing emissions by 55% by 2030. It covers a wide array of sectors and includes major reforms to the EU Emission Trading System (ETS), including its expansion into new sectors like transportation and buildings. The goal is to make carbon pricing an integral part of all sectors contributing to emissions, creating a strong market-driven incentive for businesses to reduce their emissions.

For smaller oil and gas companies or those that lack the infrastructure to track emissions comprehensively, complying with the Fit for 55 regulation could be overwhelming. The need to gather precise emissions data, participate in the expanded ETS, and meet stricter reporting standards means that businesses must invest in new technologies and systems. This poses a significant burden for companies that do not have the resources to build internal compliance teams or invest in sophisticated data management tools.

Moreover, the Fit for 55 package will likely force companies to make significant changes to their operations, such as transitioning from fossil fuels to cleaner energy sources or implementing more efficient processes. Between 2005 and 2023, emissions from stationary installations under the EU ETS fell by 48%, primarily due to the shift toward cleaner energy sources. However, companies must accelerate their decarbonization strategies to remain competitive in a rapidly evolving market.

Key Considerations for Companies:

• Transition away from carbon-intensive processes
• Improve emissions data accuracy and transparency
• Enhance carbon offset strategies to comply with new ETS policies

Carbon Border Adjustment Mechanism (CBAM): Raising the Bar

European firms in EU ETS sectors face carbon prices of approximately €60-70 per tonne of carbon. In contrast, many non-EU countries do not impose similar costs, giving their products a competitive edge. To address this competitive imbalance and prevent carbon leakage, the CBAM imposes a carbon price on imports of high-emission goods like steel, aluminium, and cement, based on their embedded carbon. CBAM—which will be fully effective by January 2026—will ensure fair competition between EU and non-EU producers while supporting global decarbonization.

Free allowances are currently provided to EU firms in ETS-covered energy-intensive sectors that are most susceptible to leakage. However, this reduces the incentive to cut emissions. As CBAM rolls out, free allowances will be phased out, encouraging investment in decarbonization since these sectors will no longer be shielded from carbon prices. The price of CBAM certificates will match the weekly average auction price of EU ETS allowances (€ per metric tonne of CO₂), ensuring imported carbon costs align with domestic prices. Non-EU producers can deduct any carbon price paid in their home country from their CBAM obligation.

Table 1: Proposed timeline for CBAM phase-in and free allowances phase-out.

As the mechanism expands to other sectors, potentially those relying on including fossil fuels, those that fail to decarbonize their operations will likely face mounting costs. For smaller oil and gas companies or businesses with less access to capital, the financial burden could be particularly severe. CBAM will effectively apply a carbon price to products from outside the EU, based on their emissions. This creates a strong incentive for companies in the EU to clean up their supply chains, as the price of these imported goods will increase. Oil and gas companies that delay decarbonizing risk mounting costs, investor scrutiny, and loss of competitiveness. Companies relying on traditional extraction methods, flaring, and methane-intensive production will find themselves at a disadvantage.

The CBAM rollout marks a decisive step in the EU’s net-zero strategy, reinforcing the bloc’s commitment to climate leadership. However, recent discussions around postponing its full implementation to 2027 or beyond raise concerns about the EU’s ability to maintain its climate momentum. A delayed rollout could ease short-term economic pressure but may also slow down much-needed industrial transformation. The extent to which CBAM drives global decarbonization will depend on its timely and effective execution, alongside international cooperation on carbon pricing mechanisms. With key EU member states such as France and Italy advocating for reforms to CBAM, it remains to be seen whether the delay will be a temporary adjustment or a sign of waning political commitment to climate action.

The Investor Demand for Sustainability

Beyond policy pressures, investors are reshaping the energy landscape by demanding stronger ESG commitments. With capital shifting toward cleaner energy and financial markets favouring companies with credible net-zero, companies must demonstrate clear and credible pathways to net-zero emissions. It’s no longer just about shifting assets, corporate reputation is also on the line. Public perception now has a tangible financial impact, and companies that fail to show meaningful progress on sustainability risk losing their social license to operate.

How Companies Can Respond:

• Investing in carbon capture, utilization, and storage (CCUS)
• Expanding renewable energy portfolios
• Enhancing emissions transparency and reporting

Innovation: The Key to Adaptation

Technology will be the linchpin in Europe’s energy transition and emissions management. Advances in AI-driven emissions monitoring, electrification of operations, and CCUS offer game-changing opportunities for oil and gas companies to significantly reduce their carbon footprints. Real-time emissions monitoring, predictive analytics, and automated data collection are crucial for companies aiming to stay ahead of regulatory requirements. By integrating advanced emissions modelling with operational data, businesses can identify emission hotspots, optimize energy use, and drive meaningful reductions.

As Europe accelerates its path to climate neutrality by 2050, the pressure on businesses—especially in the oil and gas sector—to embrace emissions reduction strategies has never been greater. The regulatory frameworks, technological innovations, and market dynamics discussed here provide a clear roadmap, but the real challenge lies in how quickly and effectively companies can adapt.

For companies navigating the complexities of compliance, reporting, and emissions reduction, emissions management platforms are crucial. Envana’s advanced platform streamlines emissions data collection, ensuring accuracy and automating compliance with EU regulations such as the EU Methane Regulation, Fit for 55, and CBAM. With its ability to track and detect emissions, calculate Scope 3 emissions, and provide real-time insights, Envana empowers companies to meet their sustainability goals with confidence and precision.

How Envana Can Help

Envana’s team of climate, emissions management, and energy transition specialists delivers science-based, data-driven solutions. We help companies like yours assess and enhance your emissions strategies while navigating the complexities of climate resilience. By enabling businesses to detect, measure, monitor, and reduce emissions across their operations and value chain, we support your journey toward net-zero commitments, energy security, and a Just Transition. A joint venture of Siguler Guff and Halliburton, we have over a century of industry expertise ready to be applied to your emissions challenges.

Contact us to discuss further.