EU new Emissions Trading System (ETS2) and Social Climate Fund: Mechanisms, challenges and conditions for a fair decarbonisation in road transport

Trends in decarbonising transport

In 2023, road transport and buildings covered by the ETS2 emitted a total of 1,235 million tonnes of carbon dioxide equivalent (MtCO₂e); 61% of this was from road transport and 28% from buildings (EEA, 2026a). Transport is responsible for around a quarter of all net EU GHG emissions. This makes it the largest emission source in the EU.

Emissions from power plants and energy-intensive industries covered by ETS1 halved over the 2005-2023 period (EEA, 2025a), mainly driven by reduced emissions in the power sector. Meanwhile, road transport emissions fell by only 4.4% over the same period (Figure 1).

Figure 1. Emissions trends of the ETS1 stationary and ETS2 in EU-27 and EFTA countries

This limited progress reflects intrinsic characteristics and barriers in the sector. Road transport emissions come from millions of decentralised sources — cars, vans, trucks and motorcycles. As such it is harder to reduce them than, for instance, emissions in the power sector which can be addressed relatively efficiently through centralised measures.

In addition, transitioning to low-emission transport solutions is capital intensive for individuals and cannot be achieved without important investments in public infrastructure. Continued increases in demand for mobility and freight have offset much of the progress achieved through technological improvements, the use of biofuel and uptake of electric vehicles (EVs). In road transport, decarbonised technologies are available but better frameworks are needed to incentivise their use (see Box 1) (EEA, 2026b).

Sectors covered by the ETS1 (power plants and energy-intensive industries) have benefited from:

• clear carbon pricing;
• low-cost renewable electricity — as wind and solar power with near zero-marginal costs has entered the grid;
• economies of scale in decarbonisation, meaning that costs have declined as clean technologies have been deployed on a greater scale and supply chains have matured.

The precise scope of the ETS2 is discussed in Box 2. It will extend the carbon pricing principle to road transport. This, coupled with other sectoral policies and measures (standards, regulations, information, awareness), is expected to provide an additional incentive to accelerate the shift towards cleaner fuels and technologies.

Given the fundamental differences between transport (and buildings) and large industrial installations, the ETS2 will provide a separate price signal adapted to the level of incentive needed for a shift towards lower carbon intensity in transport (and buildings). The aim of this will be to ensure that emissions are reduced as effectively as possible and at the lowest achievable cost while applying the polluter pays principle.

Overall, by reflecting the carbon cost in fuel prices, the ETS2 — as part of the EU Fit for 55 legislation package proposed in 2021 — will strengthen the economic case for energy efficiency, electrification and modal shift. By ensuring that price is a more significant driver in the equation, the intention is to incentivise consumers and suppliers to move towards low- and zero-emission mobility options.

The functioning of ETS2 for cleaner mobility

The objectives and functioning of the ETS1 and the ETS2 are very comparable. However, because building and transport sectors differ fundamentally from the large industries covered by the ETS1, abatement differ widely. This is why the two markets operate independently, allowing the ETS2 to provide a carbon price signal tailored to the level of incentive needed in transport (and building).

In practice, the ETS2 will apply a carbon price to fuels used in road transport, buildings and small industrial emitters not covered by the ETS1 (see Box 2). It will follow the same ‘cap-and-trade principle’ as ETS1. All emission allowances will be auctioned, and fuel suppliers will be required to surrender allowances equivalent to emissions caused by sold fuels used in activities covered by ETS2. The total allowance volume will be capped and decline annually, with a target 42% reduction in emissions from 2005 levels by 2030 (see Box 2). All auction revenues will be used to support vulnerable households and small industries, to help fund the transformation of road transport and, when necessary, to provide temporary income support (see Boxes 2 and 4).

The future price of a tonne of carbon will be set by the ETS2 market. It will depend primarily on energy consumption in the road transport and building sectors and the pace of energy efficiency improvements, including the uptake of heat pumps in buildings and zero-emission vehicles. Broader developments in energy markets and macroeconomic conditions will also play a role.

In addition, interactions with other EU legislation — including energy efficiency, renewable energy and CO₂ emission standards for vehicles — as well as complementary national policies and measures, will influence the demand for emission allowances over time.

Like the ETS1, the ETS2 system will include mechanisms designed to stabilise the carbon price and ensure mid-term predictability and stability. This is key to supporting investment decisions. A declining cap and the use of a market stability reserve (MSR), in the event of supply imbalances or rapid price increases, will help to adjust the supply of allowances, reducing the risk of sustained price volatility.

A distinctive feature of the ETS2 is the inclusion of innovative mechanisms designed to ensure fairness, particularly in light of geopolitical developments that may affect energy prices and exacerbate existing socio-economic disparities. These include the establishment of the SCF — which will be funded by revenue from auctioning allowances — and the option to delay the start of the ETS2 if oil and gas prices are excessively high.

In the context of negotiations on the 2040 GHG emission target, the European Council and European Parliament agreed to delay the ETS2 in November 2025. It will now begin in January 2028 instead of 2027. In addition, the European Commission has proposed amendments to the Market Stability Reserve decision to facilitate  a more gradual and smoother introduction and implementation of the ETS2  (EC, 2025).

While this will postpone the implementation of the carbon price signal for fossil fuel in transport, it will not halt progress towards cleaner transport as Member States are still responsible for reaching their effort sharing targets on emission reductions — covering sectors not included in the ETS1. Structural decarbonisation measures are even more important to mitigate impacts of carbon price on individuals under ETS2.

