As the EU prepares to launch ETS2, extending carbon pricing to buildings and road transport, attention is shifting from carbon pricing to a more political question: what happens to the money? 

This was the focus of the webinar “ETS Talk: Lessons from ETS1 to ETS2 – Insights for Fair and Effective Investments”, which examined how revenues from the existing emissions trading system (ETS1) have been used so far and what this means for the credibility and fairness of the next phase.

Aleksander Śniegocki from the Reform Institute presented findings from a new study analysing ETS1 revenue use in five major member states—Germany, France, Italy, Spain and Poland—which together account for around two-thirds of total ETS auction revenues. On paper, the picture looks encouraging. Most spending is broadly aligned with EU climate goals, flowing into building renovation, transport, clean power, industrial transition and research and innovation. Spending that is directly climate-harmful is rare.

However, the deeper the analysis goes, the messier reality becomes. Reporting practices differ significantly across countries and over time. Member states use highly aggregated categories, inconsistent classifications and, in many cases, incomplete reporting. The option to report ‘financial equivalents’ rather than actual revenue spending gives governments wide flexibility – and sometimes too much room for creative accounting. In practice, this means that compliance with the ETS Directive does not always translate into additional climate action on the ground.

National examples illustrate this tension clearly. Germany relies heavily on its Climate and Transformation Fund, which provides visibility and political recognition for climate spending but mixes multiple revenue streams, making it harder to trace ETS money precisely. Poland reports spending in climate-related categories to the European Commission, while domestically ETS revenues may be channelled into broader budgetary purposes such as electricity price support or crisis funds. Italy demonstrates another challenge altogether: delays in spending mean revenues generated years ago are sometimes only used much later, weakening their impact. France and Spain demonstrate how priorities can shift significantly over time, especially following changes to EU rules.

A particularly important risk highlighted in the discussion is fossil fuel lock-in. While few programmes explicitly subsidise fossil fuels, broader schemes – especially in buildings and transport – have at times supported gas boilers or fossil-dependent mobility options under the banner of transition. These design choices matter, especially for ETS2, where investment decisions in heating and transport can lock in emissions for decades.

Responding to the study, Viktoria Noka from Öko-Institut emphasised that governance is the most significant hinge point. The technical solutions are well known: clearer earmarking, dedicated funds instead of general budgets, consistent and traceable reporting, and stronger verification. The challenge is not identifying best practices but ensuring they are applied consistently and can survive changing political priorities. Without strong governance, revenue recycling risks becoming a box-ticking exercise rather than a driver of transformation.

At the same time, both speakers stressed that the picture is not all negative. There are solid foundations to build on. Many existing programmes already support energy renovation, sustainable mobility and social objectives, and some countries are explicitly integrating just transition considerations into ETS revenue use. These experiences show that carbon pricing revenues can be recycled in ways that visibly benefit citizens – an essential condition for public acceptance, particularly as ETS2 begins to affect household energy and transport costs more directly.

The webinar also underscored a crucial timing issue. Once ETS revenues flow into general budgets without strong earmarking, it becomes politically and fiscally difficult to ringfence them again at a later date. For ETS2, this means governance decisions taken early will shape outcomes for years to come. Transparency is not just about better reporting to Brussels; it is about giving citizens a clear answer to a simple question: where is the money going, and how is it helping the transition?

The lesson from ETS1 is therefore not that revenue use has failed, but that legitimacy cannot be taken for granted. ETS2 will succeed politically only if carbon pricing is visibly linked to fair, effective and socially conscious investment. Getting governance right – early, clearly and transparently – may be just as important as getting the price signal right.