According to the Draghi report, companies in the EU are today facing multiple challenges, including having to comply with a heavy regulatory burden (such as having to meet stringent emission goals that are more ambitious than in other jurisdictions) and obstacles to decarbonising, for example, in relation to net zero project permitting, project financing and clean tech manufacturing.¹

To address these challenges, as a key part of its new 2024-2029 mandate, the European Commission is prioritising competitiveness and growth and balancing them with an ambitious 2040 emissions reduction target. To get there, over the next five years, the EU will seek to recalibrate the European economic path and give more support to companies to shape their decarbonisation strategies.

We are at the beginning of a new legislative cycle in the EU, where key initiatives setting the direction of travel are being published or announced. One of these key initiatives is the Clean Industrial Deal, published last February, which is seen by the Commission as “a transformational business plan”. The deal will target energy intensive industries (EIIs) and the clean tech sector by integrating decarbonisation goals with economic development, accelerating permits, deploying funding, and simplifying aid to encourage decarbonisation investments. Alongside that, industry-specific action plans and in-flight policies carried over from the previous mandate are expected to be implemented or reviewed, and secondary legislation will be progressed to make them fully applicable.

Right now, specifics on how these initiatives will be implemented or funded are still largely unknown but they are likely to be defined over the next two years. More clarity will only emerge as key regulatory milestones or decision points are reached. Nevertheless, given the direction of travel, there are some no-regret actions that companies may be able to consider as part of their resilience strategy.

1. Increased EU focus on competitiveness and red tape reduction and more support and funding for decarbonisation and clean tech will help companies shape their medium-term decarbonisation strategies

The EU has set a binding emission reduction target of 55% by 2030 (as compared to 1990 levels). Emission targets require EU companies to invest in decarbonisation projects, but lack of funding has been a key obstacle. For example, the four largest EIIs in the EU will need to spend EUR 500 billion on decarbonisation over the next 15 years.² This is on top of energy costs which in the EU are approximately 30 percentage points higher than for companies in other major economies.³ Besides funding, there is a need for more regulatory clarity regarding eligible net zero technologies that will be prioritised to attract investment and scale up manufacturing capacity. This, combined with existing “red tape” affecting project planning and long permitting times, make it more difficult for companies to define and implement their net zero strategies.

The European Commission’s new Clean Industrial Deal, a multi-year plan targeting EIIs and the clean tech sector, seeks to address these challenges by integrating decarbonisation initiatives into economic development. The deal outlines upcoming actions, many of them expected to be defined in the next two years, including increased funding, a new State aid framework for decarbonisation and clean tech projects, and faster permitting for renewables and industrial decarbonisation.

Increased funding

The EU is prioritising investment for net zero projects through two short-term funding mechanisms, expected to be defined in 2025. The first is a relief programme of EUR 100 billion under the Clean Industrial Deal for EU-made clean manufacturing, which includes guarantees of EUR 1 billion under the current Multi-annual Financial Framework (MFF). The second initiative is a pilot facility for industrial decarbonisation with EUR 1 billion in value. The facility will seek to support projects focusing on carbon reductions and will attempt to bridge the gap between capital and operational expenditures. During H2 2025, the Commission is seeking to amend the InvestEU Regulation to increase its risk-bearing capacity and mobilise EUR 50 billion for priorities including manufacturing and deployment of clean tech and modernisation of industrial processes. There is still no clarity regarding when the funding will be available and the requirements companies will have to meet to access these funds.

In the medium term, the EU is planning to deploy other funding instruments. For example, in Q2 2026 the Commission is planning to propose an Industrial Decarbonisation Bank with EUR 100 billion funding to drive investments in innovation and clean technologies. The Commission will also seek to create a new Competitiveness Fund, under the future 2028-2034 MFF, which aims to target projects supporting industrial decarbonisation and clean tech.

New State aid framework

During H2 2025 the EU is planning to adopt a new State aid Framework. The framework will seek to implement measures such as simplified rules for quick approval and to propose five-year planning horizons to reduce investment barriers further and increase investment predictability. The process recently went through a consultation period and aid availability will depend on funds being made available by Member States. Companies pursuing eligible projects will have an opportunity to bridge the current funding gap to support their decarbonisation strategy. Once the proposal is published there will be more clarity on the potential implementation timeline, which is unlikely to occur before 2026. An important consideration is that there may exist significant differences across the EU regarding State aid, as wealthier Member States will be able to provide more support to their industries than less wealthy countries.

