ETS 2 and the Social Climate Fund-A Strategic Alliance to Address Energy and Transport Poverty in European Union Member States


ETS 2, which aims to reduce CO2 emissions from fuel combustion in buildings, road transport, and other sectors by 42% by 2030 compared to 2005 levels, will come into force in 2027.


The scope of ETS 2


A new emission trading system (ETS), named ETS 2, will include and manage the CO2 emissions originating from fuel combustion in buildings, road transport, and other sectors, mainly focusing on smaller industries not covered in the existing EU ETS. ETS 2 was developed as part of the 2023 revisions of the ETS Directive and is said to complement the policies of the EU Green Deal. 
Similar to the existing EU ETS, ETS 2 will also have a cap-and-trade approach; however, it will focus on upstream emissions. Fuel suppliers, not end users like households or car owners, will need to purchase allowances to cover their emissions. 

ETS 2 is paired with the Social Climate Fund, which involves identifying the most affected EU Member States to implement the SCF effectively


For implementing the ETS 2 in the EU Member States, which needs priority support regarding increased energy costs, the Social Climate Fund (SCF) is required and paired with the ETS 2. SCF will help the usage of revenues from the auction of the emission allowances in ETS 2 to support member countries, especially in Central and Eastern Europe (CEE) as soon as those in need demonstrate the Social Climate Plans. Countries in the CEE are considered vulnerable since they have the lowest average income levels.



This graph also shows that the additional cost for transportation and household heating for ETS 2 will be higher in low-income member states.


According to the European Commission, ETS 2 will start to operate in 2027, and the initiation of SCF is scheduled for 2026, requiring the development and submission of Social Climate Plans by mid-2025.
SCF will contribute to financing long-term investments, including renewable energy integration, building renovation, and reinvention of public transport and mobility services. Thus, the issue of identifying the most affected EU Member States to execute the SCF successfully is essential. In this context, EU Member States should conduct thorough vulnerability analyses, customize measures, and seek best-practice examples for effective SCF implementation. The European Commission should guide Member States in aligning targeting strategies with the Fund's objectives. The active involvement of sub-national actors from the beginning is crucial for understanding the new carbon pricing mechanism and contributing to effective policy and program development.
Despite limited time for Social Climate Plans, integrating ETS 2 with the Social Climate Fund is crucial for addressing energy and transport poverty in Europe, ensuring inclusivity for all.