In less than a year, the European Union is set to receive billions of euros from the Social Climate Fund (SCF), a significant milestone in the EU’s climate policy. However, the path to equitable distribution of these funds is fraught with challenges. Luke Haywood, Policy Manager for Climate and Energy, and Hannah O’Sullivan, Associate Communications Officer for Climate and Energy at the European Environmental Bureau (EEB), have called for a firm stance on the upcoming Emissions Trading System (ETS-2), which will extend carbon pricing to heating and transport sectors. The success of ETS-2 hinges on two critical factors: equitable distribution of revenues and complementary policies to reduce fossil fuel demand.
ETS-2, set to commence in 2027, will put the ‘polluter pays’ principle into action, with the biggest polluters bearing the most significant costs. However, for many low-income European households, this cost could be a substantial burden. The SCF, primarily funded by ETS-2 revenues, aims to mitigate this impact by supporting strategies that help disproportionately affected households. The SCF can be used to expand transport services, provide direct income support, or fund targeted support schemes such as subsidies for replacing fossil boilers with heat pumps or discounted public transport access. The EEB advocates for a socially just distribution of revenues, arguing that citizens, not big businesses, should ultimately benefit from the carbon price.
The EEB’s stance is clear: ETS-2 is not a silver bullet. Prices in ETS-2 will be high if demand for fossil fuels remains high. Therefore, policies that reduce fossil fuel demand through means other than ETS-2 will have a dampening effect on the price. For instance, substantial investment in bicycle infrastructure in urban areas could reduce transport fuel demand, lowering costs for citizens in rural areas who still rely on cars. National policies, such as a carbon price floor, could also reduce demand and increase the predictability of ETS-2 prices, supporting investments in decarbonisation and reducing carbon price levels and volatility in the long term.
The process of establishing National Social Climate Plans, which determine the spending of ETS-2 revenues via the SCF, provides an opportunity to consider how to make ETS-2 work effectively. This involves not only the smart distribution of revenues but also complementary policies that contain price levels from the outset. The extension of carbon pricing to heating and transport fuels will be a litmus test for EU climate policy. Energy prices may soar if proper supporting measures are not implemented. The majority of building and transport emissions are produced in Germany, Italy, and France, so complementary measures in these countries will significantly influence the price of emissions for the whole of the EU. For countries with higher rates of energy and transport poverty, such as Bulgaria, Hungary, or Slovakia, supporting households to permanently phase out fossil fuels should be a priority.
The EEB’s call to action is clear: policymakers must stand firm behind ETS-2 and ensure that revenues are distributed equitably. This will require targeted support schemes for low-income households and complementary policies that reduce fossil fuel demand. The success of ETS-2 will depend on the EU’s ability to navigate these challenges and ensure a just transition to a low-carbon future. The EEB’s stance is a wake-up call for policymakers to act decisively and ensure that the benefits of ETS-2 are felt by all, not just the biggest polluters.
