Challenges to the Implementation of ETS2 and the Social Climate Fund

The consortium identified several challenges facing the implementation of ETS2 and SCF, as described below.

1. The greatest challenge is misinformation and disinformation. The implementation of ETS2 and SCF is closely related to households’ daily lives, making them socially sensitive and prone to be used by populists, far-right forces, certain business groups, and even some governments to undermine the EU’s climate policies. 

2. Several governments (e.g. Bulgaria, Czechia, and Poland as well as Estonia, France, and Hungary) have already attempted to delay or water down the implementation of ETS2.

3. Climate action in general is under severe attack by populists and the far-right as well as some vested interests, which might have an influence on the fate of ETS2 implementation.

4. Energy poverty is substantial in CEE. This problem must be tackled in parallel with (or, even better, before) the implementation of ETS2. Direct income payments to citizens are a quick and efficient method for solving this problem. However, the lack of political will might be a huge obstacle to its implementation. SCF should be an example and encouragement for EU countries to implement such programs themselves on a regular basis to tackle energy poverty meaningfully.

5. Currently, fossil fuels receive enormous subsidies in CEE, which are mostly absorbed by the rich at the expense of the poor. It must be ensured that the SCF substantially contributes to reducing this injustice. 

6. Poorly designed subsidies from ETS2 revenues can also be both environmentally damaging and highly regressive (for example, subsidies to large luxury electric cars). 

7. Some countries might introduce new subsidies or increase existing subsidies on energy consumption, which neutralise the emission reduction effect of ETS2. For example, some countries may reduce energy excise duties for all in order to compensate for higher carbon prices. Due to the highly regressive nature of carbon-energy taxation in CEE, this not only counteracts climate change mitigation objectives but also enhances income inequalities. 

8. The transition to climate-friendly buildings and transport requires huge resources (e.g., for improving the energy efficiency of buildings, providing better public transport, and supporting vulnerable households). The financing needs go far beyond the volume of the SCF, and it is yet to be seen how the necessary financing will be provided. Removing environmentally harmful subsidies could help solve this problem, but again, political will is lacking. Moreover, it is still unclear whether Member States are willing to use the additional revenues from ETS2 that do not go to the SCF for this purpose in an efficient way.  

9. As carbon prices are determined through demand and supply, they can be expected to exhibit significant volatility, with forecasts ranging from €48 to €340 per tCO2 by 2030. This will make it difficult to adjust to for all stakeholders (governments, businesses, citizens). Whereas the volume of financing for the national Social Climate Plans (SCPs) is set, it is the additional ETS2 revenue that will depend on the actual carbon prices. In fact, ETS2 revenues may be multiple times higher than the annual allocations of SCPs.

10. A substantial part of the national SCFs might be hijacked by influential business groups. This could be best avoided by providing direct payments to citizens; however, the EU rules permit only temporary direct income support, moreover, they must not exceed 37,5 % of the total SCF national expenditure. Therefore, national funding must be ensured for direct payments; revenues from the ETS2, which are not used for the SCF, might serve this purpose.

11. There is a risk of traders hiding taxes and selling more without invoices. There are already expectations that the hidden economy will increase due to ETS2.

12. Increasing the price of heating with fossil fuels (gas, electricity, district heating) could lead to more frequent burning of biomass, with a catastrophic effect on rural ecosystems whose carbon absorption capacity will be reduced if the biomass exploited is not replaced (there is a high risk that it will not be). The residential burning of waste is also a danger, causing more climate-damaging emissions and air pollutants than in the case of burning fossil fuels. (Although residential waste burning is illegal, it is widely practiced in CEE.)

13. There is a lack of awareness about the possibilities to reduce heating and cooling costs quickly and cheaply, at least to a certain extent. In CEE, the overwhelming majority of the buildings are characterised by very low energy efficiency, and therefore, it is impossible to renovate even a fraction of them within a short period of time, while the effect of ETS2 on energy prices will be immediate. Therefore, awareness should be raised about quick and cheap methods to reduce energy consumption, with cheap and quick methods, even if they cannot provide a full solution.

14. There is a serious lack of skilled labour force to renovate buildings. Strong new housing construction demand in some countries attracts skilled labour force. Moreover, in some countries, the government subsidises many investments which are much less important than the renovation of buildings, and this also drains away skilled labour force.

15. Due to the increase in petrol and diesel prices, the number of vehicles filling their tanks outside of the EU where fuel is cheaper might increase. Although this is already occurring and therefore, the effect of ETS2 might be limited, the problem of vehicles with fuel filled outside the EU and entering the EU must be tackled to reduce environmental pollution and budgetary losses.

16. The increase in transport fuel prices might hit people in rural areas harder than in cities. In these regions, it has been difficult to organise effective public transport. New solutions such as public transport on demand can help to lower the – increasingly costly – fossil fuel dependency of people living in rural areas. 

17. Although the SCF Regulation prescribes that the principle of additionality must be respected in the use of the SCF (i.e., SCF funding must not be used to substitute national funding), there is no proper methodology to identify a violation of the additionality principle.

18. Proper public participation is so far lacking in several EU member states, which might lead to less efficient implementation of ETS2 and SCF. The very mixed experience from public participation in the drafting and updating of the National Energy and Climate Plans seems to repeat or even worsen in the case of Social Climate Plans in several member states. 


All of the above challenges can be overcome with appropriate planning and political will. This is not only possible but an absolute necessity. Namely, by far the biggest challenge is climate change and the loss of biodiversity, all of which are due mainly to the fact that prices do not reflect the costs, especially the environmental costs. 
The consortium of the EUKI project ClimateFair Monitor aims to recommend solutions to the above challenges.


The author expresses thanks to members of the CAN Europe Social Climate Fund Working Group who contributed to this article with valuable comments.