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Sustainability and green taxes
Overview:
- European Parliament votes on amendments to the EU Climate Law
- European Commission and United Kingdom negotiations on the linkage of the emission trading systems
- The European Industry Summit discussion on the role of incentives and carbon markets
- Greenhouse Gas Protocol published the first ever Land Sector and Removals Standards
- European Parliament briefing on the European Commissions proposed amendments to the CO2 emission performance standards for new light duty vehicles and vehicle labelling
- European Investment Bank and European Commission announce 3b EUR funding to support EU emission trading system 2 covered sectors
- Industry view on the forthcoming Industrial Accelerator Act
- Delegated Decision announced as part of the EU Packaging and Packaging Waste Regulation
- Council of the EU approves amendments to the sustainability reporting simplification package
European Parliament votes on amendments to the EU Climate Law
On 10 February, the European Parliament (Parliament) voted in favour with a 63% majority to approve the amendments to the EU Climate Law. The EU Climate Law sets a legally binding 2040 climate target, aiming for a 90% reduction in net greenhouse gas emissions compared to 1990 levels. This revision of the EU Climate Law builds on the 2030 target of a 55% reduction and the long-term goal of climate neutrality by 2050.
The agreement introduces greater flexibility for Member States in meeting the target. From 2036, a 5% reduction from high quality international carbon credits will be allowed to count towards emission reductions (up 3% from the Commission’s proposal), expanding the role of market-based instruments. Notably, the international carbon credits can only be used to address emissions that are not covered by the EU’s emission trading system (ETS) and can only come from countries with climate targets and policies aligned with the Paris Agreement’s targets. In addition, a review to be undertaken every two years in which changes to the targets could be implemented, based on factors including energy prices and technological progress.
The revisions also allow domestic permanent carbon removals to offset hard-to abate emissions within the EU ETS, with implications for carbon removal markets, investment incentives and future pricing signals.
The approved amendments also include a delay to the launch of the EU ETS2, covering buildings and road transport, to 2028. The amendments also include flexibility to ETS2 implementation by providing member states with the ability to compensate for shortfalls within individual sectors to meet climate goals.
Following the adoption of the text by the Council of the European Union (Council) has endorsed the text, it will enter into force twenty days after it has been published in the EU Official Journal. A consultation is open on the role of international credits.
What it means
Companies should be aware of the changes in carbon markets and credits landscape and consider their exposure to evolving carbon pricing regimes (EU ETS2) by preparing for potential cost and supply chain impacts. The revised credit rules and ETS flexibility could alter the carbon cost embedded in EU exports, affecting how EU products compete internationally under mechanisms like CBAM.
European Commission and United Kingdom negotiations on the linkage of the emission trading systems
On 2 February 2026, the EU and UK representative met to negotiate the linkage the EU ETS1 with the UK ETS. The linkage aims to prevent specific sector exports from a carbon leakage cost under the EU’s recently implemented Carbon Border Adjustment Mechanism (CBAM). The discussions follow last year’s political agreement to reconnect carbon markets post-Brexit, though no negotiation timeline has been disclosed. UK industry groups have urged rapid progress to avoid CBAM exposure, particularly for steel and other emissions-intensive goods.
The linkage negotiations also build on the EU’s wider ETS revision agenda and growing expectations for consistent cross border decarbonization incentives. Industry groups on both sides are pressing for rapid alignment, given the impending expansion of CBAM obligations and the rising importance of coherent carbon pricing frameworks. A linked ETS would support price convergence and facilitate more coherent cross-border decarbonization incentives.
What it means
Companies should prepare for potential ETS price convergence, reassess CBAM exposure, and monitor negotiations closely to anticipate compliance, reporting, and cost impacts across specific sectors. A linked ETS would directly influence the carbon cost applied to cross border trade, reducing CBAM related frictions and alter competitiveness for EU–UK goods.
The European Industry Summit discussion on the role of incentives and carbon markets
At the European Industry Summit on the 11 February, the European Commission (Commission) announced plans to channel a greater share of Emissions Trading System (ETS) revenues into industrial sectors. The Commission set out this direction in response to European industry calling for action to address rising energy and carbon costs, declining investment confidence and the structural disadvantages created by increasingly high ETS driven carbon prices. Industry leaders have stressed the need to revise sustainability related taxes, carbon cost mechanisms and incentive structures; to ease regulatory burdens and expand access to finance for clean technologies.
The Commission highlighted that the ETS has already generated more than EUR 260 billion in revenue, all reinvested at EU level into industrial innovation, including the EUR 100 billion Industrial Decarbonisation Bank. As part of scaling financial support, a EUR 1 billion pilot auction will be launched to fund low carbon industrial processes such as furnace firing, metal production and chemical manufacturing.
