In the short term, the Emissions Trading System for road transport and buildings may temporarily lead to slightly higher energy bills for people still using fossil fuels extensively. However, with the right investments, ETS2 will not only ensure our fuel sources are cleaner but also lead to lower energy bills.

It is true that, like the original Emissions Trading System, ETS2 is founded on the polluter pays principle. In the creation of the scheme, concerns over price controls were front and centre so as to avoid overburdening households. ETS2 features many price control mechanisms including more pollution  permits in the early years for a smooth start and a soft price cap of €45 per tonne of emissions for its initial years which means more allowances will enter the market once this price is reached. A price of 45 euro a tonne would translate to a minimal increase of about 11 cents per litre of fuel for your car at the pump and less than 1 cent per litre for fossil fuel gas heating.

Moreover, and crucially, imposing a carbon price is meant to encourage decarbonisation. Those who switch to renewable energy, such as from solar and wind sources, insulate their homes or invest in energy-efficient heating and/or cooling technologies, such as heat pumps, are unlikely to experience higher fuel or utility bills and may actually pay less than they did before. Once installed, solar and wind power operate at low to no cost and when the initial costs are spread out over the lifetime of the installation, they often work out cheaper than fossil fuels.

And there’s more. Investing in reducing emissions in buildings and road transport will lower the ETS2 price because it will lead to lower demand for pollution permits, the number of which is pegged to a falling cap.

However, these efforts take time, and not everyone can afford this switchover, while others, such as renters, do not have the possibility to renovate or retrofit their homes. In these instances, it is incumbent upon governments to use the revenue generated by the Emissions Trading System (and other eligible sources) to help those who need it to embark on the clean energy transition through subsidies and other schemes including socially targeted renovations, affordable zero emissions transport options, such as social leasing of vehicles and public transport, and affordable financing for clean heating and cooling.

For vulnerable households that experience temporary or longer-term challenges, such as the risk of falling into energy poverty, ETS2 has mechanisms in place to support them, such as the Social Climate Fund, which must be topped up with wider ETS2 revenue.

This will ensure that the energy transition is fair and leaves nobody behind.

As evidenced by Transport and Environment the fluctuating price of fossil fuels in recent years remains far higher than an ETS2 price of at least €100 per tonne of CO2. Highlighting that the real danger is not a carbon price but continued dependency on dirty fuels, both for our pockets and the planet.

Buildings and road transport contribute a massive two-fifths of the EU’s total CO2 emissions. What’s more, governments are not taking sufficient action to shrink this enormous carbon footprint.

That’s where the ETS2 comes in. By 2030, projections forecast that ETS2 emissions from road transport and buildings could drop by over 40% compared to 2005 levels. 

And how will it do this? 

Firstly, the revenue generated from applying a carbon price to the fossil fuels used to power buildings and vehicles will be invested in climate solutions that will reduce the EU’s carbon footprint.

Secondly, this carbon price will incentivise the uptake of cleaner technologies. Year upon year, ETS2 will gradually reduce the total amount of carbon pollution it will allow, making it less viable to continue sourcing energy from polluting sources. Through this capping system, emissions in 2030 are expected to be 42% lower than in 2005.

However, this does not mean that the ETS2 willshould be left to reduce emissions in buildings and road transport by itself. National governments must also consider additional measures that provide affordable alternatives to fossil fuels and address the social impact of an increasing carbon price until these alternatives are in place.

The Social Climate Fund (SCF) has been developed with the explicit purpose of alleviating potential energy and transport poverty occurring from the transition towards clean mobility, buildings and housing. But, governments must not expect the SCF to carry the full load.

In designing the Social Climate Fund, EU member states agreed to cap its total to €86.7 billion, financed by €65 billion of the monies generated by the ETS2, and supported by an additional €21.7 billion from member state co-financing.

According to data at least 41 million people in Europe were unable to adequately heat their homes in 2022, so although the SCF is a welcome and essential policy that will go some way to addressing energy and transport poverty, it will not stretch far enough. 

That said, based on a price per tonne of CO2 at €45, between 2027 and 2032, member states will have over €200 billion returned to them to spend on social and climate spending, in addition to the Social Climate Fund.

Therefore, member states should act by funding socially targeted renovation, grants and affordable financing for heat pumps and zero emissions transport options, as well as providing temporary income support while these measures are put in place.

Of course, member state governments need not only rely on ETS2 revenues and Social Climate Fund to prompt spending on societal decarbonisation, but rather view it as complementary to their policy mix.

By applying an EU-wide price on pollution and putting a cap on the amount of available emissions, the ETS2 will allow the EU to take an important step towards cutting the emissions from one of its most polluting sectors.

