Sustainability and green taxes

Local Contact

25 May 2026
Subject Tax updates
Categories Tax

Overview:

European Commission synopsis on third country carbon price under the EU Carbon Border Adjustment Mechanism

  • On 13 May, the European Commission published the synopsis of the public consultation feedback on how carbon prices paid in third countries will be recognised under the definitive phase of the EU Carbon Border Adjustment Mechanism (CBAM). The consolidated stakeholder feedback will support the design of practical, credible rules that avoid double charging while safeguarding CBAM’s environmental integrity in the implementing acts, currently under consultation (ending 10 June).
  • The synopsis confirms broad support for CBAM’s objectives but highlights significant complexity in translating foreign carbon pricing into CBAM deductions. Key themes include strong calls to recognise robust third country carbon pricing systems, such as emissions trading schemes, provided they are explicit, verifiable and aligned with EU ETS principles. Stakeholders emphasised the need for clear rules on the eligibility of carbon taxes, offsets and Article 6 credits, with concerns about double counting, rebates and hidden subsidies undermining effective carbon prices. Practical implementation issues featured heavily, notably standardised proof of payment requirements, transparent currency conversion methodologies, and internationally inclusive accreditation of third party verifiers to avoid trade barriers and excessive administrative burden.
What does it mean
  • Companies subject to CBAM should prepare for stricter scrutiny of foreign carbon costs, assess the credibility of carbon pricing in their supply chains, and strengthen data, verification and documentation processes ahead of final CBAM implementing rules.

European Parliament committee proposed amendments to EU Carbon Border Adjustment Mechanism

  • On 10 April 2026, the European Parliament’s Committee on the Environment, Climate and Food Safety published a draft report on proposed amendments to the EU Carbon Border Adjustment Mechanism (CBAM), focusing on extending its scope and strengthening anti circumvention measures. 
  • The draft supports the Commission’s proposal to expand CBAM coverage from 1 January 2028 to selected steel and aluminium intensive downstream goods, addressing carbon leakage risks further along the value chain. It emphasises quantitative and transparent methodologies for scope expansion, tighter rules on declaring actual emissions (including renewables based electricity), and stronger monitoring of abusive practices. Key revisions include clearer treatment of pre consumer scrap, enhanced reporting and traceability requirements, removal of provisions allowing temporary scope removal, and rejection of international carbon credits for CBAM compliance. The report also calls for closer alignment with the EU ETS, phased inclusion of indirect emissions, and greater interoperability with third country carbon pricing systems, while flagging potential future inclusion of chemicals, polymers and certain scrap materials.
What does it mean 
  • Companies should be aware of the considerations to EU CBAM scope being discussed and prepare for wider CBAM exposure and reduced flexibility on emissions reporting. 

European Commission consultation on benchmarks and other proposed amendments for EU Emission Trading System ahead of the Directives review

  • On 11 May 2026, the European Commission proposed updated EU Emissions Trading System (EU ETS) benchmark values for the period 2026–2030, launching a public and Member State consultation ahead of formal adoption. This update comes at a critical point in the EU’s ongoing efforts to balance industrial competitiveness with accelerated decarbonisation under its climate policy framework.
  • EU ETS benchmarks are central to determining the level of free allocation of emissions allowances for industry. The proposed revisions maintain average free allocation at around 75% of emissions, while making full use of legal flexibilities to address industry concerns. Notably, the update continues to cover indirect electricity emissions across 14 product benchmarks, strengthening incentives for industrial electrification. This change is expected to increase benchmark values, with an estimated financial impact of around €4 billion over 2026–2030. The update also aligns with broader reforms, including changes to the Market Stability Reserve and the planned ETS review on 15 July 2026, which may introduce sector specific fallback benchmarks and additional investment support for decarbonisation. Alongside including expanded sectoral coverage (such as municipal waste incineration, smaller combustion installations, additional maritime emissions and possibly international aviation), new rules for carbon removals and carbon capture use, and consideration of residual emissions in hard to abate sectors.
  • On 10 April 2026, the European Parliament’s Committee on the Environment, Climate and Food Safety published a draft report on proposed amendments to the EU Carbon Border Adjustment Mechanism (CBAM), focusing on extending its scope and strengthening anti circumvention measures. 
  • The draft supports the Commission’s proposal to expand CBAM coverage from 1 January 2028 to selected steel and aluminium intensive downstream goods, addressing carbon leakage risks further along the value chain. It emphasises quantitative and transparent methodologies for scope expansion, tighter rules on declaring actual emissions (including renewables based electricity), and stronger monitoring of abusive practices. Key revisions include clearer treatment of pre consumer scrap, enhanced reporting and traceability requirements, removal of provisions allowing temporary scope removal, and rejection of international carbon credits for CBAM compliance. The report also calls for closer alignment with the EU ETS, phased inclusion of indirect emissions, and greater interoperability with third country carbon pricing systems, while flagging potential future inclusion of chemicals, polymers and certain scrap materials.
What does it mean 
  • Companies should consider their future ETS exposure, carbon price risks, eligibility for free allowances, potential scope extensions and interactions with CBAM and other sustainability taxes. Early scenario planning and engagement could help manage cost impacts and capture transition incentives for clients.
  • Companies should assess the impact of revised benchmarks on future free allocation, factor potential cost and incentive changes into decarbonisation strategies, and prepare for upcoming consultations and the wider EU ETS review.

