4.3 The energy crisis case
The problem of targeting was identified during the energy crisis of 2022-23. Policies rolled out during the crisis often failed to promote energy savings or target the most vulnerable energy users. Many countries resorted to universal value-added tax reductions on energy bills, electricity price caps and schemes based on past consumption expenditures. Only 27 percent of the total funding disbursed to alleviate the pressure from the energy crisis was targeted (Sgaravattiet al, 2024).
Having to quickly react to crisis because of a lack of preventative measures can cost governments huge sums without effectively alleviating the strain on the most affected parts of the population. Creating a framework that allows targeted support to reach the most vulnerable is thus not just a goal of the ETS2, but could also prove essential in a future crisis.
5 Policy suggestions to inspire countries preparing their Social Climate Plans
5.1 Taxonomy of support
The ETS2 offers a significant opportunity to address longstanding social issues through its revenue recycling element, but its success hinges on proper structuring of this element. In Figure 12 we propose a taxonomy of support detailing the use of SCF, national revenues and additional suggestions.
Figure 12: Taxonomy of support to guide the structuring of revenue use
Source: Bruegel.
The individual elements of the taxonomy aim to contribute to the achievement of comprehensive, targeted, flexible and fair policies in EU countries. Bringing coordinated policies together and creating a system with multiple layers of support will help overcome the challenge of targeting assistance.
The European Commission has published a collection of good-practice examples and case studies (Luddenet al, 2024) that can serve as a point of reference for EU countries when deciding on suitable measures.
5.2 Transport guidelines
Direct income transfers, if used, should be tied to a household’s location and characteristics
Measures must consider the rural-urban divide. If EU countries want to employ direct income support, it should target low-income households in rural communities. This targeting hinges on the effective use and extension of administrative capacities, for example making use of tax declarations and postal codes. A clause could also be included that would allow urban commuters to request the same lump-sum payment granted to households in rural communities if they can prove commuting distance above a certain threshold, or in areas underserved by public transport.
Rural areas should focus on adoption of electric vehicle car-sharing or leasing schemes and increase incentives for fleet electrification
Investment support for car-sharing or leasing for electric vehicles, rather than expensive and regressive subsidies for vehicle purchases, is likely the most efficient option to alleviate transport poverty in rural communities. The French example of offering low-income citizens in rural communities subsidised leasing rates should be expanded across the EU, as it has proven immensely successful. The leasing scheme resulted in 50,000 households benefitting from leasing rates of €100-€150 per month for a minimum of three years . By offering monthly instalments as an alternative to buying, the scheme could successfully circumvent the high upfront cost of purchasing a new electric vehicle (Luddenet al, 2024). Using some funds to support public electric-vehicle infrastructure additionally heightens the attractiveness of purchasing for the middle class, while supporting the uptake of leasing schemes for lower-income households.
Social leasing schemes may also favour cars from European manufacturers, stimulating demand for domestic production, with implications for competitiveness, as the cheapest available option to consumers are currently Chinese electric vehicles. Furthermore, as 80 percent of Europeans purchase used vehicles, schemes would assist in the creation of second-hand markets for electric vehicles, where current supply is insufficient, providing a stronger incentive for households to purchase European electric vehicles at discounted prices, helping lower-income households make this investment.
Urban centres and towns should offer discounted public transport for the most vulnerable
For urban areas, the focus should be on improving access to and the feasibility of using public services in towns and cities, offering drastically cheaper or free public transport to the poorest.
To encourage uptake of public transport options in urban areas, countries could follow the example of Brussels. Free travel within the city is granted to a variety of residents, including young children and certain groups of people reliant on social benefits. Discounted tickets are available to students and senior residents. Empirical evidence from other contexts, for example the UK, shows that usage among lowest-income beneficiaries is double that of those who are eligible but have more financial means (Luddenet al, 2024).
A scheme that introduces uniform standards and criteria, such as for modes of payment in buses (eg a free-travel card that works in buses all over the country), across regions and municipalities can also contribute to a lower total administrative cost and achieve better connectivity of citizens that otherwise might be at risk of social exclusion due to transport poverty. Beyond the social factors, free or discounted public transport may have a positive impact in terms of reducing congestion and emissions from transport. Tallinn for example noted a 9 percent increase in the share of public transport in personal mobility and a decrease of 3 percent in car usage, after abolishing fares for public transport .
