ETS2 101 An introductory guide to the ETS2 (Emissions Trading System for buildings and road transport), and the Social Climate Fund

The document provides a comprehensive introduction to the ETS2, a 'cap and trade' system starting in 2027 to reduce emissions in buildings and road transport by 42% relative to 2005 levels by 2030. It details the market mechanisms, including the Linear Reduction Factor and the Market Stability Reserve (MSR2), and emphasizes that carbon pricing must be paired with complementary policies—such as building renovations and EV electrification—to prevent price volatility and ensure a just transition. The guide also describes the Social Climate Fund (SCF), a €65 billion mechanism designed to support vulnerable households facing energy and transport poverty, and analyzes the distribution and potential misuse of ETS2 revenues among member states.

• The ETS2 is designed to target a 42% reduction in CO2 emissions from buildings and road transport by 2030 compared to 2005 levels.
• The system will enter into effect in 2027, applying a carbon price to fuel used in buildings, road vehicles, and small industrial installations with a thermal input below 20 megawatts.
• Five EU member states—Germany, France, Italy, Spain, and Poland—are responsible for 70% of all ETS2 emissions, with Germany and France alone accounting for nearly 40%.
• The ETS2 employs a 'cap and trade' mechanism where the number of available European Union Allowances (EUAs) decreases annually via a Linear Reduction Factor (LRF), initially set at 5.1% for 2027 and 5.38% from 2028 onwards.
• To manage price volatility, the MSR2 will hold 600 million EUAs and trigger the release of allowances if prices spike; for example, 50 million EUAs are released if the average price for three consecutive months is more than twice the average of the prior six months.
• The Social Climate Fund (SCF) will provide €65 billion from 2026 to 2032 to mitigate energy and transport poverty, with Poland, France, Italy, Spain, and Romania receiving the largest allocations.
• Carbon pricing alone is insufficient; complementary measures are required, such as the 2023 CO2 regulation for cars and vans (mandating 100% emissions reduction for new models by 2035) and the Energy Performance of Buildings Directive (EPBD).
• ETS2 is projected to generate between €342 billion and €570 billion in revenue between 2027 and 2032, with the largest share returned to member states for climate and energy-related activities.
• Historical data suggests a risk of revenue misallocation, with analysis showing that between 2013 and 2021, only 57.8% of ETS revenue was spent on genuine climate action.
• The document warns against merging ETS1 and ETS2 before 2031, arguing that the different demand elasticities could allow high-emitting sectors like transport to pay for offsets rather than reducing emissions.

APA

Scott, E., Marullaz, J., Mair, G., & Sabio, N. R. (2025). ETS2 101 An introductory guide to the ETS2 (Emissions Trading System for buildings and road transport), and the Social Climate Fund. Carbon Market Watch. https://carbonmarketwatch.org/wp-content/uploads/2025/12/EUETS2_101_EN.pdf

Chicago

Scott, Eleanor, Jeanne Marullaz, Gavin Mair, and Noemí Rodrigo Sabio. ETS2 101 An introductory guide to the ETS2 (Emissions Trading System for buildings and road transport), and the Social Climate Fund. Carbon Market Watch, 2025. https://carbonmarketwatch.org/wp-content/uploads/2025/12/EUETS2_101_EN.pdf.

Wikipedia

{{cite report |last1=Scott |first1=Eleanor |last2=Marullaz |first2=Jeanne |last3=Mair |first3=Gavin |last4=Sabio |first4=Noemí Rodrigo |title=ETS2 101 An introductory guide to the ETS2 (Emissions Trading System for buildings and road transport), and the Social Climate Fund |publisher=Carbon Market Watch |date=October 2025 |url=https://carbonmarketwatch.org/wp-content/uploads/2025/12/EUETS2_101_EN.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{scott2025ets2, author = {Scott, Eleanor and Marullaz, Jeanne and Mair, Gavin and Sabio, Noemí Rodrigo}, title = {{ETS2 101 An introductory guide to the ETS2 (Emissions Trading System for buildings and road transport), and the Social Climate Fund}}, institution = {Carbon Market Watch}, year = {2025}, month = oct, url = {https://carbonmarketwatch.org/wp-content/uploads/2025/12/EUETS2_101_EN.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }