Emissions Allowances and Businesses: How to Reduce Energy Costs Through Legitimate ESG Reporting

22.4.2026 | ARROWS law firm

Emission allowances represent real financial costs that affect your competitiveness. In 2026, the situation changes with the full operation of the Carbon Border Adjustment Mechanism (CBAM) and legally enforceable ESG reporting. Preparations for the expansion of the ETS2 system in 2028 are well underway. This article shows how to legally reduce energy costs and avoid penalties.

The photograph shows specialists from ARROWS, a Prague-based international law firm, focusing on emissions allowances and CBAM matters.

What the emissions allowance system is and how it actually works
ESG reporting: From voluntary to a legal obligation
CBAM: A new import levy and its impact on companies importing into the EU
How to legally reduce energy costs: Practical steps
The Social Climate Fund and subsidies in the Czech Republic

What the emissions allowance system is and how it actually works

The EU Emissions Trading System (EU ETS) has been operated by the European Union since 2005 and is among the most ambitious climate instruments in the world. On paper, it is a simple idea: the state sets a maximum emissions cap for a given sector, issues the corresponding number of allowances, and companies trade them among themselves. In practice, however, it is more complex—and directly critical for businesses.

If they emit more, they must purchase allowances on the market; otherwise, they face penalties for non-compliance. The principle is that each allowance entitles its holder to release one tonne of carbon dioxide equivalent (CO₂e) into the atmosphere. Companies that burn coal or gas and generate electricity must surrender one allowance for every tonne they emit. If they emit less, they can sell surplus allowances.

The price of an emissions allowance is not fixed—it is formed on the exchange and fluctuates depending on supply, demand, and regulatory decisions of the European Commission. Today it is around EUR 75 per tonne of CO₂, which represents a significant operating cost for energy-intensive facilities. This cost is then largely passed through into electricity and gas prices for end customers—i.e., for you.

Each year, the EU reduces the total number of allowances released for auction. This increases their scarcity and creates economic pressure on companies to invest in low-carbon technologies. This is also linked to the contractual and regulatory setup of energy projects, which often falls within energy law. This includes switching from coal to biomass, installing renewable sources, increasing the energy efficiency of buildings, and similar measures.

So far, the EU ETS (referred to as ETS1) has primarily applied to large power plants, district heating plants, heavy industry, and aviation. It covers approximately 35–37.8% of all EU greenhouse gas emissions. From 2028, a new system—ETS2—will come into play, which will price emissions from road transport, the combustion of fossil fuels in buildings, and small industry. This will increase emissions coverage to more than 70% of all EU emissions.

ESG reporting: From voluntary to a legal obligation

A few years ago, ESG reporting was more of a voluntary matter for companies. Today, it is a legally enforceable mandatory regime. For financial institutions and regulated entities, sustainability obligations also often overlap with supervision and licensing requirements, as we discuss in Why financial institutions turn to ARROWS for CNB licences: Smooth navigation of a complex regulatory process and ensuring lawful operations. The European Union adopted the CSRD (Corporate Sustainability Reporting Directive), which requires companies to report on their environmental, social, and governance activities.

The implementation timeline for CSRD obligations by financial year and reporting deadlines is as follows:

For the financial year 2024 (first reports in 2025): Companies that were already subject to the Non-Financial Reporting Directive (NFRD).
For the financial year 2025 (first reports in 2026): Other large undertakings that meet at least two of the three criteria: more than 250 employees, net turnover above EUR 50 million, or a balance sheet total above EUR 25 million.
For the financial year 2026 (first reports in 2027): Listed small and medium-sized enterprises (SMEs).

In the Czech Republic, this is estimated to affect around 250 companies directly and tens of thousands indirectly—as suppliers, subcontractors, or property owners.

The reporting format is precisely defined—companies must disclose data in accordance with the uniform European standards ESRS (European Sustainability Reporting Standards). These standards cover ten thematic areas:

Environmental: climate change E1, pollution E2, water resources E3, biodiversity E4, waste and circular economy E5
Social: own workforce S1, workers in the value chain S2, affected communities S3, consumers S4
Governance: business conduct and ethics G1

The key principle is the so-called double materiality. A company does not have to report on all topics, but only on those that are materially significant for it—i.e., those that have a real impact on its financial performance or on people and the environment.

