European Commission sets out tax proposals to encourage decarbonisation

The Communication issued on 26 February mentioned tax in various places, but the key takeaways are that the EC intends to issue recommendations for Member States to design incentives to support clean energy compared to fossil fuels and to adopt tax incentives to support the ambitions of the Deal. These may include:

• Allowing shorter depreciation periods for certain assets, enabling businesses to quickly write off costs and benefit from tax incentives to offset high initial investments; and
• Allowing the use of tax credits for businesses in strategic sectors for the clean transition, to make it more financially attractive to invest in such areas.

The recommendations are scheduled for the second quarter of 2025 and are also intended to be integrated into the compatibility rules under the new Clean Industry State Aid Framework (see further below).

Based around a number of building blocks, other interesting tax developments in the Deal include:

• An Affordable Energy Action Plan which points out that the current Energy Taxation Directive allows Member States to decrease electricity taxation down to zero for energy intensive industries and indicates an EC aim to issue a recommendation on how to ensure that electricity is taxed less than other energy sources;
• Plans to boost clean supply and demand including the development of a voluntary label on the carbon content of industrial products which Member States may use to design tax incentives;
• The Public and private investments block will include measures to establish a new Clean Industrial State Aid Framework (see below) along with other forms of support; and 
• Powering the circular economy – a secure access to materials and resources indicates that the Commission will review the rules on the secondhand scheme contained in the VAT directive as part of a broader green VAT initiative.

State Aid and tax incentives

EU State aid rules generally prohibit advantages in any form conferred by national public authorities to undertakings on a selective basis. One exception is aid intended to remedy a serious disturbance in the economy of a Member State (or across the EU economy). We saw this used in 2022 when the EC adopted a Temporary Crisis Framework (TCF) allowing Member States to provide aid to companies impacted by the conflict in Ukraine. Following several amendments the TCF was replaced by the Temporary Crisis and Transition Framework (TCTF) in 2023 as part of the broader Green Deal Industrial Plan.

The 26 February Communication sets out the intention to develop a new State Aid Framework to accelerate the roll-out of renewable energy, strengthen industrial decarbonisation and ensure sufficient manufacturing capacities for green tech. It will build on the TCTF and allow separate support schemes for specific technologies such as wind and solar and further facilitate support for additional manufacturing for clean-tech products. 

The new framework is scheduled to be adopted by June 2025.

Refining CBAM in the Sustainability Omnibus

As part of a broader Sustainability Omnibus published on the same day, the Commission published a CBAM simplification package which included proposals to simplify the processes and administration for businesses. 

The accompanying press releaseopens in a new tab states that the main changes on CBAM will:

• Exempt small importers, mostly SMEs and individuals, from CBAM obligations. These are importers who import small quantities of CBAM goods, representing very small quantities of embedded emissions. This will be done by introducing a new CBAM cumulative annual threshold of 50 tonnes which the Commission estimates will eliminate CBAM obligations for approximately 90 percent of importers, while still covering over 99 percent of emissions in scope; and
• The rules will be simplified for those companies that remain within the CBAM scope in areas such as the authorisation of CBAM declarants, the calculation of embedded emissions and reporting requirements.

Longer term, the CBAM will be extended to other Emissions Trading Scheme sectors and downstream goods.

The EC aims to present a comprehensive CBAM review in the second half of 2025 and a legislative proposal on the extension of CBAM in the first quarter of 2026.

EU developments remain an area to watch

Whilst there are no specific plans for new direct tax Directives, clearly the Commission does see tax as an enabler to boost the EU’s competitiveness and progress towards decarbonisation. Whilst we have yet to see the flesh on the bones of these proposals, they do indicate the direction of travel of the EU in terms of using the tax system to encourage decarbonisation. The question domestically will be whether this nudges the Chancellor to do something similar in the UK.