ECJ: no tax on CO₂ emission allowances

Author: Johannes Hartlieb

In April 2026, the European Court of Justice (ECJ) ruled that a Hungarian tax on free CO₂ emission allowances violates EU law. Background: Under the EU Emissions Trading System, companies must surrender allowances for every ton of greenhouse gases emitted. However, particularly energy-intensive businesses that are at risk of relocating outside the EU receive these allowances for free so that they can remain competitive while investing in more climate-friendly technologies (to prevent “carbon leakage”).

In 2023, as part of budget consolidation efforts amid the war in Ukraine, Hungary introduced a tax of EUR 36 per ton on the emissions of such companies. Among those affected was Nitrogénművek, one of the largest fertilizer manufacturers in the EU. The company challenged the tax, prompting a Hungarian court to request a preliminary ruling from the ECJ.

The ECJ made it clear: The free allocation of emission allowances is fully harmonized across the EU. As a result, unilateral national measures that undermine the purpose of this allocation are impermissible. The Hungarian tax effectively turns the free allowances into paid ones and removes the incentive for companies to invest in more environmentally friendly technologies. This directly contradicts the objective of the free allocation scheme.

The judgment is convincing: The EU Emissions Trading System is a carefully balanced market mechanism whose pricing could be distorted by unilateral national taxes. Ultimately, the amount of the Hungarian tax at around half the market price of an emission allowance effectively nullified the economic benefit of receiving allowances free of charge.