There is no doubt, that ETS2 will lead to higher prices for household energy and transport fuels. Opponents of this measure argue that these price increases will hit poor households hardest. However, this is a very one-sided view. In this article, we will show how this argument can and should be refuted. (In the following, for the sake of simplicity, we use data only from Hungary but the situation is similar in all EU countries).
Poor households spend a much higher share of their total expenditure on household energy than rich households; in Hungary, the poorest 10% of the population spend 23%, while the richest 10% spend only 15%. This confirms, that in relative terms, any increase in energy price would hit the poor much harder than the rich.

CAAG’s calculation based on Hungarian Statistical Office data
However, rich households use much more energy than poor households; for example, in Hungary, the richest 10% of households use almost twice as much gas as the poorest 10%.

CAAG’s graphic, data from the Journal of Economic Literature
In Hungary, there is an enormous direct subsidy on gas for all household consumers. Since the richest households consume about twice as much gas as the poorest households, the former receive twice as much subsidies as well. This is extremely unjust socially and senseless economically. Moreover, in addition to direct subsidies, indirect subsidies for household energy use are enormous, too. It is estimated that in Hungary, the external cost of fossil fuels equals more than 6% of the GDP (the external costs include mainly the environmental and health costs). In view of the above, these costs should be internalised (i.e. incorporated into the price of fossil fuels) not only for environmental and economic reasons but also to eliminate the unjust subsidising of the rich.
When it comes to car use, the situation is much worse than it is for household energy. According to household statistics, in Hungary, the richest 10% of the population spends 7 times more on the purchase and use of cars than the poorest 10%. However, the real situation is much bleaker than shown by these statistics: namely, richer people often use company cars for private purposes, and this is not included in the household statistics on household expenses. This is why some experts say that the richest 10% of the population are likely to spend at least 10 times more on car travel than the poorest 10%. Thus, since there are enormous (mostly indirect) subsidies on car use, the richest people receive at least 10 times more subsidies for cars than the poorest.

CAAG’s calculations based on Hungarian Statistical Office data
In the case of road transport, indirect subsidies are colossal, too. According to a study commissioned by the European Commission, in Hungary, car users pay only one-third of the cost they cause in comparison with the amount of transport-related taxes and fees they pay to the state, i.e. two-thirds of these costs are paid by the whole society.
For these reasons, it is even more urgent to get transport prices right, than getting household energy prices right. On the other hand, making everyone pay the full costs of household and transport energy would place an unbearable burden on poorer households.
However, this problem can be easily solved if there is political will to do so: households should be compensated, preferably by direct payment. (The revenues from the price increase would provide ample resources for such compensation.) Such a method has already been successfully applied in various countries. (The EU’s Social Climate Fund is envisaged to be one of the main sources of compensation in parallel with the introduction of ETS2.)
We now have the daunting task of explaining to the public why raising the price of fossil fuel, while compensating households will not only benefit the environment but will also substantially reduce social inequalities.
Responsible for the content of this article is EUKI project ClimateFair Monitor: Towards climate-neutral buildings and road transport