Putting the ETS 2 and Social Climate Fund to Work

In early 2023, the EU passed landmark legislation establishing a new emissions trading system (ETS) for the buildings and road transport sectors – the ETS 2 – which is to be accompanied by a new Social Climate Fund. On its own, the carbon price risks unfairly impacting the poor and vulnerable, and potentially exacerbating social and political divisions. In the former communist bloc countries of Central and Eastern European, the risk is acute. 

The Social Climate Fund is therefore conceived to channel a share of ETS 2 revenues towards those that especially need it. Together, these new policies present an opportunity to transform European society for the better. However, to be successful, they need to be effectively implemented. And with an ambitious timeline, this presents a considerable challenge. All actors need to be equipped with the knowledge and tools required to take a constructive role in the process. 

This report is therefore intended as a steppingstone towards implementation. It provides a basis of knowledge for policymakers and experts across the climate and social policy fields tasked with making the Social Climate Fund work. We review the new legislation to gain an understanding of its scope, objectives, and processes. We then use original modelling analyses to examine vulnerability to the carbon price across Europe, focusing in on Poland and Romania. Furthermore, we unpack the discussion on policy design considerations, drawing on a broad range of good-practice policies from Europe and around the world. 

Our study thereby provides insights into the following questions:

• What are the ETS 2 and Social Climate Fund, and how should they work
• What impacts can be expected from the carbon price across European households
• What patterns of vulnerability can be seen within Member States and what types of indicators and analyses can be used to identify vulnerable groups.
• What policy design considerations are important when developing nationally appropriate measures.
• What types of measures and investments should be funded, and how can these be designed to target the vulnerable.
• How have other jurisdictions designed similar measures and what experiences can we learn from, both within Europe and internationally.

This publication is part of the project Facilitating Socially Just Carbon Pricing Policies in Central and Eastern Europe.