Making the ETS 2 and Social Climate Fund 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.