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The carbon tax is here

The Hungarian Government Decree 320/2023 (VII. 17.) on the carbon dioxide quota, published on 17 July 2023, has the unconcealed aim of imposing a significant tax on the country's largest carbon dioxide emitters, which will mean extra tax liability for dozens of stakeholders, including many foreign-owned companies. Our blog post summarises the most important things to know.

The carbon dioxide quota

Stationary installations that are covered by the EU Emissions Trading Scheme (ETS) and emit significant amounts of carbon dioxide have a fixed amount of allowances (also known as emission units) per year, which entitle them to emit a certain amount of CO2 "for free".  The free carbon allowances decrease each year in a degressive manner, giving large companies an incentive to reach greener operation by cutting their emissions.  If they emit more than the free quota, they are obliged to buy more allowances to compensate for the extra pollution. In other words, companies covered by the ETS will have to pay for CO2 emissions only above the free allowance.

The Hungarian Government Decree aims to tax the country's biggest CO2 emitters

Contrary to the logic of the ETS scheme, under the Government Decree published on 17 July, the installations do not have a quantity of carbon dioxide allowances entitling them to free emissions, but are liable to pay a tax on their total emissions.  

The tax will be payable for the tax year beginning after 31 December 2022 by companies that "have received a free allocation of emission allowances equal to at least 50% of the average of their verified carbon dioxide emissions in the year before the tax year and the three preceding years and whose annual average verified carbon dioxide emissions in the three preceding years exceeded 10,000 tons." 

In other words, the most significant carbon-quota holders and largest emitters in the market will be affected by the new carbon tax, i.e. some operators in the fertiliser, cement, oil refinery, steel, glass, chemical, and metal sectors, among others.  The number of companies affected by the new tax could exceed 40.

It is not only the tax they need to pay

The carbon tax is set at €40 per ton of CO2 emitted.  In addition, the Government Decree requires a transaction fee to be paid to the Climate Protection Authority when transferring free allowances.  The amount of this fee is 10% of the EEX-EUA exchange rate value of the free allowances transferred, converted at the daily mid-market exchange rate set by the National Bank of Hungary. 

In addition, the companies concerned are also required to submit a quarterly tax return and pay a tax advance by the 15th day of the second month following the quarter in question.  This is accompanied by an obligation to report data on quarterly emissions.  The annual tax return must be submitted by 31 May of the year following the tax year.

Alleviating circumstances

Electricity generating companies not covered by the free carbon quota system are exempt from paying the tax.  Generators under bankruptcy or liquidation proceedings in the year preceding the current year are also exempted, even if they would otherwise meet the above criteria.  

Furthermore, a 50% reduction of the tax base will be possible in the following cases: 

  • the level of production with CO2 emissions is at least 90% of the capacity of the main activity,
  • the capacity of the main activity has not decreased compared to the capacity of the previous year (i.e. neither capacity nor production decreased significantly as a result of the acquisition of the free carbon quota),and 
  • the CO2 emissions per unit of output have decreased by an amount equal to the linear reduction factor of the ETS in force in the current year. 

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