European Commission support for International Maritime Organizations progression towards a global shipping carbon price

  • On 29 April 2026, the European Commission published its 2025 Report on greenhouse gas emissions from maritime transport, alongside a detailed Staff Working Document. The reports provide a comprehensive assessment of shipping emissions following the extension of key EU climate instruments to the maritime sector and reflects the rapidly evolving regulatory, tax and incentive landscape for shipping and logistics businesses.
  • Set against the context of the EU’s “Fit for 55” and European Green Deal agenda, the report confirms that 2024 marked a step change for the sector. Maritime transport was brought into the EU Emissions Trading System (EU ETS) in January 2024, with ships required to monitor and pay for CO₂ emissions. At the same time, monitoring, reporting and verification rules were expanded to include methane and nitrous oxide, anticipating their inclusion in the EU ETS. Along with the implementation of FuelEU Maritime, which led to a progressive tightening of greenhouse gas intensity requirements for marine fuels. 
  • The report aligns with the International Maritime Organization (IMO) 84th session of its Marine Environment Protection Committee (MEPC84) MEPC84 concluded in early May marking renewed momentum in negotiations on global shipping emissions, marine pollution and ocean protection.
  • The IMO Net Zero Framework is intended to deliver “mid term measures” to achieve net zero for global shipping by or around 2050. Countries debated multiple proposals under the Net Zero Framework to achieve this goal and acknowledged the need to rebuild consensus to reduce greenhouse gas emissions from shipping. This has the potentially to be achieved through a combination of regulatory limits, carbon pricing type mechanisms and incentives to scale up low and zero emission fuels.
  • The MEPC 84 concluded with countries agreeing to move forward with the several of the Net-Zero Framework proposals including a goal-based maritime fuel standard, a polluter-pays levy on GHG emissions and incentives for early adopters of clean fuels and technologies. The introduction of a carbon price remains on the table but has sparked contentious debate with strong opposition from US and the Kingdom of Saudi Arabia. 
  • In addition, the MEPC agreed to establish an intersessional Working Group to refine draft measures, with further amendments expected ahead of MEPC 85 next year. Planned intersessional meetings and a technical workshop on fuel “chain of custody” models will focus on tracking and verifying emissions across the fuel supply chain, a foundation for any future sustainability levies or market based measures.
What does it mean 
  • Companies in the sector should assess the impact of carbon pricing on their operations. This should take into account carbon cost exposure under EU ETS, consideration of fuel strategy alignment with FuelEU Maritime, and actively consider the EU funding opportunities available to support decarbonisation investments and maintain competitiveness.
  • Companies in shipping, maritime fuel suppliers, ports and cargo owner’s industries should be aware of the MEPC 84 discussions and conclusions.
  • Companies should factor in modelling exposure to potential emissions charges, engaging in consultations, and accelerating investment in alternative fuels, data systems and compliance capabilities.

European Parliament review of EU Emission Trading System 2 updated draft legislation

  • On 17 April 2026, the European Parliament (Parliament) tabled the draft legislative resolution amending Decision (EU) 2015/1814 on the Market Stability Reserve (MSR) for the new EU emissions trading system (ETS2) covering buildings, road transport and additional sectors. The proposal responds to concerns raised by 19 Member States over EU ETS2 price uncertainty, volatility and the potential social impact of higher carbon costs as the system starts in 2027.
  • The updated draft legislation sets out Parliament’s first reading position, building on the European Commission’s proposal to strengthen price stability mechanisms while reinforcing EU climate objectives. Key updates include extending the lifetime of unused MSR allowances beyond 2030 (with partial invalidation only from 2034 and 2036), accelerating the release of allowances when price control triggers are met, and increasing scrutiny of price volatility in the early years of EU ETS2. Crucially for sustainability taxes and incentives, the amendments emphasise the use of EU ETS2 auction revenues for complementary decarbonisation measures, Social Climate Plans and greater support for vulnerable households. The Parliament also calls for stronger links between EU ETS revenues, the Social Climate Fund, and national investment in energy efficiency, clean heating and low carbon transport.
What does it mean 
  • This will likely impact the market in terms of greater short term price stability, but continued exposure to rising carbon costs in buildings and transport.
  • Companies should consider the pass-through cost of ETS2 related taxes.

