💵 Carbon taxation, in particular through the EU ETS2 system for the heating and transport sectors, is an important tool for achieving the EU's climate goals. It is crucial to use it wisely ETS2 revenues to avoid pressure to relax emission caps due to rising prices. One of the main ways to use the revenues is to invest in fossil-free alternatives such as heat pumps or zero-emission transport, which can be socially targeted to increase fairness.

However, The second essential use of revenues is to return them to citizens in the form of direct payments.Citizens are facing higher fuel prices and heating costs. Direct payments, for example in the form of a transfer marked as "Climate bonus", are visible, transparent and credible argumentthat carbon taxation is not just a tool to finance general government spending. This strengthens citizens' trust in climate policy.

Direct payments can turn carbon taxation into a progressive instrumentwhich benefits low- and middle-income households, as these groups spend a relatively higher share of their income on energy. The payments help protect purchasing power consumers and increase public support ambitious climate policy. They ensure that aid reaches the to all those affected price increases throughout the value chain, not just to direct users of fossil fuels. At the same time, they offer a kind of insurance against high prices – the value of payments automatically increases when prices rise, thus providing visible benefits. Despite being universal, low-income households benefit the most from themRevenue-financed investments, if not strictly socially targeted, on the contrary, more often benefit wealthier households.

Financing of direct payments is possible under EU law in several waysThe Social Climate Fund (SCF) allows up to 37.51% of its resources to be used for temporary direct income support to vulnerable households. Revenues from the existing ETS1 system must now be used in full for defined purposes, which explicitly includes funding for national climate bonus schemes with proven positive environmental impact. The interpretation of “positive environmental impact” in the context of direct payments may be related to creating the policy conditions to support carbon taxation. ETS2 revenues not distributed through the SCF are another important source and prioritize addressing social aspects. These multiple paths they allow carbon tax revenues to be redistributed back to households who will bear the burden of higher prices. SpringR.

Glossary of key terms

• Carbon pricing: A mechanism for setting a price for carbon emissions, usually through taxes or emissions trading schemes.
• ETS (Emissions Trading System): An emissions trading system that sets a cap on total emissions and allows companies to buy and sell permits to emit greenhouse gases. The text mentions ETS1 (for emission-intensive sectors) and ETS2 (for heating and transport).
• ETS2: A new EU emissions trading system targeting the building heating and road transport sectors.
• Non-fossil energy alternatives: Energy sources that do not come from burning fossil fuels, such as solar energy, heat pumps and electric vehicles.
• Retrofitting: Modernizing existing buildings to improve their energy efficiency, for example by installing better insulation or replacing windows.
• Direct payments: Direct financial transfers to citizens, often referred to as "climate dividends".
• Climate dividends (Climate dividends): Another term for direct payments to citizens, financed by carbon pricing revenues.
• Progressive tool: A policy or mechanism that has a greater positive impact on lower-income households compared to higher-income households.
• Social Climate Fund (SCF): An EU fund designed to address social hardship resulting from higher energy and transport prices.
• National Social Climate Plans (NSCPs): Plans submitted by EU Member States to obtain funding from the SCF.
• Temporary direct income support: A type of expenditure permitted in NSCPs that provides direct financial assistance to vulnerable households.
• Fit-for-55 package: The European Commission's package of proposals to revise EU legislation to achieve the target of reducing net greenhouse gas emissions by 55 % by 2030.
• Market Stability Reserve (MSR2): A mechanism in the ETS2 system that helps regulate the amount of emission allowances available on the market to prevent excessive price volatility.
• Vulnerable households: Households that are particularly vulnerable to negative impacts, such as rising energy prices, often due to low incomes.
• Non-take-up of means-tested benefits: The problem is that eligible individuals or households do not take advantage of income-tested benefits, often due to bureaucracy or lack of information.