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In its ruling issued today, the European Court of Justice (ECJ) clarified that Member States may not impose national taxes on CO2 emission allowances allocated free of charge under the EU Emissions Trading System (EU ETS).
The case originated in Hungary, where the authorities, invoking a state of emergency due to the war in Ukraine, introduced a tax on free CO2 emission allowances granted to major emitters. The ECJ stated in its ruling the following:
- The free allocation of CO2 emission allowances is fully harmonised at EU level on a sectoral basis.
- National fiscal measures are permissible only if they do not undermine the objectives of the EU ETS.
- Directive 2003/87/EC aims to maintain economic development, employment, and fair competition in the internal market, which also includes the prevention of “carbon leakage”.
- A tax that significantly diminishes the value of free emission allowances and therefore deprives operators of incentives to invest in emission reduction measures or to maintain their site in the EU is contrary to the objectives of the EU ETS.
The ECJ’s ruling draws clear boundaries for Member States regarding fiscal measures related to free CO2 emission allowances. Compliance and regulatory teams should therefore carefully assess whether national taxes or charges could distort the incentive structure envisaged by the Directive 2003/87/EC.
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