Climate Change Regulation 2023

Last Updated July 27, 2023


Law and Practice


KNP LAW Nagy-Koppány Lencs and Partners is an international law firm based in Budapest, Hungary. The firm was founded in 2006 by a group of attorneys with legal education and training from Hungary, the United States and European Union nations. There are approximately 25 members on the team, spanning from partners to paralegals. The firm is primarily focused on pharmaceuticals and life sciences, with a recent emphasis on renewable energy law. In addition to these practice areas, the firm also excels in M&A, data protection, labour and employment, and real estate law. The firm specialises in excessively complex renewable energy issues that necessitate lobbying efforts. KNP LAW is affiliated with over 40 European and Middle Eastern jurisdictions through the pharmaceutical Conference Bleue (CB) and Global Business Lawyers (GBL) Alliance networks. The firm’s clients include multinational pharma companies, representatives of the hospitality industry and operators of warehouses, power plants and manufacturing facilities, as well as foreign governments.

Hungary’s Participation in International Climate Conventions and Agreements

United Nations Framework Convention on Climate Change

Hungary signed the United Nations Framework Convention on Climate Change (UNFCCC) on 13 June 1992 and ratified it on 24 February 1994.

Hungary is a country party to the UNFCCC as an Annex I country and as such agreed to undertake commitments on greenhouse gas emission and adopted national policies and corresponding measures to mitigate climate change. Following ratification, Hungary issued a declaration which, in accordance with a certain degree of flexibility provided for under Article 4.6 of the UNFCCC, set forth that the government of Hungary will consider the average level of anthropogenic carbon dioxide emissions for the period of 1985–1987 as a reference level in the context of commitments under Article 4.2 of the UNFCCC.

Hungary also added to its declaration that it strives to contribute to the objective of the UNFCCC. In accordance with Hungary’s dualistic legitimisation approach regarding international treaties, the UNFCCC was promulgated into law by Act LXXXII of 1994 and became applicable as of 25 May 1994.

The Kyoto Protocol

The Kyoto Protocol, adopted in 1997 by the UN, contains the quantified greenhouse gas emission reduction commitments of industrialised nations to help implement the UNFCCC. It was ratified by Hungary on 21 August 2002 and promulgated into law by Act IV of 2007 with an application date of 16 February 2005. Act LX of 2007, providing for the framework for the implementation of the UNFCCC and the Kyoto Protocol, came into force on 27 July 2007.

The Paris Agreement

Following the end of the Kyoto Protocol’s first commitment period, the signing parties expressed their willingness to continue the Kyoto Protocol, but the document containing related necessary conditions never entered into force. Therefore, the third significant climate policy document, the Paris Agreement, was adopted by the UN in December 2015. The Paris Agreement defines a more comprehensive global set of objectives for the countries in the context of climate change.

On 1 May 2004, Hungary joined the European Union (EU) and signed the Paris Agreement as an EU member state on 22 April 2016. The Paris Agreement was ratified on 5 October 2016. Hungary integrated the Paris Agreement into its legal system with Act L of 2016 as the first EU country to adopt a legal regulation on the ratification of the Paris Agreement.

Hungarian legal regulations and national policies on primary climate change issues

Hungary contributes to the success of the EU undertaken bloc commitments by implementing EU legislation. In addition, Hungary has specific national policies and measures to address and combat climate change. These policies are introduced and enacted in alignment with EU directives and regulations to ensure consistency with the EU framework.

Regarding the Paris Agreement, the EU negotiated as a bloc to establish its intended nationally determined contribution and subsequent nationally determined contribution (NDC) targets. The EU’s NDC covers every member state, including Hungary. As part of the EU, Hungary contributes to the EU’s overall efforts to combat climate change under the Paris Agreement.

The main legal regulation of Hungary on climate change is Act XLIV of 2020 on Climate Protection (the “Climate Protection Act”), which outlines a long-term social, economic, and technological pathway to meet the 2050 climate neutrality objective. The Hungarian government also prepared the National Climate Change Strategy, the National Energy and Climate Plan and the National Energy Strategy of Hungary in which the medium-term objectives are laid down.

To mitigate the consequences of the rapidly changing climate, Hungary has dedicated special attention to energy efficiency and renewable energies, aimed to increase energy efficiency and implemented various programmes to improve the energy efficiency of residential, commercial and industrial buildings with energy efficiency and energy modernisation programmes in the framework of Act LVII of 2015 on energy efficiency. Additionally, the use of renewable energy sources is strongly encouraged by reducing legal and administrative burdens for the installation of renewable energy power plants, particularly photovoltaic (solar) systems, and financially supporting the integration of clean energy production into the Hungarian electricity system by government issued tenders.

The National Adaptation Strategy aiming at the preservation of national resources (natural, human, economic) and adaptation to changing external conditions is included in the National Climate Change Strategy. The National Adaptation Strategy sets forth the objectives and tools for adaptation, such as improving environmental health protection and disease surveillance systems, and the dissemination of water-efficient irrigation technologies.

Participation in the EU

As an EU member state, Hungary has participated in regional climate change regimes through its involvement in EU policies and initiatives since it first joined the EU on 1 May 2004, and the country is subject to EU laws, including EU regulations and directives. Regulations are binding legislative acts that are directly applicable in all member states, including Hungary, without the need for additional national implementation. When a regulation is adopted at the EU level, it directly becomes part of the legal framework of Hungary. Hungarian authorities and citizens are required to comply with EU regulations, which take precedence over conflicting national laws. Regulations may cover various areas, including environmental protection and climate change.

