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What the Commission proposes

The European Commission has published an impact assessment and legislative review concerning Directive 2003/87/EC and Decision (EU) 2015/1814 on the EU Emissions Trading System (EU ETS) and the Market Stability Reserve. This initiative serves as the first part of a broad post-2030 framework package aimed at driving competitiveness and cost-effective decarbonisation. It evaluates how stationary installations, aviation, and maritime sectors can deliver necessary emission reductions while ensuring carbon leakage protection and orderly market functioning. The review addresses the shrinking supply of allowances and adapts the system to align with intermediate 2040 targets and 2050 climate neutrality goals.

• Reviews the EU ETS and the Market Stability Reserve to prepare for post-2030 climate targets.
• Assesses pathways toward the 2050 climate neutrality goal and the intermediate 2040 target.
• Focuses on industrial sectors, maritime transport, and aviation to ensure cost-effective decarbonisation.
• Examines carbon leakage protection, free allocation benchmarks, and the funding transition through EU revenues.
• Analyzes market functioning and allowance supply adjustments to prevent trading frictions and price volatility.
• Accompanies related proposals simplifying monitoring, reporting, and verification regulations.

Summary written by AI from the Commission's document.

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1. Achieving the EU’s 2050 net-zero climate target requires action across all economic sectors. These include actions related to materials and how we produce, use, re-circulate and dispose of them. Waste management and the circular economy hold considerable, mutually reinforcing potential for mitigating climate change. The introduction of additional measures linking emission reductions and circular economy policies is important to help accelerate future GHG emissions reductions while increasing circularity and improving waste management. More than half of stakeholders in the open public consultation from different stakeholder groups, both companies and business associations as well as NGOs and environmental

   COMMISSION STAFF WORKING DOCUMENT IMPACT ASSESSMENT REPORT..., page 73 (EN)

2. • the inclusion of different waste management activities in the EU ETS, and changes to point of payment for carbon that is captured and used in non-permanent products, in case municipal waste incineration is included in the EU ETS. 5. PREFERRED POLICY OPTION AND MAIN ENVISAGED IMPACTS Overall, the impact assessment concludes that the EU ETS can be adjusted to contribute cost- effectively to the 2040 domestic climate target, while enabling a more manageable decarbonisation pathway for the EU ETS sectors with more decarbonisation options and increased financial support, and expanding to new sectors to promote effective contribution to the climate ambition by all parts of the economy. It also offers options to ensure effective climate action on the EU’s fair share of international maritime and aviation emissions.

   COMMISSION STAFF WORKING DOCUMENT EXECUTIVE SUMMARY OF THE IMPACT..., page 4 (EN)

3. On the basis of this assessment, it is considered appropriate and feasible to amend Directive 2003/87/EC to include emissions from municipal waste incineration installations in the EU ETS. The extension of the EU ETS to municipal waste incineration, as part of a comprehensive approach with strengthened circular economy policies under Regulation (EU) […./..] of the European Parliament and of the Council Circular Economy Act26 and complemented with enabling conditions, incentivises economy-wide decarbonisation, circularity of materials and carbon, and a level playing field within and between sectors.

   Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE..., page 50 (EN)

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What the Commission proposes

The European Commission has launched a call for evidence for an evaluation and impact assessment running in parallel regarding VAT rules and the circular economy. The initiative aims to modernise selected value added tax rules that currently hinder circular business models, sustainable consumption choices, and the single market for secondary raw materials. It focuses on three specific pillars: second-hand goods, the donation versus destruction of viable goods, and VAT deduction rules for passenger cars. A legislative proposal is indicatively planned for the second quarter of 2027.

• Evaluates and reviews current EU VAT rules to ensure they align with the circular economy and complement the Ecodesign for Sustainable Products Regulation and the Circular Economy Act.
• Examines the VAT treatment of second-hand, refurbished, and remanufactured goods to address lack of deduction rights and complex margin schemes.
• Addresses economic distortions where destroying viable goods is more advantageous under current VAT rules than donating them.
• Considers aligning VAT deduction rules for passenger cars with sustainability objectives and zero-emission mobility goals.
• Assesses policy options including mandatory or discretionary measures on vehicle deductions, harmonised margin schemes, and VAT relief on donations.

What is asked: The Commission asks respondents to provide feedback and evidence on the evaluation of current VAT rules and the impact assessment of potential policy options regarding second-hand goods, the donation or destruction of viable goods, and VAT deduction rules for passenger cars.

Summary written by AI from the Commission's document.

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1. Reducing resource dependencies and keeping materials in productive use for longer are important not only for achieving the EU’s environmental objectives, but also for improving its industrial competitiveness and economic security. This is reflected in the Clean Industrial Deal, in which the Commission identified circularity as one of the key enablers of a competitive and decarbonised European economy and announced a future ‘green VAT initiative’ (also referred to as ‘Circular VAT’). The importance of the circular economy for achieving the EU’s ambition to boost competitiveness and economic security will also be reflected in the forthcoming Circular Economy Act (CEA), which is intended to strengthen the single market for secondary raw materials and is scheduled for adoption in late 2026.

   Proposal for a Council Directive amending Directive 2006/112/EC as..., page 1 (EN)

2. CALL FOR EVIDENCE FOR AN EVALUATION AND IMPACT ASSESSMENT RUN IN PARALLEL TITLE OF THE INITIATIVE VAT and the circular economy LEAD DG - RESPONSIBLE UNIT DG TAXUD (Unit C1 and Unit C5) LIKELY TYPE OF INITIATIVE Legislative proposal INDICATIVE PLANNING Q2-2027 ADDITIONAL INFORMATION - This document is for information purposes only. It does not prejudge the final decision of the Commission on whether this initiative will be pursued or on its final content. All elements of the initiative described by this document, including its timing, are subject to change. A. Political context, evaluation, problem definition & subsidiarity check Political context The transition towards a circular economy is a central element of the European Union’s wider agenda for competitiveness, climate neutrality and resilience.

   Proposal for a Council Directive amending Directive 2006/112/EC as..., page 1 (EN)

3. The Ecodesign for Sustainable Products Regulation (ESPR), which entered into force in 2024 and is being progressively implemented, is a key instrument for making environmentally sustainable and circular products the norm. By establishing requirements relating to durability, repairability and reusability, which thereby support the repair- and second-hand markets, it prolongs product life and encourages customers to make more sustainable choices. In addition, the ESPR also addresses the destruction of unsold but viable consumer products by requiring economic operators to take all necessary measures to prevent them having 1 Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (OJ L 347, 11.12.2006, p. 1, ELI: http://data.europa.eu/eli/dir/2006/112/oj) Ref. Ares(2026)8589104 - 09/09/2026

   Proposal for a Council Directive amending Directive 2006/112/EC as..., page 1 (EN)

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