Faster permitting for renewables and industrial decarbonisation

In Q4 2025, the Commission is planning to present the Industrial Decarbonisation Accelerator Act proposal, which will seek to speed up planning and deployment of net zero projects. With this comprehensive and multifaceted approach, the EU envisages tackling the root causes that have been hindering long-term decarbonisation strategies for companies in recent years. In addition to permitting, the Act will aim to incentivise the supply of EU-made clean products by providing funding and including these products in procurement criteria. Companies are unlikely to benefit from shorter permit times and increased funding before mid-2026. However, given the lengthy lead times for planning net-zero projects before they can be deployed, companies can pursue no regret actions such as identifying priority net-zero projects, which can be shaped once the proposal is published in late 2025.

Secondary legislation on clean tech and carbon removals

EU efforts should be boosted by expected secondary legislation for two key initiatives that entered into force during the last Commission’s mandate – the Net Zero Industry Act (NZIA) and the Carbon Removals Certification Framework (CRCF). In Q2 2025, the EU will provide more clarity on which technologies will be supported under the NZIA and in Q4 2025 it will release methodologies for carbon removal projects under the CRCF. Through implementation of its current Carbon Management Strategy and future measures recognising carbon capture in products, the EU is expecting to improve the business case for carbon removals. For companies across Europe, especially EIIs, these developments, if successful, will create potential opportunities, including the reduction of financial risks associated with net-zero projects, targeted short term access to funding, faster deployment of decarbonisation projects through streamlined permitting, new options to offset emissions, and increased availability of net-zero technologies, where economies of scale would drive decarbonisation costs for companies. 

Key actions for companies to start to consider:

• Assess how they could leverage the Commission’s programmes for decarbonisation, such as the pilot action under the Innovation fund or the short term relief for clean manufacturing, which are likely to be defined by Q4 2025. Then, they could determine how they could fit into their medium term decarbonisation strategies and vision. Increased funding is likely to create new opportunities, such as for funding operational as well as capital expenditure; and more flexible risk criteria to access those funds will be available. 
• Use the emerging clarity in Q2 2025 to identify the type of net-zero technologies and projects that can be funded and thus explore options to reduce their direct emissions further. Once the short-term funding mechanisms are in place, and the conditions for accessing funding are available, companies can then continue their assessment to determine which funding instruments are suitable to deploy for their projects, so that they can benefit from new EU schemes.
• Begin identifying carbon removal projects to tackle indirect emissions as a medium term strategy to increase resilience. Once the DA to implement the CRCF is published in late 2025, companies will be able to explore how the solutions approved by regulators can help them offset emissions outside their value chains. Thereafter, companies should be able to make a preliminary assessment of the potential cost of their carbon removal projects and determine if and how the additional funding made available by the Commission could finance the project.

2. Carbon emissions from raw materials – regulators will review existing schemes, but competitiveness implications will shape legislation

The carbon content of raw materials remains a priority for the EU. Carbon taxes such as CBAM are “an important instrument for European companies to stay competitive against their international peers”. ⁴ CBAM is currently in a transitional period, and is expected to come fully into force next year. However, there have been questions on its effectiveness, as according to the Commission, a limited number of importers are responsible for almost 99% of greenhouse gas (GHG) emissions of imported products into the EU. Therefore, in late 2025, as part of the Omnibus packages, the Commission is planning to introduce a CBAM threshold exemption of 50 tonnes mass and simplify compliance requirements for importers within scope of CBAM. Then, also in late 2025, a legislative review of CBAM is also expected, which could result in a further expansion of the mechanism beyond cement, electricity, hydrogen, fertilisers, iron and steel, and aluminium. Since carbon taxes can create a burden for EU exporters of goods made with imported raw materials covered by CBAM as these goods would be more expensive and less competitive, the legislative review will also consider potential measures to address impacts on exports of goods covered by CBAM. In the medium term, CBAM is likely to interact with the UK CBAM. A legislative proposal following the conclusion of the CBAM review is expected in H1 2026, and it is likely to start from January 2027. Overall, there will be regulatory uncertainty regarding CBAM for companies until the legislative review has been completed and the legislative proposal is introduced. However, the direction of travel is more certain for companies importing high volumes (over 50 tonnes mass) of raw materials currently within scope of the regulation. These companies should make efforts to reduce the carbon content of raw materials to limit future carbon taxes. For other raw materials such as chemicals and plastics, which could potentially be included in CBAM, companies should be able to make more informed decisions by Q1 2026, once the proposal and the legislative review have been published. 

In addition to mandatory programmes, the Commission is also looking at voluntary schemes to incentivise companies to reduce the carbon footprint of their raw materials. A proposal for the Industrial Decarbonisation Accelerator Act is expected in late 2025. The Act will include a voluntary labelling initiative targeting the carbon intensity content of industrial products. A methodology for the labelling initiative, which initially will include steel and cement, will be published in 2026 based on inputs from CBAM and the EU Emissions Trading System (EU ETS). The Commission’s intention is to drive the adoption of this voluntary label by providing incentives under EU programmes, for example, procurement opportunities or funding.

