Provisional text

OPINION OF ADVOCATE GENERAL

ĆAPETA

delivered on 9 October 2025 (1)

Case C‑519/24

Nitrogénművek Vegyipari Zrt.

v

Nemzeti Adó- és Vámhivatal Fellebbviteli Igazgatósága

(Request for a preliminary ruling from the Veszprémi törvényszék (Veszprém High Court, Hungary))

( Reference for a preliminary ruling – Environmental protection – Directive 2003/87/EC – Greenhouse gas emission allowance trading system – EU ETS – Objectives of Directive 2003/87 – Emission allowances free of charge – Carbon leakage – National tax on carbon dioxide produced as a result of the use of free allowances )

I.      Introduction

1.        The emissions trading system established by Directive 2003/87/EC (2) (‘the EU ETS’) is one of the instruments through which the European Union endeavours to achieve its environmental goals. The directive aims to decarbonise the economy of the European Union by regulating greenhouse gas emissions (‘GHG emissions’). At the same time, and taking into consideration the economic interests of the European Union, it strives to achieve reductions in a cost-effective and economically efficient manner. (3)

2.        The present case raises the question as to what extent Member States can supplement that system established at EU level.

II.    The facts in the main proceedings, the questions referred for a preliminary ruling and the procedure before the Court

3.        In the aftermath of the COVID-19 pandemic and due to Russia’s war of aggression against Ukraine, on 17 July 2023 Hungary adopted the a jelentős térítésmentes kibocsátásiegység-kiosztásban részesülő létesítmény üzemeltetőjét érintő egyes veszélyhelyzeti szabályokról szóló 320/2023. (VII. 17.) Kormányrendelet (Government Decree No 320/2023 on certain emergency rules relating to operators of installations qualifying for a significant free allocation of emission allowances; ‘the Government Decree’).

4.        By the present reference for a preliminary ruling, the Veszprémi törvényszék (Veszprém High Court, Hungary; ‘the referring court’) seeks clarification from the Court of Justice of the relevant EU law in order to decide on the compatibility of that government decree with the objectives and provisions of Directive 2003/87.

5.        Before the referring court, Nitrogénművek Vegyipari Zrt., a nitrogen fertiliser producing company established in Hungary (‘the applicant’), challenges a decision of the national tax authority, which found the applicant liable to pay a carbon tax under the Government Decree.

6.        The Government Decree imposes a carbon tax, calculated on the basis of the quantity of emission, on ‘operator[s] of an installation qualifying for a significant free allocation of emission allowances’. Tax is imposed if such operators (i) produced an annual average of certified emissions of carbon dioxide in the three years preceding the year in question in excess of 25 000 tonnes and (ii) received in the year prior to the year in question the allocation of free allowances equivalent to at least 50% of the average of its total certified emissions of carbon dioxide in the three years preceding the year in question. (4)

7.        The Government Decree defines its scope of application ratione personae as applying only to those operators of an installation that qualify for a significant free allocation of emission allowances which have a ‘product benchmark sub-installation’ or a ‘process emissions sub-installation’ within the meaning of Commission Delegated Regulation (EU) 2019/331. (5)

8.        Falling within that scope of application, the applicant was held liable to pay tax on carbon dioxide emissions.

9.        However, the applicant considered that the Government Decree, upon which the fiscal charge is based, was contrary both to the Magyarország Alaptörvénye (Hungarian Basic Law) and to EU law, and thus requested that the tax authorities allow it to amend its tax return.

10.      The Nemzeti Adó- és Vámhivatal Veszprém Vármegyei Adó- és Vámigazgatósága (National Tax and Customs Authority – Tax and Customs Directorate, Province of Veszprém, Hungary; ‘the first-tier tax authority’) rejected the applicant’s tax return, filed on 21 December 2023, considering that the provisions of the Government Decree were in force and applicable to the applicant.

11.      The applicant then lodged an administrative appeal against the decision of the first-tier tax authority to the Nemzeti Adó- és Vámhivatal Fellebbviteli Igazgatósága (National Tax and Customs Authority – Appeals Directorate, Hungary; ‘the second-tier tax authority’ or ‘the defendant’).

12.      The second-tier tax authority confirmed the decision of the first-tier tax authority. It explained that, as law enforcement authorities, tax authorities are not empowered to rule on the legality of a rule of law from the point of view of any alleged incompatibility of the latter with provisions of the Hungarian Constitution or of EU law. It considered that a ruling on the substance of an infringement of EU law must be given in judicial review proceedings.

13.      Following that decision, the applicant initiated proceedings before the referring court, claiming that the decisions of both the first-tier and the second-tier tax authorities (‘the contested decisions’) should be amended in such a way that the referring court allows its tax return. In the alternative, it claimed that the contested decisions should be annulled and the defendant should be ordered to conduct new proceedings and issue a new decision. The applicant based its claims on the contention that the contested decisions infringe the Hungarian Basic Law and the EU ETS, and are contrary to the objectives of Directive 2003/87.

