A Fair and Solidarity-based EU Emissions Trading System for Buildings and Road Transport
Kopernikus-Projekt Ariadne
June 2022
30 p.
Buildings emissions, ETS 2, Investments, Social Climate Fund, Transport emissions


The new emissions trading system for buildings and road transport – the so-called ETS2 – proposed by the European Commission in the Fit for 55 package is key for decarbonising these two sectors. But a uniform EU-wide carbon price has important distributional implications – both between EU member states and within them. Managing these implications in a way that ensures solidarity and fairness is of utmost importance to providing the ETS2 and its price signal with the necessary political robustness and enduring credibility.

To that end, the Commission has proposed the creation of a Social Climate Fund (SCF). While this proposal builds on evidence gathered by the Commission for related analysis, no dedicated impact assessment has yet been conducted. Other studies have analysed some of the design aspects – especially the distributional effects of carbon pricing on households – but key design choices have not yet been systematically explored. In particular there needs to be an understanding of: (1) the advantages and disadvantages of different design options, and (2) interactions with other policies and regulations at EU and member-state level. This study fills this gap for three particularly important choices that may have far-reaching consequences for the overall policy package:

The first design choice is the institutional structure and general governance level of the mechanism to manage the distributional implications. While the SCF seems generally capable of performing its designated function, there are concerns surrounding whether the SCF should be established at EU level or at the member-state level. Against this backdrop, this report compares the SCF with three other design options that differ in terms of how they are situated between national and supranational levels.

The second design choice relates to the interaction between the ETS2 and the Effort Sharing Regulation (ESR). In general, the ETS2 can shift the distribution of emissions reductions away from agreed-upon ESR targets, with consequent welfare effects. In order to maintain a fair effort- sharing between EU member states, it is crucially important to manage the distribution and flow of revenues resulting from the trade of ESR certificates (annual emission allocations, AEAs) and ETS2 certificates. This report uses quantitative modelling to analyse how welfare would change if AEA trade was limited, and/or the ETS2 price was relatively high.

The third design choice concerns the financial volume of the SCF (or of an alternative social transfer mechanism): how large does it need to be, in terms of the share of total auction revenues, to ensure fair compensation for households across the EU, given varying criteria for social fairness? This is important because there is a trade-off between using revenues for social compensation on the one hand, or financing green investments and infrastructure on the other. Furthermore, different forms of compensation entail different administrative requirements and specific challenges. This report discusses these issues in light of the SCF spending criteria, specifically with a view to possible adjustments that would make compensation more targeted.

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