What companies often do not realise is that ESG reporting is not merely a list of numbers in a PDF. It is hard legal documentation that must be verified by an independent auditor. If a company provides incorrect or misleading information, it faces a fine which, in the Czech Republic, can reach significant amounts—potentially up to 4% of annual turnover. In practice, it therefore pays to set up internal control processes in advance and also to factor in how any disputes over liability or penalties are handled within commercial and litigation disputes.

The link between ESG reporting and emissions allowances

Where exactly do emissions allowances and ESG reporting intersect? At the moment a company measures its emissions. To comply with the CSRD and report under ESRS E1 (climate change), a company must know its carbon footprint. This means calculating emissions in three categories—scope 1 (direct emissions from its own facilities), scope 2 (emissions from purchased electricity and heat), and scope 3 (emissions in the supply chain). Precisely with emissions limits and related obligations, it is useful to be clear on permitting regimes and sanctions as well, as summarised in the article Integrated permit (IPPC) and emissions limits: the legal framework and sanctions for breaches.

And once ETS2 takes effect from 2028, it will also have to account for allowances for gas and fuels that it either consumes itself or sells as part of its product. Once a company knows what emissions it has, it automatically knows how many emissions allowances it will need if it falls under the ETS1 system.

Emissions data are therefore not just confusing metrics for investors—they are direct inputs into the calculation of real operating costs.

CBAM: A new import levy and its impact on companies importing into the EU

As of 1 January 2026, the Carbon Border Adjustment Mechanism (CBAM) entered into force in its final form. This mechanism addresses a long-standing issue: what if a company relocates production outside the EU to avoid emission allowances and then imports the final product back into Europe?

CBAM prevents this. The importer must demonstrate that an appropriate price has been paid for the emissions released during the production of the imported goods—either in the country of origin or through the purchase of CBAM certificates. If it cannot, it faces the risk of the import being blocked at the border and the obligation to pay the carbon price via CBAM certificates.

In practical terms, this means that as of 1 January 2026, every import of goods covered by CBAM (cement, steel, aluminium, fertilisers, electricity, hydrogen) is automatically reported to the European Commission. All information is verified against actual customs data—this is no longer just a paper report, but digital transparency.

For suppliers outside the EU, this means new pressure on documentation and transparency. For domestic companies in the Czech Republic, it means that their competitors from third countries will have to pay significantly more for imports. This theoretically favours local producers—provided they prepare in time and have their documentation in order.

A common mistake companies make: they import input materials or semi-finished products but do not document the emissions profile of their suppliers. When a CBAM inspection comes, they find they have no supporting documents. This can lead to delays in import clearance or even the return of the goods.

How to legally reduce energy costs: Practical steps

At this point, many entrepreneurs think: “Well, we have emissions, we have to buy allowances, our energy prices are going up. What can we do about it?” The answer is: there are legal and very effective ways to reduce energy costs—without bending the rules.

Step 1: Measure your emissions accurately

Before you make any decision, you need to know what emissions you actually have. This is not a trivial task—in practice it means:

Mapping all emission sources in the business (heating boilers, machinery, vehicle fleet, electricity purchases)
Determining emission factors for each source (how much CO₂ a unit of fuel or energy emits)
Categorising the results by scope 1, 2 and 3

Scope 1 and 2 are relatively easy to calculate—just take your invoices for gas, coal and electricity and multiply by standard emission factors. Scope 3 is more complex, but for most companies it accounts for 60–80% of total emissions.

A mistake companies make: they use outdated emission factors, ignore scope 3 entirely, or hire an external advisor who performs the calculation without understanding their actual operations. The result? The figures in the report do not reflect reality. Our Czech legal team at ARROWS can help structure this process so that the data are verifiable and legally protected even in the event of a later inspection.

Step 2: Identify unnecessary costs and technological options

Once you have an accurate picture of emissions, start looking for where reductions can be made effectively. Typically, this includes:

Energy efficiency of buildings and operations: Insulation, replacing lighting with LED, modernising heating systems. The lifespan of these investments is 15–25 years and their payback period is often in the range of 3–7 years.
Renewable sources: Rooftop photovoltaics, heat pumps for heating, biomass. From 2026, subsidies are available from the Social Climate Fund (up to CZK 50 billion for the Czech Republic) and other programmes. The payback can be surprisingly short, especially if your energy profile is a good match.
Transport optimisation: Company vehicle fleet. If you have, on average, older internal combustion engine cars, it can cost you tens of thousands of Czech crowns per year in allowances alone. Upgrading to electric vehicles, hybrids, or even just modern internal combustion engines will pay off.
Digital energy management: Smart IoT devices that monitor consumption in real time. It is often discovered that shops are heated at night, or a production line runs without load. Saving 10–20% of electricity is not uncommon.