5.3 Buildings guidelines
Finding targeted way to lower electricity bills that circumvent the lack of administrative capacity and/or granular data
Given the poor availability of granular data on energy performance of buildings and income levels, public administrations could build composite indices using proxy metrics for energy use, such as years of construction, together with socio-economic indicators for people living in certain areas, such as unemployment benefits and crime rates. This data could give a reliable picture of where support should be targeted.
A similar approach was used by the Community Energy Savings Programme (CESP) in England to target low-income areas with energy-efficiency interventions. The areas were chosen based on an index capturing different aspects of deprivation, calculated at the neighbourhood-level linked to postal codes. The scheme was funded by an obligation on major energy suppliers and electricity generators to provide energy-efficiency measures at very low cost or for free. The cost of the energy supplier obligation was passed on by energy companies to all customers via their energy bills, keeping the impact on household bills negligible (Luddenet al, 2024). As the only eligibility criteria was the postal code, the scheme was limited in its administrative burden and reached vulnerable households that may have potentially been deterred by elaborate application processes.
Ensuring the alignment of incentives for both landlords and tenants
Landlords might be inclined to evict vulnerable households in order to refurbish houses and apartments and re-let them for higher rents (‘renovictions’). One option would be to add legal obligations to renovation schemes to protect tenants after energy-efficiency investments have been carried out. Germany put forward an initiative that incentivises landlords to carry out renovations, while guaranteeing financial support for tenants that receive basic income support. Rental increases linked to renovation costs are covered by the scheme and are paid out directly to the landlord using an existing channel, such as the local institution responsible for unemployment payments. The amount corresponds to the home’s energy efficiency rating, encouraging landlords to carry out renovations to increase their net earnings while simultaneously shielding vulnerable tenants from renovictions (Luddenet al, 2024).
Schemes must meaningfully support the energy transition of low-income households and should not lead to excessive profits for those who do not rely on support
Through application processes that use stringent criteria, the targeting of support schemes can be improved. This helps prevent support flowing towards wealthy households that do not need the funding. ‘Gent knapt op’ is a scheme in Ghent, Belgium, which focuses on improving housing quality and improving energy efficiency to reduce emissions and to support homeowners with limited means. Eligible participants must have a low income and own one home where they must be resident and which complies with specific safety conditions (eg fire insurance). The renovation is carried out and financed by Ghent’s Public Centre for Social Welfare, does not require prefinancing, and homeowners are only required to pay back the renovation cost if the renovated house is sold or rented out. Through this repayment condition, the scheme is very targeted, avoids profits falling to affluent households and achieves both objectives – improving living conditions for those who would otherwise not be able to finance it and energy improvements (Stad Gent, 2022).
Introduction of heat-pump leasing
Only 6 percent of households in the EU used heat pumps in 2021 (Cotê and Pons-Seres de Brauwer, 2023), with heat pump sales slowing in recent years (EHPA, 2024). This number could be significantly increased via a leasing scheme that lowers the cost barrier. Most households would like to adopt lower emissions heating systems but are hindered by high prices paired with technical and operational concerns. This is especially the case in markets where heat pumps are in the early stages of being rolled out. A government-supported leasing system could push take up by removing these barriers through flexible packages that include maintenance and repairs and/or offer a lease-to-own option. Finally, to further support low-income households, a scheme could be set up whereby monthly lease payments can (partially) be deducted for tax purposes (Cotê and Pons-Seres de Brauwer, 2023).
5.4 Beyond the SCF: putting national revenues to good use
SCF top-up
For higher-income countries, the SCF will likely be insufficient to shield low-income households fully from the ETS2 impact on energy prices, while simultaneously supporting vulnerable households and SMEs in making the required green investments (Braungardtet al, 2022) . It is therefore recommended that in these countries, the national top-up of their social climate plans funding is above 25 percent, especially if the ETS2 carbon price goes above the Commission’s soft cap. As national revenues are less strictly regulated than funds allocated to the SCF, this ensures that funds would reach the groups that rely on them most, rather than allowing governments a simple solution with measures that could lead to policies that benefit politically important households more than vulnerable ones.
