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ECJ: no tax on free emission allowances

Authors: Johannes Hartlieb, Valentina Knees

European emissions trading

The European system for taxing greenhouse gas emissions provides for a market-based mechanism. For every ton of emissions, an emission allowance must be purchased and surrendered. This is intended to create an incentive to reduce the burning of fossil fuels.

Certain companies that are particularly energy-intensive and whose relocation from the EU is looming receive free emission allowances. This significantly reduces the tax burden for these companies. The aim is also to encourage them to invest in alternative energy technologies. This system is fully harmonized at the EU level.

Nitrogénművek: a Hungarian fertilizer producer

One of these beneficiary companies is the Hungarian firm Nitrogénművek. It is one of the largest fertilizer producers in the EU, headquartered in the western part of Hungary.

The fertilizer industry has recently come into the media spotlight due to the negative impacts of the Iran war and its crucial importance for global food production. It is an energy-intensive industry whose electrification faces significant hurdles (“hard to abate”).

ECJ: Hungarian tax not permissible

The Hungarian Government introduced measures to consolidate the national budget in the wake of the war in Ukraine, including a tax on freely allocated emission allowances. This tax, set at EUR 36, amounts to roughly half the value of these allowances and particularly affects energy-intensive companies.

The European Court of Justice has now ruled that such a tax is not permissible, for several reasons. First, such a tax disrupts the balance of the emissions trading system. Moreover, it undermines the effect of the free allocation and, in particular, removes the incentive for companies to invest in alternative energy sources (green technologies). The fully harmonized European emissions trading system leaves no room for such national deviations, even though tax sovereignty lies with the member states.

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Disclaimer

This article is for general information only and does not replace legal advice. Haslinger / Nagele Rechtsanwälte GmbH assumes no liability for the content and correctness of this article.