Sustainability and green taxes

Local Contact

19 Jan 2026
Subject Tax updates
Categories Tax

Overview:

Announcement of new simplification package on environmental legislation including Circular Economy Act

On 10 December 2025, the Commission unveiled a new simplification package on environmental legislation, focusing on reducing administrative burdens and supporting the transition to a sustainable, circular economy. 

Key elements include the proposed Circular Economy Act, which aims to harmonise and simplify rules for cross-border circular activities, lower costs, and facilitate the creation of a single market for waste and recycled materials. Updates to Extended Producer Responsibility (EPR) remove the requirement for companies to appoint authorised representatives in every Member State. 

The public consultation closed in November 2025, and the Commission has since been collecting stakeholder input and conducting expert-group discussions as part of that assessment phase. The next step remains finalizing the impact assessment ahead of drafting the legislative proposal, expected in Q4 2026.  Some of the comments raised during the consultation are expected to have supply chain impacts. For example, CBAM represents a strategic opportunity to embed circular economy objectives within carbon pricing frameworks. Stakeholders highlighted that CBAM should not only serve to prevent carbon leakage but also actively incentivize circularity and ensure alignment with the forthcoming Circular Economy Act.

What does it mean

Companies should consider the implications of this simplification package across supply chains with revisions potentially impacting manufacturing and waste management. The revisions favouring business models aligned with circularity.

European Commission announce Automotive Package with focus on the sectors green transition

On the 16 December 2025, the European Commission presented the Automotive Package, aimed at accelerating the transition to clean mobility and enhancing the competitiveness of the EU automotive sector. This comes as the industry faces mounting regulatory, technological, and market pressures due to the dual challenges of decarbonisation and global competition. The package introduces revised CO₂ emissions standards, requiring a 90% reduction from 2035, with remaining emissions offset via low-carbon steel, e-fuels, and biofuels. It incentivises sustainable materials, fuels and circular economy business models. Notably, new tax and subsidy mechanisms are proposed including super credits and bonuses for EU-made small electric vehicles, tailored grants and purchase incentives, and harmonised labelling rules to inform buyers. An example of this is the EUR 1.8 billion Battery Booster that will provide interest-free loans for R&D and production, strengthening the EU battery value chain. This omnibus packaging for the sector aims to reduce the administrative burden saving EUR 706 million annually, enabling further investment in decarbonisation and innovation.

What does it mean

Companies in the automotive sector should be aware of the Automotive Package and consider the implications this could have on their business, particularly in terms of emission reduction requirements and incentives for R&D.

EU Sustainability Reporting and Due Diligence simplification updates

The introduction of the Omnibus I legislation in February 2025 aimed to streamline EU sustainability obligation and reduce administrative burdens within the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDDD), both covering activities across companies’ value chains. These simplification packages are in ongoing negotiations. 

Planned Corporate Sustainability Reporting Directive (CSRD) changes include:

  • Threshold for EU companies: average over 1,000 employees and a net annual turnover of over EUR 450 million. Companies with under 1,000 employees are not required to report beyond what is set out in the voluntary standards.
  • Threshold for non-EU companies: Increased to EUR 450 million generated in the EU. 
  • Sector-specific reporting to be made voluntary.
  • A digital portal with templates and guidelines on EU and national reporting requirements will be created. 
  • For Wave 2 large EU companies under the stop-the-clock mechanism of the Omnibus there will be a two-year delay with CSRD reports now due in 2028. While for Wave 3 SMEs (PIEs and listed companies) there will also be a two-year delay for those who are still in scope with CSRD report due in 2029. 

Planned Corporate Sustainability Due Diligence Directive (CSDDD) changes include:

  • Threshold for EU and non-EU companies: more than 5,000 employees and a net annual turnover of over EUR 1.5 billion.
  • Businesses will no longer need to prepare transition plans but will be liable at a national level for non-compliance with the potential to be fined up to 3% of the company’s worldwide net turnover.
  • Postponement to 26 July 2028 with companies having to comply with the new rules by July 2029.
     