Additional enablers to mobilise the middle class
Given the importance of electricity in buildings and transport, another focus should be the rebalancing of energy prices in favour of electricity. One option would be to design contracts for difference for electric heating (McWilliams and Zachmann, 2021). These would represent a form of insurance for consumers so that when they invest in fuel-switching (for example, by installing an electric heat pump), they are guaranteed that the price of operating the clean appliance will always be cheaper than the displaced fossil-based one. For example, a strike price of €100 per tonne of CO2 would ensure the investment case for fuel switching away from fossil-based heating appliances in virtually all EU countries.
Governments should also encourage the emergence of smart electricity tariffs, which allow heat-pump users to adjust their electricity usage based on the wholesale electricity price, thermal features of the house and efficiency changes due to varying outdoor temperatures. This could further increase both energy and cost savings for consumers, as seen in Scandinavian countries (Burger, 2024). Similarly, the deployment of vehicle-to-grid technologies and dynamic tariffs can enable users of electric vehicles to gain money by feeding electricity into the grid in periods of high electricity prices. This is already happening in Norway, where consumers can earn €70-€100 per year by enabling smart charging of their electric vehicles, on top of any potential cost savings from dynamic tariffs (Rangelovaet al, 2024).
Hardship relief fund
Even if the outlined measures succeed overall, some households will likely fall through the cracks, with their vulnerabilities unaddressed. While a top-up linked to carbon price increases can extend SCP schemes, an additional ‘hardship fund’ might be needed for special cases when existing support fails. Access criteria should be country-specific, identifying gaps left by SCP measures. For example, if public transport support is postal-code based, urban residents commuting to rural areas might be excluded despite their vulnerability – precisely when a hardship fund should intervene.
Evidence from the energy crisis shows that uptake of such funds remains low if they are too obscure or complex . A collaborative approach involving energy providers could help, using energy usage data to identify at-risk households through indicators such as low consumption, unpaid bills or heating type. These households could then receive tailored guidance, simplifying the process for potential applicants, increasing the fund’s visibility and providing valuable data for future crises.
5.5 General recommendations
Coupling of income and investment support
As the SCF is foreseen as an instrument to aid vulnerable households in their transitions, monetary benefits should be slowly phased out or transformed to target the source of the vulnerability rather than treating its symptoms. If such a phase-out schedule is implemented, it needs to be clearly communicated and tied to the achievement of investment support targets, to ensure a smooth transition in which households still reliant on support are not left behind. This could be coupled with the hardship relief fund: in the later ETS2 implementation stages, this instrument will remain as support layer for the most vulnerable, while more general income support is phased out at an earlier point.
Fossil-fuel subsidy phase-out
The move away from fossil fuels would be jeopardised by the continuation of fossil-fuel subsidies, which can actively work against the decarbonisation mechanisms of carbon pricing by undermining its price signal. Fossil-fuel subsidies also prevent investments in renewable energy, building renovation and electrified transport . In the EU, subsidies were introduced to shield households from rising costs during the energy crisis, these widely untargeted subsidies are outdated. Currently, only around half of EU countries have put forward concrete plans detailing how they will phase out fossil-fuel subsidies (Nill, 2024). However, the ETS2 and its revenues could alleviate households’ financial burdens to a similar extent to fossil-fuel subsidies, if implemented correctly, while aligning with climate goals.
European registry of policies
To capture characteristics of individual policies, the design and implementation of the SCPs should be accompanied by the establishment of a ‘European registry of policies’. This would serve as a centralised resource, cataloguing characteristics of various individual policies implemented by EU countries, including their benefits, limitations and targeting approaches. Regular updates would ensure the registry reflects lessons learned in real time. It would act as a dynamic knowledge-sharing platform, enabling EU countries to explore proven strategies and innovative ideas from others, fostering cross-country learning.