The ETS2 as one instrument in a broader coherent policy mix

It is widely recognised that significant emission reductions will only be achieved if ETS2 is combined with a broader set of coherent EU and national climate policies. Its effectiveness and social acceptance will depend on complementary policies and measures that guide technology, behaviour and the development of infrastructure.

These measures can form a coherent policy mix in which the ETS2 provides a broad market incentive, while regulatory, information and economic instruments accelerate the investment in infrastructure, behavioural change and the uptake of technology. The ETS2 therefore also represents an incentive to implement other policy instruments and measures effectively, as emission reductions will help limit demand for the allowances and keep the carbon price in check.

In the road transport sector, a range of EU regulations directly encourage emission reduction measures. These include:

• the new CO₂ emission performance regulations, for passenger cars, light commercial vehicles and heavy-duty vehicles, which set CO₂ emission standards for new vehicles;
• the Alternative Fuel Infrastructure Regulation;
• the Toll Directive or Eurovignette Directive, which allows for road charges to be differentiated according to CO₂ emissions.

In practice, many well-known options are possible in road transport. The Avoid-Shift-Improve (ASI) framework provides a structured approach for assessing emission reductions options from road transport according to:

• strategy (avoid-shift-improve);
• timeframe (short-medium-long term);
• level of action (individual, community, policy) (see Box 3).

The more efficient and socially targeted the approaches are, the lower the carbon price necessary to meet the targets and respond to the social impacts of carbon pricing.

The social challenges of the ETS2 in transport

Specific attention must be paid to the challenges faced by the most vulnerable groups when when introducing a carbon price in road transport (EEA, 2025b; EC, 2025b). Low- and lower-middle-income households, as well as peri-urban and rural households that depend heavily on cars for daily activities, may be disproportionately affected financially by higher fuel costs before affordable mobility and transport alternatives become available. These issues could jeopardise the ETS2’s effectiveness and the extent to which it is accepted publicly.

Carbon pricing increases operating costs immediately for combustion engine cars; meanwhile alternative options often require upfront capital investment although the life-time costs are considerably lower. Households lacking access to capital can face a disproportionate financial barrier, limiting their ability to switch to a low-carbon solution and potentially exposing them to higher risks of transport poverty.

To address and anticipate these issues, Member States are requested to develop national social climate plans (SCPs) outlining proposed measures and investments in the 2026-2032 period to soften the social impacts of the ETS2 and reduce transport and energy poverty. Possible actions include subsidies for EVs, support for public transport, promotion of car-sharing and active mobility (e.g. cycling infrastructure) as well as temporary income support.

The SCPs must be coherent with the national energy and climate plans (NECPs) and other strategic documents, including climate adaptation strategies when relevant. They will be co-financed by the SCF which will be funded primarily by ETS2 revenue (see Box 4). The fund will financially support Member States to invest at the national and local levels in low-carbon structural measures and direct income support, as identified in the SCPs.

The SCPs must be submitted to the EC by Member States as a pre-requisite for accessing the funds. The draft plans were expected by 30 June 2025 (EU, 2023). By February 2026, Latvia, Lithuania, Malta, the Netherlands and Sweden had submitted their SCPs to the EC. The Swedish plan has now been adopted and others are currently under assessment (EC, 2026).

The effectiveness of each SCP will depend on how funds are allocated and translated into concrete and well-targeted measures at the national level early enough before the ETS2 begins to impact prices.

Examples of policy and measures implemented by Member States that could be included in SCPs have been identified both in a recent EC study and an EC report (2025b). These are categorised below (Figure 4):

Figure 4. Examples of policy and measures implemented by Member States that could be included in SCPs

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Crucially, the preparation of SCPs must involve public consultations with local and regional authorities, social partners and civil society organisations to enhance coordination, transparency and public engagement. The aim is to ensure that SCF spending aligns with national needs while fostering citizens’ awareness of the impacts of the ETS2.

The ETS2 and Social Climate Fund (SCF): A Pivotal Step and Remaining Challenges

The implementation of the ETS2 and the SCF together marks a pivotal step in Europe’s path towards climate neutrality. By extending carbon pricing to transport fuels and using the revenue to support those most affected to decarbonise, the EU is combining environmental effectiveness with social responsibility.

The success of the ETS2 will depend on both national implementation and policy coherence. If implemented in isolation, the ETS2 risks fuelling public resistance by raising fuel prices without offering alternatives. However, together with the SCF, if combined with robust transport and social policies reducing the demand for fossil fuel, the system could become a powerful driver of clean mobility and equity and effectively contribute to energy security, affordability and climate neutrality in the EU.

Three priorities stand out:

1. Infrastructure readiness: Rapid expansion of ease-of-use EV charging networks and multimodal transport and active mobility options are essential to make low-carbon mobility practical and affordable.
2. Policy coherence: Carbon pricing, fuel taxation and support schemes must align to avoid counterproductive incentives, such as continued subsidies for fossil fuels.
3. Social benefits and communication: Transparent use of the ETS2 revenue and clear communication of the tangible benefits to citizens — such as cleaner air, lower operating costs for EVs and improved transport services — are crucial for public acceptance (Valencia et al., 2024).

With effective and well-timed national implementation and coordination with other EU policies, EU ETS2 can help transform Europe’s mobility system — reducing emissions, improving air quality, and enhancing energy security. With sustained investment, coherent policy action and social dialogue, the reward could be a transport system that is low CO₂ intensive, less polluting, more climate resilient and accessible for all Europeans and contributing to improve the energy security of the EU.