14.      In respect of the latter, the applicant claimed before the referring court that the tax on carbon dioxide is incompatible with the objective to avoid carbon leakage, which the European Union sought to ensure by introducing the free allocation of allowances in the EU ETS. As the levying of that tax is directly linked to the free allowances received under Directive 2003/87, it has the effect, in practice, of depriving those allowances of their character as allowances allocated without consideration.

15.      The applicant further stated that the Government Decree constitutes an obstacle to the exercise of fundamental freedoms guaranteed by the Treaty and that the legislation in question is discriminatory. In that regard, the applicant claimed that the definition of the scope ratione personae of the Government Decree is arbitrary and discriminatory against operators that fall within the scope of that law as compared with those who do not, as well as against operators established in Hungary who fall within its scope as compared to operators from other Member States.

16.      The applicant further claimed that that Government Decree is contrary both to the freedom of establishment and to the freedom to provide services, since it contains a disproportionate restriction not justified by an overriding reason in the public interest and therefore in breach of the principle of non-discrimination, in the light of the concept of ‘operator’ under Article 3(f) of Directive 2003/87. Furthermore, in conferring a selective advantage on other economic operators, the Government Decree also constitutes non-notified State aid that infringes Articles 107 and 108 TFEU.

17.      Finally, the applicant claimed that the Government Decree constitutes a disproportionate restriction on property and thus infringes Article 17 of the Charter of Fundamental Rights of the European Union (‘the Charter’) and Article 1 of the First Additional Protocol to the Convention for the Protection of Human Rights and Fundamental Freedoms (ECHR). In that regard, the applicant stated that any restriction of fundamental rights must respect the principles of legal certainty and the protection of legitimate expectations, meaning that it must be foreseeable and must allow those affected enough time to make the amendments required by the legislative changes in question. The absence of a transitional period infringes those principles.

18.      The defendant before the referring court submitted that the action for judicial review should be dismissed and the legal reasoning set out in the contested decisions maintained. In particular, the defendant contended that the Government Decree does not infringe Directive 2003/87.

19.      In respect of their claims regarding the (non-)conformity of the Government Decree with Directive 2003/87, both the applicant and the defendant relied on the same case-law of the Court, namely Iberdrola and Others, (6) ŠKO–Energo (7) and PPC Power. (8)

20.      Concerning the applicant’s argument relating to the freedom of establishment, the defendant stated that it is unclear how such a freedom could have been infringed since the applicant is already established in Hungary and its establishment – or the commencement or continuation of its business activities – in another Member State is not, from any point of view, the subject of the present case. (9) Finally, the defendant referred to Adusbef and Others (10) in order to support its argument that the freedom to conduct a business is not an absolute right and may be subject to interventions on the part of public authorities which may limit the exercise of economic activity in the public interest. The defendant also claimed that the right to property is not an absolute right and its exercise may also be subject to restrictions.

21.      In those circumstances, the Veszprémi törvényszék (Veszprém High Court) decided to stay the proceedings and to refer the following questions to the Court of Justice for a preliminary ruling:

‘(1)      Must – or may – the objectives and the provisions of [Directive 2003/87] – in particular, although not exclusively, Articles 1, 10 and 11 and recitals 5, 7 and 20 thereof – be interpreted as precluding a national measure ([g]overnment decree) which:

–        retrospectively subjects emissions produced as a result of the use of emission allowances to a fiscal charge (levying of a charge);

–        retrospectively subjects emissions produced as a result of the use of free emission allowances to a fiscal charge (levying of a charge);

–        retrospectively subjects emissions produced as a result of the use of free emission allowances to a fiscal charge (levying of a charge) the effect of which is to deprive the free emission allowances of their value and their compensatory effect;

–        retrospectively subjects emissions produced as a result of the use of free emission allowances to a fiscal charge (levying of a charge) the effect of which is to deter operators from reducing their emissions, improving their environmental efficiency or investing in more environmentally friendly technologies;

–        retrospectively subjects emissions produced as a result of the use of free emission allowances to a fiscal charge (levying of a charge) the purpose of which bears no relation to environmental protection or to the European Union’s emissions trading scheme and its objectives; on the contrary, the purpose of, and sole basis for, authorising the imposition of that charge is to deal with the effects of the armed conflict and humanitarian disaster close to Hungary?

(2)      In the light of the prohibition of discrimination arising from Articles 18, 49 and 56 [TFEU], Article 21 of the [Charter] and Article 14 [ECHR], must – or may – the concept of “operator” referred to in Article 3(f) of [Directive 2003/87] be interpreted as precluding a national measure ([g]overnment decree) which discriminates, in an unjustified and arbitrary manner and without any overriding reason in the public interest, against a particular category of such operators by comparison with operators not falling within its scope?

(3)      Must – or may – Articles 18, 49 and 56 TFEU be interpreted as precluding a national measure ([g]overnment decree) which restricts the exercise of those freedoms and which:

–        [d]iscriminates, in an unjustified and arbitrary manner and without any overriding reason in the public interest, against a particular category of operators within the meaning of Article 3(f) of [Directive 2003/87] by subjecting them to different (more onerous) rules;

–        defines its scope ratione personae in an arbitrary manner without any overriding reason in the public interest, and which is not suitable for attaining the objectives of empowerment that led to its adoption; and

–        is introduced suddenly and unforeseeably, with only three days having elapsed between its publication and its entry into force, and at the same time retrospectively imposes retroactive obligations in respect of events that occurred prior to its entry into force?

