The Court of Justice of the European Union has ruled that national legislation cannot neutralise the incentive effect of CO2 emission allowances allocated free of charge within the context of the European carbon market, according to a judgment (C 519/24) published on Thursday 16 April.
When a Hungarian court referred the matter to the Court of Justice for a preliminary ruling, it held that the European scheme “establishes a system [...] to promote reductions of greenhouse gas emissions in a cost-effective and economically efficient manner” (Article 1 of Directive 2003/87 establishing a system for greenhouse gas emission allowance trading). It points out that the aim of free quotas is to prevent “carbon leakage” and preserve the competitiveness of European industries.
The case concerned a Hungarian tax of €36 per tonne of CO2 imposed on industrial companies with high emissions that benefit from free allowances. In the Court’s view, such a national measure is contrary to EU law where it has the effect of “neutralising the compensatory effect of allocating such allowances” and “eliminating the incentives aimed at promoting the reduction of greenhouse gas emissions”.
The judges emphasised that although the Member States have tax powers, these cannot call into question a mechanism that is “fully harmonised at EU level”. According to the Court, a tax must not “diminish the incentive to reduce greenhouse gas emissions to the point of eliminating it altogether”.
Applying this reasoning to the present case, the Court considers that the Hungarian tax has the effect of “depriving greenhouse gas emission allowances of a substantial part of their economic value” and amounts to reducing to nothing the incentive system of the European carbon market.
However, it will be up to the national court to verify whether the disputed measure does in fact have this neutralising effect.
Link to the judgment: https://aeur.eu/f/lli (Original version in French by Lionel Changeur)