EU directives are legislative acts that set certain objectives or results to be achieved by the member states within a given timeframe. Unlike regulations, directives require transposition into national law by each member state. The transposition process involves incorporating the directive’s provisions into the national legal system through legislation or other appropriate means. Member states have some flexibility in choosing the form and methods of implementation, as long as these meet the directive’s objectives. Once transposed, directives have the same legal effect as national laws in Hungary.

The EU has been at the forefront of international efforts to combat climate change and established several key frameworks and regulations to address climate-related challenges. The main feature of Hungary’s participation in the EU climate change legal regime is the EU Emission Trading Scheme (EU ETS) which is a key instrument for reducing greenhouse gas emission in Europe.

The EU also adopted the Effort Sharing Regulation in 2018 which sets binding emission reduction targets for sectors not covered by the EU ETS, such as transportation, agriculture, waste and the construction industry.

To enable the EU to fulfill the undertaken commitments based on the UN climate regime and become a low-carbon society, the EU took the initiative of creating an Energy Union. The Energy Union aims to ensure secure, affordable, and sustainable energy for every EU member state. This involves the adoption of various legal acts to establish the framework for co-operation between member states and set further targets and obligations such as the preparation and submission of the National Energy and Climate Strategy (NECS) to EU stakeholders, concerning the national objectives, commitments and the pathway to achieving them.

Participation in the Visegrad 4 Group

In addition to the above, Hungary is member of the Visegrad 4 Group (V4), which is primarily an intergovernmental political and economic alliance and includes Hungary, Poland, the Czech Republic and Slovakia.

It must be noted that the V4 does not have a formal legal regime specifically dedicated to climate change, but the V4 countries are engaged in policy co-ordination and information exchange on climate change and collaborate on regional projects. The V4 countries often align their positions and advocacy efforts in international climate negotiations and issue joint statements and declarations.

The primary framework for Hungarian climate change policy is set forth in Act XLIV of 2020 on Climate Protection, which aligns with current international reference values, reflects the recommendations of the scientific community, and meets the EU-initiated process towards climate neutrality by adopting the common 2050 climate neutrality goal and launching the European Green Deal (EGD) initiative, all within the framework of the Paris Agreement. The existing EU environmental and climate protection regulations, as well as the ongoing development and implementation of the detailed rules of the EGD, fundamentally influence Hungary’s possibilities and policy decisions during the implementation of the National Energy and Climate Plan (NECP). The annexes of the NECP include the most important international, EU and Hungarian documents for a detailed presentation of the policy and the legal environment. To ensure a comprehensive solution to the most pressing issues in 2015, the UN General Assembly adopted the Sustainable Development Agenda for the period until 2030.

As Hungary actively participates in multilateral and regional climate change regimes, including the UNFCCC and the EU’s climate policies, these international frameworks provide guidance, targets and best practices which greatly influence Hungary’s climate change policy preparation and implementation.

The NDC of Hungary provides a comprehensive outlook on socio-economic and technological progress for the next three decades. Hungary’s long-term NDC is designed to assist achieving climate neutrality objectives, with a strong emphasis on the welfare of the Hungarian population and the preservation of natural resources without hindering economic growth.

The government of Hungary also demonstrated its support for the green transition and social development of the Western Balkans region through the creation of the Western Balkans Green Fund Project. In 2019, the government established the Western Balkans Green Centre (WBGC) as a component of this project. Operated under the Ministry of Energy, the WBGC strives to assist the region in its climate protection endeavours and aligns it with the NDC outlined in the Paris Agreement.

The Hungarian government relies on scientific research, assessments and recommendations to gain insight into the consequences of climate change and identify effective measures to tackle them. Reports from the Intergovernmental Panel on Climate Change (IPCC) and other scientific literature greatly contribute to informed policy decisions. The primary objective established by the Hungarian government for the Research, Development and Innovation (RDI) sector is to transform the Hungarian economy into a green, high-tech, resilient and self-sufficient one.

To foster green RDI endeavours, the following primary domestic strategic objectives and implementation measures have been identified:

  • creating a stable state-owned financing system and maintaining an incentivising tender system for RDI activities;
  • developing an effective RDI ecosystem;
  • operating a supportive environment and dedicated financial institutions for micro, small and medium-sized companies using innovative and environment-friendly solutions to strengthen their market opportunities;
  • periodic tenders for specific economic stimulus interventions; and
  • ongoing engagement and dialogue with relevant stakeholders.

Increasing public awareness and stakeholder engagement have also influenced the evolution of climate change policy in Hungary. Civil society organisations, research institutions, and grassroot initiatives have played significant role in advocating for stronger climate actions and policy decisions.

