The EU Corporate Sustainability Due Diligence Directive and the Carbon Border Adjustment Mechanism (CBAM): The Good, the Bad, and the Ugly

     EU regulatory control is once again leading to companies threatening to pull out of doing business with the union. One might see the disruptive effect somewhat similar to that of Trump’s tariff wars. I am referring to the EU Corporate Sustainability Due Diligence Directive (CSDDD). This rule makes it much harder for some foreign companies to do business in the EU. It essentially puts a tariff or tax on emissions and on behavior regarding environmental, labor, and human rights issues.

     This post is mainly about the CSDDD but also about the EU’s overly ambitious decarbonization regulations, which include CBAM. Thus, I will focus briefly first on CBAM.  

 

Carbon Border Adjustment Mechanism (CBAM)

     CBAM has been in effect since 2023, when its Transitional Phase began, requiring importers of certain carbon-intensive industries, such as steel and cement, to report emissions. Beginning on January 1, 2026, is the Definitive Phase, which will require importers to purchase CBAM certificates, which will be utilized in the EU Emissions Trading System (ETS). While importers pay for the certificates, those costs are passed to the exporters by requiring low-carbon and decarbonized products, which entail extra costs to produce. Thus, the degree to which a product is decarbonized relative to the non-decarbonized version is one parameter in emissions mitigated, the metric for which is usually CO2equivalent. The EU has done this with natural gas with the EU Methane Regulation (MER), effective August 2024, by requiring exporting companies to report upstream and midstream methane emissions, the biggest source of emissions of natural gas before combustion. Importers are expected to comply with Monitoring, Reporting, and Verification (MRV) requirements. I believe most of the natural gas in the U.S. and an even larger amount of U.S. LNG exports meet those requirements. The rule is sure to meet with some challenges when the Definitive Phase goes into effect in less than 2 months. CBAM is designed to ensure that all production, exports, and imports are subject to some sort of carbon price that they can then exchange on the ETS.  

 

The EU Corporate Sustainability Due Diligence Directive

     This rule, or directive, is designed to initiate the practice of human rights, social, and environmental due diligence. It is considered to be an ESG directive, though really more of an ES directive that seeks to have companies collect and report policies, emissions data, and other parameters. The intentions of the directive seem to be simply to ensure that countries and companies are doing all they can to be sustainable. However, I think a hierarchical approach to each part: labor rights/human rights, environmental impact, and greenhouse gas emissions, would be better. If an exporter has suspected or documented labor rights or other human rights issues, that is a more immediate potential for harm than greenhouse gas emissions. Thus, it should be more important in such a directive. The U.S. has shown this by sanctioning the Chinese for forcing workers making solar panels and other products at Chinese Uyghur re-education work camps, where workers are essentially enslaved.     

     The due diligence process involves the following six steps:

(1) integrating due diligence into policies and management systems; (2) identifying and assessing adverse human rights and environmental impacts; (3) preventing, ceasing or minimising actual and potential adverse human rights and environmental impacts; (4) monitoring and assessing the effectiveness of measures; (5) communicating and (6) providing remediation.

     It seems that a big part of the directive is the requirement to share information. One question is whether companies have the information at the level of detail required.  

(40) To comply with due diligence obligations, companies need to take appropriate measures with respect to the identification, prevention, bringing to an end, minimisation and remediation of adverse impacts, and the carrying out of meaningful engagement with stakeholders throughout the due diligence process.

     I think that the rule would have better focused on just human/labor rights and environmental impact and excluded climate and greenhouse gas emissions. Many greenhouse gas emissions directives retain a voluntary nature and are considered non-binding. In any case, I think it would have been better addressed separately.

(73) This Directive is an important legislative tool to ensure corporate transition to a sustainable economy, including to reduce the existential harms and costs of climate change, to ensure alignment with ‘global net zero’ by 2050, to avoid any misleading claims regarding such alignment and to stop greenwashing, disinformation and fossil fuels expansion worldwide in order to achieve international and European climate objectives. In order to ensure that this Directive effectively contributes to combating climate change, companies should adopt and put into effect a transition plan for climate change mitigation which aims to ensure, through best efforts, that the business model and strategy of the company are compatible with the transition to a sustainable economy and with the limiting of global warming to 1,5 oC in line with the Paris Agreement and the objective of achieving climate neutrality as established in Regulation (EU) 2021/1119, including its intermediate and 2050 climate neutrality targets.

