CAKE/KOBiZE ET2 recommendation policy brief

CAKE/KOBiZE ET2 recommendation policy brief

CAKE/KOBiZE ET2 recommendation policy brief

KOBiZE/CAKE expert team releases a new policy paper: “A Fairer ETS2: Policy options ensuring climate ambition with social balance, while addressing price risks and distributional impacts.” The publication presents key recommendations for modifying the design of the new ETS2 system.

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  A Fairer ETS2: Policy options ensuring climate ambition with social balance, while addressing price risks and distributional impacts (852.4 KiB, 1,091 hits)

The ETS2 system, scheduled to start in 2027, aims to reduce emissions from buildings and road transport, as well as other sectors not currently covered by the EU ETS (such as small industrial installations). Participants in ETS2 will be fuel suppliers obliged to surrender allowances corresponding to the emissions generated by the combustion of the fuels they sell.

However, the introduction of ETS2 raises serious concerns regarding its potential social and economic impacts, resulting from:

• significant uncertainty about allowance prices, including the risk of substantial price increases,
• uneven burden-sharing between households and across countries and regions with different income levels,
• differences in fuel mix structures among EU Member States.

To mitigate the negative consequences of ETS2, the Social Climate Fund (SCF) has been established. Its goal is to provide direct financial support and investment grants to individuals and entities for whom rising fuel prices and reduced fuel use could create substantial challenges. However, the SCF’s resources may prove insufficient to cover all investment needs in the transport and buildings sectors.

In their paper, KOBiZE/CAKE experts outline the main design features of ETS2, identify key risks, and propose a set of policy options to limit these challenges, including:

• Introducing a soft price cap on ETS2 allowance prices. This measure would involve increasing the supply of allowances available at auction from sources such as the Market Stability Reserve (MSR) under ETS1, or through the purchase of international offset units.
• Postponing the launch of ETS2 by up to three years, while ensuring early access to financing from the Social Climate Fund.
• Applying socially-adjusted surrender factors to reflect income differences between Member States and to differentiate the effective emission costs across the EU. These factors could be defined similarly to those used in the Effort Sharing Regulation, allowing countries with GDP per capita below the EU average to surrender fewer allowances than their actual emissions, and those above the average to surrender more – while maintaining the same overall EU-wide emissions cap.
• Allowing the use of international offset units within ETS2, managed by a newly proposed institution – the European Central Carbon Bank (ECCB).

CAKE/KOBiZE experts emphasize that without stronger mechanisms to prevent excessive allowance price increases, ETS2 could face political and social backlash, potentially weakening the system and undermining climate policy goals.

It is important to note that ETS2 was designed to support emission reductions in sectors not covered by the existing EU ETS (ETS1). Yet, if allowance prices in ETS2 become too high or fail to account for income disparities across Member States, the system may produce counterproductive effects.

The proposed reforms are not intended to favor any particular country, but rather to maintain the political and social legitimacy of Europe’s climate transition.