The Hungarian legal system places significant importance on climate change and environmental protection, and the state has a legal obligation to promote and protect environmental sustainability supported especially, but not limited to the following legislation:

  • The Fundamental Law of Hungary (Article XXI Environmental Protection);
  • Act LIII of 1995 on the General Rules of Environmental Protection;
  • Act LIII of 1996 on Nature Conservation;
  • Act XL of 2007 on the Framework for the Implementation of the United Nations Framework Convention on Climate Change and of the Kyoto Protocol;
  • Act LXXXV of 2011 on Environmental Product Charges;
  • Act C of 2012 on the Criminal Code (Environmental Offences);
  • Act CLXXXV of 2012 on Waste;
  • Act CCXVII of 2012 on the Participation in the Scheme for Greenhouse Gas Emission Allowance Trading within the Community and in the Implementation of the Effort Sharing Decision;
  • Act LVII of 2015 on Energy Efficiency;
  • Act XLIV of 2020 on Climate Protection;
  • Government Decree No 314/2005 (XII. 25.) on the Environmental Impact Assessment and the Unified Environmental Use Permit Procedure;
  • Government Decree No 176/2008 (VI. 30.) on the Certification of Energetical Characteristics of Buildings;
  • Government Decree No 410 of 2012 (XII. 28.) Laying Down Certain Rules of Implementation of Act CCXVII of 2012 on the Participation in the Scheme for Greenhouse Gas Emission Allowance Trading within the Community and in the Implementation of the Effort Sharing Decision; and
  • Climate and Environmental Protection Action Plan.

Hungary, as a signatory to the Paris Agreement, is committed to take proper actions to mitigate climate change and adapt to its impacts. The Paris Agreement aims to strengthen international co-operation for limiting global warming to below 2°C above pre-industrial levels.

Like other parties to the Paris Agreement, Hungary participates in international climate change conferences, such as the annual UN Climate Change Conference. These conferences provide a platform for countries to negotiate and discuss climate change-related issues, share best practices and strengthen co-operation.

Article 6.2 of the Paris Agreement allows participants to trade emission reductions and removals among each other through bilateral and/or multilateral agreements. These traded credits are called Internationally Transferred Mitigation Outcomes (ITMOs). As of today, Hungary has not entered into any bilateral agreement for ITMO trading or similar co-operation.

Hungary engages in climate change negotiations with the V4, including sharing experience and knowledge, and collaborating on joint projects to address common challenges, but no formal bilateral instrument of co-operation has been adopted within the V4 group.

Hungary built a comprehensive framework of central level climate change-related authorities to address the challenges posed by global warming and ensure effective policy implementation. These authorities play a crucial role in formulating strategies, developing regulations, and co-ordinating actions to mitigate greenhouse gas emissions, adapt to climate change impacts and achieve climate resilience.

Central Level

Among the key authorities involved in climate change policy formulation and implementation are the Ministry of Energy and the Ministry of Culture and Innovation. They are responsible for climate change and energy policy, overseeing the development of national strategies and action plans in line with international agreements and EU legislation. Their expertise and co-ordination efforts contribute to Hungary’s sustainable energy transition and emission reduction targets.

Another important authority is the Ministry of Agriculture, which plays a significant role in addressing climate change impacts on agriculture, forestry and rural areas. This ministry formulates policies, supports sustainable land management practices, and promotes climate-resilient agricultural systems. It collaborates with stakeholders to develop measures which enhance the sector’s adaptive capacity and reduce its environmental footprint.

The Ministry of Finance is also instrumental in climate change-related initiatives, particularly in its financing and investment aspects. It facilitates the allocation of funds to climate mitigation and adaptation projects, incentivises green finance, and contributes to the development of sustainable economic models. Its financial expertise ensures the availability of resources necessary for the effective implementation of climate action plans.

The Ministry of Interior is responsible for co-ordinating civil protection and disaster management, including responses to climate-related emergencies. This authority plays a crucial role in enhancing societal resilience, ensuring public safety, and co-ordinating efforts to minimise the impact of extreme weather events and climate-related hazards.

The Climate Change Committee operates under the Ministry of Energy. It serves as an advisory body responsible for providing expert advice on climate change-related matters. The committee includes representatives from government bodies, scientific institutions, civil societies and other stakeholders.

The Hungarian Energy and Public Utility Regulatory Authority is an independent regulatory authority responsible for regulating and overseeing the energy sector in Hungary. It implements energy-related policies and regulations, including those aimed at promoting renewable energy and energy efficiency, which are crucial for addressing climate change.

The National Council for Sustainable Development is a consultative body established to promote sustainable development in Hungary. It advises the government on various aspects of sustainability, including climate change mitigation and adaptation.

The Hungarian Climate Change Office is a specialised institution responsible for co-ordinating and implementing climate change-related policies and programmes. It provides expertise, conducts research and supports the government in fulfilling its international climate commitments.

Collaboration among these central level authorities, along with other relevant ministries and governmental agencies, allows for a comprehensive and co-ordinated approach to climate change mitigation and adaptation in Hungary. Through their combined efforts, Hungary aims to achieve its climate targets, fulfill international commitments and safeguard the well-being of its citizens in the face of a changing climate.

Among others, Hungarian central authorities are responsible for:

  • enforcement of environmental requirements during the performance of the duties of the state;
  • preservation, restoration and the gradual improvement of the state of the environment;
  • determination of priority tasks of environmental protection;
  • establishment of legal, economic and technical regulatory systems for the attainment of environmental goals; and
  • provision of economic and financial bases for environmental protection.

Regional Level

In Hungary, the regional level implementation of climate change policies primarily falls under the jurisdiction of the regional offices of the Ministry of Agriculture. These offices play a crucial role in carrying out climate change policies at the regional level, overseeing the co-ordination and monitoring the diverse activities related to climate change adaptation and mitigation within their respective regions.

Regional environmental and nature conservation directorates, operating under the authority of the Ministry of Agriculture, also contribute to the implementation of climate change policies. These directorates are responsible for supervising environmental protection, nature conservation, and associated endeavours at the regional level, which often encompass measures addressing climate change adaptation and mitigation.