By providing access to diverse approaches and outcomes, the registry would help member states better exploit the inherent flexibility of the SCPs. Moreover, this initiative would encourage governments to view the preparation and implementation of SCPs as an iterative and evolving process, optimising policy effectiveness and alignment with national priorities.
Ensure proper sequencing and timing, social outreach and communication
As the SCF is scheduled to start in 2026, national governments need to prepare support measures that will be accessible to households by this time. Initial support should be rolled out before the price effects of the ETS2 are felt by citizens. For this purpose, a communication channel should be set up to communicate ETS2’s impact, when it will materialise and how to access support.
Figure 13: ETS2 and SCF Timeline
Source: Bruegel.
Generally, making information about the scheme and spending of revenues readily available can aid in increasing support among the general public – especially if this communication happens before consumers feel the price increases.
Governments should analyse the needs of their populations, assess their ability to provide effective support and continuously seek to improve their approach. Poorly designed plans risk misallocating billions of euros, failing to protect the most vulnerable. A well-structured, transparent, and timely approach is essential to ensuring that the SCF delivers on its promise of turning climate action into a just and inclusive transition, rather than an economic burden.
References
Agora Energiewende and Agora Verkehrswende (2023)Der CO2-Preis Für Gebäude Und Verkehr. Ein KonzeptFürDenÜbergang Vom Nationalen Zum EU-Emissionshandel, Agora Energiewende, available athttps://www.agora-energiewende.de/fileadmin/Projekte/2023/2023-26_DE_BEH_ETS_II/A-EW_311_BEH_ETS_II_WEB.pdf
Ahrendt D., H. Dubois, V. Ezratty, T. Fox, J.M. Jungblut, A. Pittini … J. Vandamme (2016)Inadequate housing in Europe: Costs and consequences, Eurofound, available athttps://www.eurofound.europa.eu/en/publications/2016/inadequate-housing-europe-costs-and-consequences
Braungardt, S., K. Schumacher, D. Ritter, K. Hünecke and Z. Philipps (2022)The Social Climate Fund – Opportunities and Challenges for the buildings sector,Öko-Institut e.V., available athttps://www.oeko.de/en/publications/the-social-climate-fund-opportunities-and-challenges-for-the-buildings-sector/
Burger, J. (2024)Imagine all the people. Strong growth in tariffs and services for demand-side flexibility in Europe, Regulatory Assistance Project, available athttps://www.raponline.org/toolkit/strong-growth-in-tariffs-and-services-for-demand-side-flexibility-in-europe/
Castle, C., Y. Hemmerlé, G. Sarcina, E. Sunel, F. Maria D’Arcangelo, T. Kruse … M. Pisu (2023) ‘Aiming better: government support for households and firms during the energy crisis’,OECD Economic Policy PaperNo. 32, Organisation for Economic Cooperation and Development, available athttps://doi.org/10.1787/839e3ae1-en
Cotê, E. and C. Pons-Seres de Brauwer (2023) ‘Preferences of homeowners for heat-pump leasing: Evidence from a choice experiment in France, Germany, and Switzerland’,Energy Policy 183: 113779, available athttp://dx.doi.org/10.1016/j.enpol.2023.113779
Duma, D., C. Postoiu and M.Cătuți (2022)The Impact of the Proposed EU ETS 2 and the Social Climate Fund on Emissions and Welfare: Evidence from the Literature and a New Simulation Model, Energy Policy Group, available athttps://www.euki.de/wp-content/uploads/2023/02/ETS2_Policy_Brief_EPG-1-1.pdf
Eden, A., I. Holovko, J. Cludius, N. Unger, V. Noka, K. Schumacher … K. Głowacki (2023)Putting the ETS 2 and Social Climate Fund to Work - Impacts Considerations, and Opportunities for European Member States, Policy Report, adelphi,Öko-Institut, Center for the Study of Democracy and WiseEuropa, available athttps://adelphi.de/system/files/document/policy-report_putting-the-ets-2-and-social-climate-fund-to-work_final_02.pdf