Key actions for companies to start to consider:

• During 2025, prioritise understanding the carbon content in core raw materials, as by Q1 2026, a legislative proposal will be introduced to revise the current version of CBAM. Companies should look beyond what is currently covered under CBAM and explore whether lower carbon alternatives are available.
• Once the CBAM proposal is released in Q1 2026, assess risks of current raw materials covered in the proposal. Assessments can include interdependency of potential actions⁵ and scenario analysis aligned with potential support for exporters of raw materials covered under CBAM. Then, based on the results from the policy scenarios, devise a high-level framework to replace carbon intensive raw materials for those with a smaller carbon footprint. The framework can be turned into an action plan once the CBAM regulation comes into force.

3. Looking beyond – emission reductions for transport are set to continue, with a focus on road transport

Transport-related emissions are an important area of focus for the new Commission. Emissions from transport account for 25% of all GHG emissions and, unlike other emission categories, they are higher than 1990 levels.⁶  As part of the Green Deal, Emission reductions for maritime shipping under the EU ETS are already in place, with a requirement for shipping companies to pay in 2025 40% of their emissions from the previous year. Sustainable aviation fuel (SAF) targets are also starting in 2025 with a mandate for airport fuel suppliers of two percent.

In the short term, one of the key new developments was the launch of the strategic dialogue with the automotive industry in Q1 2025, which seeks to address challenges related to emission standards, innovation, future technologies, regulatory streamlining, charging infrastructure and recharging infrastructure. The dialogue fed into an Industrial Action Plan for the European automotive sector also published in Q1 2025 which targeted those focus areas. The plan reinforces the EU’s vision to become climate neutral by 2050, and to achieve this, transport-related emissions need to be reduced by 90% by then. To achieve emission reductions, the Commission is seeking to incentivise demand for zero-emission vehicles through social leasing schemes. Guidance on social leasing schemes is expected to be published by Q3 2025. The decarbonisation of corporate fleets is another key area for the Commission, with a legislative proposal expected by Q4 2025. This is likely to include company cars, leasing and rental fleets. It will seek to prioritise zero emission rental vehicles at major transit hubs, and make zero emission fleets more attractive through taxation. This will be supplemented with a Sustainable Transport Investment Plan, set to be adopted during 2025, which will look at land transport more broadly by proposing rules to facilitate aid. In general, it is unlikely that these initiatives will increase the demand for green vehicles and fleets in the short term, considering that the average age of passenger cars, vans and trucks is over ten years in the EU.⁷ It is also unclear if there will be binding requirements; further analysis will be needed once these initiatives are published by the Commission.

In the medium term and beyond, binding legislation will focus on emission reductions. The 2035 internal combustion engine ban remains, but will be reviewed by the Commission in 2025, which could result in legislative changes to this target. Then by 2027, the EU ETS will be extended to road transport. These regulatory initiatives will be complemented by new standards for vehicles running on sustainable fuels (CO2 standards for light-duty vehicles regulation).

The current EU regulatory framework will have implications for the auto industry, which represents over six percent of total EU employment and contributes to eight percent of European manufacturing value added.⁸  For example, the difference between EU and non-EU decarbonisation policies for the auto industry could affect competitiveness and increase the risk of carbon leakage, if companies divert production to non-EU neighbour countries.⁹

Key actions for companies to start to consider:

• Companies in the aviation and maritime shipping sector will have to estimate the increased costs associated with SAF purchases or sustainable marine fuels. Fuel costs are uncertain and can vary significantly, based on factors including location, feedstock, production capacity and expected demand.
• Existing pricing models for sustainable fuels could be updated by sharing the additional cost of sustainable fuels with end customers. In addition, companies using sustainable fuels can partner with fuel suppliers to secure long term supply and ensure they can meet their regulatory mandates.
• Companies looking to renew their ground fleets as part of their regular fleet renewal cycle can undertake no regret actions to tackle emissions from their existing fleets by starting to identify alternative low carbon solutions for their fleets. Once the legislative proposal for corporate fleets is published in Q4 2025, companies will be able to complement their analysis by determining how future tax incentives or State aid plus binding emission targets change the business case for renewing their fleets.
   

Key legislative and policy measures

Figure 1. Decarbonisation in the EU in 2025, key legislation and policies for the next 12 months

Initiatives

Acknowledgements:

The authors would like to thank Giorgio Consoli, Ramon Bravo Gonzalez and Ruth Kilsby for their contributions to this article.

______________________________________________________________________________

1 Draghi
2 Pp 39, Draghi
3 Pp 35, Draghi
4 Pp 35: Draghi
5 sustainability-net-zero-2024.pdf
6 Pp 44 Draghi
7 European Environment Agency and European Automobile Manufacturers’ Association (ACEA)
8 The crisis facing the EU's automotive industry
9 Pp 44 Draghi