Impact on taxation

The suggested amendment of the Energy Taxation Directive is a critical component of the Clean Industrial Deal, aimed at reducing energy costs and promoting the use of clean energy over fossil fuels. In the Clean Industrial Deal, the following is announced in respect of energy taxation.

1. Finalise negotiations on the revised Energy Taxation Directive
   The Clean Industrial Deal emphasizes the urgent need to conclude negotiations on the revised Energy Taxation Directive. The main aim of this revised directive is to create a tax framework for Member States to implement energy taxes that support electrification and avoid incentivising the use of fossil fuels, thereby supporting the EU's climate and energy goals. The revised Energy Taxation Directive was part of the Fit for 55 plans already but no agreement on the changes has been reached so far between the Member States. See here for details and backgrounds on the previously published revised Energy Taxation Directive.

2. Reducing electricity taxation
   To provide short-term relief to energy-intensive industries investing in decarbonisation, Member States are encouraged to reduce taxation levels on electricity. This includes eliminating levies that finance policies unrelated to energy.
   The European Commission will issue recommendations to guide Member States on how to effectively lower electricity taxation in a cost-effective manner. These recommendations aim to support industrial decarbonisation efforts.

3. Network charges
   The Commission will propose a harmonised design of tariff methodologies for network charges. This initiative aims to ensure that energy flows efficiently from production sites to where it is needed, thereby reducing costs and improving the competitiveness of European industries.

The Commission is proposing to update the Carbon Border Adjustment Regulation with the aim to simplify reporting obligations for importers of goods into the European Union, enhancing compliance efficiency and reducing administrative burdens.

Based on market feedback two primary simplifications are essential for the effective functioning of CBAM:

• Broader Exemptions: Importers of very small quantities of CBAM goods will be exempt from CBAM requirements.

• Streamlined Requirements: A set of simplifications aimed at importers of CBAM goods exceeding the exemption threshold to ease compliance with complex reporting demands.

These proposed simplifications are anticipated to exempt approximately 90 percent of importers from CBAM obligations while maintaining over 99 percent of embedded emissions within the CBAM’s scope, thereby ensuring the environmental integrity of the mechanism. Below are the key updates.

1. New CBAM Applicability Threshold

The new threshold to report is set at 50 tonnes of net mass for cumulative imports of CBAM products (excluding electricity and hydrogen), applicable to commodities such as aluminium, cement, fertilizers, and iron and steel. This threshold corresponds to approximately 80 tonnes of CO2 equivalent on average per importer.

2. Delay of Financial Impact

The recent updates have shifted the financial impact of CBAM from 2026 to 2027. This delay addresses uncertainties regarding the initial year of the post-transitional period and streamlines information exchanges between the CBAM registry and the common central platform. From 1 February 2027, Member States will sell CBAM certificates to authorized CBAM declarants via a central platform. Furthermore, the annual deadline for submitting CBAM declarations will move from May to October. Declarants will be able to purchase CBAM certificates in February 2027 to cover emissions embedded in CBAM goods imported during 2026. They will still have two months (from February to the end of March 2027) to acquire the necessary certificates before the application of the new “50% rule” that replaces the previous "80% rule" for the first quarter of 2027.

3. Review of CBAM Products in Scope

Non-calcined kaolinic clays will be excluded from the products covered by CBAM. Additionally, the Commission will explore expanding CBAM’s scope.

4. Simplified Method for Determining Embedded Emissions

The process for determining default values for embedded emissions will now prioritize actual data. Declarants would be allowed to freely choose between actual embedded emissions and default values with a mark-up. Default values will be established based on the best available data and will be revised periodically through implementing acts to ensure they reflect the most accurate information. 

The Emission Trading System (ETS) is a cornerstone of the EU's strategy to reduce greenhouse gas emissions. Key aspects linking to ETS include:

• Industrial Decarbonisation Bank: The Commission will propose an Industrial Decarbonisation Bank aiming for EUR 100 billion in funding based on funds in the Innovation Fund, additional revenues resulting from parts of the ETS as well as the revision of InvestEU.

• ETS Directive Revision: The planned revision of the ETS Directive in 2026 will also include the emissions of hard to abate sectors. In that light the Commission aims to develop an Industrial Carbon Management Strategy (partially) connected to ETS, which aims to build the business case for permanent carbon removals to compensate for residual emissions from hard to abate sectors. 

• Maximizing Emission Reduction: The Commission also views the EIB facilities as a financial support to reduce greenhouse gas emissions priced via ETS. The Clean Industrial Deal aims to provide the necessary financial support to make these investments feasible. By offering guarantees, loans, and other financial instruments, the EIB helps to de-risk investments in decarbonisation projects, making it easier for companies to secure the funding they need to comply with the ETS and reduce their carbon footprint

• Carbon Accounting Methodologies: The Commission will work to simplify and harmonize carbon accounting methodologies, identifying priority areas and possible avenues for simplification and harmonization by Q4 2025.

The Green VAT Initiative is an important element of the Clean Industrial Deal, aimed at promoting circular economy practices and supporting the decarbonisation of European industries. By addressing the issue of embedded VAT in second-hand products and implementing complementary measures, the initiative seeks to make the tax system more conducive to the reuse and recycling of materials, ultimately contributing to a more sustainable and resilient industrial ecosystem in the EU.

As part of the Green VAT Initiative, the European Commission will review the rules on the second-hand scheme contained in the VAT Directive. The current EU VAT second-handscheme (VAT margin scheme) aims to solve cumulation of VAT by applying the standard VAT rate to a reduced tax base (the margin). This review aims to simplify and update the existing VAT rules to better support the circular economy. By addressing the issue of embedded VAT in second-hand products, the initiative seeks to make it more financially attractive to reuse and recycle materials, thereby reducing waste and promoting sustainability.