Regional development councils and agencies, in collaboration with regional governments, may participate in shaping regional climate change policies. These entities are tasked with regional development planning and have the potential to incorporate climate change considerations into their strategies and programmes. Regional authorities are responsible for:

  • preparation of environmental programmes in co-ordination with local authorities;
  • issuance of preliminary opinions on municipal environmental programmes and initiating their preparation;
  • preparation of opinions on draft municipal by-laws of municipal local authorities affecting environmental protection; and
  • making recommendations for the establishment of municipal environmental associations.

Local Level

At the local level, environmental protection falls within the jurisdiction of the local municipalities. Local authorities are responsible for implementing environmental policies and initiatives at the local level and play significant roles in the following areas:

  • waste management – local municipalities are responsible for waste management systems, including selective waste collection, minimising waste disposal and promoting waste recycling;
  • protection of water and natural resources – it is their responsibility to safeguard water sources, natural areas, and habitats, as well as protect water quality;
  • maintenance of green areas and natural spaces – local authorities ensure the upkeep of green zones, parks and natural areas to improve the quality of the urban environment;
  • protection of the climate via local energy efficiency programmes, utilisation of renewable energy sources and development of sustainable transportation systems; and
  • environmental education and awareness by organising programmes, campaigns and events to increase the public environmental consciousness and promote sustainable lifestyles.

National policy and regulatory mechanisms are in place in Hungary to address climate change mitigation, aiming to reduce greenhouse gas emissions and transition to a low-carbon economy. Some of the specific mechanisms applied to climate change mitigation in Hungary are as follows.

  • NECP – Hungary has developed an NECP in line with EU requirements. The NECP sets out targets and measures for reducing greenhouse gas emissions, increasing the share of renewable energy, improving energy efficiency and promoting sustainable transportation.
  • Renewable Energy Support Mechanisms – Hungary has implemented various support mechanisms to promote the generation of renewable energy. These mechanisms include feed-in tariffs, feed-in premium systems, and green certificate schemes that provide financial incentives for the production of electricity from renewable sources.
  • Energy Efficiency Regulations and Incentives – Hungary has established energy efficiency regulations for buildings, appliances and industrial processes. These regulations set energy performance standards, encourage energy-saving practices, and promote the use of energy-efficient technologies. Financial incentives and subsidies are also available to support energy efficiency improvements.
  • Carbon Pricing – Hungary participates in the EU ETS, which sets the price on carbon emissions from large industrial installations. This cap-and-trade system incentivises emission reductions and provides economic signals for companies to invest in cleaner technologies and processes.
  • Low-Carbon Transport Initiatives – Hungary promotes the adoption of low-carbon transportation solutions. This includes the development of the electric vehicle charging infrastructure, support for electric vehicle sales through price incentives and tax benefits, and the promotion of public transportation and cycling infrastructure.
  • RDI – Hungary invests in research and innovation to drive technological advancements and support climate change mitigation efforts. These include funding for research projects, collaboration with academic institutions and the industry, and participation in international research programmes.

Implementation of these mechanisms involves co-ordination among various governmental bodies, regulatory agencies, industry stakeholders and civil society organisations. The policies and regulations are framed to meet international commitments, such as those under the UNFCCC and the EU’s climate goals.

Climate change issues and potential consequences are assessed, and where necessary mitigation plans are required by the municipal and regional environmental authorities, as a licensing entity for the issuance of new building/construction permits and upon completion for occupancy and use permits.

In Hungary, climate change adaptation is addressed through various national policies and regulatory mechanisms. These mechanisms are designed to assess the impacts of climate change, develop strategies for adaptation, and implement measures to enhance resilience. Some of the key policy and regulatory approaches specific to climate change adaptation in Hungary are the following.

  • National Climate Change Adaptation Strategy – Hungary has developed a National Climate Change Adaptation Strategy which provides a framework for identifying climate change risks and vulnerabilities, setting adaptation priorities and implementing actions. The strategy focuses on various sectors, including agriculture, water management, forestry and urban development.
  • Sectoral Adaptation Plans – Hungary has developed sector-specific adaptation plans that address the vulnerabilities and adaptation needs of different sectors. For example, the National Water Strategy includes measures to enhance water availability and manage flood risks in the context of climate change.
  • Land Use Planning – Land use planning plays a crucial role in climate change adaptation. Hungary incorporates climate considerations into spatial planning processes to reduce risks associated with extreme weather events, ensure efficient management of water resources and protect vulnerable ecosystems.
  • Building Regulations and Standards – Hungary has introduced building regulations and standards that consider climate change impacts. These regulations include provisions for energy-efficient building design, resilience to extreme temperatures and flood-resistant construction.
  • Ecosystem-Based Adaptation – Hungary recognises the importance of ecosystem-based adaptation in enhancing resilience. The conservation and restoration of natural ecosystems, such as wetlands and forests, are promoted as nature-based solutions to mitigate climate risks and support adaptation.
  • Monitoring and Research – Monitoring and research activities contribute to evidence-based decision-making and help identify emerging climate risks. Hungary invests in climate monitoring networks, data collection and research initiatives to improve understanding and provide information for the support of adaptation strategies.

The implementation of these policy and regulatory mechanisms involves co-ordination among various governmental bodies, scientific institutions, local authorities and stakeholders. It often includes awareness-raising, capacity-building and the integration of adaptation considerations into relevant sectors and their decision-making processes.

