The 2024 revision of the EPBD has introduced several key measures to decarbonise the sector. It mandates a gradual phase-out of fossil fuel boilers, starting with a ban on subsidies for stand-alone fossil heating systems from 2025, and introduces Minimum Energy Performance Standards (MEPS) for the worst-performing buildings. Member states have until May 2026 to transpose the provisions of the updated EPBD and successful implementation will be crucial. 

The 2023 revision of the EED now includes higher annual energy savings obligations, rising to 1.9% from 2028, and a binding 3% annual renovation target for public buildings. But even with these stronger legislative tools, member states are far off track. No member state currently meets the renovation rate required to achieve the 2030 and 2040 targets. A strong ETS2 carbon price signal will help to deploy energy saving measures in the buildings sectors at an increased pace.

To deliver on climate goals while containing the ETS2 price, member states must focus on two critical areas that have the highest potential to reduce CO₂ emissions and mitigate the cost burden on households. 

First, increasing the rate and depth of renovations is essential to improving energy efficiency. Research shows that if all residential buildings in the EU were renovated to targeted efficiency standards, 44% of the final energy used for heating could be saved. By substantially lowering overall energy demand, deep renovations directly reduce the need for fossil fuel heating, thereby cutting emissions and the associated costs from carbon pricing under ETS2. Particular emphasis must be placed on renovating the worst-performing buildings, as this is both a highly cost-effective and socially progressive measure, targeting support where it is most needed. Vulnerable households are often the most exposed to energy poverty and the least able to invest in upgrades themselves, requiring the total cost to be subsidised. Programmes like France’s ‘MaPrimeRénov’, which covers up to 90% of costs for modest-income households, and Belgian city Ghent’s ‘Gent Knapt Op’, offering renovation grants repayable only upon resale, show how well-designed financial schemes can help to remove upfront barriers and ensure fair access to energy improvements. 

Second, accelerating the deployment of renewable heating systems, such as heat pumps and decarbonised district heating, is crucial. The REPowerEU plans to deploy 30 million heat pumps by 2030 compared to 2020, yet this ambition could be scaled up further. A recent EEB study shows that dedicating just one third of the Social Climate Fund could subsidise the installation of 20 million heat pumps by 2032, enough to reach 65% of EU energy-poor households and cut EU gas demand by 11%, nearly as much as was imported from Russia in 2024.

However, as this would still leave many households uncovered, tapping into broader ETS2 revenues would help to close the gap. Transitioning to zero-emission buildings will require stricter rules for new construction and retrofits, alongside a clear strategy for reaching renewable heating and cooling targets. Replacing fossil-fuel-based heating and cooling with clean alternatives can effectively eliminate the emissions priced by ETS2, shielding households from rising fuel costs. However, this shift must also account for social and technical realities. Around 15% of EU citizens live in poorly insulated homes, and many of these buildings cannot support clean heating systems like heat pumps due to their high energy demand. In these cases, electrification without renovation risks being wasteful and regressive. That’s why renewable heating deployment must go hand-in-hand with targeted housing upgrades. Energy communities also represent a great opportunity in this regard: they can provide access to clean electricity for neighbourhoods, benefit from economies of scale, facilitate collective renovation projects, and often include dedicated support for vulnerable households. Here again, EU legislation plays a role: the EPBD requires consideration of vulnerable groups in renovation requirements and promotes their access to funding, while the EED mandates member states to identify and prioritise vulnerable consumers in energy efficiency programmes. 

Going further, binding fossil fuel phase-out plans in national renovation strategies in the next EPBD revision cycle, coupled with stringent MEPS for residential buildings, would secure long-term progress towards decarbonisation. With only 6% of EU households using heat pumps in 2021, additional measures are needed. Heat pump subsidies could be deployed in many forms, such as a support mechanism like the ‘Heat Pump Grant System’ in Ireland, or a member state government-backed heat pump leasing scheme could accelerate uptake by lowering upfront costs, particularly in early-stage markets, while providing flexible packages that cover maintenance options to make clean heating more accessible. 

To unlock greater renovation rates, the tenant-landlord split must also be addressed. Legal frameworks enabling cost-sharing, fiscal incentives for landlords, and safeguards against eviction or energy disconnection post-renovation can provide a fair foundation for upgrading the housing stock. For example, Germany has introduced a scheme that covers rental increases linked to renovation costs for tenants receiving basic income support, paying landlords directly via existing welfare channels. In parallel, member states must address less visible but significant drivers of building emissions, like growing floor area and underused buildings. Repurposing existing buildings, curbing floor area growth and promoting more effective use of existing stock are critical strategies, given the slow pace at which the existing stock can be decarbonised. 

Together, these measures can significantly cut building-sector emissions, contain ETS2 price impacts, and deliver real, lasting improvements in people’s lives – warmer homes, cleaner heating, and lower energy bills.