Taxing carbon quotas is unlawful, according to the EU Court’s Advocate General

The Advocate General of the Court of Justice of the EU (“CJEU”) has declared Hungary’s carbon quota tax incompatible with EU law. This finding can have serious consequences for both the state budget and the affected companies.

The tax, introduced in July 2023, must be paid by companies whose carbon dioxide emissions exceeded 25,000 tons in any of the previous 3 years. The tax is EUR 36 per ton and it affects several industries, including oil, chemicals and construction materials. It has placed a significant financial burden on many large Hungarian companies, particularly on construction material producers.

Although some aspects of the tax have been softened, its underlying logic was incompatible with the EU’s emissions reduction system from the outset. Under the EU’s Emissions Trading System, major emitters receive a gradually decreasing number of free allowances each year, and only emissions exceeding that amount must be covered by purchased quotas. This mechanism was designed to encourage emission reductions. The EU’s system of free allowances is intended to prevent companies from becoming immediately uncompetitive against other players who pay little or nothing. However, the Hungarian tax runs counter to this principle of gradualism.

In October, the Advocate General argued in his opinion that the carbon quota tax violates EU law. The CJEU usually follows the Advocate General’s opinion in its final rulings, which are typically delivered within 2-6 months after the Advocate General’s opinion. If the CJEU ultimately rules against the tax, it orders the state to refund all payments.