Climate change assessments and adaptions are considered both on local and regional authority levels and are part of matters such as the issuance of residential, commercial and industrial building construction permits, changing land zoning, removal of land from agricultural cultivation and any changes to waterways. Non- compliance with prescribed procedures may result in fines, rejection of occupancy and use permits, and mandatory land recultivation.

Article 6.4 of the Paris Agreement establishes a co-operative approach to international carbon markets. The primary goal of this provision is to enable countries to collaborate on reducing greenhouse gas emissions and achieve their nationally determined contributions in a cost-effective manner. Under Article 6.4 of the Paris Agreement, countries have the option to engage in international co-operation by voluntarily transferring mitigation outcomes, such as emission reductions to other countries. 

Although Hungary is actively involved in international efforts to address climate change, it does not participate in the carbon markets evolving under Article 6.4 of the Paris Agreement. In addition, no official announcement has yet been made indicating any actions taken pursuant to the Article 6 Rulebook approved in 2021 at the UN Climate Change Conference in Glasgow (the “COP26”). Then President of Hungary, the Honourable Janos Ader, proposed at the COP26 climate summit that countries whose per capita emissions significantly exceed the international average should contribute more to the costs of fighting climate change. He also announced that Hungary will increase the output of its solar plants to 6,500 megawatts by 2030 at the latest.

As an EU member state, the EU ETS is the primary carbon market for Hungary. The EU ETS is a regional cap-and-trade system established by the EU, covering private sector operators engaged in various sectors, including power generation, industrial installations and aviation.

The EU ETS allows for the trading of emission allowances among installations within the system, but it does not involve levies on the export of emission reductions. On 18 April 2023, the European Parliament adopted a legislation package named “Fit for 55”, which includes a new mechanism for imposing levies on climate-damaging manufactured goods imported into the territory of EU.

Since Hungary operates on the EU ETS, it is subject to Directive 2003/87/EC on establishing a system for greenhouse gas emission allowance trading within the EU. The Hungarian domestic regulation is defined by the governing EU legal framework. There are no indications that Hungary would introduce further domestic regulations concerning the carbon markets, apart from the legal regulations implementing the above-mentioned EU Directive, such as Act CCXVII of 2012 on the Participation in the Scheme for Greenhouse Gas Emission Allowance Trading within the Community and in the Implementation of the Effort Sharing Decision, and Government Decree No 410/2012 (XII. 28.) on the implementation of the aforementioned Act.

The EU adopted a new mechanism, the European Union Carbon Border Adjustment (CBAM) to impose carbon costs on certain imported goods of the most carbon-intensive sectors, such as iron and steel, cement, fertilizers, aluminum, electricity and hydrogen, based on their embedded carbon content. The CBAM will enter into force on 1 October 2023.

The scope of the CBAM covers carbon-intensive products imported into the EU, promoting the import of goods by non-EU businesses which comply with climate standards to be applied in the EU. Most of the concerned goods come from countries like Russia, Ukraine, Turkey, China, the United States and/or the United Kingdom.

Although imported goods of non-EU based businesses are subject to the CBAM and the new mechanism imposes levies directly on concerned importers, CBAM is expected to have impacts on every EU country, including Hungary. 

One of the main effects of CBAM is addressing the risk of carbon leakage, which occurs when industries relocate their production facilities to countries with less stringent climate policies to avoid high carbon costs. By imposing carbon costs on certain imported goods, the CBAM intends to create a competitive playing field for EU industries. In addition, CBAM is expected to protect EU industries from unfair competition by ensuring that imported goods are subject to similar carbon costs as their EU counterparts.

At the time of the preparation of this chapter, general climate-related financial disclosures are not considered as standard practice in Hungary. This is primarily due to the fact that there are no local statutory provisions in place which explicitly call for such disclosure, other than a general obligation to include a non-financial statement on environmental issues in the business report of publicly traded companies and certain entities of public interest. Only two publicly traded Hungarian companies, Magyar Telekom Plc and Wizz Air Holdings Plc have officially declared their support of the TCFD.

To date, only the financial services sector can be deemed an exception, with Regulation (EU) 2019/2088 on sustainability‐related disclosures in the financial services sector, which came into force on 10 March 2021. This sector has also shown local initiative, with the Central Bank of Hungary (MNB) being one of the first central banks to publish its own Climate-Related Financial Disclosure in accordance with TCDF guidelines. MNB also published its non-binding recommendations on climate-related and environmental risks and the integration of environmental sustainability considerations into the activities of credit institutions, similarly to the Budapest Stock Exchange ESG Reporting Guide.

Albeit less direct influence, EU law to which Hungary is subject has been considerably influenced by the TCFD’s activities and recommendations. The Sustainable Finance Action Plan disclosed by the European Commission in March 2018, within the scope of the EGD, relies on the recommendations of the technical expert group on sustainable finance (TEG), integrating it with TCFD recommendations.

More universal reporting obligations are scheduled to follow in accordance with the Corporate Sustainability Reporting Directive, which entered into force on 5 January 2023 and requires large companies and publicly traded entities to publish regular reports on the social and environmental risks they face, and on how their activities impact people and the environment.

Environment-related civil societies tend to focus on specific local matters, like the government’s plans to make eastern Hungary an EU-based EV battery centre, which have already generated substantial environmental and social concerns.