(4)      Must – or may – the protection of the right to property guaranteed by Article 17 of the Charter and Article 1 of the First Additional Protocol to the ECHR be interpreted as precluding a national measure ([g]overnment decree) which is confiscatory in nature and which deprives operators falling within its scope of all of their gains in the immediate future, thus constituting a disproportionate and intolerable interference?’

22.      The applicant in the main proceedings, the Hungarian Government and the European Commission submitted written observations to the Court.

23.      A hearing was held on 25 June 2025 at which those parties presented oral argument.

III. Analysis

A.      On the questions referred

24.      A few preliminary remarks are in order in relation to the first question referred.

25.      First, by that question, the referring court seeks the interpretation of inter alia Article 10 of Directive 2003/87. In the original version of that directive, the provision which dealt with the allocation of free allowances was indeed Article 10. However, that directive has since been amended multiple times, (11) and thus the allocation of free allowances is now provided for in Article 10a thereof. Therefore, the first question of the referring court should be understood as requiring the interpretation of Article 10a of that directive, not of Article 10 thereof.

26.      Second, the first question referred relates to different scenarios presented in five parts. The scenario presented in the first part, which concerns the tax on emissions produced as a result of the use of emission allowances in general, is hypothetical, since that scenario does not represent the circumstances of the case before the referring court. Instead, the tax at issue in the present case, imposed by the Government Decree, concerns a tax on carbon dioxide emissions produced by installations which are allocated significant amount of free allowances, and only concerns such installations. For that reason, the Court cannot provide an answer to that part of the first question.

27.      The remaining components of the first question relate to tax on emissions produced as a result of the use of free allowances. Those parts of the question in fact already qualify the national legislation at issue as depriving the free emission allowances of their value and of their compensatory effect, as well as having the effect of deterring operators from reducing their emissions, improving their environmental efficiency and/or investing in more environmentally friendly technologies. It then asks whether that national legislation, having such effects, is allowed or prohibited under Directive 2003/87.

28.      Whether or not the national legislation at issue really has such effects is not a question that the Court can consider in preliminary reference procedures. Given that any national legislation that specifically undermines the objectives of a directive is inevitably precluded by that directive, it must be understood from the questions before the Court in the present case that the referring court is in fact asking for confirmation that the objectives it mentions are indeed the objectives being pursued by Directive 2003/87 in maintaining the free allowances in the EU ETS.

29.      In my analysis, I will therefore answer the question by focusing on the objectives of maintaining the free allowances in the EU ETS, and the legal framework through which those objectives are ensured.

30.      The final part of the first question asks whether a fiscal charge is precluded on the ground that it bears no relation to environmental protection or to the EU ETS and its objectives, but whose purpose is rather to deal with the effects of the COVID-19 pandemic and Russia’s war of aggression against Ukraine. To my mind, this question requires an answer only if the tax at issue does not run contrary to the objectives of the free allowances within the EU ETS. If it does, it is prohibited by Directive 2003/87 regardless of its domestic budgetary purpose.

31.      As far as the second, third and fourth questions are concerned, I do not find them to be relevant. Directive 2003/87 was adopted on the basis of Article 192(1) TFEU (then Article 175(1) TEC), which is the legal basis for the adoption of legislation in the area of the environment. Nevertheless, under recital 7 of that directive, its provisions are also considered necessary for preserving the integrity of the internal market and to avoid distortions of competition. Therefore, if the national legislation at issue is found to contravene that directive, it will not be necessary to establish whether it is also contrary both to the freedom of establishment and to the freedom to provide services, as it would be prohibited under the directive itself.

32.      Taking the above into consideration, I will address the objectives of distributing emissions allowances free of charge to certain market operators. If the referring court finds that the Government Decree and the decisions adopted on the basis of that decree run contrary to those objectives, it must set aside the national legislation at issue.

B.      Objectives of the free emission allowances

33.      As stated in the introductory part and confirmed by the case-law of the Court, the EU ETS aims to reduce substantially the GHG emissions in the European Union without, however, harming the economic development, employment and competitiveness of EU industries. (12)

34.      In general, the EU ETS scheme functions so that every GHG emission covered by the scheme must correspond to the amount of emission allowances to be surrendered. By 30 April each year at the latest, the operator of every installation must surrender the quantity of allowances corresponding to their GHG emissions during that period. (13)

35.      Allowances may be acquired by auction, that is for consideration, or allocated for free. While, at the same time, the cap on the overall amount of emissions allowed is progressively decreased.

36.      The EU ETS as it exists today has been introduced in stages. Thus far, there have been four EU ETS trading periods. (14)

37.      During the first trading period, from 2005 to 2007, almost all allowances covering emissions from installations included in the scheme were allocated free of charge based on the quantity of the past emissions of those industries. For that period, it was the responsibility of each Member State to set the cap, which meant that national authorities were tasked with establishing the volume of allowances allocated to each installation based on their national allocation plan.

