Starting in 2027, the European Union will implement the Emission Trading System 2 (ETS2), extending carbon pricing to cover fuel suppliers for buildings and road transport. 

This marks a significant turning point in Europe’s climate policy and presents both challenges and opportunities for Italy. To mitigate the potentially regressive impacts of ETS2 on households and small businesses, the EU has also introduced the Social Climate Fund (SCF), a mechanism aimed at supporting vulnerable groups during the transition.

In this article we explore how Italy can strategically align ETS2 revenues and SCF resources to implement equitable and effective climate policies. As part of the LIFE Effect project, of which ECCO and eight other EU organisations are members, this article also aims to provide national insights on the issue. 

The wider project is aiming to raise awareness of ETS2, and advocate for carbon pricing that benefits both people and the planet.

A dual-track system: ETS2 and the SCF

ETS2 is expected to generate significant revenue through the auctioning of emission allowances. Projections for Italy between 2027 and 2030 estimate annual proceeds from ETS2 ranging from €3 billion (if the carbon price remains around €45/tCO₂) to over €13 billion under high-price scenarios. In contrast, the SCF has a fixed total of €7 billion between 2026 and 2032, complemented by a mandatory 25% national co-financing contribution, bringing Italy’s amount to at least €8 billion.

While the SCF offers essential support to low-income groups, addressing the broader impacts of ETS2 requires additional, well-designed policies that can, in part, be funded through ETS2 revenues. 

This should include a review of the energy taxation system, as ETS2 overlaps with existing tax structures that must be more effectively aligned with decarbonisation objectives.

Ensuring a just transition

The Italian approach to ETS2 and the SCF must move beyond ex-post compensation to embrace a pre-distributive logic. 

Rather than merely offsetting costs after they arise, policies should proactively direct ETS2 revenues toward systemic reforms that reduce both emissions and inequality. This includes investing in renewable energy, energy efficiency and low-carbon mobility, particularly targeting vulnerable households and microenterprises.

A key priority is protecting those most at risk of energy and transport poverty. The cost transfer from fuel suppliers to final consumers could disproportionately affect low-income families and small businesses. A targeted use of ETS2 revenues, complemented by SCF funding, must be devised to avoid regressive outcomes and strengthen Italy’s social cohesion.

Strategic priorities for the SCF 

Italy’s Social Climate Plan (SCP) and related climate-social policies could focus on several key strategic areas:

1. Energy-efficient social housing

A proposed fund for the renovation of Public Residential Buildings (PRB) could support vulnerable tenants living in the most energy inefficient homes. Targeted measures may include the installation of prefabricated facades, replacement of inadequately insulated windows, deployment of heat pumps and integration of solar technologies. Prioritising buildings in colder climate zones and those with the poorest energy performance could significantly reduce energy bills for low-income families.

For example, the decarbonisation of PRBs in Zone B is estimated to cost approximately €6.63 billion, an attainable target that could be financed through the Italian SCP and additional resources allocated to social policies. These efforts should be complemented, and not replaced, by revenues from ETS2 to maximise the ‘double dividends’ of social and decarbonisation initiatives.

2. Mobility vouchers and forced car ownership

Transport-related costs are a major concern for Italian households, especially in rural areas with limited public transit options. To address this, Italy could implement a ‘Mobility Voucher’ scheme, an annual subsidy for vulnerable users to access public and shared mobility services. 

This voucher programme, modelled on the EU’s ‘Mobility Wallet’ concept, would not only ease financial pressures on households but also encourage sustainable mobility habits. The programme is estimated to cost between €2.35 and €3.3 billion over seven years.

3. Microenterprise support and technological leapfrogging

Unlike large industries covered by ETS1, microenterprises, especially those in energy-intensive sectors, may lack the capital or knowledge to adapt to ETS2 requirements. Policies supported under the SCP for vulnerable microenterprises could include:

• Direct income support: this measure would compensate enterprises for the marginal increase in energy costs attributed to ETS2, serving as a short-term buffer to ensure business continuity.
• Social leasing mechanisms: as a more forward-looking component, this would subsidise the lease of electric commercial vehicles, thereby facilitating technological upgrades that reduce fossil fuel dependency. The leasing approach ensures affordability by removing upfront capital barriers.

Governance and long-term integration

Italy’s policy design must ensure that the SCF and ETS2 funded programmes are not fragmented, but instead form part of a broader national climate strategy. This should involve clear governance structures, efficient spending channels and local administrative capacity. Decentralised implementation must be matched with strong monitoring and evaluation systems to avoid inefficiencies and duplication.

Furthermore, consistency with EU-level planning tools, such as Cohesion Funds, Recovery and Resilience Plans, and Just Transition Territorial Plans, is essential for guaranteeing synergy and resource optimisation.

Avoiding social backlash

Recent European history offers a cautionary tale. 

The French “Gilets Jaunes” movement arose from a perception that climate policies unfairly burdened middle-income rural households. To avoid similar unrest, Italy must ensure that the benefits of decarbonisation are visible and tangible across all income groups. 

This includes the need to develop robust policies that ensure the social sustainability of the energy transition, not only for the most vulnerable groups but also for households up to the sixth or eighth income decile. 

Therefore, ETS2 should be directed towards strong complementary measures with the potential of not only reducing emissions and supporting wider income groups, but to lower ETS2 prices through less demand of allowances. 

Key to success

Italy’s success in implementing ETS2 and the SCF will depend on its ability to strategically align climate objectives with social equity. This requires moving from reactive compensation to proactive investment, from isolated interventions to coordinated policy packages, and from fragmented governance to inclusive decision-making.

The transition to a low-carbon economy can also be a transition to a fairer society, where no community is left behind and where climate action becomes a driver of competitiveness and shared prosperity.