Liability Towards the Company

Directors and other executive officers have an obligation to ensure that their companies are compliant with prevailing sustainability and environmental requirements. This, among others, includes compliance with rules on greenhouse gas emission, waste management, environmental permitting and various statutory provisions aimed at avoiding pollution. This liability is primarily towards the company and is in accordance with the relevant breach of contract-related liability provisions of the Hungarian Civil Code. Exemption from this liability can be ascertained if the executive officers can prove that:

  • the breach of contract was caused by circumstances outside of their control;
  • these circumstances were not foreseeable upon concluding the contract; and
  • avoiding such circumstances and/or the damages could not be expected from them,

whereas all three tests must be simultaneously proven for being successfully exempted from liability.

If the shareholders’ meeting rejected taking legal action against an executive officer, the claim may be enforced on behalf and for the benefit of the company directly by members holding at least 5% of the total voting rights.

Liability Towards Third Parties

Liability vis-à-vis third parties is limited, and it is always the company that is the primary subject of such liability. An exception to this rule can be a situation where the damages were caused intentionally by the executive officers, in which case they shall be subject to joint and several liability together with the company.

In case of a liquidation procedure, the liquidator may bring a court action during the proceedings to establish that the former executive officers of the company failed to exercise their management functions in the interests of the creditors, in direct consequence of which the creditors’ claims cannot be satisfied. The creditors’ interests shall be considered to have been ignored if the executive officers failed to fulfill their obligations in relation to preventing environmental damages or ceasing activities otherwise causing environmental damages or omitting related obligations of remediation (in consequence of which the claims of creditors cannot be satisfied). If the damages are caused by more than one executive officer, their liability is joint and several.

Limiting Liability

Possibilities of limiting individual liability include:

  • the application of appropriate contractual limitations (this is not general practice in Hungary and is usually not accepted by the stakeholders); and/or
  • obtaining a release certificate under the Civil Code from the shareholders’ meeting upon the acceptance of the annual report and/or upon the termination of the executive officer’s assignment; and/or
  • conclusion and availability of professional liability insurance with proper coverage.

Regulatory and Civil Society Attention

Regulatory and civil society attention of investments that may have negative climate impact depends largely on the exact subject and conditions of certain investments and often manifests as opposing forces. For example, recent investment projects involving the establishment of EV battery plants on eastern Hungary have been the beneficiaries of favourable regulatory decisions, coupled with a high level of scrutiny and opposition from the concerned civil societies. At the same time, the exploitation of wind power as a renewable energy source is still facing regulatory hindrances even though this is an area strongly supported by various civil organisations and the EU.

Companies are generally liable for their obligations to the extent of their assets. Shareholders, including parent companies, are usually not liable for the debts or other obligations of a company, unless the company is a general partnership or limited partnership, operating with at least some of its members having joint and several liability for obligations of the company not covered by its own assets. These corporate forms are almost exclusively family-owned micro-enterprises, which typically do not carry out activities with serious environmental impact on climate change.

That being said, there is a general possibility of lifting the corporate veil, even in case of companies operating under a limited liability concept. Namely, based on the provisions of the Civil Code, if a shareholder is found to have explicitly abused its limited liability, resulting in unsatisfied creditor claims upon the dissolution/liquidation/winding up of the company, the shareholders may have unlimited liability for such debt. This possibility can arise in a plethora of situations, including cases of abuse of limited liability in relation to a company’s climate-related and environmental obligations.

Obligations Based on the Accounting Act

Basic environment-related information must be included in the annual financial reports of companies, based on the Hungarian Accounting Act. For example tangible assets serving environmental protection purposes and the quantity and value figures of the opening and closing inventories of hazardous waste and pollutants as included in the notes on the accounts and an explanation of the effect of environmental considerations on the company’s financial standing and environment related projects and policies, should all be detailed in the annual report. These can, but do not necessarily include explicitly climate change-related aspects, and information and related reports are generally kept to a minimum.

Special rules apply to entities of public interest with over 500 employees, which fulfill at least two of the following three criteria in the previous two consecutive financial years:

  • balance sheet total exceeding HUF6 billion;
  • annual net turnover exceeding HUF12 billion; and/or
  • average number of employees exceeding 250.

Based on the Accounting Act, as amended to incorporate requirements of Directive 2014/95/EU as regards disclosure of non-financial and diversity information by certain large undertakings and groups, such entities must publish a non-financial statement, which provides an overview of their activity, relating to environmental, social and employee matters, respect for human rights, anti-corruption and bribery issues, to the extent required to ensure an understanding of the company’s progress, performance, position and impact. This ESG reporting obligation does not necessarily include explicit information on climate change, but depending on the activity of the company this may form a part of its reporting on environmental issues.

Stock exchange listing is not subject to ESG reporting but the Budapest Stock Exchange has recently issued an ESG Reporting Guide as a soft law instrument.

The Corporate Sustainability Reporting Directive (CSRD)

ESG reporting obligations are under transformation, based on Hungary’s obligations as a member of the EU. In April 2021, the Commission adopted a proposal for a Corporate Sustainability Reporting Directive (CSRD), as part of the European Green Deal. Based on this proposal, Directive (EU) 2022/2464 on corporate sustainability reporting entered into force on 5 January 2023. A public feedback period is open until 7 July 2023, regarding the sustainability reporting standards for companies, following which the Commission will finalise such standards and submit them to the European Parliament. Detailed incorporation of these rules into Hungarian law is expected to follow soon afterwards. The first companies subject to the reporting obligation will have to apply new rules starting from financial year 2024, which means that the first reports based on the CSRD will be published in 2025.