Looking ahead, the summer reform of the ETS will seek to redirect a higher proportion of revenues back into industry, noting that Member States currently invest less than 5% of ETS income into industrial decarbonisation.
What it means
Companies should monitor the landscape for changes in incentives, new funding channels, and revised carbon cost mechanisms that will shape support for low carbon investment. Redirecting ETS revenues toward industry may lower production costs for energy intensive exporters, influencing trade competitiveness and carbon adjusted pricing.
Greenhouse Gas Protocol published the first ever Land Sector and Removals Standards
On 30 January 2026, the Greenhouse Gas Protocol published the Land Sector and Removals Standard, establishing a unified framework for measuring and reporting greenhouse gas (GHG) emissions and CO₂ removals from land sector activities. This was supported by the European Commission with the announcement the adoption of the first voluntary certification methodology for carbon removals and carbon farming across the similar sector activities.
The new Standard, effective from 1 January 2027, requires companies with significant land sector activities to quantify land based emissions (including land use change, land management, and biogenic product emissions) and CO₂ removals from both biological and technological pathways such as direct air capture and geologic storage. Importantly, it introduces criteria for traceability, data quality, permanence, and double counting safeguards, for a sector that has been excluded historically excluded from carbon accounting. While the initial version excludes forestry and non productive land, further guidance is expected, signalling that this could be a precursor to broader inclusion and potential regulatory mechanisms such as carbon markets. This lays the groundwork for future potential carbon pricing across the sector.
What it means
Companies in the agriculture, consumer goods, food, bioenergy, and related value chains should be aware of the potential for enhanced data collection, supply chain traceability, and updated reporting processes. This creates voluntary climate related considerations in the sector. The standard may become a foundation for future carbon accounting rules in traded agricultural and bio based products, shaping market access and export requirements.
European Parliament briefing on the European Commissions proposed amendments to the CO2 emission performance standards for new light duty vehicles and vehicle labelling
On 23 February 2026, the European Commission proposed revisions to CO₂ emission performance standards for new light duty vehicles. This aims to introduce greater flexibility, support technology neutral pathways, and ease compliance pressures on manufacturers. The update responds to industry concerns raised during the 2025 strategic dialogue on the future of the automotive sector, reflecting challenges such as volatile energy prices, supply chain pressures, weaker EV demand and increasing global competition.
The proposal lowers certain 2030 and 2035 reduction targets, introduces multi annual compliance options, and incorporates credits for sustainable renewable fuels and low carbon steel. This effectively creates a new incentive mechanism within the EU’s broader sustainability framework. A new harmonised EU wide vehicle labelling system is also proposed, enhancing transparency for consumers and supporting the shift to electric vehicles. Together, these measures form part of the EU’s wider automotive package designed to safeguard competitiveness while maintaining long term decarbonisation objectives.
What it means
Companies who work in the automotive sector should be aware of the prosed amendment and consider how the new credit mechanisms could support clients. Adjusted vehicle standards and renewable fuel credits influence the carbon intensity of traded vehicles and components, affecting competitiveness in global automotive markets.
European Investment Bank and European Commission announce 3b EUR funding to support EU emission trading system 2 covered sectors
On 4 February 2026, the European Commission announced a new €3 billion ETS2 Frontloading Facility, developed in partnership with the European Investment Bank. The ETS2 Frontloading Facility is designed to accelerate decarbonisation investments in sectors covered under the EU’s ETS2 for buildings and road transport, which is expected to take effect in 2028.
The ETS2 Frontloading Facility will allow Member States that have already transposed ETS2 into national legislation to access funding before ETS2 revenues are collected. This funding and pre-financing is intended to support programmes that reduce emissions in buildings and transport. To ensure a fair and smooth transition, the ETS2 Frontloading Facility will prioritise cleaner heating and cooling solutions, reduced energy demand in buildings, and more affordable clean mobility. It also supports expansion of public and shared transport, e mobility schemes, and zero emission vehicle uptake.
What this means
Companies in the relevant sectors should identify eligible projects and secure investment opportunities that support decarbonisation. Accessing this funding can help reduce future exposure to the ETS2 carbon price once the system becomes operational. Improvements in transport and building efficiency can reduce logistics costs and enhance competitiveness in international supply chains as ETS2 drives new carbon related cost structures.
Industry view on the forthcoming Industrial Accelerator Act
On the week of 16 February, ahead of the European Commission’s expected release of the Industrial Accelerator Act (IAA), 25 February 2026, industry groups have called for an ambitious framework capable of delivering strong lead markets for low carbon products. The Act is anticipated to outline a new strategy to accelerate industrial decarbonisation, reinforce Europe’s manufacturing base, and reduce strategic dependencies. This will place low carbon, "made in EU" products at the centre of Europe’s competitiveness and economic agenda.
