The New Emissions Trading System’s Impact on Your Energy Bills

Eleanor Scott from Carbon Market Watch explores two key pieces of the EU climate policy puzzle: the Social Climate Fund and the Emissions Trading System 2 (ETS2). 

EU Emissions Trading System – or ETS – has long been the EU’s primary tool for reducing greenhouse gas emissions by placing a price on carbon. In 2022, the EU revised the ETS directive, expanding its scope to include a new system – ETS2. What does this expansion mean, and how will it affect citizens, industry, and climate goals? Let’s dive in.

Absolutely. I work on EU carbon market policy at Carbon Market Watch, a climate NGO that serves as a watchdog in carbon markets. Our mission is to ensure these markets are both fair and effective. We focus on the regulatory carbon markets – so that’s ETS1, which covers industrial decarbonisation, and the new ETS2, which targets buildings and road transport. Some of my colleagues also work on the voluntary carbon market and carbon removals. 

Specifically, I work on ETS2 and the Social Climate Fund, which we’ll be discussing today. We collaborate with other climate organsations and civil society actors to ensure that ETS2 is implemented in a socially just and effective way. 

Of course. ETS2 is a new carbon pricing system for fuels used in buildings, road transport, and smaller industrial installations that fall below the ETS1 threshold. The core idea is to cap emissions and reduce that cap annually, which drives up the price of pollution over time. This helps reflect the true cost of fossil fuels and encourages the adoption of cleaner alternatives, such as electric vehicles, heat pumps, and solar panels. 

Another crucial aspect is the revenue ETS2 will generate. These funds are intended to support investments in clean energy and make green alternatives more affordable. While fossil fuel suppliers – like Total Energies or Engie – are the ones directly regulated, the cost is typically passed on to consumers via higher energy bills. 

To address this social impact, the EU created the Social Climate Fund, aimed at supporting those most vulnerable to increased energy and transport costs. With around €86.7 billion available, including member state co-financing, countries must submit Social Climate Plans (due in June 2025) detailing who is affected and how they’ll use these funds to provide clean and affordable energy alternatives. 

Up to 37% of the fund can be allocated toward direct income support to help individuals cover their energy bills. Around 2% is allocated for technical assistance, like setting up information hubs, and the remaining funds are intended for long-term solutions, such as home retrofitting, clean energy infrastructure, and zero-emission transport options. 

Yes, this is a major concern. Lower-income households typically spend a higher share of their income on energy, and unless affordable alternatives are made available quickly, they will bear the brunt of increased costs. 

Lower-income households typically spend a higher share of their income on energy, and unless affordable alternatives are made available quickly, they will bear the brunt of increased costs.

The Social Climate Fund will help, but it’s only part of the solution. ETS2 revenues overall are expected to be much larger – about €260 billion in the first five years at a carbon price of €45 per ton. These funds will be returned to member states, and under the revised rules, 100% must be used for climate action. But it’s up to each country to decide exactly how. 

At Carbon Market Watch, we advocate for using a significant portion of that revenue – around 25% – for targeted income support, helping low-income households manage higher costs while the infrastructure for affordable alternatives is put in place. 

Beyond that, there are data challenges. It’s not always easy to identify who exactly is in energy or transport poverty. People facing these hardships may also lack access to information or support programs. 

It’s also important that we don’t rely solely on ETS2 to reduce emissions in buildings and transport. It’s just one part of the broader Fit for 55 package. Complementary policies – like the Energy Performance of Buildings Directive and CO₂ standards for cars – also play a crucial role by reducing pollution demand, which can in turn lower the ETS2 carbon price. 

We should also note that France and Germany together account for about half of ETS2 emissions. So, what happens in these countries will have a major impact on prices across the EU. It’s vital that the EU supports them in meeting their emissions targets. 

And let’s not forget: the current system is already broken. Over 40 million people in Europe can’t afford to adequately heat their homes. Fossil fuel companies profited massively during the recent energy crisis. ETS2 is a tool to change this, but it must be combined with strong social support and other climate standards. 

Over 40 million people in Europe can’t afford to adequately heat their homes.

Great question. It’s encouraging that the European Commission is prioritizing energy affordability – this is a pressing issue and a major voter concern. It’s also good to see the link between climate policy and social policy becoming more prominent. 

The Action Plan’s focus on lowering electricity prices and investing in grid upgrades aligns well with ETS2. Making clean technologies like heat pumps and EVs more cost-effective is essential. 

However, there are some disappointments. The plan doesn’t mention ETS2 at all, despite its imminent rollout and direct connection to energy affordability. That’s a major oversight. 

Even more concerning is the plan’s support for new gas infrastructure. Investing in fossil fuel infrastructure is risky, especially when gas prices are highly volatile. Renewables are not only cleaner but offer more stable and affordable prices in the long run. 

Renewables are not only cleaner but offer more stable and affordable prices in the long run. 

So while the Action Plan is a step forward, it needs to be better aligned with the broader climate policy framework, including ETS2. 

Yes, member states have a crucial role. For instance, Poland has a high percentage of coal users who will be especially vulnerable under ETS2. It’s critical that these populations receive support early – either through affordable alternatives or direct income assistance. 

The foundation for fair implementation is a strong Social Climate Plan, based on meaningful stakeholder consultations and robust data on who is affected by energy and transport poverty. 

But since the Social Climate Fund is limited in size, member states should proactively scale up investment in building decarbonisation and clean transport. They can use existing EU funds – like the Recovery and Resilience Facility or Cohesion Fund – to front-load investments before ETS2 revenues start flowing in 2027. 

Additionally, Carbon Market Watch is calling for 100% of ETS2 revenue to be reinvested in measures that support a just transition. That means direct grants for low-income households, affordable loans for middle-income earners, and sustained income support during the transition. 

Carbon Market Watch is calling for 100% of ETS2 revenue to be reinvested in measures that support a just transition.

Some good practices are already emerging. For example, France introduced an electric vehicle leasing program, offering income-tested access to EVs for as little as €50 per month. There’s also growing innovation in policies that protect tenants and incentivise landlords to retrofit buildings and install heat pumps. 

Finally, we must guard against the political pressure to roll back complementary measures. ETS2 alone cannot achieve emissions targets or ensure a fair transition. If it’s left to operate in isolation, the result will be higher prices and rising public frustration. 

And one last point: communication is key. Carbon pricing can become a political lightning rod, as we’ve seen in France and Canada. We all need to start discussing ETS2, ensuring that people understand what it is, how it works, and how it can benefit them if implemented effectively.