38.      During the second trading period, from 2008 to 2012, the proportion of allocation of free allowances fell to around 90%. As in the previous period, the allowance allocation was decided on at Member State level, which led to diverging national approaches. In order to avoid the discrepancies that that created, the EU legislature adapted the system for the third time.

39.      The big change to the system occurred in the third trading period, lasting from 2013 to 2020. From the beginning of that period, Member States were no longer required to prepare national allocation plans. Instead, those plans were replaced by a single EU-wide cap on allowances. That cap has since been reduced annually in line with the European Union’s climate target, ensuring that overall EU emissions decrease over time.

40.      During that third period, the auctioning of emission allowances became the default system when allocating them. However, free allowances continued to be distributed.

41.      Whereas in the first two periods the free allocation of allowances could be justified by the need to launch the new market for allowances and to allow participating economic operators to prepare for it, why have the free allowances been maintained in the third and fourth trading period?

42.      The most important reason – which was also relevant in the first two periods as confirmed by the case-law relating to those periods (15) – is to prevent the loss of competitiveness between EU industries, which may lead to the phenomenon known as carbon leakage. (16)

43.      Carbon leakage refers to the risk of the displacement of production and therefore of GHG emissions beyond the borders of the European Union, motivated by the economic burden imposed by decarbonisation in the European Union. (17)

44.      As mentioned above, the regulation and management of the EU ETS became centralised in the third trading period, requiring harmonised EU rules. The distribution of free allowances has since been based on the assessment of the risk of carbon leakage made at EU level. On the basis of Directive 2003/87, the Commission establishes a carbon leakage list, (18) enumerating the sectors and subsectors eligible for the free allocation of allowances on account of their exposure to a significant risk of carbon leakage. Installations and sub-installations operating in those sectors can receive free allowances covering up to 100% of their emissions.

45.      However, prevention of carbon leakage is not the only objective of the system for free allowances established under the EU ETS. Free allowances cannot obstruct the main goal of that scheme, which is decarbonisation. Therefore, the other objective that the free allocation of allowances is designed to achieve is to incentivise the installations that receive such allowances to nevertheless introduce new cleaner technologies. To achieve that aim, the EU legislation provides that installations that are eligible for 100% coverage of their emissions can receive such allowances only if they perform well in terms of decarbonisation, which is determined based on EU-wide harmonised ex ante performance benchmarks. The number of free allowances allocated for each installation is no longer calculated only on the basis of past emissions, but is determined by using GHG emissions benchmarks developed for each product. As explained by the Commission, benchmarks are determined based on the top 10% most efficient installations in terms of decarbonisation at EU level; (19) doing so is intended to reward installations that become cleaner and incentivise other installations to follow the same path.

46.      In order to align with the European Green Deal project (20) and to meet the European Union’s 2030 climate target objective of a reduction of at least 55% of net emissions compared to 1990 levels, the EU ETS was adapted for a fourth time, as of 2021. (21)

47.      The present case concerns the fourth trading period, lasting from 2021 to 2030.

48.      Compared to the third trading period, there have been no significant changes in relation to the objectives of allocating free allowances, or to the core methods of attaining those objectives.

49.      In the fourth period, auctioning emission allowances remains the main method for their distribution and is regulated under Article 10 of Directive 2003/87. However, allowances are also still distributed free of charge, and their allocation is regulated under Articles 10a and 10b of Directive 2003/87, the former concerning the rules for the establishment of the EU-wide ex ante benchmarks and the latter establishing the rules for determining the sectors at risk of carbon leakage.

50.      Moreover, in that period, the number of sectors benefiting from free allocations fell to 63, which still represented a large proportion of the emissions in the European Union, namely 94%. (22) However, even if in theory those sectors may receive free allowances to cover 100% of their emissions, they would still have to buy the other allowances in the market in order to cover their costs of production – if they do not perform as well as the top 10% most efficient installations. Finally, the system for calculating such benchmarks has also been partially amended in the fourth period. (23)

51.      Notwithstanding certain changes undertaken in the fourth trading period as compared to the third, the primary reasons for keeping the free allocations remained the same – on the one hand, they serve to maintain the competitiveness of EU industries and prevent carbon leakage and, on the other hand, they aim at incentivising decarbonisation efforts in the sectors eligible for free allowances.

52.      Those two objectives might require different and even conflicting measures. The harmonised EU system for free allowances under the EU ETS thus aims at balancing those two objectives.

53.      As long as there are no decarbonisation measures at global level, the competitiveness of EU industries covered by the EU ETS will be affected, as the products imported from other countries that do not have such environmental measures might enter the EU market at lower prices. That may change with the introduction of the carbon border adjustment mechanism (‘the CBAM’), which may, in time, eliminate the reasons for keeping free allowances. (24) However, the transitional introduction of the CBAM in 2023 has not influenced the circumstances at issue in the present case, as the applicant remained an installation entitled to full coverage of its emissions by free allowances for its production within the benchmarks.

