Tax has emerged as a powerful tool in the EU’s Clean Industrial Deal. Sinead Kelly explores how policy could unlock investment and drive Europe’s green transition
On 26 February 2025, the European Commission unveiled the Omnibus Package, a set of proposals aimed at simplifying EU rules, boosting competitiveness and unlocking investment capacity.
A key component is the Clean Industrial Deal (CID), which focuses on raising funds and driving innovation to accelerate decarbonisation and foster a circular economy.
The CID strategically focuses on energy-intensive industries and the clean-tech sector, identifying six key business drivers: affordable energy, lead markets, financing, circularity, global markets and skills – all essential for a sustainable industrial ecosystem.
Tax policy is often cited as a potential lever for influencing behavioural change and mobilising the investment needed to fund the clean transition and meet our climate targets.
It is interesting that tax policy is noted as a key lever within all six key business drivers, representing a combination of the “carrot and stick” approach.
It is also noteworthy that, at the recent EU Tax Symposium in Brussels, Commissioner Hoekstra stated that decarbonisation is a priority on the EU competitiveness agenda and tax measures are needed to help energy-intensive industries decarbonise.
Tax as a lever
Here are some key areas where tax features within the CID.
Affordable energy
The European Commission recognises securing affordable energy as crucial for industry competitiveness, with tax playing a role via the Energy Taxation Directive.
Negotiations to revise the Energy Taxation Directive have been ongoing since July 2021 and aim to ensure tax frameworks do not incentivise the use of fossil fuels and are more conducive to electrification. The CID emphasises the urgency of concluding these negotiations.
For short-term relief, member states are encouraged to reduce tax levels on electricity, including eliminating levies on electricity that are used by governments to fund initiatives not directly related to the energy sector.
The European Commission will issue recommendations to guide member states on how to lower electricity taxation cost-effectively.
Lead markets
Building a business case for decarbonised products is central to the CID.
The proposed Industrial Decarbonisation Accelerator Act (Q4 2025) will introduce resilience and sustainability criteria to foster clean European supply for energy-intensive sectors.
This includes a voluntary carbon intensity label for industrial products. Such labels should allow industrial producers to distinguish the carbon intensity of their industrial production and to benefit from targeted incentives.
It is suggested that member states could use these labels to design tax incentives and other support schemes in line with state aid rules.
This approach aligns with our climate-related pre-budget submissions, suggesting targeted tax incentives linked to greenhouse gas (GHG) emission reductions.
Financing
Leveraging public and private capital is crucial for funding the substantial investment required for the European clean energy transition.
From a tax perspective, the European Commission recommends member states support clean business through corporate tax systems, suggesting:
- Accelerated depreciation for clean technology assets; and
- Tax credits for businesses in strategic sectors for the clean transition.
Helpfully, the European Commission mentions that to the extent these measures involve state aid, the new state aid framework will integrate these instruments into its compatibility rules.
Ireland should proactively review these proposals and consider tax policy changes to encourage faster decarbonisation of the Irish economy, increased investment in decarbonisation measures and position Ireland as a clean tech innovation leader.
Circular economy
The European Commission recognises the importance of scale and a single market for waste, secondary raw material and reusable materials to promote circularity.
VAT has been identified as a potential lever, with a commitment to review the rules on the second-hand scheme contained in the VAT Directive by Q4 2026 to address the issue of embedded VAT in second-hand products (Green VAT initiative).
Global markets
European clean industrialisation requires global partnerships and open, rules-based trade with access to third markets for goods and capital. Tax can play a role here in seeking to protect a global level playing field. This includes:
The Carbon Border Adjustment Mechanism
The Carbon Border Adjustment Mechanism (CBAM), operational since 2024 (reporting only), seeks to ensure that the EU’s efforts to reduce carbon emissions are not undermined by the importation of carbon-intensive products into the EU.
From 2027, importers of certain carbon-intensive products must purchase CBAM certificates to equalise carbon costs between imported and EU-produced goods.
Recognising the complexity in compiling CBAM returns, especially regarding supplier data, the European Commission proposes to simplify administration in 2025 while continuing to incentivise global carbon pricing.
A comprehensive review of CBAM in Q3 2025 will explore extending CBAM to other EU ETS sectors at risk of carbon leakage, to downstream products and indirect emissions with the aim of closing potential loopholes.
The Foreign Subsidies Regulation
Effective July 2023, the Foreign Subsidies Regulation (FSR) impacts businesses operating in the EU, including non-EU-based multinational companies.
It requires European Commission notification and approval for merger and acquisition activities or public procurement contracts above certain thresholds if non-EU governments provide 'financial contributions' (including grants, export subsidies or tax credits) that could unfairly advantage companies against EU competitors.
By the first quarter of 2026, the European Commission will adopt guidelines on key FSR concepts, including assessing foreign subsidy distortions and clarifying the circumstances in which mergers, which do not meet the thresholds but pose a risk to the level playing field in the single market, may be reviewed.
The European Commission has also stated that it will continue FSR ex officio investigations in strategic sectors, such as the ongoing probe into Chinese wind turbine suppliers.
Skills
The European Commission aims for an inclusive clean transition.
As part of the General Block Exemption Regulation review, it will consider whether state aid rules can be updated to provide better incentives to industry to invest in upskilling, reskilling, quality jobs and the recruitment of workers for a just transition.
Examples in an Irish context could include different PRSI rates and double tax credits for green upskilling.
Sinead Kelly is a Director at PwC Ireland
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