Proposed changes to emissions reporting for imports to the European Union highlight the difficulty of simplifying regulations for businesses while still achieving the bloc’s climate goals.

Last week, the EU commissioner for climate, net-zero and clean growth, Wopke Hoekstra, proposed to exempt roughly 80% of businesses from requirements under the carbon border tax known as the Carbon Border Adjustment Mechanism (CBAM), reports the Financial Times. Hoekstra said the remaining 20% of businesses account for 95 to 97% of emissions, and the exemption “doesn’t do anything to [diminish] the importance of the climate objectives.”

But it would still undermine CBAM’s intent to “ensure a fair and ambitious approach to carbon pricing at the EU border,” and could create regulatory uncertainty that might deter investment in sustainable business practices, Maya Saryyeva, acting executive director of the Queen’s University’s Institute for Sustainable Finance, told The Energy Mix. While reducing compliance burdens for some smaller firms, exemptions could weaken the EU’s ability to drive emissions reductions globally.

CBAM addresses the issue of “carbon leakage,” which occurs when companies move their production to countries with less strict environmental regulations, avoiding the costs associated with emissions. The policy tool was drafted to fairly price carbon emitted during the production of carbon-intensive goods imported to the EU like cement, iron and steel, aluminium, fertilizers, electricity, and hydrogen.

Under the rules, EU businesses that import such goods must buy certificates for their associated carbon emissions. They must declare emissions from imported goods each year and surrender certificates corresponding to that amount. Importers can deduct certificates owed if they prove a carbon price was already paid when the good was being produced.

CBAM was administered in a transitional stage from 2023 to 2025. It required reporting, but no certificates. Certifications are now being phased in during a second stage.

Hoekstra’s proposed exemptions would ease the reporting burden for an estimated 80,000 to 200,000 businesses within the CBAM’s scope. It follows a push to streamline the EU’s sustainability regulations for businesses and cut through bureaucratic red tape.

Last December, European Commission President Ursula von der Leyen announced plans to simplify the EU’s main environmental laws—the Corporate Sustainability Reporting Directive, the Corporate Sustainability Due Diligence Directive, and the EU Taxonomy—to avoid redundant and overlapping data collection. But she promised the changes were not meant to undermine the EU’s progress toward sustainability; “It’s our task to reduce this bureaucratic burden without changing the correct content of the law that we all want,” she said.

The European Commission is expected to unveil an omnibus package simplifying the three regulations later this month. Other pieces of legislation—like CBAM and the proposed exemption—might also be addressed in the bill. But it “is not clear whether this will be a formal legislative proposal, or merely a ‘roadmap’ with a legislative proposal to follow later,” writes White & Case LLP.

Earlier this month, a letter from 163 investors—representing approximately €6.6 trillion in assets (C$9.7 trillion)—addressed the European Commission about the forthcoming omnibus legislation. The investors called for the Commission “to preserve the integrity and ambition of the EU’s sustainable finance framework,” and avoid creating uncertainty by focusing “on streamlining the technical standards and [providing] clear implementation guidance.”

CBAM is its own piece of legislation distinct from the other three, but Saryyeva said the exemption proposal could still potentially “weaken the effectiveness of the EU’s broader sustainability framework by introducing an exemption that significantly narrows its application”. That’s because the other legislative acts are written to identify, disclose, and provide accountability for environmental and social risks under a coherent legislative system.

“Additionally, the EU Taxonomy aligns investments with sustainability objectives, but the exclusion of a large portion of CBAM-applicable companies may reduce incentives for businesses to align with it,” Sarryeva said.

“Without broad coverage, the incentive to decarbonize across supply chains may weaken, potentially limiting the effectiveness of the sustainable finance framework as a whole.”