C.      The remaining powers of Member States in relation to free allocation of allowances under the EU ETS

54.      In order to achieve the objectives of the system for free allowances under the EU ETS, the rules for their allocation are fully harmonised at EU level. (25) To that end, the main instrument is Directive 2003/87, on the basis of which the Commission is empowered to adopt implementing acts and certain delegated acts which may supplement it. Article 10a(1) of that directive refers to the cases in relation to which the Commission is entitled to supplement the rules harmonised by the EU legislature relating to the free allocation of allowances.

55.      On the basis of its delegated powers, the Commission thus adopted Delegated Decision 2019/708 amending the list of sectors and subsectors deemed at risk of carbon leakage for the period 2021 to 2030. (26)

56.      Another area in which the Commission is empowered to supplement Directive 2003/87 with delegated acts is the establishment of benchmarks for the allocation of free allowances to installations on the carbon leakage list, for which it can adopt common rules. The delegated act that is relevant for the current trading period and for stationary installations, such as the applicant’s installation, is Delegated Regulation 2019/331. The Commission also adopted the revised benchmarks for the period from 2021 to 2025 in Implementing Regulation (EU) 2021/447. (27)

57.      On the basis of those acts, as part of the national implementing measures, Member States provided the Commission with their national lists of installations and sub-installations entitled to free allocation of allowances according to harmonised EU rules. The Commission then approved those lists if they were deemed to conform to those harmonised EU rules provided for by Decision (EU) 2021/355. (28)

58.      Even if detailed rules are adopted by the Commission, the EU legislature sets the criteria for determining the risk of carbon leakage and for establishing the benchmarks as well as the list of eligible installations and the quantity of free allowances they may receive in any given period. Those legislative criteria bind the Commission when establishing implementing and supplementing rules. Thus, as the Court explained in DK Recycling, (29) the Commission must follow the rules under Directive 2003/87 when establishing benchmarks and the carbon leakage list. (30)

59.      Therefore, as far as the allocation of free allowances is concerned, Directive 2003/87 established full harmonisation at EU level, allowing the EU legislature to ensure that the distortion of competition in the internal market is minimised. (31)

60.      It clearly follows that Member States may not unilaterally change the rules governing the allocation of free allowances and which are harmonised at EU level.

61.      As explained by the Commission at the hearing, the process of establishing the lists of sectors at risk of carbon leakage and the lists identifying the top 10% most efficient installations in order to establish benchmarks is complex and time consuming. It aims at establishing an adequate balance between rules that, on the one hand, ensure maintenance of competitiveness and prevent carbon leakage and, on the other hand, incentivise economic operators to look for ways to decarbonise.

62.      As highlighted above, Member States have a role in designing the system for free allowances, that is, through implementing measures, which they must undertake pursuant to Article 11 of Directive 2003/87. They submit detailed lists of installations operating in their territory to the Commission, which then accepts or rejects them after checking the conformity of those installations with the harmonised EU rules established by the EU ETS.

63.      However, once the lists of eligible installations and the quantity of free allowances to which they are entitled are established at EU level, Member States can no longer interfere with the system. That is so even if they consider that the harmonised EU rules do not lead to sufficient decarbonisation.

64.      There is only one measure that Member States may take in relation to the free allowances that have been set at EU level. Article 10a(6) of Directive 2003/87 allows Member States to adopt financial measures for the benefit of certain sectors or subsectors that are exposed to a high risk of carbon leakage because of significant indirect electricity costs, provided that such financial measures are in accordance with State aid rules and do not cause undue distortions of competition in the internal market.

65.      Justification for that provision can be found by looking at the effects which the exclusion of the electricity sector from the system of free allowances during the third trading phase had on other participants in the EU ETS. The companies in the electricity sector had to start auctioning their allowances, which resulted in an increase in electricity prices, as the cost of that auctioning was passed on to the consumers. Increased electricity prices represent indirect costs for carbon-emitting installations and are not covered by the free allowances they receive. Therefore, Directive 2003/87 allows – or one may even argue, requires – Member States to introduce subsidies for those installations which are not able to pass such indirect costs on to consumers without losing competitiveness. Thus, Article 10a(6) of Directive 2003/87 allows Member States to take measures to mitigate carbon leakage additional to free allowances.

66.      In my opinion, the fact that Directive 2003/87 itself empowers Member States to take additional measures to mitigate carbon leakage created by the EU ETS scheme in the form of financial subsidies is an argument in favour of understanding the system for free allowances under that directive as a fully harmonised system at EU level. Member States cannot interfere with that system unless specifically empowered to do so by the EU legislation in question.

67.      The fact that the allocation of free allowances under the EU ETS is fully harmonised does not, however, mean that Member States cannot establish additional, more ambitious decarbonisation targets through instruments such as carbon taxes collected from economic operators under their jurisdiction. However, such taxes cannot interfere with the system for the allocation of allowances free of charge as established under the EU ETS. Additionally, even if such taxes do not interfere with that scheme, they cannot create unjustified obstacles to freedoms guaranteed in the internal market.

