The new Emissions Trading System (ETS), specifically ETS2 has the potential to provide EU countries with significant financial resourcesThe goal is to use the money earned from trading with emissions from buildings and transport to support households affected by the transition to a climate-neutral economy.

What is ETS2 and why does it generate revenue?

ETS2 introduces carbon pricing in the building heating and transport sectors. This means that the prices of fossil fuels used in these sectors will increase, and therefore the prices of all products that contain them as inputs. EU legislation requires countries to use an estimated revenue of €260 billion. They are to “prioritize activities that can contribute to addressing the social aspects of emissions trading.” If the prices of emission allowances in ETS2 were to reach early market signals (around €75 per tonne of CO2), revenue could reach up to 344.48 billion eurosThese funds could be used to support households during the transition and to finance the transition to decarbonised technologies. Sources suggest that revenues from the ETS1 (carbon pricing in industry) could also be used to help households adjust to higher prices.

ETS2 revenues vs. Social and Climate Fund (SCF)

It is important to distinguish between revenues from ETS2 and the Social Climate Fund (SCF). Revenues from ETS2 go to far beyond the scope of SCF. While The SCF is specifically designed to support the most vulnerable against price increases due to emissions trading, ETS2 revenues are broader and can be used to address social impacts on all households. The ETS legislation allows only a limited number of activities to be financed directly from the revenues, with only some of them addressing social impacts. The legal basis for the use of ETS2 revenues and SCF funds is set out in three relevant articles: Article 8 of the SCF Directive describes the use of SCF funds to support vulnerable households and microenterprises. Article 30 of the ETS Directive specifically addresses the social impact on all households. Article 10 of the ETS Directive prescribes the use of all revenues from the ETS, including ETS2.

Policy Options

The sources identify four main types of measures that can be financed from ETS2 revenues. These measures can be divided into categories:

1. Investments in renewable energy and networks: These measures support the energy transition by developing technologies and infrastructure to replace fossil fuels. The impact on household incomes is not always direct and vulnerable households are difficult to reach. Positive examples include: energy communities specifically for low-income households.
2. Direct assistance to citizens during the transition: This includes investments in climate-friendly passenger transport, ensuring access to zero-emission vehicles and measures to building improvement through insulation and electrification of heating. Recent research has shown that investing 34 % of SCF funds and other ETS2 revenues would be enough to decarbonise the heating and cooling of almost all vulnerable households in 23 EU countries.
3. Financial support: The proceeds can be used to provide income support to households such as compensation for higher prices and to incentivise household investment in reducing emissions. Targeted financial support can help address energy poverty, while national schemes climate dividends they can cover a large part of the population and increase public support.
4. Skills formation: Revenues can be used to support skills development, thereby contributing to a just transition. Skills development programmes can be target vulnerable groups through SCF, as the transition to decarbonized sectors will create new job opportunities.

Policy Goals

The sources identify seven objectives that can be achieved by using these revenues:

• Reduce emissions: An overarching goal of carbon pricing, incentivized by both pricing and revenue use.
• Preserve purchasing power: Address the impact of higher fuel prices on households by reducing dependence on fossil fuels, reducing other taxes, or taking measures to increase household incomes.
• Target the vulnerable: SCF requires targeting of spending plans on vulnerable households. Carbon pricing is targeted in itself (depends on fuel consumption, which is higher for higher-income households), but investment subsidies often require co-financing, which favors the wealthier. It is recommended differentiate the amount of subsidies and eligibility according to social criteria and use financial instruments to reduce initial costs (e.g. leasing models).
• Quickly implement: Social support needs to be implemented quickly, as pricing will start in 2027. Means-testing tends to be administratively and politically challenging; countries with a well-functioning social security infrastructure they can provide socially targeted payments more effectively.
• Lasting impact: The SCF legislation separates measures with a lasting impact from direct income support. However direct payments can also have a lasting impactif used for investments in decarbonised technologies (e.g. repayment of a home improvement loan).
• Volatility resistance: ETS2 prices may fluctuate. Social measures must be resilient to this volatility and protect consumers from additional risk.
• Visibility: The price increases from ETS2 are visible (e.g. at the gas station) and will generate resistance. For continued political support, the use of revenues should also be visible and understandablein order to communicate well.

Challenges and next steps

They exist significant compromises when deciding on the use of revenues, for example between targeting vulnerable households and protecting purchasing power, or between seeking a lasting impact and providing quick relief. A successful mix of revenue uses should take into account the most pressing needs in specific EU countries, allow for policy sequencing over time, include insurance mechanism for high prices and provide a framework for comparing and evaluating the use of revenues.

The first national socio-climate plans, which are being prepared in the first half of 2025, represent an opportunity to discuss the use of ETS2 revenues. For the successful implementation of ETS2, necessary cooperation between social and climate experts on the efficient use of revenues. ETS2 revenues have the potential combine climate policy with positive social impact in the EU. However, social priorities have not yet been fully integrated by all EU governments, as confirmed by the fact that climate ministries, not social ministries, are responsible for the SCF and the use of ETS2 revenues in most EU countries. Spring

Glossary of key terms

• ETS2 (Emissions Trading System 2): An expanded EU emissions trading scheme covering CO2 emissions from building heating and road transport.
• Fossil fuels: Fuels that are formed from the remains of ancient organisms (coal, oil, natural gas). Their combustion is the main cause of CO2 emissions.
• Carbon price: A price charged for each ton of CO2 emissions released into the atmosphere, serving as an economic incentive to reduce emissions.
• Social Climate Fund (SCF): An EU fund established to support the most vulnerable households and micro-enterprises affected by the introduction of carbon pricing under ETS2.
• Vulnerable households: Low-income households, which are particularly sensitive to increases in energy prices and have limited opportunities to invest in more energy-efficient measures.
• Decarbonization: The process of reducing or completely eliminating carbon emissions (especially CO2) from energy systems and other sectors.
• Purchasing power: The amount of goods and services that can be purchased with a unit of currency. An increase in prices reduces purchasing power unless income increases proportionately.
• Renewable energy: Energy obtained from sources that are naturally renewable (e.g. solar, wind, geothermal energy).
• Energy poverty: A situation where a household spends a disproportionately high portion of its income on meeting basic energy needs, or is unable to maintain adequate thermal comfort in its home.
• Climate dividend: A mechanism to return carbon price revenues directly to citizens, often in the form of regular payments, to offset higher costs.
• Lasting impact: The effect of a measure that persists even after its direct implementation has ended, for example an investment in building insulation that reduces energy consumption for many years.
• Price volatility: Price fluctuations, in this context emissions or fossil fuel prices. Volatility resilience means the ability to protect households from the negative impacts of these fluctuations.
• Skill formation (skill support): Programs aimed at acquiring new skills or retraining workers, especially those whose jobs are threatened by the transition to a low-carbon economy (e.g. workers in the fossil fuel sector).
• Just transition: A principle ensuring that the transition to a sustainable economy is fair and inclusive, addressing the social and economic impacts on workers and communities dependent on high-emissions sectors.