The IAA is expected to introduce harmonised EU wide low carbon standards, mandatory EU origin and requirements for public procurement, and a voluntary GHG intensity label for steel. These measures complement existing carbon pricing tools, such as the EU Emission Trading System (ETS), by easing cost asymmetries for energy intensive sectors. This also allows for the use of verified emissions data by the EU Carbon Border Adjustment Mechanism (CBAM) for the operationalisation of labelling schemes. The IAA is also expected to expanded incentives for clean technologies, streamlined permitting processes, and strengthened conditions on foreign investment, aiming to unlock industrial decarbonisation and ensure greater EU value creation.
However, industry groups warn that the IAA risks being too narrow. They argue that heavy reliance on public procurement and unclear Union content rules could limit market uptake. To maximise impact, they call for broader sector coverage, harmonised EU standards, and financial incentives that de risk early investment.
Companies should note that on Monday 23 February the Commission announced that the Act would be delayed further, now expected on the 4 March. The reason for this postponement was stated to be due to disagreements around the "Made in EU" criteria.
What it means
Companies should be aware of the upcoming publication of the Industrial Accelerator Act and consider the impact of the IAA in terms of labelling requirements, low carbon standards and incentives tied to EU made goods. The Act’s focus on EU origin, low carbon standards, and product labelling will affect market access and could reshape competitive dynamics between EU and imported products.
Delegated Decision announced as part of the EU Packaging and Packaging Waste Regulation
On Wednesday 25 February 2026, the European Commission issued a Delegated Decision to the EUs Packaging and Packaging Waste Regulation (PPWR). PPWR entered into force 11 February 2025 with the aim of redefining how packaging is designed, used and managed. PPWR impacts how businesses account for Extended Producer Responsibility fees, Plastic Packaging Taxes and incentives linked to recycled content, design innovation and circular operating models.
The Delegated Decision provides a 100% exemption for operators using pallet wrappings and straps in transportation from the reuse requirements under Regulation (EU) 2025/40. This Delegated Decision will come into force within twenty days.
The decision responds to significant economic and operational constraints identified across logistics and manufacturing sectors, where transitioning to fully reusable pallet wrapping systems would require substantial investment in redesigned packaging lines, new automated equipment, and staff training. Costs of this being estimated at over EUR 600 million for logistics providers alone.
The Delegated Decision is part of the EU Packaging and Packaging Waste Regulation (entered into force 11 February 2025), which introduces mandatory reuse, recyclability, and circularity requirements from 2030. While the Regulation maintains the overall target 40% reusability target. The exemption acknowledges that pallet wrappings and straps used in transport, although technically reusable, is not yet feasible at scale without disrupting supply chains or imposing disproportionate burdens on operators.
What it means
Companies should be aware of the exemption and the relief it offers the transport and logistics sector and consider how their supply chains can adapt to increasing circular economy targets. The exemption reduces near term compliance burdens on exporters and importers reliant on palletised goods, avoiding disruptions to cross border logistics and trade flows.
Council of the EU approves amendments to the sustainability reporting simplification package
On 24 February 2026, the Council of the EU approved the simplification package on corporate sustainability reporting disclosures (CSRD) and corporate sustainability due diligence (CS3D), part of the European Commission’s Omnibus I legislation. These amendments follow growing concerns from businesses about administrative burden, high compliance costs and disproportionate trickle down obligations on SMEs.
The decision narrows the scope of both directives: CSRD now applies only to companies with over 1,000 employees and €450m+ turnover, with a wave-one exemption for 2025 and 2026 reporting. While CS3D thresholds rise to 5,000 employees and €1.5bn+ turnover. Several obligations are removed or eased, including the requirement to develop climate transition plans under CS3D and the EU wide harmonised liability regime. Penalties are capped at 3% of global turnover, and companies may prioritise due diligence where risks are most material, reducing pressure on smaller suppliers. The transposition of CS3D has also been postponed to 26 July 2028, with companies needing to comply by July 2029.
These revisions form part of the broader Omnibus I simplification agenda, aimed at cutting red tape, streamlining sustainability obligations and aligning reporting requirements with economic reality, while still supporting long term environmental goals.
The text will now enter into the EU’s official journal and will enter into force 20 days after its publication. Member states will then have one year after the entry into force to transpose the provisions into national legislation.
What it means
Companies should be aware of the sustainability reporting changes and determine if they are required under the revised scope to submit sustainability reports. Simplified reporting reduces administrative burdens for internationally firms and helps avoid divergent disclosure requirements that can complicate cross border operations and procurement.