However, ETS2 is only the first important step in the right direction. It is essential that member states continue the journey by introducing complementary and additional policies. Member states will not only need to spend ETS2 revenue on effective climate action and a just transition, they will also need to utilise other financial sources. 

For starters, the EU must not backtrack on the implementation of agreed-upon legislation, such as the combustion engine phase-out for cars and the Energy Performance of Buildings Directive (EPBD). Beyond that, member states must go further and implement complementary climate policies for buildings and road transport, such as developing clean transport infrastructure and expanding retrofitting programmes. 

Each additional measure to lower emissions in buildings and road transport will result in a lower ETS2 price as pollution is reduced. Without supporting measures to further bring down emissions, the carbon price could rise to a level that imposes an unfair cost on households. This could potentially undermine the system’s ability to develop the affordable clean energy alternatives it is expected to deliver.

ETS2 carbon pricing targets the fossil fuels we use to heat our homes and drive our cars, which are responsible for causing a whopping 40% of all carbon pollution in the EU. This causes a great deal of harm, the cost of which is borne by us all.

ETS2 is not about taxing people, but about balancing the real cost of fossil fuels with the benefits of clean energy and using the revenue generated to invest in making clean alternatives more affordable. If it works properly, it will actually impose less of a financial burden on people over time and break our dependency on imported fuel, like gas and oil.

This carbon pricing model works in a simple way: the more our homes and transport pollute, the greater the demand for pollution allowances and the higher the ETS2 price will be. The sooner member states reduce their emissions, the lower the ETS2 price will be felt across the EU. This is particularly true of France, Germany, Italy, Poland, and Spain, which are responsible for 70% of the emissions covered by ETS2.

Revenue must be spent by member states on lowering emissions or combating the social impact of ETS2 for lower-income groups. Member states decide how this ETS2 revenue will be spent, while governments must design the policies that return the money to citizens through investments and income support. 

The LIFE Effect project is campaigning for much-needed climate action to be implemented in a manner that is socially fair and environmentally impactful.

National governments have the responsibility to alleviate unfair carbon pricing. The more ambitious the actions taken by member states to reduce carbon pollution, the lower the carbon price that citizens will pay.

What’s more, the EU could eliminate the free pollution permits worth €11.3 billion per year, awarded to heavy industrial polluters in the Emissions Trading System for electricity and heat generation, industrial manufacturing and aviation sectors (ETS1), and in its upcoming revision, extend coverage of the policy to cover the full impact of aviation pollution and generate more than €1 trillion in revenue for climate action. Fossil fuel subsidies also represent a harmful misuse of finance that could be spent on a just transition. In 2023 alone, EU fossil fuel subsidies reached €111 billion, with over 60% concentrated in Germany, Poland, and France. 

Yes to carbon pricing. But, it must be implemented in a socially fair and environmentally impactful way.

The EU institutions and national governments have enshrined the science-based principle of reducing emissions in the European Climate Law. They collectively committed to the Paris Agreement, which mandates signatories to implement policies that aim to limit global warming to a maximum of 1.5°C above pre-industrial levels.

This climate accord was motivated by the economic, health, and livelihood risks caused by climate change and air pollution, not to mention the ramifications of the climate crisis, such as the increased frequency of extreme weather events.

However, some political agitators would have you believe that the European Commission has forced climate policy upon its member states. That is not how EU policymaking works.

ETS2 was first designed by the European Commission in response to the legal responsibility to lower emissions, as efforts to reduce pollution from road transport and buildings have been stalling.

The ETS2 proposal was then debated, modified, and ultimately agreed upon by democratically elected members of the European Parliament. The agreed-upon text was then reviewed by your democratically elected heads of state within the European Council. Democratically elected governments in each member state are then responsible for transposing the ETS2 into national law.

Furthermore, ETS2 is not the only EU-wide policy that seeks to reduce CO2 emissions. It is part of a package of laws and measures known as Fit for 55, which aims to lower net emissions by 55% from 1990 levels by 2030.

Every cent of ETS2 revenue is returned to member states to lower emissions and reduce the social impact of society’s transition to clean energy sources. This directly counters the myth propagated by those fundamentally opposed to the European Union, which claims that ETS2 revenue is sent to Brussels.

Approximately a quarter of the revenue returned to national governments will be allocated to implementing their Social Climate Plans. These plans are designed to provide targeted investment and income support to citizens experiencing energy and transport poverty.

The remaining 75% is also returned to member states for spending on ‘climate action’, such as investments in clean energy, insulation, green public transport, and income support to lower income groups.

The amount of ETS2 revenue returned to each country is proportional to the total number of pollution permits purchased by that country. The more a country emits, the more money is returned to that government to fund pollution reduction efforts.

To ensure transparency and accountability, member states must report annually to the European Commission on how this money is spent, with the records made publicly available.