The CSRD will require companies to explicitly include climate change-related information in their ESG reporting, regarding the company’s plans to ensure that its business model and strategy are in line with the Paris Agreement and, where relevant, the exposure of the undertaking to coal-, oil-, and gas-related activities. Sustainability reporting standards to be adopted by the Commission will specify the information that undertakings must disclose regarding:

  • climate change mitigation, including greenhouse gas emissions, where relevant;
  • climate change adaptation;
  • water and marine resources;
  • resource use and the circular economy;
  • pollution; and
  • biodiversity and ecosystems.

Work of the International Sustainability Standard Board does not so much influence local law directly, but it is also relevant in Hungary through EU legislation, taking into account that the International Financial Reporting Standards (IFRS) is the applicable accounting language of financial statements in the EU and will likely serve as a source of inspiration to the Commission upon its adoption of the sustainability reporting standards.

Current General Practice

Climate change due diligence is generally conducted in major M&A, finance, and commercial and industrial property-related transactions in Hungary, which may have a significant impact on the environment. Certain activities and transactions may explicitly call for obligatory due diligence procedures in the form of an environmental impact assessment based on Government Decree No 314/2005. (XII. 25.) on the Environmental Impact Assessment and the Unified Environmental Use Permit Procedure, as amended to date to ensure compliance with EU law.

Regarding available methodologies, the Hungarian Chamber of Engineers prepared a methodological guidance for conducting climate change analysis in 2021, which may be used to aid due diligence procedures. Other projects may require that due diligence processes and policies be assessed against the requirements of Regulation (EU) 2020/852 on the establishment of a framework to facilitate sustainable investment (Taxonomy Regulation).

The Corporate Sustainability Due Diligence Directive

Stronger wind is certainly blowing in the EU regarding climate change-related due diligence, which will result in more widespread procedures. On 23 February 2022, the Commission adopted a proposal for a Corporate Sustainability Due Diligence Directive (CSDDD). The CSDDD aims to establish corporate due diligence duties, require companies to take responsibility for environmental harm throughout their global value chains and introduce new duties for executive officers. On 1 June 2023, the European Parliament adopted its position on the CSDDD. The next step in the formal approval of the CSDDD is the negotiation phase between the European Parliament, the European Council and the European Commission. Adoption of the CSDDD is expected to follow in 2024, with member states (including Hungary) then having a further two-year period to implement CSDDD requirements into national law and modify the landscape of climate change-related due diligence reviews in the EU.

One of the main objectives of the EU is to encourage the use of renewable energy sources which can contribute to the reduction of the consequences of climate change. To achieve this objective, several legislative acts were adopted by the EU in 2018 as part of the “Clean Energy for All Europeans” initiative package, which intended to increase the consumption of energy produced from renewable energy sources.

The 2018/1999 EU Regulation on the Governance of the Energy Union and Climate Action set forth the requirements for the member states to prepare their national energy and climate strategies, which included Hungary.

In its NECS, Hungary set a target of increasing the share of renewable energy in electricity consumption to at least 21% by 2030. The NECS identifies the expansion of solar PV capacity as the basis for making the electricity sector more sustainable and outlines solar energy as the most demanded renewable energy source to be increased at the largest scale. The Hungarian objectives consist of expanding the solar capacity of Hungary from 680 MW to approximately 6500 MW by 2030. According to the official announcement of the Ministry of Energy in April 2023, the already installed capacity of solar power plants in Hungary exceeded 4200 MW in the domestic utilisation of solar energy, which is a significant increase compared to the international level.

To realise these objectives, Hungary established the legal and administrative framework to encourage industry operators’ investment in clean energy production, especially in solar systems. To ensure the willingness to invest, Hungary introduced the feed-in tariff (in Hungarian – KAT) tender which system allows clean electricity to be sold at a legally set price, which is higher than the market price. Due to legislative changes, a new tender named METAR was introduced and entered into force on 1 January 2017. METAR provides support for the modernisation of energy and the utilisation of renewable energy sources for the Hungarian population.

The Hungarian legislation established a legal framework to simplify the process of transitioning to renewable energy sources. This framework reduces the administrative burdens associated with licensing. For example, it enables the competent governmental authorities to issue a building permit under the Act LXXXVI of 2007 on Electricity for establishing the producer line of the renewable power plant without the specific consent of landowners. The basis of this rule derives from the public interest in establishing renewable capacities and environmental protection versus the right of private property.

Due to the government’s support for the establishment of renewables and related regulations reducing administrative burdens, several new renewable operator-initiated connection applications to feed-in the produced energy to the Hungarian electric grid. This sudden demand proved that the development of the Hungarian electricity infrastructure lagged behind the speed of renewable energy production and the grid was unprepared to take on the produced power.

Although Hungary pays particular attention to increasing solar capacities, operators who intend to install wind turbines are still facing serious legal obstacles. As the Hungarian government defined solar energy as the key element to achieving renewable energy objectives, the transformation of the legal framework for establishing wind capacities is still on the backburner. Semi-official releases from members of the Hungarian government and a statement from the Minister of Energy in the spring of 2023 promised a major overhaul in the area of wind energy regulations but at the time of the preparation of this guide no official proposal was yet submitted to the Hungarian Parliament to accomplish these long-awaited legislative revisions.

Policy and Regulatory Support for the Uptake and Other Forms of Climate-Friendly Investments

To meet the steps of a climate-neutral transition which Hungary committed to achieve by 2050, various policy and regulatory investment instruments were introduced. These investments involve not only Hungary’s national budget but also financial and capital markets, EU funds and blended financing of public and private funds.

