Putting the ETS 2 and Social Climate Fund to Work - Impacts Considerations, and Opportunities for European Member States
Authors:
Alexander Eden, Iryna Holovko – adelphi, Johanna Cludius, Nelly Unger, Victoria Noka, Katja Schumacher – Öko-Institut, Andreea Vornicu-Chira – Center for the Study of Democracy, and Piotr Gutowski, Krzysztof Głowacki – WiseEuropa
Suggested citation:
Eden et al. 2023 “Putting the ETS 2 and Social Climate Fund to Work: Impacts, Considerations, and Opportunities for European Member States”
EXECUTIVE SUMMARY
In early 2023, landmark legislation was passed by the EU, establishing a new emissions trading system (ETS 2) for the buildings and road transport sectors. As the resulting rise in energy costs is expected to have uneven social impacts, the ETS 2 is paired with the Social Climate Fund, a mechanism to channel a share of revenues from ETS 2 allowances to the most vulnerable.
The ETS 2 carbon price is scheduled from 2027, and the SCF from 2025, setting an ambitious timeline for implementation. Member States need to develop national Social Climate Plans, which entail analysing patterns of vulnerability and developing a set of nationally appropriate measures. This report contributes to the discussion of the ETS 2 and Social Climate Fund implementation by a) examining the rules and processes outlined in the legislation; b) analysing national patterns of impacts and vulnerability; and c) discussing key policy design challenges in the light of international good practice.
Our modelling shows that an ETS 2 carbon price of €70 will on average have a limited impact on household expenditures across Europe. However, without revenue use, on its own the carbon price will be regressive, disproportionately affecting low-income households and on average representing a greater cost burden for lower-income Member States.
SCF funding should target the vulnerable, defined as households in energy or transport poverty, as well as those facing a significant cost burden without the means to adapt. In the context of each Member State, low incomes, dependence on fossil fuels, and the rural-urban divide, all contribute to national patterns of vulnerability.
Across a range of indicators, energy poverty is shown to be more prevalent in lower-income Member States, while transport poverty levels are similar across Europe. These conditions typically affect households in the bottom three income deciles, yet extend into higher deciles in some countries, such as Poland and Romania. All EU Member States are home to some share of vulnerable populations.
A key challenge of the SCF is the requirement to target vulnerable groups with green investment and direct income support measures. Effective targeting poses challenges of data availability, methodology, and feasibility. Work is needed to develop accurate yet practical indicators that can integrate local-level socio-economic data within each Member State, to define eligible groups, locate households, and find channels for delivery.
Sub-national actors, such as municipalities, will play a central role in implementation. Stakeholder engagement and communications are therefore key to building engagement, awareness, support, ownership, trust, and commitment. Policymakers should work collaboratively and engage stakeholders early in the process.
A selection of good practice examples can inform policy design, especially from existing carbon pricing systems in Europe and North America. While no single approach may perfectly fit the SCF framework, many aspects may be drawn on or adapted.