Step 3: Choose the right legal and contractual framework

This is where you need to act carefully. If you are planning an investment in renewable sources, you need:

A properly structured contract with the equipment supplier
Guaranteed parameters (output, efficiency, lifespan)
A contractually secured right to maintenance and servicing
Clearly defined deadlines and penalties for non-compliance

Companies without legal advice often sign a contract that protects only one side (the seller). Then the equipment breaks down in the third year and the seller says “that falls under normal wear and tear”.

Likewise, if you employ a technician or manager within the company to oversee the projects, they must have clear instructions and responsibilities in written form—so that in the event of an error, liability is not unclear.

Step 4: Link operational decisions with ESG reporting and taxes

This is where many companies fail to realise that their operational decisions (which energy to purchase, what vehicle fleet to buy, when to insulate a building) have a direct impact on the ESG report and on their tax liability.

Example: A company decides to buy 10 electric buses instead of gas-powered ones. In accounting, this is an investment. In the E1 (climate change) section of the ESG report, it will reduce scope 1 emissions. In the CSRD report, it will be reported as a measure to mitigate climate risks.

The correct legal structuring of the investment is key to optimising these aspects. From a tax perspective, many sustainability investments (e.g., in energy savings or renewable sources) may affect corporate income tax through depreciation, potential tax reliefs, or deductions that must be applied correctly.

Common mistake: a company invests without properly structuring its contractual relationships and tax aspects, and is then surprised that the auditor points out an error in classification or that certain costs cannot be claimed.

The attorneys at ARROWS advokátní kancelář can help you structure such investments so that they are clean from both a legal and tax perspective, and so that you can subsequently report them correctly in your ESG report.

Step 5: Monitor and review regularly

ESG reporting and emissions obligations are not a one-off exercise. Every year, data must be updated, the methodology verified, and results compared against targets. If a company finds that its emissions are rising instead of falling, it is a signal that something in the strategy is not working.

If management does not have a system for monitoring ESG risks, it is legally responsible for that. The law also requires that companies have members of senior management responsible for ESG. This is not part of HR—it is part of risk management.

Potential issues	How ARROWS helps (office@arws.cz)
Incorrect carbon footprint calculation and flawed ESG reporting, leading to a fine of up to 4% of turnover	ARROWS advokátní kancelář will help you structure data collection, review the methodology, and ensure that your report is legally compliant and approved by the auditor without comments.
Insufficient documentation for CBAM declarations and the risk of import blockage	The attorneys at ARROWS will prepare templates and procedures for maintaining CBAM documentation, review your customs declarations, and ensure that imports are not detained due to formal errors.
Greenwashing: a company claims it is sustainable but has no data to support it—legal sanctions may apply	ARROWS advokátní kancelář will help you distinguish between legally substantiated ESG claims and misleading greenwashing. We will prepare a methodology for supporting claims with data.
Investments in renewable sources without proper legal and tax structuring—loss of tax benefits	The lawyers and tax advisers at ARROWS will help you structure the investment so that you obtain all tax advantages and the investment is legally clean.
Litigation with an energy or equipment supplier regarding quality or performance	ARROWS advokátní kancelář will represent you in court proceedings and enforce your position or adequate compensation.
Inspection by a regulator (Ministry of the Environment, tax authority)—insufficient preparation for defence	ARROWS will help you prepare arguments, gather documents, and represent you before inspectors. A proactive audit by ARROWS can prevent problems.

Social Climate Fund and subsidies in the Czech Republic

If you think the only way to reduce costs is to invest from your own cash, you are mistaken. In 2024, the European Union adopted the Social Climate Fund (SCF), from which the Czech Republic can claim up to CZK 50 billion for the period 2026–2032.

This fund is not intended only for vulnerable households—it is intended for all entities that may be affected by rising energy prices as a result of the introduction of ETS2. The fund covers:

Insulation of apartments and family houses
Replacement of old heating systems with modern ones (biomass boilers, heat pumps)
Installation of photovoltaics and other renewables
Financial support for business entities and small-scale energy projects
Advisory services and energy audits

The Czech Republic must co-finance part of this money itself (at least 25%), but the resulting volume of funding is enormous.

