The EU’s climate action is nearing a major test. In just under two years, emissions from buildings and road transport will be subject to a new EU carbon pricing system, ETS-2. What does this shift mean, and how can we ensure its effectiveness?
The so-called cornerstone of EU climate policy is modelled closely on the already existing Emissions Trading Scheme (ETS) for large industries. Known as one of the most complex instruments in the European policy toolbox, this market-based mechanism was introduced to encourage industries to shift to cleaner practices by forcing large polluters to pay for each ton of carbon dioxide emitted. Its first iteration, launched in 2005, implemented a cap and trade system for the power, aviation, and industry sectors.
After the success of this system, with a 47% emissions reduction across these sectors since 2005, the EU agreed to introduce a second scheme —ETS-2— aimed at tackling emissions in the buildings and road transport sectors. These sectors are particularly energy-hungry and emissions reductions have been stagnant for decades. The EU anticipates that introducing a carbon price in these areas will help accelerate the long-overdue transition.
What is ETS-2?
An ETS puts the ‘polluter pays’ principle in action – if you consume fossil fuels, you pay for it. Our fuel suppliers will pay for emissions credits that reflect the carbon produced from the fuel they sell, then they pass this fee on to consumers. As the number of allowances is reduced over time, so does the amount of emissions. Unlike a carbon tax, where the carbon price is fixed and emissions reductions are uncertain, in an emission trading scheme the amount of emissions is fixed and the price level depends on whether demand for fossil fuels falls faster or slower than the amount of emissions credits.
Who will drive emissions down?
As shown below, the majority of the EU’s building and transport emissions are produced in just five EU countries: Germany, France, Italy, Spain and Poland. While collective action will be necessary, the steps that these five countries take to reduce their emissions will determine the overall EU carbon price.

Figure 1: Relative size of ETS-2 emissions by EU country. See the full Öko-Institut (2024) report here.
Where does the money go?
The revenues from the sale of emissions credits can be used in a variety of ways, from renovating energy-wasting homes to renewable-based public transport infrastructure.
For households with the means to do so, the higher fuel cost under ETS-2 may contribute to the decision to switch from a combustion engine car to an EV or a carshare scheme or swap a fossil boiler for a heat pump. However, higher fuel prices will put significant strain on those who are already struggling to get by. For these households, how the revenues are reinvested will be critical to gaining societal support for the scheme.
Supporting the vulnerable
The Social Climate Fund (SCF), available to EU countries from 2026, is key to gaining public acceptance for ETS-2. The SCF was developed to alleviate transport and energy poverty in advance of ETS-2 and intended for targeted investments and support systems. Though this funding is insufficient alone to meet the investment gap to decarbonise these sectors, it mobilises governments to begin preparations for ETS-2 so that the most disproportionately affected households are assisted.
Transitioning to renewables-based transport systems and investing in large-scale building renovations to phase out fossil fuels in buildings will require time, so the more organised countries are, the better.
EU countries must submit National Social Climate Plans (NSCPs) to detail how they will use the SCF money by mid-2025. Facilitating meaningful public participation in this process to allow civil society and individuals to contribute to these plans is essential for their effectiveness and gaining collective buy-in. As the role of ETS-2 in raising future fossil fuel prices remains a scarcely discussed topic, this process can also double as an awareness-raising opportunity. Looking to countries that have successfully implemented similar national schemes can help to mitigate potential problems when it comes into force across the EU.
Learning from Austria
In Austria, where a national carbon pricing system has been in place since 2022, revenues from their carbon pricing system have been returned to all Austrian residents in annual direct payments (Klimabonus) ranging from €145 to 290. The level of payment is determined by access to public transport and accessibility to essential services such as schools and pharmacies. With money visibly returning to households, the transparent use of revenues increases public support for the system.
The Austrian Parliament has decided that in 2027 the EU’s carbon price will replace their national one (currently at €55 per ton of CO2), though it is currently unclear whether the Klimabonus will continue. Nonetheless, other EU countries can learn from the successes of the Austrian system when preparing for ETS-2.
Achieving the EU’s target of 55% carbon emissions reduction by 2030 (based on 1990 levels) will depend on the successful implementation of ETS-2 in 2027. This signal that the fossil fuel phase-out in buildings and transport is inevitable will trigger both consumers and businesses to decarbonise. Existing policies such as the energy performance of buildings directive mandate a phase-out of fossil boilers in homes and the installation of solar power on new buildings. However, these simply haven’t reduced emissions quickly enough, and time is of the essence.
The clock is ticking
Carbon pricing is not a silver bullet. Its success will also depend on accompanying policies to accelerate decarbonisation in these sectors which will be essential to prevent ETS-2 prices from becoming very high. It also requires ambition from EU countries in designing and implementing their plans for the use of the estimated €260 billion that this system will produce. These revenues from the carbon pricing system have the potential to transform the buildings we live in and how we travel in our daily lives.
Though ETS-2 will only be introduced in 2027, the preparations for it are already underway with consultations at national level ongoing for what to use the revenues for. How policymakers at EU and national levels use this time could be critical to the success of this project in the long-term. Successful carbon pricing in transport and buildings would not only help Europe meet its emissions reduction goals; it could set a global benchmark, inspiring effective climate action worldwide.
With the support of the LIFE Programme of the European Union. Funded by the European Union. Views and opinions expressed are however those of the author(s) only and do not necessarily reflect those of the European Union or CINEA. Neither the European Union nor CINEA can be held responsible for them.
You can find out more about the LIFE EFFECT project here.