Sustainability and green taxes

Local Contact

20 Apr 2026
Subject Tax updates
Categories Tax

Overview:

European Council meeting on EU emission trading system (ETS) review considering the impacts of the conflict in the Middle East

On 19 March, the European Council held a meeting that called on the European Commission to review the EU Emissions Trading System (ETS) by July in response to surging energy prices linked to the conflict in the Middle East. The wider geopolitical instability of the conflict has affected energy markets and industrial competitiveness across Europe. This has caused concerns that volatile carbon prices, combined with high fossil fuel import costs, are straining businesses, supply chains and energy intensive sectors.

The ask was for leaders to provide a targeted, short term measures to keep energy affordable while safeguarding long term decarbonisation goals. The Commission’s upcoming ETS review is expected to address carbon price volatility, its impact on electricity prices, and risks of industrial relocation, while still maintaining a strong market based signal for climate investment. Officials are also pushing for continued or extended free allowances. Commission President Von der Leyen confirmed that the review will explore a more “realistic trajectory,” extended free allocations beyond 2035, and a €30 billion ETS funded investment booster to accelerate decarbonisation.

What does it mean

Companies should be aware of the upcoming EU ETS review and prepare for potential ETS design changes, assess exposure to energy price volatility. 

European Commission proposal to amend the invalidation of allowance under the EU emission trading system (ETS)

On Tuesday 1 April, the European Commission (Commission) published a proposal to amend Decision (EU) 2015/1814, proposing to cease the invalidation of allowances held in the EU Emissions Trading System (EU ETS) Market Stability Reserve (MSR).

The MSR was designed to stabilise the EU carbon market by absorbing surplus allowances and releasing them during periods of scarcity. Since 2023, allowances held above a defined threshold have been invalidated. This has resulted in 3.2 billion allowances being permanently removed at the end of 2024. Earlier reforms under the Fit for 55 package fixed the MSR threshold at 400 million allowances to improve predictability. With the historical surplus largely eliminated and future market tightness expected from the mid 2030s, the Commission has concluded that continued invalidation risks undermining long term market stability.

The proposal introduces a targeted revision that aims to remove the invalidation of allowances above the MSR threshold. This allows more allowances to remain in reserve, strengthening the MSR as a liquidity and price stabilisation tool. The change does not alter the wider ETS framework, cap trajectory, or design, but directly affects carbon price dynamics that underpin ETS linked costs. It is also expected that after Easter the Commission will publish a spectral focused Implementing Act on benchmarks for free permit allocations.  

What does it mean

Companies should be aware of the proposed revision as it will affect the ETS price dynamics with the aim of greater price predictability over the long term. The proposed revisions to MSR should be considered for carbon cost forecasting. 

European Commission announced the price of EU CBAM certificates

On Tuesday 7 April, the European Commission (Commission) published the first price of EU Carbon Border Adjustment Mechanism (CBAM) certificates for Q1 2026. This update is part of the EU’s broader sustainability tax framework, designed to align the carbon cost of imports with the EU Emissions Trading System (EU ETS) and support the EU’s climate objectives.

The Commission confirmed that EU CBAM certificate prices in 2026 will be set on a quarterly basis, with four prices calculated as the weighted average of EU ETS auction clearing prices for each quarter. The first published price for Q1 2026 is €75.36 per tonne of emissions. Although authorised CBAM declarants will not be required to purchase certificates until February 2027, the early publication of prices aims to improve transparency, provide a reliable market reference, and reduce uncertainty for businesses planning for future compliance. From 2027 onwards, CBAM certificate prices will be published weekly, further strengthening alignment with the EU carbon market.

What does it mean

Companies should consider integrating published EU CBAM prices into financial planning and supply chain modelling. The early visibility of carbon costs supports better pricing, contract negotiations, and decarbonisation strategies, and underscores the importance of readiness for CBAM’s financial impact from 2026 onward.

Innovation Fund supports 54 clean industry projects 

On 24 March 2026, the European Commission announced €2.7  billion to support 54 clean industry projects under the Innovation Fund. The implementation of the projects that span 17 countries and industrial sectors is a significant step in scaling net zero technologies across Europe. The projects focus on decarbonising heavy industry and accelerating cleantech manufacturing, with expected emissions reductions of around 210 million tonnes of CO₂ over their first decade. A further six reserve list projects, worth up to €491 million, have also been invited to begin grant agreement preparation. The Innovation Fund is supported by EU ETS revenues in funding industrial decarbonisation. It reinforces the benefit of the circularity of funding to support hard to abate sectors. 

What does it mean

Companies should consider assessing and identifying opportunities to access Innovation Fund support, particularly for energy intensive industries.

