Web Seminar: Putting the ETS 2 and Social Climate Fund to work

Published: 27 October 2023

The EU’s new Emission Trading System 2 (ETS 2) is set to have far-reaching effects on industries and consumers. Vulnerable households could be disproportionately affected with financial burdens. Uneven impacts of carbon pricing on the poor and vulnerable are intended to be cushioned by the Social Climate Fund. However, practical implications and implementation have not yet been sufficiently discussed. The EUKI-project “Socially Just Carbon Pricing Policies in Central and Eastern Europe” has examined this issue through extensive research, culminating in the newly published policy report “Putting the ETS 2 and Social Climate Fund to work: Impacts, considerations, and opportunities for European Member States”.

The EUKI Academy, in cooperation with adelphi research GmbH, hosted this web seminar to present the results of the report and discuss practical steps and challenges towards the effective implementation of the Social Climate Fund. The discussion was facilitated by Alexander Eden, advisor at adelphi Research and lead author of the report. Five panelists shared their insights: Johanna Cludius, Senior Researcher for Energy and Climate Action at Öko-Institut, Andreea Vornicu-Chira, Expert at the Romanian Center for the Study of Democracy, Piotr Gutowski, Energy sector specialist at WiseEuropa, Iryna Holovko, Advisor at adelphi Research, as well as Milena Damianova, Legal Officer at the European Commission’s Directorate-General for Climate Action.

What are ETS 2 and the Social Climate Fund?

The ETS 2 is a new emissions trading system for the buildings, road transport, and additional sectors, introducing a Europe-wide carbon price in these sectors starting from 2027.

The introduction of ETS 2 will lead to higher consumer prices for heating and transport fuels, potentially affecting lower-income households disproportionately.
To counterbalance this, the Social Climate Fund has been established. It aims to channel a portion of the ETS revenues towards vulnerable groups, ensuring they are not unfairly impacted by the carbon price.
Money out of the Social Climate Fund will be allocated to member states using a progressive formula, with economically less affluent states and those with higher energy poverty rates, like Poland and Romania, receiving a larger share.
According to estimations, the ETS 2 could generate up to 260 billion Euros between 2026 and 2034, a quarter of which shall be invested via the Social Climate Fund.

How will the Social Climate Fund be implemented?

The fund will be implemented by European Member States through national Social Climate Plans, with the first funding available in 2026.
The Social Climate Fund will primarily be used for green investments that reduce fossil fuel consumption over time. Up to 37.5% of funds may be used for direct income support. Supporting services like information campaigns and technical assistance should also be funded.
The core concept of the Social Climate Fund is to provide targeted support to vulnerable households, transport users, and micro-enterprises.

Vulnerability in Central and Eastern Europe

Vulnerability is defined not just by current energy and transport poverty but also by the risk posed by the carbon price and the inability to adapt.

The biggest factors for vulnerability are fossil fuel use and income, as well as place of residence, which vary vastly between and within member states.
Social Climate Plans must address how these factors are weighed. For example, while Romania’s low-income population has huge economic disadvantages, they largely use wood to heat, which is why middle-income households using gas to heat will be more directly affected.
Direct income support can only be provided to those identified as vulnerable and for a limited time. For Poland the share of the Social Climate Fund that may be used for this purpose will most likely suffice. However, allocation will pose a challenge because policymakers will have to agree on which measures and indicators are used.
Different indicators for energy poverty provide different results in identifying vulnerable groups, but analysis shows the poorest 30% of households will likely be vulnerable, with the urban-rural divide also playing a role.

Challenges and Steps Forward

The European Commission has recently adopted rules for monitoring and reporting as well as auctioning for the ETS 2, which are crucial for its effective functioning. Furthermore, the Commission announced a publication on the updated definition and legal framework of energy poverty in member states.
Member States face the challenge of preparing Social Climate Plans and submitting them to the European Commission by June 2025. Essential steps for Member States include assessing national vulnerability patterns, designing targeted measures, and engaging stakeholders at various levels. All parties emphasize the importance of stakeholder engagement in the drafting process as well as compatibility with national legislation and NECP’s.
The submitted Social Climate Plans should show how countries will target the same groups with both types of measures: green investments and direct income support. The former should be the focus to not only compensate costs but alleviate vulnerability.

For further information please feel free to contact:

adelphi Research Alexander Eden, Advisor, eden@adelphi.de

adelphi Research Iryna Holovko, Advisor, holovko@adelphi.de

Öko-Institute Johanna Cludius,Senior Researcher for Energy and Climate Action, J.Cludius@oeko.de

Center for the Study of Democracy (Romania) Andreea Vornicu-Chira, Expert, vornicu@fspac.ro

WiseEuropa (Poland) Piotr Gutowski, Energy Sector Specialist, piotr.gutowski@wise-europa.eu