European Commission publishes documents on the outcomes of the EU deforestation regulation simplification review

  • On 4 May 2026, the European Commission published a report reviewing the simplification of the revised EU Deforestation Regulation (EUDR). This was published alongside updated guidance, draft delegated regulation, and system enhancements, ahead of the revised regulation’s entry into application at the end of 2026. The review aims to provide clearer rules, proportionate obligations and better digital tools to support compliance, particularly for smaller operators.
  • Commissions report
    • The report provides a comprehensive overview of the simplification measures in place and those proposed. It assesses their cumulative impact on administrative burden and confirms that; they are expected to reduce annual compliance costs for affected companies by around 75% compared to the original Regulation. The report also sets out planned trade facilitation tools, including repositories of producer country legislation and recognised certification schemes, to support risk assessment and due diligence. Importantly, it highlights that the EUDR is already driving structural changes in global supply chains through increased investment in traceability and transparency.
  • Guidance Document and Frequently Asked Questions
    • The updated guidance and FAQs respond directly to issues most frequently raised by stakeholders since adoption of the revised EUDR. They provide clearer explanations of obligations across the downstream supply chain and detail the highly simplified regime applicable to micro and small primary operators. The documents also clarify practical implementation issues, including e commerce scenarios and acceptable geolocation approaches. 
  • Draft Delegated Act 
    • The draft delegated act proposes targeted amendments to the scope of products covered by the EUDR, building on last year’s draft and incorporating stakeholder feedback from the consultation process. It proposes the inclusion of selected downstream products, such as soluble coffee and certain palm oil derivatives, to avoid regulatory gaps. At the same time, it introduces exclusions for products such as leather and retreaded tyres, alongside horizontal exemptions for samples, specific packaging materials, used and second hand goods, and waste. The draft delegated act is open for public feedback until 1 June 2026.
  • Updated Information System
    • Key developments include a simplified declaration for micro and small primary operators aligned with existing due diligence statements, updated specifications for automated application interfaces, contingency arrangements for system outages, and a voluntary grouping feature requested by the business community. In parallel, the Commission is working with Member States to integrate relevant national database information into the system, further reducing administrative burden and supporting smoother compliance ahead of the Regulation’s application from December 2026.
What does it mean 
  • Companies in the sector should be aware of the Commissions updated simplification measures and reassess their clients EUDR exposure. Early engagement, data readiness and supply chain transparency will allow for greater management of risk and cost control. 

European Parliament advances discussions on the upcoming Circular Economy Act

  • On Tuesday,5 May 2026, the European Parliament (Parliament) Environment, Climate and Food Safety (ENVI) Members held an exchange of views with Executive Vice President Stéphane Séjourné on the EU’s industrial and environmental agenda, alongside discussions linked to the Parliament’s Circular Economy Forum. The exchange took stock of major forthcoming initiatives, notably the Industrial Accelerator Act and the Circular Economy Act, set against the EU Green Deal objective of reconciling competitiveness with climate and environmental goals.
  • The discussion highlighted 2026 as a pivotal year for Europe’s transition to a circular economy. Key updates focused on reforms that directly affect sustainability taxes, incentives and cost signals for business, including revisions to the EU Emissions Trading System (ETS), Carbon Border Adjustment Mechanism (CBAM), landfill levies, pay as you throw schemes and enhanced incentives for secondary raw materials. Séjourné reemphasised that the Circular Economy Act expected later this year, will aim to reduce regulatory fragmentation, harmonise Extended Producer Responsibility schemes, and strengthen economic incentives to shift materials away from disposal and towards reuse and recycling. Complementary initiatives, such as the Clean Industrial Deal, Ecodesign requirements and digital product passports, further embed durability, reparability and traceability into products, with implications for compliance costs and investment decisions across value chains.
What does it mean 
  • Companies should stay abreast of the consultation and stakeholder discussions being held by the Commissions. 
  • Companies should reassess their exposure to EPR fees and monitor upcoming revisions.