A common mistake companies make: they wait for the fund to open “next year” and then find that the conditions are stricter than expected or that the calls are already oversubscribed. The right approach is to map your situation already now—in 2026—identify projects, and start preparing the application for support. The attorneys at ARROWS advokátní kancelář can help you formulate the project plan and prepare all documentation so that it is accepted and the subsidy is actually paid out.

Final summary

Emission allowances and ESG reporting are no longer the future – they are the present. Companies that ignore them or deal with them only administratively will run into problems within a few years. Those that turn these topics into a competitive advantage increase their value and gain access to markets that are closed to “green-naive” companies.

Key takeaways: Emissions are not just theory – they are hard energy costs. ESG reporting is not optional – it is a legal obligation with high sanctions. And most importantly: reducing energy costs is not about bans and adversity, but about smart, data-driven investing and legal structuring.

A fundamental mistake we see among companies in the Czech Republic is that they treat ESG reporting and emission allowances as two separate issues. In reality, it is one ecosystem: once you know what emissions you have (ESG reporting), you know how many allowances you will need (ETS1 or ETS2), and then you can strategically invest in reducing them (renewables, efficiency). All of this must be structured legally and tax-wise so that the investment is as efficient as possible.

If you want to avoid fines, legal disputes, and reputational damage, seek advice from the attorneys at ARROWS, a Prague-based law firm. We have experience with CSRD, ESG reporting, CBAM, emission allowances, and litigation with regulators. We will prepare a legal strategy that turns your complications into a competitive advantage.

FAQ - Most common questions about emission allowances and companies

1. What happens if we do not submit the ESG report on time?
If you fall under CSRD and do not submit the report by the deadline (usually within 4–5 months after the end of the financial year), you risk a notification being filed with the regulator and a subsequent fine. In addition, you will make access to bank financing more difficult – from 2025, banks require correct ESG data as part of due diligence.

2. How do scope 1, 2 and 3 emissions differ in practice?
Scope 1 are your direct emissions (e.g., burning gas in a boiler in a building, fuel consumption in company cars). Scope 2 are emissions from purchased electricity and heat (i.e., emissions that arose during their production elsewhere, but you consume them). Scope 3 are emissions at your suppliers and in the logistics chain – these are usually 60–80% of the total. Measuring scope 1 and 2 is easier; scope 3 requires cooperation with dozens of suppliers.

3. Can we buy so-called “carbon neutrality” through offsets without actually reducing emissions?
This is the definition of so-called greenwashing. Even without a specific directive on green claims, general rules against misleading commercial practices and unfair competition already apply. Upcoming legislation (such as the proposed Green Claims Directive) will only tighten and specify these rules. If you want to be carbon neutral, you must first demonstrably reduce your own emissions – offsets serve only to balance residual emissions that can no longer be reduced. A misleading neutrality claim may lead to legal sanctions and reputational damage.

4. If we ourselves do not fall under ETS1 or ETS2, do we still need to address this topic?
Yes, for several reasons: (1) If you are suppliers to larger companies, you will very likely be required to provide them with data on your emissions for their scope 3 reporting. (2) If you import goods, CBAM will apply to you. Ignoring these obligations means losing business opportunities and facing legal problems.

5. What specific subsidy programmes in the Czech Republic for energy and emissions are available in 2026?
As of 2026, programmes available include, for example, Nová zelená úsporám (for insulating apartments and houses), the Social Climate Fund (with an expected allocation of up to CZK 50 billion for the Czech Republic by 2032), and various programmes supporting renewable sources and energy efficiency. In addition, an advisory network is being launched under the Social Climate Fund. Specific conditions change continuously – the key is to have projects prepared in advance.

6. How should I prepare for CBAM if I import goods from Asia?
You should find out from your supplier what emissions were released during the production of the goods and whether a carbon tax or an equivalent charge was paid in the country of origin. If not, you will have to purchase CBAM certificates. At the same time, check that your customs declarations contain the correct CN code and the CBAM account number. Errors here lead to import delays and potential fines.

Notice: The information contained in this article is of a general informational nature only and serves as basic guidance on the issue under the legal framework as of 2026. Although we take maximum care to ensure accuracy, legal regulations and their interpretation evolve over time. We are ARROWS advokátní kancelář, an entity registered with the Czech Bar Association (our supervisory authority), and for maximum client security we are insured for professional liability with a limit of CZK 400,000,000. To verify the current wording of regulations and their application to your specific situation, it is necessary to contact ARROWS advokátní kancelář directly (office@arws.cz). We accept no liability for any damages arising from the independent use of the information in this article without prior individual legal consultation.

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