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Sustainability and green taxes
European Parliament Think Tank briefing on upcoming revisions to the EU emission trading system
On Friday 16 January 2026, the European Parliament’s Think Tank published an update on the forthcoming revision of the EU Emissions Trading System (EU ETS). Established in 2005, the EU ETS sets a carbon price through a cap and trade system covering power generation, industrial manufacturing and aviation, with ETS2 scheduled to extend carbon pricing to road transport, buildings and additional sectors from 2028. As part of the 2026 Commission work programme a climate package was announced with a proposal to revise the EU ETS by July 2026. This is designed to align the system with the EU’s new 2040 target of a 90% emissions reduction.
The revision will launch a comprehensive review of:
- the role of carbon dioxide removals,
- expanding ETS coverage to new sectors and GHGs to include (aviation, maritime, municipal waste, small installations),
- rules for non permanent carbon capture and utilisation, and
- addressing carbon leakage risks in sectors outside the Carbon Border Adjustment Mechanism (CBAM).
- reviewing the Market Stability Reserve
- exploring further international ETS linkages, building on existing links with Switzerland and potential linkage with the UK before 2030.
What does it mean
- Companies should be aware that a potential expansion of ETS coverage would increase carbon cost exposure across more sectors, requiring companies to anticipate broader compliance and pricing impacts.
- Companies should note that a reassessment of free allocation and leakage protections in non CBAM sectors could heighten competitiveness and carbon leakage risks for both exporters and importers.
- Companies should also monitor the possibility of ETS linkages with Switzerland and the UK, which may harmonize carbon costs across borders and reduce friction in cross border trade.
- Companies should prepare for new reporting obligations around carbon removals, non permanent CCU, and additional GHGs, which will increase supply chain compliance requirements.
- Companies should be aware that the review of the Market Stability Reserve could drive greater carbon price volatility, affecting input costs and the trade competitiveness of carbon intensive sectors.
European Union and India Free Trade Agreement role of sustainability
On 27 January, the EU and India concluded a landmark Free Trade Agreement (FTA), marking the most ambitious deal ever reached by either side. The agreement comes at a time of heightened geopolitical tensions and increasing global pressure to align trade policy with climate and sustainability objectives. It strengthens economic ties by creating a free trade zone covering 2 billion people and reducing tariffs on 96.6% of EU goods exports to India. In addition to market access gains for goods, services, and IP protection, the FTA embeds an enhanced sustainability agenda.
Central to this is a strengthened set of sustainability incentives. The agreement includes a comprehensive Trade & Sustainable Development chapter and establishes a new EU-India climate cooperation platform launching in 2026. The EU anticipates providing €500 million to support India’s emissions reduction efforts, its sustainable industrial transition, and wider climate related investment, directly shaping future subsidy frameworks, R&D collaboration and low carbon technology incentives.
A key point of tension during negotiations was India’s objection to the EU’s Carbon Border Adjustment Mechanism (CBAM). Despite India seeking flexibility akin to the U.S., the EU reaffirmed that its legislative framework does not allow preferential CBAM treatment for specific trading partners. India had previously threatened a WTO challenge and dismissed the idea of a domestic carbon tax as a solution to carbon leakage concerns. In the final agreement, instead of exemptions, the parties established the possibility of a technical dialogue on CBAM, with the EU committing not to extend more favorable terms to any partner in the future.
What does it mean
- Companies should consider the implications when working with EU importers and multinationals sourcing from India should prepare for full CBAM compliance, including carbon intensity reporting and potential cost exposure.
- Companies should be aware of the FTA and the sustainability implications which signal accelerated alignment on climate-linked taxes, levies, incentives and reporting, impacting supply chain due diligence and investment decisions.
- Companies should monitor for EU funding to support India’s transition strategy create openings for technology providers, R&D partnerships, and companies developing renewable energy, hydrogen, circularity and emissions reduction solutions.
- Companies should map CBAM-affected product flows, engage suppliers on emissions data readiness, and assess eligibility for emerging climate -related grants, subsidies and R&D incentives linked to the partnership.
Geostrategic Shifts in 2026: Sustainability Pressures Reshaping Global Trade
The beginning of 2026 has seen the 56th Annual Meeting of the World Economic Forum (WEF), the WEF Global Risks Report 2026, and the EY geostrategic outlook report published. These reports and conferences collectively shared a common theme, signalling a fundamental shift in the geopolitical, environmental and economic landscape shaping global trade. Against rising fragmentation, climate driven resource constraints and more interventionist industrial policies, companies face growing complexity in aligning tax, trade and sustainability strategy. The EY geostrategic outlook report raising the need for integrated governance models spanning tax, sustainability, technology and risk to better anticipate political shifts and regulatory change.
A central theme is the intensifying sustainability agenda. The WEF’s agenda for the 56th Annual Meeting in Davos in January 2026 included a priority of building prosperity within planetary boundaries. The thematic is reinforced by the WEF risk findings, where extreme weather ranks as the third most likely source of global crisis and long term risks cluster heavily around environmental degradation. Water scarcity and critical minerals competition are emerging as pressure points driving new regulations, sustainability linked taxes, incentives for domestic production and tighter permitting, particularly for water intensive sectors such as AI data centres and semiconductor manufacturing.
The Davos discussions point to mounting structural volatility in global supply chains, driven by geopolitical fragmentation, technological acceleration and climate pressures, with shipping costs and trade flows heavily disrupted in 2025. This environment demands greater agility and transformation, with resilience now viewed as one of the key growth drivers. Embedding sustainability, digital innovation and collaborative models to build flexible, future ready supply networks were among the outcomes frequently voiced at Davos.
What does it mean
- Companies should prepare for increasingly sustainability driven border measures, shifting incentive regimes, and rising compliance expectations.
- Companies should redesign supply networks to reduce structural volatility, embedding sustainability into core supply chain decision making to enhance resilience and competitiveness.
- Companies should accelerate digital transformation to improve agility, foresight, and ecosystem coordination, while leveraging incentives that support innovation, new business models, and stronger sustainability outcomes.
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.