What does it mean

Companies within the above mentioned thresholds should monitor further developments as the directive is formally adopted. This will take place twenty days after publication into the Official Journal following formal approval by the Council. Preparation for CSRD Wave 2 reporting would be expected to start imminently and may require inputs from the Supply Chain/ global trade groups.

Update for January 2026 – the postponement of the Industrial Accelerator Act 

Lots of supply chain developments are expected in 2026, including the postponed Industrial Accelerator Act (IAA) now expected on 28 January 2026. The act was initially communicated by the European Commission as part of the Clean Industrial Deal under the Industrial Decarbonisation Act. The IAA is expected to introduce clean, resilient, circular, cybersecure criteria to strengthen demand for EU-made clean products and deliver clean European supply for energy-intensive sectors. It would facilitate faster permitting for modernisation and decarbonisation efforts of, for example steel production sites. In addition, the act is expected to establish a low carbon label, initially covering steel and then cement, to provide consumers with information on the carbon intensity of products. According to the Commission the label would help companies achieve a green premium for their products. 

What does it mean

It is likely that greater emphasis and tighter procurement criteria will be put in place to encourage the uptake of EU-content in subsidies, procurement, and fleet regulations. Companies should assess supply chains, secure local sourcing, and prepare compliance strategies. Early adaptation will mitigate risks and position businesses to benefit from incentives tied to sustainability and European preference.

EUR 5.2 billion of EU Emissions Trading revenues support the latest open application window of the Innovation Fund to support clean technologies

On 4 December 2025, the European Commission announced the application window for three new funding opportunities under the Innovation Fund, allocating EUR 5.2 billion from EU Emissions Trading System revenues to support clean transition technologies. The Innovation Fund aims to incentivise investment in technologies that advance Europe’s journey to climate neutrality by 2050.

This update introduces the EUR 2.9 billion IF25 Net-Zero Technologies (NZT) call, the EUR 1.3 billion third IF25 Hydrogen Auction, and the first of its kind EUR 1 billion IF25 Heat Auction focused on decarbonizing industrial process heat. These opportunities target a range of projects spanning renewable energy manufacturing, hydrogen production, and low-carbon industrial heat solutions, with a new focus on supporting both large-scale initiatives and SME-led innovations. Auctions will be market-based, awarding support to projects that offer the most cost-effective greenhouse gas reductions. Notably, Germany and Spain will supplement EU funds with national investments, expanding potential support for promising projects.

What does it mean
  • IF25 Net Zero Technologies information session 16 December, application window closes 23 April 2026 with grant award letters expected Q1 2027 
  • IF25 Hydrogen and Heat Auction information session 10 December, application window closes 19 February 2026 with grant award letters expected nine months later.

Provisional agreement reached on amendments to the European Climate Law 

On 10 December 2025, the Council of the European Union (Council) and the European Parliament (Parliament) negotiators provisionally agreed to set a legally binding 2040 climate target, aiming for a 90% reduction in net greenhouse gas emissions compared to 1990 levels. This revision of the European Climate Law builds on the 2030 target of a 55% reduction and the long-term goal of climate neutrality by 2050.

The updated framework introduces greater flexibility for Member States, such as: 

  • The use of high-quality international carbon credits (up to 5% of 1990 emissions) from 2036 with an expected pilot period between 2031-2035 under Article 6 of the Paris Agreement
  • The inclusion of domestic permanent removals under the EU Emissions Trading System (ETS)
  • Through this discussion the postponement of ETS2 for buildings, road transport, and small industries by one year to 2028 was confirmed aiming to provide businesses with more time to adapt.

Following this provisional agreement the Council and Parliament will need to formally adopt the text after which the amendments of the European Climate Law will be published in the Official Journal of the EU and enter into force.

What does it mean

Companies should monitor the developments to the European climate law and any changes in energy pricing and carbon trading requirements and timelines. 

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