68.      To my mind, therefore, a Member State can introduce a carbon tax – which would generally increase the price of production – on every company in its territory that emits greenhouse gasses, and therefore also affects the installations that are entitled to free allocations under the EU ETS. (32) While the higher price of production might discourage installations from establishing themselves in that Member State, it does not affect the freedom of establishment, in the same way as, for example, higher minimum wages in one Member State in comparison to other Member States does not interfere with that freedom. Furthermore, such a tax does not negatively affect the objectives of the EU ETS, even if it does affect the compensatory effect of free allocations. A company established in a Member State that imposes carbon taxes might decide to move its production to another Member State which does not impose carbon taxes alongside the EU ETS, but in which it will continue benefiting from free allowances. Therefore, such a general tax does not necessarily create an incentive to leave the EU internal market and is therefore not contrary to the objective of carbon leakage prevention.

69.      On the contrary, if a fiscal charge introduced by a Member State disturbs the balance reached at EU level in the system for free allocation under the EU ETS, that charge would be prohibited by Directive 2003/87.

D.      The application to the present case

70.      From the foregoing analysis, it is possible to conclude that Directive 2003/87 prevents Member States from adopting measures, including a carbon tax, which interfere with the harmonised system for the allocation of free allowances and which run counter to the objectives of such a system.

71.      This answers the referring court’s first question.

72.      That court must, therefore, assess whether the tax introduced by the Government Decree does in fact interfere with the system established for the allocation of allowances free of charge and whether it runs counter to any of its objectives, in particular the objectives to safeguard the competitiveness of economic operators established in the European Union and to incentivise them to decarbonise their production.

73.      Even though such an assessment is for the national court to make, the Court of Justice can provide some guidance in that respect to help the national court in its assessment. I will therefore offer my understanding as to why Directive 2003/87 does not allow the imposition of fiscal charges such as those introduced under the Government Decree.

74.      To recall, the applicant’s installation belongs to the group of sectors and subsectors which, pursuant to Article 10b(1) of Directive 2003/87, are deemed to be at risk of carbon leakage, as established in in point 1 of the annex to Delegated Decision 2019/708. Installations listed therein are allocated free allowances for the period lasting until 2030 at 100% of the quantity that matches the benchmarks determined pursuant to Article 10a of Directive 2003/87 and the implementing EU legislation.

75.      The fiscal charge introduced by the Government Decree affects the applicant’s allocation of free allowances, to which it was entitled under the EU ETS system. Given that the charge applies only to operators qualifying for a significant free allocation of emission allowances, that government decree effectively turns those free allocations into allocations for consideration. Furthermore, given that the fiscal charge is applied to the past emissions of the affected operators, the applicant had no possibility to include such a charge in the price of its products in order to compensate for it. Therefore, the imposition of the fiscal charge at issue runs contrary to the objective of maintaining competitiveness of carbon-intensive industries in the European Union, which is achieved through the allocation of allowances free of charge.

76.      In addition, the fiscal charge introduced by the Government Decree does not apply to all GHG producers, even though it is calculated on the basis of the quantity of greenhouse gasses produced.

77.      In fact, it applies only to those GHG producers that were entitled to the full coverage of their production through the free allowances under the EU ETS. The charge does not, therefore, generally increase the costs of business in Hungary, but affects exclusively those economic operators that were deemed by the EU legislature to require protection from a decrease in competitiveness and carbon leakage.

78.      Furthermore, it seems that the fiscal charge at issue additionally differentiates between operators entitled to free allowances by excluding those that receive them according to heat and fuel benchmarks. At the hearing, the Hungarian Government was asked to explain the reasons for such a differentiation and stated that, in some sectors, the objectives of decarbonisation were not fulfilled, which is why the legislature decided to react by introducing the charge.

79.      However, as explained earlier, the installations, whose entitlement to free allowances was confirmed by the Commission’s implementing decisions on the basis of the information submitted by Member States, cannot be deprived of that entitlement by unilateral national measures. The fiscal charge at issue interferes with the list of installations entitled to receive the free allowances on account of being at high risk of carbon leakage. Should a Member State consider that a list is to be amended, it must initiate such a change at EU level.

80.      When composing the lists to later submit to the Commission, Member States had to pay attention to whether one benchmarked product was produced in more than one installation or whether more than one benchmarked product was produced in the same installation, and also whether intermediate products were exchanged across installation boundaries. That was important, as stressed in Delegated Regulation 2019/331, in order to ensure equal treatment of installations and to avoid distortions of competition. (33)

81.      On the basis of all such information, the list which includes the applicant was created.

82.      Therefore, by interfering with the applicant’s entitlement to free allocations – or that of other installations in a similar position – the fiscal charge at issue will disrupt the EU system for free allowances based on the equal treatment of all participating operators.

83.      The defendant maintains that the fiscal charge at issue is calculated on the basis of the quantity of produced GHG emissions and not on the basis of the value of the free allowances allocated to taxable operators. Relying on Iberdrola and Others, it claims that Directive 2003/87 allows charges on the use of free allocations and only prohibits those imposed directly on free allocations.

