The new EU Emissions Trading System (ETS2) will, for the first time, put a price on CO₂ emissions in the buildings and transport sectors across Europe. Starting in 2027, fuel suppliers will be required to purchase CO₂ certificates in order to offset their emissions in these sectors. ETS2 is expected to play a central role in reducing greenhouse gas emissions by 55% by 2030, helping the European Union (EU) to achieve its climate targets. From 2027, the current national CO₂ price system in Germany will be replaced by ETS-2.

To accompany the introduction of ETS2 with social policy measures, the EU has set up the Social Climate Fund (SCF) for the period 2026 to 2032, financed by revenues from CO₂ pricing. Its purpose is to cushion the social impacts and provide targeted support to vulnerable households, small businesses, and transport users affected by energy and mobility poverty. The SCF amounts to up to €65 billion EU-wide (plus 25% of co-financing by the member states).

Since the introduction of the Fuel Emissions Trading Act (BEHG) in 2021, Germany has been considered a pioneer in CO₂ pricing in the heating and transport sectors. In particular, the CDU positioned itself early on as a vocal advocate of market-based instruments such as CO₂ pricing. Revenues from the BEHG and the European Emissions Trading System (ETS1) currently flow into the Climate and Transformation Fund (KTF). This fund is used to finance measures aimed at achieving the national climate targets set by the Federal Climate Action Act. Expenditure of €36.6 billion is planned for 2025, including building renovation programmes, relief for energy-intensive companies, and the promotion of climate-friendly mobility. 

Effective and socially just implementation of ETS-2 in Germany

Germany accounts for almost a quarter of CO₂ emissions in the transport and buildings sectors in the EU, which are covered by ETS-2. The faster emissions are reduced domestically, the more stable the European CO₂ price will remain and the lower the risk of sudden cost increases. Yet, it is precisely in transport and buildings that Germany faces a significant implementation gap. 

The Expert Council on Climate Issues recently confirmed that Germany’s emission reductions in these sectors are insufficient. Supporting instruments such as an electrification push in the transport sector and binding efficiency standards in the buildings sector are therefore all the more important.

The CO₂ price will impose a significant financial burden on households and small businesses. This is why relief measures should be targeted, as it is mainly higher-income households that have benefited from support programmes so far. Social and climate policy must be combined: those who receive transfer payments or have a low income should benefit from climate investments. 

That is where the SCF comes in. To access EU funds from the SCF, member states had to submit their National Social Climate Plans (NSCPs) to the European Commission by the end of June 2025. Germany has not yet done so. With funding from the SCF, Germany has the opportunity to finance targeted measures to support particularly vulnerable groups during the transition to climate-friendly energy. For these groups, it is crucial that the German SCP actually provides additional and well-targeted support, for example through a nationwide social ticket for public transportation or a bonus for the renovation of social housing.

Given the expected development of the CO₂ price – BloombergNEF forecasts up to €149/t CO₂ by 2030, compared to the target range of €45–60/t CO₂ – the SCF is becoming even more important as a solidarity instrument. Rising CO₂ prices generate substantial revenues available for social compensation measures, but they also place a growing burden on households and small businesses.   Germany should therefore advocate linking the fund dynamically to the price of CO₂. This would mean adjusting the SCF volume proportionally to the increase in the CO₂ price. Only in this way can the SCF live up to its promise of solidarity, socially cushioning the energy transition and securing fair conditions across Europe. 

Use of ETS2 revenues

In addition to the funding from ETS2 flowing into the SCF, Germany will retain its share of the remaining revenues, which, according to EU law, must also primarily be used to address the social challenges of the transition. Germany should use all funds from ETS2 in a targeted manner to make sure that they not only reduce emissions effectively, but also cushion social hardship and have a visible political impact. 

For Germany, a central field of action is the transport sector. The introduction of a socially tiered Deutschlandticket could not only reduce the financial burden on low-income households, but also create a strong incentive to switch from cars to local and long-distance public transport. The ticket would have the dual effect of providing social relief and reducing emissions.

There is also urgent need for action in the buildings sector. The energy-efficient renovation of social housing could be accelerated through targeted bonus funding. This would reduce heating costs in the long term and avoid emissions, while at the same time ensuring that tenants with low incomes benefit from the heating transition. 

In addition, low-income households should be supported through direct subsidies for electricity costs. Rising energy prices resulting from CO₂ pricing will affect these groups the most. Targeted support can provide short-term relief, while energy efficiency investments can reduce consumption in the medium term.

For households that cannot immediately escape fossil fuel dependency, the nationwide introduction of a climate bonus (Klimageld) is necessary. This instrument offers the chance to redistribute revenues from CO₂ pricing to the population in a visible and fair manner. A socially adjusted climate bonus system would ensure that low- and middle-income households are disproportionately relieved. This would strengthen the acceptance of CO₂ pricing and reinforce the social dimension of climate policy.

CO₂ pricing with a focus on people and the environment

ETS2 is both a challenge and an opportunity for Germany. Without social support measures, there is a risk of resistance, as seen in the debate on the ‘heating law’. However, with an ambitious NSCP, sufficient investment in infrastructure, and fair compensation for vulnerable households, ETS2 can become a driving force for both climate change mitigation and social cohesion.