ETS2: fact-check of the new EU carbon market

The European Uni­on plans to extend its car­bon trad­ing sys­tem to the trans­port, con­struc­tion and small industry sec­tors from 2028, open­ing up a new European car­bon mar­ket: ETS2¹. Designed to strengthen the price sig­nal, i.e. inform­a­tion on the upstream price of car­bon, this scheme imposes quotas on fuel sup­pli­ers to reduce CO2 emis­sions by around 42% by 2030 com­pared to 2005 levels². This reduc­tion cor­res­ponds to an aver­age annu­al decrease of around 5% per year, or an annu­al reduc­tion of around 63 mil­lion tonnes of CO₂ for these sec­tors com­bined³.

How­ever, the res­ult­ing cost is passed on to con­sumers via fuel and heat­ing prices. This impact is likely to affect more than 100 mil­lion European house­holds⁴. Among them, isol­ated or single-par­ent house­holds would be more exposed to energy price increases⁵. Many ques­tions remain, illus­trat­ing the sens­it­iv­ity sur­round­ing the price of car­bon and con­cerns about the social accept­ab­il­ity of the scheme. As a res­ult, sev­er­al Mem­ber States have suc­ceeded in post­pon­ing the launch of the mar­ket until 2028. Mem­ber States are call­ing for a reli­able mech­an­ism cap­able of con­tain­ing price volat­il­ity, as well as adequate fund­ing for the Social Cli­mate Fund (SCF) to take into account the spe­cif­ic dif­fi­culties of each coun­try⁶.

Accord­ing to estim­ates, the likely rev­en­ue from ETS2 for the peri­od 2027–2032 is between €342 and €570 bil­lion. A por­tion of this budget would be redir­ec­ted to the SCF. The aim is to sup­port vul­ner­able house­holds and fin­ance the energy trans­ition⁷. How­ever, to ensure the effi­ciency of the sys­tem and its social accept­ab­il­ity, the key para­met­ers boil down to price sig­nals and the alloc­a­tion of car­bon rev­en­ues⁸.

To decipher the issues sur­round­ing this mar­ket, Phuc Vinh Nguy­en, head of the Energy Centre at the Jacques Delors Insti­tute and research­er on French and European energy policy, pub­lished a detailed study in Novem­ber 2025 on the gov­ernance and social impacts of ETS2, includ­ing redis­tri­bu­tion and front­load­ing mech­an­isms designed to lim­it the effects on vul­ner­able house­holds⁹.

Phuc Vinh Nguy­en. The aim is to estab­lish a car­bon mar­ket that increases the price sig­nal in the trans­port, con­struc­tion and small industry sec­tors. The scheme will not apply dir­ectly to the pub­lic, as it will be imple­men­ted upstream, but the cost will then likely be passed on to them in full. The idea is to encour­age beha­vi­our­al change through this price sig­nal, for example by mak­ing the switch to elec­tric vehicles more attract­ive in the long term or by encour­aging people to replace gas boil­ers with heat pumps.

PVN. A sig­ni­fic­ant por­tion must go towards com­pens­at­ing house­holds with the low­est incomes and those in fuel poverty. Anoth­er por­tion should sup­port invest­ments with high upfront costs, such as elec­tric vehicles or heat pumps, through schemes such as MaPrimeR­énov or social leas­ing. The chal­lenge is to strike a bal­ance so that com­pens­a­tion does not become too dom­in­ant, as the mech­an­ism aims to gradu­ally reduce the use of fossil fuels.

Opin­ion polls show that sup­port for car­bon taxes or pri­cing is fairly low in France, at around 50%. How­ever, it increases when the rev­en­ue is clearly ear­marked for the energy trans­ition and tar­gets the most vul­ner­able house­holds. The latest ADEME sur­vey con­firms this trend. European research¹⁴ also shows that pub­lic accept­ance depends heav­ily on the full use of rev­en­ues for trans­ition meas­ures aimed at those who bear the brunt of the cost of this transition.

PVN. No insti­tu­tion­al source guar­an­tees full com­pens­a­tion. Price increases will depend on the mar­ket, sup­pli­er choices and nation­al choices, in addi­tion to the effect­ive­ness of the meas­ures put in place. Even with the SCF, there is a risk that some house­holds will still exper­i­ence sig­ni­fic­ant increases. The Com­mis­sion itself recog­nises the risk of neg­at­ive social impacts if Mem­ber States do not take suf­fi­cient action. In oth­er coun­tries that have imple­men­ted sim­il­ar car­bon pri­cing schemes, the effect­ive­ness of com­pens­a­tion meas­ures has largely depended on the speed and accur­acy of redis­tri­bu­tion mechanisms.

PVN. Sev­er­al states and NGOs, includ­ing Car­bon Mar­ket Watch, sup­port this option. The idea makes eco­nom­ic sense: invest before price increases reduce house­holds’ vul­ner­ab­il­ity. This requires mobil­ising avail­able resources quickly and coordin­at­ing aid at a nation­al level to stim­u­late demand for clean and, ideally, European tech­no­lo­gies. The suc­cess of this approach will depend on the admin­is­trat­ive capa­city to deploy this fund­ing effect­ively and dir­ect it towards the most rel­ev­ant invest­ments. This strategy does not auto­mat­ic­ally com­pensate all vul­ner­able house­holds, but it can sig­ni­fic­antly lim­it the social impact of the first car­bon prices.

Our recent ana­lyses extend this pro­pos­al by broad­en­ing its scope. The idea is to use a front­load­ing mech­an­ism, which involves bor­row­ing now and repay­ing with future car­bon rev­en­ues (Fig­ure 2). This mech­an­ism should also be applied to ETS1. It would raise around €200 bil­lion between 2028 and 2034, which could be spent imme­di­ately and used exclus­ively to fin­ance decar­bon­isa­tion invest­ments, not off­sets. This is con­sist­ent, since these are invest­ment expendit­ures, which can have a pos­it­ive effect on the eco­nomy. How­ever, this requires strong com­mu­nic­a­tion to clearly explain the link between the car­bon price and the invest­ments made possible.

A post­pone­ment to 2028 has already been agreed by Mem­ber States and the European Par­lia­ment, although it has yet to be form­al­ised. The dir­ect­ive allowed for a post­pone­ment until 2028, but not bey­ond. Going fur­ther would require a com­plete rene­go­ti­ation, which would be extremely com­plex. Mem­ber States must now cre­ate the con­di­tions for imple­ment­a­tion of the scheme at a reas­on­able price. Our recom­mend­a­tion is to set a price floor and a price ceil­ing, which would guar­an­tee a min­im­um level of rev­en­ue to repay the joint loan and lim­it excess­ive price volat­il­ity. We also need to con­sider the very dif­fer­ent start­ing points between Mem­ber States, as nine coun­tries already have a nation­al car­bon price for these sec­tors, while oth­ers, par­tic­u­larly in East­ern Europe, do not and have lower liv­ing standards.

ETS2 was dis­cussed in the con­text of set­ting the 2035 and 2040 tar­gets, and the carry-over was used as a bar­gain­ing chip to reach an agree­ment. Future dis­cus­sions are likely to focus more on the 2028–2034 European budget. The carry-over poten­tial could then become a bar­gain­ing chip again in these debates.

Interview by Aicha Fall