84.      However, the situation in Iberdrola and Others  was different; in that case, the Spanish Government introduced charges in order to eliminate the practice of passing the value of the allowances on to consumers within the electricity industry. That industry, which at that time (the second trading period) was still eligible for those allowances, was including and passing on the value of those allowances in the prices to be paid by consumers, even if those allowances were allocated free of charge. When allowances are auctioned and their price passed on to consumers, the profit therefrom, created through emitting greenhouse gasses, goes to the State. When allowances are allocated free of charge but their value is still passed on to consumers, the profit from carbon emissions remains with the economic operator that produced the emissions. That is clearly contrary to the polluter pays principle. As the aim of the charges in that case was to prevent the realisation of such profits which were contrary to the objectives of Directive 2003/87, the Court did not find those charges contrary to that directive.

85.      In the present case, the national legislation at issue does not represent any such correction of the effect of the allocation of emission allowances free of charge. Rather, the fiscal charge at issue neutralises the compensatory value of such allocations and therefore runs contrary to the objective of preserving competitiveness and avoiding carbon leakage.

86.      It may well be true that the fiscal charge at issue could incentivise the operators subjected to it to decrease the quantity of their carbon emissions, that is, if the company manages to withstand the decrease in competitiveness and decides to remain in the State concerned. However, the EU system for free allowances balances those two objectives. Therefore, interference with that balance through selective carbon taxes runs contrary to the system harmonised at EU level.

87.      The Court found, in two other cases mentioned by the defendant, that the national legislation at issue ran contrary to one of the objectives of the system for free allocation of allowances. In ŠKO–Energo, the charges imposed directly on the value of the free allowances were considered to run counter to the objective of maintaining competitiveness, and in PPC Power, a Slovak tax imposed on unused free allocations was considered contrary to the objective of incentivising efforts towards decarbonisation.

88.      Therefore, it is sufficient that the national provisions contradict only one of the objectives of the system for the allocation of free allowances under the EU ETS to find a national measure, such as a selective carbon charge, contrary to Directive 2003/87.

89.      Finally, the reasoning presented above is applicable to any national measure, whatever its purpose. Therefore, even if, as follows from the final part of the first question referred, the fiscal charge at issue is not aimed at decreasing the carbon emissions but rather at dealing with the effects of the COVID-19 pandemic and Russia’s war of aggression against Ukraine, such a measure would be deemed contrary to the EU ETS as established by Directive 2003/87 because it would run counter to the objectives of the free allocation of allowances and/or interfere with the balance established at EU level to achieve those objectives.

IV.    Conclusion

90.      In the light of the foregoing considerations, I propose that the Court of Justice answer the first question referred for a preliminary ruling by the Veszprémi törvényszék (Veszprém High Court, Hungary) as follows:

The objectives and provisions of Directive 2003/87/EC of the European Parliament and of the Council of 13 October 2003 establishing a scheme for greenhouse gas emission allowance trading within the Community and amending Council Directive 96/61/EC, as amended by Directive 2009/29/EC of the European Parliament and of the Council of 23 April 2009, in particular Articles 1, 10a and 11 thereof,

must be interpreted as precluding a fiscal charge imposed by national law which:

–        retrospectively subjects emissions produced as a result of the use of free emission allowances to a fiscal charge the effect of which is to deprive the free emission allowances of their value and their compensatory effect; or

–        retrospectively subjects emissions produced as a result of the use of free emission allowances to a fiscal charge the effect of which is to deter operators from reducing their emissions, improving their environmental efficiency or investing in more environmentally friendly technologies,

notwithstanding the proclaimed purpose of such a charge under national law.

1      Original language: English.

2      Directive of the European Parliament and of the Council of 13 October 2003 establishing a scheme for greenhouse gas emission allowance trading within the Community and amending Council Directive 96/61/EC (OJ 2003 L 275, p. 32).

3      Article 1 of Directive 2003/87. See also recitals 5 and 7 thereof.

4      See Paragraph 1(1)(ba) and (bb) of the Government Decree.

5      Commission Delegated Regulation of 19 December 2018 determining transitional Union-wide rules for harmonised free allocation of emission allowances pursuant to Article 10a of Directive 2003/87 (OJ 2019 L 59, p. 8) (‘Delegated Regulation 2019/331’).

6      Judgment of 17 October 2013 (C‑566/11, C‑567/11, C‑580/11, C‑591/11, C‑620/11 and C‑640/11, ‘Iberdrola and Others’, EU:C:2013:660).

7      Judgment of 26 February 2015 (C‑43/14, ‘ŠKO–Energo’, EU:C:2015:120).

8      Judgment of 12 April 2018 (C‑302/17, ‘PPC Power’,  EU:C:2018:245).

9      The defendant made references to judgments of 3 March 2020, Tesco-Global Áruházak (C‑323/18, EU:C:2020:140); of 3 March 2020, Vodafone Magyarország (C‑75/18, EU:C:2020:139); and in Iberdrola and Others.

