Taxation and Customs Union

European Green Deal: what role can taxation play?

The Commission has adopted the European Green Deal on 11 December 2019. The Green Deal is a new growth strategy that aims to transform the EU into a fair and prosperous society, with a modern, resource-efficient and competitive economy where there are no net emissions of greenhouse gases in 2050 and where economic growth is decoupled from resource use.

Policy Context

The Green Deal acknowledges the crucial role of taxation in the transition towards a greener and more sustainable European growth and the need to better align our taxation systems with EU climate objectives. Well-designed tax reforms can indeed boost economic growth, help reduce greenhouse gas emissions by ensuring an effective carbon pricing and contribute to a fair transition.

The European Green Deal Communication announces two initiatives in the field of taxation:

  • Revising the Energy Taxation Directive (ETD);
  • Creating a Carbon Border Adjustment Mechanism (CBA).

Revising the Energy Taxation Directive (ETD)

The Energy Taxation Directive 2003/96 lays down the EU rules for the taxation of energy products used as motor fuel or heating fuel and of electricity. Since its adoption in 2003, all attempts to revise the Directive have been blocked by the Council. Meanwhile, energy markets and technologies have experienced significant developments and EU’s international commitments, notably the Paris Agreement in 2015, have evolved considerably.

In September 2019, the Commission published the evaluation of the Energy Taxation directive (full reportsummary). Its conclusion is clear: the EU Energy Taxation Directive is no longer in line with the EU climate objectives.

  • The ETD does not promote emission reductions, energy efficiency, or alternative low carbon / sustainable fuels. A wide range of sectorial exemptions and reductions applied by Member States de facto incentivizes the use of fossil fuels;
  • The ETD does not provide sufficient incentives for investments in clean technologies;
  • The ETD is not in line with other climate EU policies (EU Emission Trading System, Renewables Directive, Energy Efficiency Directive).

The revision of the ETD will aim to reflect more accurately the climate impact of the various sources of energy and to encourage consumers and businesses to change their behaviour.

What’s next?

DG TAXUD has already launched the work on the preparation of the impact assessment of the Energy Taxation Directive to inform the Commission's decision before proposing an amendment to the ETD by June 2021.

On 4 March, an inception impact assessment on the review of the Energy Taxation Directive was published. This aims to inform citizens and stakeholders about the Commission's plans, and allow them to provide feedback on the intended initiative.

The work on data collection has already started, while the economic analysis will start in the first quarter of 2020 and the assessment’s publication is expected at the same time as a possible legislative proposal. DG TAXUD will also consult citizens and other stakeholders through a dedicated public consultation to be launched in spring 2020.

Creating a Carbon Border Adjustment Mechanism (CBA)

In the EU, the carbon price for energy-intensive industry sectors is determined by the market through the EU Emission Trading Scheme (EU ETS). The EU ETS works on the 'cap and trade' principle. A cap is set on the total amount of certain greenhouse gases that can be emitted by installations covered by the system. Within the cap, companies receive or buy emission allowances which they can trade with one another as needed.

The CBA will aim to ensure that the price of imports reflect more accurately their carbon content. It should reduce the risk of carbon leakage. Carbon leakage refers to the situation that may occur if, for reasons of costs related to climate policies, businesses were to transfer production to other countries with laxer emission constraints. The CBA should apply to selected industries at risk of carbon leakage. The precise design of the measure is yet to be defined. It would be an alternative to the measures that address the risk of carbon leakage in the EU’s ETS. All possible options will have to factor in the carbon price of the EU ETS.

The CBA is an instrument that can help realise the EU’s ambitious policy objectives to reduce greenhouse gas emissions. It will be designed to take full consideration of the WTO rules and other international obligations of the EU.

What’s next?

The Commission has begun its assessment of the CBA and will propose a design for such a measure. An external study will be conducted in the course on 2020 to gather data and assess the different options. 

On 4 March, the Commission published an inception impact assessment on the CBA. This provides a roadmap towards the possible adoption of a legislative proposal, including studies, public consultations and an impact assessment. The publication of the inception impact assessment coincides with the launch of a four-week long public consultation for stakeholders and the general public, to gauge their initial reactions. 

The Commission will carry out a broader public consultation later in the year.

The publication of the impact assessment itself is expected at the same time as a possible legislative proposal.

In terms of timing, the CBA being linked to the pricing of carbon in the EU, it may have to be proposed in parallel with the revision of the ETS.


A European Green Deal - Striving to be the first climate-neutral continent

DG Energy

DG Climat

DG Environment