In 2018, Hungary introduced the second National Climate Change Strategy under the commitment included in Section 3 (1) of Act LX of 2007 on the Framework for the Implementation of the United Nations Framework Convention on Climate Change and of the Kyoto Protocol which requires the Hungarian Parliament to adopt the mentioned strategy to define, among others, the means and tasks required to prepare for the domestic impacts of climate change. The second National Climate Change Strategy contains various operational programmes and related measures to be adopted by the Parliament and implemented by the government to support the uptake of climate-friendly investments.

As part of the second National Climate Change Strategy, the following operational programmes and measures were defined.

Environmental and Energy Efficiency Operational Programme (the “KEHOP Programme”)

Under the KEHOP Programme, besides energy investments based on renewables, Hungary aimed at increasing energy and resource efficiency by supporting investments and developments necessary for sustainable water management, flood protection and transformation of water utility networks. Between the period of 2021–2027, Hungary introduces the KEHOP Plus Programme, which in addition to the aforementioned incentives, covers the circular economy systems and contributes to the increase of waste management initiatives. To provide more targeted support, in Hungary, investments can be classified as a priority matter of the national economy by government decrees and help reduce administrative burdens during the licensing procedures.

For example, the reconstruction of the water management system in Jaszsag, Hungary was carried out in 2022 under the KEHOP Programme and was classified as a priority investment by Government Decree No 285/2016 (IX. 21.) on Declaring Administrative Authority Cases Related to Certain Water Management Investments under the KEHOP Programme as Cases of National Economic Priority. The investment improved the water supply in the Eastern area of Hungary and reduced the negative impact of anomalies caused by climate change. In Hungary, under the KEHOP Programme, energy modernisation of several public institutions, such as schools and hospitals, has been completed, and resulted in sustainable energy consumption. 

Regional and Local Development Operational Programme (the “TOP Programme”)

With the introduction of the TOP Programme, Hungary intended to support the areas of municipalities and regions by contributing to the development of municipal infrastructure, municipal management and local public services. Projects carried out under this programme are key opportunities for the energy and infrastructure development of economically marginalised municipalities by ensuring the careful use of energy and natural resources. The TOP Programme is also intended to support investments in the developing local transportation infrastructure and assist in the transition to a low-carbon economy in urban areas.

Economic Development and Innovation Operational Programme (the “GINOP Programme”)

Under the GINOP Programme, Hungary provides businesses with support to renew their operations and enhance their technologies, aiming to gain a competitive advantage in domestic and international markets. Under the GINOP Programme, companies investing in renewables have the opportunity to improve their technology. In Hungary, the KEHOP, TOP and GINOP Programmes are operational programmes co-financed by the EU.

In addition to the above-mentioned programmes, Hungary provides support for the uptake of other forms of climate-friendly investments through the following programmes and fundings.

  • Climate and Nature Conservation Action Plan – Within the framework of this action plan, Hungary launched the Green Bus Programme, which aims to improve urban quality of life by swiftly phasing out the most polluting public transportation buses. With the aim of shaping a green future for the Matra Power Plant, the government is initiating the implementation of the most significant Hungarian climate protection and regional development project of the next decade.
  • Energy efficiency of residential buildings – Promoting energy-efficient renovations in residential buildings is a national priority due to their significant greenhouse gas reduction potential, job creation and health benefits. To achieve this, Hungary aims to establish a comprehensive state support system, including repayable grants, interest rate subsidies and loan guarantees. As part of the modernisation of heating systems, the originally planned 6000 megawatts of solar power capacity, initially scheduled to be available by 2030, is expected to be available by 2025.
  • Green mortgage bond market – This provides targeted funding for banks to finance the construction and purchase of energy-efficient properties, thereby promoting the energy modernisation of buildings.
  • Other energy efficiency investments, energy efficiency obligation scheme – Hungary will establish an energy efficiency obligation scheme to cost-effectively achieve the goals set for energy savings and efficiency. The scheme targets service providers in the gas, electricity and motor fuel retail sector, and commercial enterprises and universal service providers of gas and electricity. Obligors will undertake interventions to generate energy savings for end-users, either through energy efficiency investments or contributions. This scheme also incorporates various measures to incentivise energy efficiency residential building renovations.
  • Municipality-level green funding – To comply with the law and enable financing for various municipal green development projects (such as public transportation, waste management, water management, municipal building renovation and renewable energy production), municipalities are eligible to establish green loan programmes and issue green bonds with government funding.
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KNP LAW Nagy-Koppány Lencs and Partners is an international law firm based in Budapest, Hungary. The firm was founded in 2006 by a group of attorneys with legal education and training from Hungary, the United States and European Union nations. There are approximately 25 members on the team, spanning from partners to paralegals. The firm is primarily focused on pharmaceuticals and life sciences, with a recent emphasis on renewable energy law. In addition to these practice areas, the firm also excels in M&A, data protection, labour and employment, and real estate law. The firm specialises in excessively complex renewable energy issues that necessitate lobbying efforts. KNP LAW is affiliated with over 40 European and Middle Eastern jurisdictions through the pharmaceutical Conference Bleue (CB) and Global Business Lawyers (GBL) Alliance networks. The firm’s clients include multinational pharma companies, representatives of the hospitality industry and operators of warehouses, power plants and manufacturing facilities, as well as foreign governments.

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