10      Judgment of 16 July 2020 (C‑686/18, EU:C:2020:567).

11      As introduced by Directive 2009/29/EC of the European Parliament and of the Council of 23 April 2009 amending Directive 2003/87 so as to improve and extend the greenhouse gas emission allowance trading scheme of the Community (OJ 2009 L 140, p. 63) and as last amended by Directive (EU) 2018/410 of the European Parliament and of the Council of 14 March 2018 amending Directive 2003/87 to enhance cost-effective emission reductions and low-carbon investments, and Decision (EU) 2015/1814 (OJ 2018 L 76, p. 3) (‘Directive 2009/29’). It must be noted that Directive 2003/87 was amended again in 2023. However, those amendments postdate the circumstances of the present case.

12      See, in that respect, judgment of 22 June 2016, DK Recycling und Roheisen v Commission (C‑540/14 P, ‘DK Recycling’, EU:C:2016:469, paragraph 49).

13      Article 12(3) of Directive 2003/87 provides that ‘Member States shall ensure that, by 30 April each year at the latest, the operator of each installation surrenders a number of allowances equal to the total emissions from that installation during the preceding calendar year as verified in accordance with Article 15, and that these are subsequently cancelled.’

14      For a concise but clear description of the evolution and the reasons behind different phases of the EU ETS, see Sato, M. et al., ‘Allocation, allocation, allocation! The political economy of the development of the European Union Emissions Trading System’, WIREs Climate Change, Vol. 13, Issue 5, 2022, pp. 1 to 19.

15      See Iberdrola and Others, paragraph 39, and ŠKO–Energo, paragraph 28.

16      See, in that respect, recital 10 of Directive 2018/410, which amended the basic Directive 2003/87 for the fourth trading period.

17      As explained by Carević, M., ‘from the environmental perspective, a measure which aims to reduce greenhouse gas emissions can only be effective if it does not at the same time induce carbon leakage which results in the increase of emissions elsewhere’; see ‘Carbon leakage in the EU in the light of the Paris Climate Agreement’, Croatian Yearbook ofEuropean Law and Policy, Vol. 11, 2016, pp. 47-71, at p. 51.

18      The first such list was established by Commission Decision of 24 December 2009 determining, pursuant to Directive 2003/87/EC of the European Parliament and of the Council, a list of sectors and subsectors which are deemed to be exposed to a significant risk of carbon leakage (notified under document C(2009) 10251) (OJ 2010 L 1, p. 10). The list of sectors exposed to the significant risk of carbon leakage has so far been amended several times. The current list is contained in Commission Delegated Decision (EU) 2019/708 of 15 February 2019 supplementing Directive 2003/87 concerning the determination of sectors and subsectors deemed at risk of carbon leakage for the period 2021 to 2030 (OJ 2019 L 120, p. 20).

19      See, in that respect, Article 10a(2) of Directive 2003/87.

20      Communication from the Commission to the European Parliament, the European Council, the Council, the European Economic and Social Committee and the Committee of the Regions – The European Green Deal (COM(2019) 640 final).

21      On the fourth trading period see, for instance, De Clara, S. and Mayr, K., ‘The EU ETS phase IV reform: implications for system functioning and for the carbon price signal’, Oxford Energy Insight, Vol. 38, 2018, pp. 1 to 18.

22      In the third period, 156 sectors representing 98% of emissions were eligible for free allowances. See Sato, M. et al., footnote 14, op. cit., p. 9.

23      Ibid.

24      The CBAM was introduced by Regulation (EU) 2023/956 of the European Parliament and of the Council of 10 May 2023 establishing a carbon border adjustment mechanism (OJ 2023 L 130, p. 52). Under that mechanism, the imported products from countries which are not subject to decarbonisation measures are charged upon entry to the EU internal market, thus protecting the competitiveness of EU production and encouraging cleaner production in non-EU countries. The transitional phase for introducing the measure started in 2023 and should apply in full as of 2026.

25      See, in that respect, recital 23 of Directive 2009/29, which inserted Article 10a into Directive 2003/87: ‘Transitional free allocation to installations should be provided for through harmonised Community-wide rules ([ex ante] benchmarks) in order to minimise distortions of competition with the Community. …’ (emphasis added).

26      See footnote 18 to the present Opinion.

27      Commission Implementing Regulation of 12 March 2021 determining revised benchmark values for free allocation of emission allowances for the period from 2021 to 2025 pursuant to Article 10a(2) of Directive 2003/87 (OJ 2021 L 87, p. 29).

28      Commission Decision of 25 February 2021 concerning national implementation measures for the transitional free allocation of greenhouse gas emission allowances in accordance with Article 11(3) of Directive 2003/87 (OJ 2021 L 68, p. 221).

29      Paragraph 52.

30      That is why in DK Recycling (paragraph 55), the Court considered that the Commission could not include an installation on that list on the basis of the concept of ‘hardship’, which was said to have existed at national level, as that condition has not been set by the EU legislature for establishing the carbon leakage list.

31      DK Recycling, paragraph 53.

32      See, in that respect, Nysten, J.V., ‘On the legality of national carbon pricing instruments alongside the new EU ETS 2’, npj Climate Action, Vol. 3, Issue 91, 2024, pp. 1 to 10.

33      See recitals 15 and 16 of Delegated Regulation 2019/331.