Written by Pieter Baert.
Achieving ambitious climate objectives while supporting robust economic growth and safeguarding tax revenue requires simple and well-targeted tax incentives that encourage sustainable investment. The European Parliament’s Subcommittee on Tax Matters (FISC) is due to hold a public hearing on this topic on 20 November 2025.
Clean industrial deal – tax recommendations
Launched in February 2025, the clean industrial deal is a package of wide-ranging actions aimed at ensuring that decarbonisation is a driver of economic growth for the European economy. Next to concrete action to lower energy prices, the European Commission published a (non-binding) recommendation to guide Member States when introducing and designing tax incentives to support the clean industrial deal objectives.
Firstly, the Commission recommends that Member States allow companies to deduct investment in green technology from their taxable income more quickly (‘accelerated depreciation‘), or even immediately (‘full or immediate expensing’). By enabling companies to deduct the cost of the asset faster – rather than spreading the cost evenly over time – accelerated depreciation effectively raises the after-tax rate of return on investment and helps mitigate distortions caused by inflation. While this incentive does not ultimately increase the nominal value of deductions, it does enhance their real value by allowing firms to claim them earlier, thereby improving businesses’ cash flow.
| France | Investment in renewable energy equipment or energy-saving technologies can be depreciated at 2, 2.5 or 3 times the normal rate. |
| Germany | 75 % of costs on electric company vehicles acquired after 30 June 2025 and before 1 January 2028 can be deducted in their first year. |
| Ireland | The Accelerated Capital Allowance (ACA) scheme allows companies to deduct the full cost of investment in energy-efficient equipment in the year of purchase, rather than over the standard eight-year period. |
| Spain | Since 2023, Spain allows companies to apply accelerated depreciation for new electric and hydrogen company vehicles, at twice the standard depreciation rate. This also applies to investment in new electric vehicle charging infrastructure, both normal and high-power. |
Accelerated depreciation for green assets – Member State examples (non-exhaustive)
Secondly, the Commission recommends that Member States, where feasible, use cost-effective and targeted tax credits for investment that creates sufficient manufacturing capacity in clean technologies, supports industrial decarbonisation, or strengthens the EU’s strategic resilience (for example, the production of a net-zero product where the EU is currently highly dependent on a single third country). The Commission notes that empirical evidence generally ranks input-based tax credits – for example, those covering R&D costs for green investment – higher than income-based credits, such as patent boxes, arguing that the former are more cost-effective in stimulating additional investment.
Action on these recommendations should be combined with other policy measures, such as the phasing out of fossil fuel subsidies, whether provided through tax expenditure or direct grants.
The Council welcomed the Commission’s recommendations, but underlined the need for flexibility, allowing Member States to adapt tax incentives to their specific fiscal contexts and budgets.
Revision of the Energy Taxation Directive
The proposal to revise the Energy Taxation Directive (ETD) remains the only unfinished file in the Commission’s ‘fit for 55‘ package, tabled in 2021, aiming to reduce emissions by 55 % by 2030.
The ETD lays down EU-wide minimum excise duty rates on motor/heating fuels and electricity. Member States are free to set their own tax rates as long as they respect the ETD’s minimum rates. The Commission’s proposal aims to update the directive – unchanged since 2003 – to bring it into line with the EU’s climate objectives and modern green technology, while maintaining Member States’ capacity to raise tax revenue. While reducing greenhouse gas emissions and preserving tax revenues are not inherently contradictory objectives, concern is growing about potential long-term future revenue erosion for national budgets, as excise duties on fossil fuels decline with the green transition.
Some of the proposal’s key provisions to revise the ETD include:
- Shifting from volume- to energy content-based taxation: Minimum rates would no longer be expressed per litre or kilogram, but rather per gigajoule of energy content, removing the existing tax bias against low-energy-content biofuels.
- Environmental ranking of minimum rates: A new structure would tax energy products according to their environmental performance, ensuring that electricity is always taxed at the lowest rate and fossil fuels at the highest.
- Gradual rate increases: Minimum rates for certain energy products, such as natural gas, would rise by one-tenth each year over a ten-year transitional period, to balance social costs, climate objectives, and fiscal stability.
- Annual indexation: Minimum rates would be automatically adjusted each year to preserve their real value over time and prevent erosion through inflation.
- Phasing out exemptions and reductions: The proposal removes several existing tax advantages, including the mandatory exemptions currently granted to maritime and aviation fuels.
Over the four years of negotiation, reaching the required unanimous support in the Council has proven difficult, aggravated by the energy cost crisis following Russia’s invasion of Ukraine and rising concerns about the resilience of European industry. Several Council presidencies have tried to break the impasse by proposing prolonged transitional periods and the possibility for Member States to provide total or partial exemptions for certain sectors and services, or the installation of an ’emergency brake’ on the increase in taxation rates when countries are faced with a sudden increase in energy prices.
The Danish Council Presidency had invited ministers to reach a general approach on the proposal on 13 November 2025, but a number of Member States expressed reservations about the proposed compromise text. Consultation on the file (2021/0213(CNS)) in the European Parliament continues.
Read this ‘at a glance note’ on ‘Encouraging clean investment: The role of tax incentives‘ in the Think Tank pages of the European Parliament.
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