Giving the billions to the millions: a socially just distribution of ETS-2 revenues

In less than a year, billions of euros from the Social Climate Fund (SCF) will land in EU governments’ pockets, but some countries are already calling for a delay of carbon pricing in heating and transport (a new emissions trading system named ETS-2), due to start operating in 2027. It is important that policymakers stand firm behind one of the most critical components of the European Green Deal. For ETS-2 to work, two elements are crucial: first, revenues need to be distributed equitably and, second, other policies to reduce fossil fuel demand must complement the EU’s carbon price.

Why revenues should be returned to people

ETS-2 puts the ‘polluter pays’ principle into action, with the biggest polluters paying the most. But for many low-income European households, this cost could be a large burden. This is why the SCF was created to fund strategies to help disproportionately-affected households. Funded primarily by the revenues from ETS-2, the SCF can be used in a variety of ways, from expanding existing transport services to direct income support for all households. This is one of the advantages of a carbon price: revenues can be used to address some of the costs of moving away from fossil fuels. 

Many households who experience energy or transport poverty will be disproportionately impacted by ETS-2. As they likely lack the means to transition from fossil fuels alone, targeted support schemes will be crucial to aiding them. One-stop shops to provide local assistance and access to information, subsidies for replacing fossil boilers with heat pumps, or discounted public transport access can all contribute to alleviating the financial burden of decarbonisation for lower-income households. 

Several countries where a carbon pricing system is already in place for building and transport emissions have opted for climate dividend schemes. An annual direct payment to all citizens offers relief if carbon prices are high, provides financial resources to assist households in transitioning away from fossil fuels, and increases public trust in the carbon pricing system.  

This works successfully in Austria, for example, where carbon pricing revenues are returned in annual direct payments. Schemes can differentiate payments by income - as the Austrian scheme does by making payments taxable - and by quality of public transport, resulting in higher payments for people living in rural areas. Citizens will ultimately pay the carbon price, so returning the revenues to them, rather than to big businesses, is the most socially just distribution.  

ETS-2 is not a silver bullet 

Prices in ETS-2 will be high if demand for fossil fuels remains high. Policies that reduce fossil fuel demand by means other than the ETS-2 will therefore have a dampening effect on the price. For example, a substantial investment in bicycle infrastructure in urban areas would reduce transport fuel demand and thus lower costs for citizens in rural areas who still rely on cars but do not yet have the resources to buy an electric vehicle. Any regulatory policy that reduces emissions in building and transport will result in lower ETS-2 prices, especially if enacted by the very large polluting countries - Germany, France and Italy account for over half of all ETS-2-relevant emissions across the EU.  

Other national policies can reduce demand too. A carbon price floor could set a minimum carbon price in transport and heating such that if the ETS-2 price falls below it, the national carbon price kicks in - a system the UK successfully pioneered for the ETS-1 while it was still in the EU. This would increase the predictability of the ETS-2 price, support investments in decarbonisation, and reduce carbon price levels and volatility in the long term.   

The process of establishing National Social Climate Plans that determine the spending of ETS-2 revenues via the Social Climate Fund provides a good opportunity to consider how to make ETS-2 work, both by smart distribution of revenues and with complementary policies that contain price levels in the first place. 

The extension of carbon pricing to heating and transport fuels will be a litmus test for EU climate policy as energy prices may soar if proper supporting measures are not implemented. The majority of building and transport emissions are produced in Germany, Italy and France, so it will be the complementary measures taken there that determine the price of emissions for the whole of the EU. For countries with higher rates of energy and transport poverty, such as Bulgaria, Hungary or Slovakia, supporting households to permanently phase out fossil fuels should be a priority. 

Recommended links  

1. ETS2: buildings, road transport and additional sectors
2. Austrian National Emissions Trading System
3. Climate and Energy (EEB)
4. Energy Poverty Advisory Hub National Indicators

About the authors  

Luke leads the EEB’s Climate and Energy team, currently involved in the LIFE EFFECT consortium working on fostering understanding of ETS-2 and capacity building for civil society. Before joining EEB, Luke was policy analyst and climate economist at the Mercator Research Institute on Global Commons and Climate Change (MCC) in Berlin. He previously worked as an economist at the Organisation for Economic Co-operation and Development (OECD) in Paris and at the German Institute for Economic Research (DIW) in Berlin. He has a PhD in economics from the Paris School of Economics, an M.Phil in Economics and a Bachelor’s degree in Philosophy, Politics and Economics from the University of Oxford.  

Hannah works in communications for the EEB's Climate and Energy team, focusing on carbon pricing and renewable energy. With previous communications experience in NGOs and media outlets, her expertise is in the energy politics of Central and Eastern Europe. She has a double MA in Central and Eastern European, Russian and Eurasian studies. 

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