Environmental Council meeting focusing on innovation to support EU climate and sustainability agenda 

On 17 March 2026, the Environment Council (Environment Ministers of the Member States) met to assess key legislative and strategic updates shaping the EU’s climate and sustainability agenda. 

  • The discussion focused on amendments to CO₂ emission standards for cars and vans, where the Commission proposed lowering the 2035 reduction target from 100% to 90% and introducing new flexibilities, including credits for sustainable fuels and low carbon EU made steel, as well as incentives for small electric vehicles produced in Europe. 

Ministers also considered the upcoming post 2030 climate framework, reviewing how investments, sectoral flexibilities and international credits can support achieving the EU’s binding 2040 climate target. 

Further conclusions were adopted on the EU bioeconomy strategy, highlighting its potential to replace fossil based materials, stimulate clean tech innovation and attract sustainable investment.

Discussions additionally addressed strengthening EU diplomatic leadership ahead of COP negotiations.

What does it mean

Companies should prepare for evolving sustainability linked incentives and compliance mechanisms, including CO₂ credit systems, bio based innovation support and future 2040 climate legislation. Early alignment with low carbon technologies, supply chain transparency and EU funding instruments will be essential to maintain competitiveness.

Boosting EU’s energy independence and lowering costs with a €200 million EU guarantee in innovative nuclear technologies

On 10 March 2026, Commission President Ursula von der Leyen announced a €200 million EU guarantee to stimulate private investment in innovative nuclear technologies, particularly Small Modular Reactors (SMRs). This update comes amid rising energy security concerns, high electricity prices and Europe’s continued dependence on imported fossil fuels, highlighting the strategic need to diversify energy sources and accelerate low carbon innovation. 

  • The funding will be sourced from the EU ETS, reinforcing the Commission’s broader effort to align climate policy, sustainability taxes and investment incentives. By using ETS revenues to de risk nuclear innovation, the EU is effectively redirecting carbon pricing proceeds toward technologies that can support decarbonization, stability and long term competitiveness. 
  • Simplified regulatory pathways, cross border sandboxes, stronger Member State cooperation and new EU level financing tools aim to scale domestic clean energy supply chains, supporting the EU’s broader clean energy investment strategy and its integration of sustainability taxes, incentives and regulation into a unified framework.
     
What does it mean

Companies should expect increased EU support for low carbon technology deployment, more incentives linked to ETS funded programs and evolving regulatory requirements around energy transition planning.

European Commission management plan incorporating the role of taxation in climate objectives

On 19 March 2026, the European Commission (Commission) set out a new workstream to address fossil fuel subsidies as part of its 2026 management plan, ahead of a wider review of EU energy and climate governance rules expected later this year. This work will feed into the update for the Energy Union Governance Regulation and the European Semester, signalling a renewed focus on aligning tax structures with climate objectives.

The Commission highlighted the scale of the challenge, with 70% of fossil fuel subsidies in 2021 delivered through tax expenditures, including reduced rates for agriculture, industry and untaxed aviation fuel. With the Energy Taxation Directive recast having failed in 2025, the Commission is preparing alternative pathways to recommend the phase out of the most distortionary subsidies, especially where tax rates fall below existing minimums. This builds on the Commission’s plan to integrate fossil fuel subsidy phaseout planning into Member States’ 2030/2050 national energy and climate strategies, alongside strengthening carbon pricing via CBAM implementation and ETS linked reforms.

Parallel initiatives include work on tax expenditures, VAT reforms, and valuation rules addressing transfer pricing and customs undervaluation.

What does it mean

Companies should understand the expected changes to tax exemptions and reforms that may raise effective energy tax costs.

Commission adopts new State aid rules to boost the use of more sustainable ways of transport

On 16 March 2026, the Commission adopted new State aid rules aimed at accelerating the shift toward more sustainable transport modes. These include the Land and Multimodal Transport (LMT) Guidelines and the Transport Block Exemption Regulation (TBER). 

  • The LMT Guidelines set out the conditions under which State aid that has to be notified to the Commission for approval before it can be granted may be declared compatible with the internal market.
  • The TBER complements the Guidelines by exempting certain categories of aid in the rail, inland waterways and sustainable multimodal transport sectors from the requirement of prior notification to and approval by the Commission.

The rules will enter into force on 30 March 2026. The TBER will be in place until 31 December 2034.

What does it mean

Companies in transport, logistics and supply chains should expect faster access to sustainability linked incentives, expanded opportunities for green infrastructure investment, and a clearer framework for cross border multimodal operations. 

Companies should assess eligibility early and prepare to align investment plans with the new guidelines before they enter into force in March 2026.

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.