European Commission publication of the AccelerateEU strategy

  • On 22 April 2026, the European Commission (Commission) published “AccelerateEU”, responding to renewed fossil fuel price volatility linked to the Middle East crisis and Europe’s continued exposure through imported oil and gas. The communication pairs short term relief with measures intended to accelerate electrification and reduce structural dependence on fossil fuels, shifting the policy emphasis toward market signals, public funding mobilisation, and targeted fiscal incentives.
  • Key points outlined in AccelerateEU include the expanded toolkit on sustainability taxes and incentives and stronger links to EU emission trading system (ETS) funding. Member States are encouraged to deploy targeted, timely and temporary tax incentives (including reduced energy taxes for vulnerable users and energy intensive industries, value added tax reductions for heat pumps/solar/batteries, and support for electric vehicle uptake), alongside targeted tax credits and accelerated depreciation to speed clean-tech deployment. The Commission also flags possible windfall profit taxation for fairness. 
  • On funding, AccelerateEU points to scaling EU and national financing and encourages using EU ETS revenues to support electrification, industrial decarbonisation and investments that reduce electricity prices. This comes alongside the Commisisons aim to increase both public and private funding for the energy transition.
  • The Commission will also adopt a legislative proposal to update the EU ETS as part of its review, expected by July 2026. This is expected to include increased support through an Industrial Decarbonisation Bank and an Investment Booster funded by ETS allowances and potential extensions of ETS support for sustainable aviation fuel and sustainable maritime fuels.
What does it mean 
  • Companies are encouraged to track member state rollouts of tax credits and incentives eligibility, particularly for SMEs or those operating in the energy intensive sectors.
  • Companies should be aware of the expected announcement following the May 2026 proposals on network charges and taxation affecting power vs. gas cost competitiveness.

European Commissions adopts draft delegated regulation on European Sustainability Reporting Standards 

  • On Wednesday, 6 May 2026 the European Commission adopted a draft delegated regulation amending the European Sustainability Reporting Standards (ESRS) under the Corporate Sustainability Reporting Directive (CSRD), delivering on its commitment to simplify sustainability reporting following the Omnibus I package. The changes sit within the EU’s broader effort to streamline sustainability related regulation within the European Green Deal.
  • The delegated act revises the existing ESRS by significantly reducing mandatory datapoints, prioritising quantitative disclosures, and strengthening the application of the materiality principle so that companies report only decision useful information. Mandatory datapoints are reduced by around 61%, reporting requirements are better aligned with other EU legislation and international standards, and additional flexibilities, phase ins and reliefs are introduced to ease value chain data collection. Clarifications are also made to key areas such as greenhouse gas reporting boundaries, climate transition plans, anticipated financial effects, and alignment with the Corporate Sustainability Due Diligence Directive. Overall, the revisions are expected to reduce reporting costs by around one third, with cumulative savings of up to €4.7 billion over five years.
What does it mean 
  • Companies should reassess CSRD readiness for financial year 2027, update materiality assessments, and align sustainability data, tax, and incentive strategies. The simplified ESRS will aim to reduce compliance burden while reinforcing the role of high quality sustainability data in supporting decarbonisation investment decisions and client reporting expectations.

European Parliament committee discussion on draft changes to the Carbon Border Adjustment Mechanism and the Temporary Decarbonisation Fund

  • On 5 May 2026, the European Parliament’s Committee on the Environment, Climate and Food Safety (ENVI) discussed draft reports on proposed amendments to the Carbon Border Adjustment Mechanism (CBAM) and the creation of a Temporary Decarbonisation Fund (TDF). The debate reflects the EU’s broader climate, trade and industrial policy agenda, where sustainability related taxes, carbon pricing tools and incentive mechanisms are being recalibrated to support decarbonisation while preserving industrial competitiveness.
  • CBAM was widely recognised as a first of its kind instrument, designed to address carbon leakage by applying an EU equivalent carbon price to imports. Rapporteurs and several political groups supported strengthening the mechanism, notably by extending CBAM to certain downstream products and tightening anti circumvention rules. Others cautioned that significant changes to scope and design should proceed through ordinary legislative procedures to safeguard legal certainty and democratic scrutiny.
  • Within ENVI, rapporteurs broadly backed the Commission’s approach but stressed predictability for business. Proposed amendments include removing emergency or urgency procedures, rejecting the use of international carbon credits for compliance, and supporting a gradual expansion to indirect emissions alongside stronger harmonisation across Member States. For the TDF, members supported its role in cushioning sectors exposed to rising carbon costs, calling for faster deployment of funds, broader eligibility including certain downstream operators and more predictable financing.
  • Broader political divisions were most visible around Article 27a, which would allow the Commission to temporarily suspend CBAM for specific products in cases of serious and unforeseen circumstances. The centre right European People’s Party (EPP) supported deleting this temporary suspension clause, arguing it undermines certainty and the credibility of CBAM as a long term climate instrument.
What does it mean 
  • Companies should be aware of the discussions taking place around proposed CBAM changes to understand the potential impact including scope changes, assess supply chain exposure to embedded carbon costs, and prepare for tighter compliance requirements over time.

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.