As part of the Fit for 55 package, the EU Commission proposed measures in July 2021 to reduce greenhouse gas emissions by 55% by 2030 and to achieve climate neutrality by 2050. The EU Emissions Trading System (EU ETS)  has been in place since 2005, where each tonne of CO2 emitted must be covered by an allowance, with the total number of allowances decreasing each year. Until now, the ETS has mainly covered installations in energy-intensive industries and the energy sector, as well as intra-European aviation since 2012 and maritime transport since 2024.

The new ETS II: Unequal impacts
One of the key measures of Fit for 55 is the extension of the EU ETS to include buildings (heating), road transport and additional sectors. Similar to the current ETS, the new ETS II will be designed as a cap-and-trade mechanism and will be introduced parallel to it. ETS II allowances will be auctioned, generating significant revenue for member states. However, the EU Commission wants - for the time being  - to maintain a price cap of 45 euros per tonne of CO2 at 2020 prices, which is equivalent to around 60 euros, when ETS II comes into force in 2027.

The Brussels-based think tank Bruegel has published a policy brief outlining the extent to which these costs are now being passed on to consumers. In particular, heating and fuel costs are rising, placing a disproportionate burden on rural and low-income households. This distributional effect can be observed both within member states and EU-wide. Poorer households have to spend a higher proportion of their income on rising costs because they tend to live in less energy-efficient homes and fossil fuels are more likely to be the main energy sources in poorer member states. Added to this is the distributional effect of the urban-rural divide, as non-urban transport accounts for 70% of national transport emissions in the EU.

Will the Social Climate Fund be sufficient?
In order to mitigate these negative distributional effects, the ETS II revenues are to be redistributed. This will be achieved, among other, by setting up a Social Climate Fund (SCF), into which up to €65 billion from ETS II revenues (according to Bruegel, a total of between €342 and €570 billion) will be paid between 2026 and 2032. The remainder will be distributed among EU member states based on their past emissions between 2016 and 2018. Of this, a further €22 billion will flow into the SCF, bringing it up to €87 billion. Poland will receive the biggest share of the Fund, followed by France, Italy and Spain. Looking at the expected revenues of each country relative to GDP, it is clear that the money is most important for Eastern European EU countries.

Bruegel criticises, that the CO2 price could be significantly higher than the EU Commission's target price of €45 per tonne as early as 2029. As CO2 prices rise, the costs for consumers also rise proportionally. Bruegel calculates that a price of €200 per tonne of CO2 would have an impact beyond the energy crisis in 2022. However, in spite of the anticipated higher costs, the volume of the SCF will remain at a maximum of €65 billion.

National plans: Time is running out
In order to receive payments from the Social Climate Fund, member states must submit national Social Climate Plans detailing how SCF funds will be allocated. These plans must be in line with European climate targets. The project is following a very tight schedule. National plans must be submitted by 30 June 2025. The EU Commission intends to make the first payments in January 2026. ETS II will come into force in 2027, whereby the full impact on consumers will become noticeable from 2028 onwards.

However, two months before the deadline expires not a single country has submitted a plan to the EU Commission. The second half of 2025 is reserved for evaluating the measures and making any necessary adjustments. As Beatriz Yordi Aguirre, Director of Carbon Markets at DG Clima, made clear at a Bruegel event, if plans are submitted late, payments will also be delayed.

What is preventing success?
Not least the energy crisis has shown that administrative capacities at national level are limited. A key challenge is to reach vulnerable households while striking a balance between simple measures that might lead to misallocation and targeted measures that require significant administrative effort. Joanna Pandera, founder and president of Forum Energii, a Polish think tank supporting the energy transition, said during the event that Poland is lacking sufficient financial and technical support for preparing implementation, as well as information on the possibilities and implications for households themselves.

Where does Austria stand?
Austria has not yet drawn up a plan either. The lengthy process of forming a government has also delayed the preparation of the plan. The BMF and the BMLUK have now the responsibility for this. However, in a recent speech, Minister of Finance Markus Marterbauer announced that the plan should be ready by the end of June.

However, Austria ranks only 18th in terms of SCF funding allocations, which is equivalent to allocating 0.89% and thus around 650 million euros in total between 2026 and 2032 (in 2021 prices). Hence, the revenue from ETS II proceeds is of much greater importance. At the same time, the use of this money is much less strictly regulated. Since Austria's SCF funds are not even sufficient to significantly reduce the burden on the first income decile, it is even more important to use these national revenues wisely.

To promote the exchange of ideas, the EU Commission has presented a list of good practices, which includes two examples from Austria. One is the ‘Clean Heating for All’ initiative, which reimburses low-income households for the costs of switching to more climate-friendly heating methods. The other is the Vienna Model for Social Housing, which includes municipal housing, subsidised housing and subsidised renovation.

What should be borne in mind?
AK also links the risk of sharp price increases  and high volatility in energy prices to households in connection with ETS II. Hence, the EU Commission and member states must work together to ensure that in particular low-income households are protected from sharp price increases. A well-functioning Social Climate Fund plays an important role in this regard. Moreover, member states will also need to use other revenues from ETS II wisely, in particular to cushion the impact of cost increases on low-income households.

Further information:
Bruegel: Policy Brief: Making the best of the new EU Social Climate Fund
AK EUROPA: Just transition to climate neutrality!
AK EUROPA: Stricter climate targets: EU Parliament must restart negotiations
AK EUROPA: ‘Fit for 55’ – Europe’s path towards climate neutrality
AK EUROPA Position Paper: ‘Fit for 55’ Package I: Pricing Greenhouse Gas Emissions
ETUC: ETUC position on the creation of a second ETS on road transport and building and of a new Social Climate Fund