     One statement of concern is the stated goal to oppose fossil fuel expansion, something Europe is currently doing to replace Russian gas, oil, & coal. Germany also, a few years ago, ramped up coal production and firing for the same reason as well as its de-nuclearization push.

“…to stop greenwashing, disinformation and fossil fuels expansion worldwide in order to achieve international and European climate objectives.”

     There are geopolitical concerns and other human welfare concerns, like affordable energy, reliable energy, competing needs for government money, and permitting expediency for the timely completion of vital projects.

     Looking over the directive, it seems at times unnecessarily complex. Requiring companies to submit detailed energy transition plans is a bit much and notoriously difficult for fossil fuel companies in particular because they don’t know what oil, gas, and coal demand will be in the future. I’m sure they don’t want to write ‘rosy future’ decarbonization plans and then be unable to finance them, while EU regulators are trying to hold them to it. In recent times, Oil Majors have had to pull back chunks of their decarbonization developments due to cost and lack of profitability compared to oil & gas. Requiring Paris Agreement-level (non-binding) commitments for companies is not good as the 1.5 °C scenario is not achievable, and really it never was. The directive calls for time-bound decarbonization pathways, which, again, for fossil fuel companies, are dependent on market demand for their products.

     Really, my main objection to the directive is the inclusion of too detailed emissions-reduction plans that may not be feasible and the penalties for non-compliance, which could be fines of 5% of their annual global revenues. The human rights, labor rights, and environmental issues seem to be generally reasonable.     

 

The U.S. and Qatar are Leading Opposition, but Many Countries Oppose the Directive

     ExxonMobil CEO Darren Woods noted recently that the hefty fines for non-compliance could result in the company ceasing work in the EU. He has strongly criticized the legislation and noted at a conference in Abu Dhabi:

“If we can't be a successful company in Europe, and more importantly, if they start to try to take their harmful legislation and enforce that all around the world where we do business, it becomes impossible to stay there.”

     After pressure from companies around the world, the European Parliament agreed in October to review the regulation. Exxon, the U.S., and Qatar want big changes. Energy Secretary Chris Wright says it may affect the U.S.-EU trade agreement.

     Qatar has taken issue with the Paris Agreement/1.5 °C requirements and has threatened to turn to other markets for its EU-bound LNG exports. Qatar currently supplies 12-14% of the EU’s LNG. They proposed that the CSDDD remove the section mandating climate transition plans. I agree with this. Qatar has also been accused of having an unfair migrant labor system of low-paid workers and has also been accused of human trafficking and slavery. The country’s legal system is based on Sharia law. They should be required to adhere to fair and just labor standards and human rights. The Qataris, however, have only complained about the unfair emissions requirements and the unfair costs of non-compliance.   

The European Commission has proposed simplifications of the directive, including delaying its launch to mid-2028 and reducing supply chain checks.         

 

References:

 

Corporate sustainability due diligence: Fostering sustainable and responsible corporate behaviour for a just transition towards a sustainable economy. EU Commission. July 25, 2024. Corporate sustainability due diligence - European Commission

ExxonMobil Threatens To Leave EU Over Sustainability Rules. Tsvetana Paraskova. OilPrice.com. November 3, 2025. ExxonMobil Threatens To Leave EU Over Sustainability Rules  

DIRECTIVE (EU) 2024/1760 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL. of 13 June 2024. on corporate sustainability due diligence and amending Directive (EU) 2019/1937 and Regulation (EU) 2023/2859. (Text with EEA relevance). Official Journal of the European Union. Directive - EU - 2024/1760 - EN - EUR-Lex

Carbon Border Adjustment Mechanism: The EU’s environmental policy tool for fair carbon emissions pricing. European Commission. Carbon Border Adjustment Mechanism - Taxation and Customs Union

EU Methane Regulation and its impact on LNG imports Open Access. Kim Talus, Gunnar Steck, James Atkin. The Journal of World Energy Law & Business, Volume 18, Issue 1, February 2025. Published: 15 October 2024. EU Methane Regulation and its impact on LNG imports | The Journal of World Energy Law & Business | Oxford Academic

Qatar warns of EU gas supply cuts over new sustainability law. Offshore Technology. July 28, 2025.