Eick G.M., B. Burgoon and M.R. Busemeyer (2023) ‘Public preferences for social investment versus compensation policies in Social Europe’,Journal of European Social Policy 33(5): 555-569, available at https://doi.org/10.1177/09589287231212784
EHPA (2024)European Heat Pump Market and Statistics Report, European Heat Pump Association, available athttps://www.ehpa.org/wp-content/uploads/2024/08/Executive-summary_EHPA-heat-pump-market-and-statistic-report-2024-2.pdf
Gagnebin, M., P. Graichen and T. Lenck (2019) ‘The French CO2 Pricing Policy: Learning from the Yellow Vests Protests’,Background, Agora Energiewende, available athttps://www.agora-energiewende.org/fileadmin/Projekte/2018/CO2-Steuer_FR-DE_Paper/Agora-Energiewende_Paper_CO2_Steuer_EN.pdf
GBPN (2013)What Is A Deep Renovation Definition?, Technical Report, Global Building Performance Network, available athttps://www.gbpn.org/wp-content/uploads/2021/06/08.DR_TechRep.low_.pdf
Gevorgian, A., S. Pezzutto, S. Zambotti, S. Croce, U.F. Oberegger, R. Lollini, L. Kranzl, and A. Müller (2021)European Building Stock Analysis: a country by country descriptive and comparative analysis of the energy performance of buildings, Eurac, available athttps://webassets.eurac.edu/31538/1643788710-ebsa_web_2.pdf
Graichen, J. and S. Ludig (2024)Supply and Demand in the ETS 2: Assessment of the new EU ETS for road transport, buildings and other sectors, Interim Report, German Environment Agency, available athttps://www.umweltbundesamt.de/sites/default/files/medien/11850/publikationen/09_2024_cc_ets_2_supply_and_demand.pdf
Günther, C., M. Pahle, K. Govorukha, S. Osorio and T. Fotiou (2024) ‘Carbon prices on the rise? Shedding light on the emerging EU ETS 2’, mimeo, available athttps://doi.org/10.2139/ssrn.4808605
Held, B., C. Leisinger and M. Runkel (2022)Assessment of the EU Commission’s Proposal on an EU ETS for buildings & road transport (EU ETS 2): criteria for an effective and socially just EU ETS 2, Report 1/2022, Klima-Allianz Deutschland, Germanwatch, WWF Deutschland, CAN-Europe, available athttps://www.wwf.de/fileadmin/fm-wwf/Publikationen-PDF/Klima/Criteria-for-an-effective-and-socially-just-EU-ETS-2.pdf
Keliauskaitė, U., B. McWilliams, G. Sgaravatti and S. Tagliapietra (2024) ‘How to Finance the European Union’s Building Decarbonisation Plan’,Policy Brief 12/24, Bruegel, available athttps://www.bruegel.org/policy-brief/how-finance-european-unions-building-decarbonisation-plan
Kiss M. (2022) ‘Understanding transport poverty’,At a Glance, October, European Parliamentary Research Service, October, available athttps://www.europarl.europa.eu/RegData/etudes/ATAG/2022/738181/EPRS_ATA(2022)738181_EN.pdf
Linden J., C. O’Donoghue and D.M. Sologon (2024) ‘The many faces of carbon tax regressivity—Why carbon taxes are not always regressive for the same reason’,Energy Policy 192: 114210, available athttps://doi.org/10.1016/j.enpol.2024.114210
Ludden V., A.M. Laine, F. Vondung, T. Koska, F. Suerkemper, H.Thomson and B. Houillon (2024)Support for the implementation of the Social Climate Fund: note on good practices for cost-effective measures and investments, European Commission: Directorate-General for Climate Action, Ramboll Management Consulting, Wuppertal Institute for Climate Environment and Energy, available athttps://op.europa.eu/s/z0Vp
McWilliams, B. and G. Zachmann (2021) ‘Making sure green household investment pays off’,Analysis, 19 July, Bruegel, available athttps://www.bruegel.org/blog-post/making-sure-green-household-investment-pays
Menner M., G. Reichert, J.S. Voßwinkel and A. Wolf (2025)Towards Decarbonised Road Transport Driven by a Globally Competitive EU Automotive Industry, cepStudy, Centres for European Policy Network, available athttps://www.cep.eu/eu-topics/details/towards-decarbonised-road-transport-driven-by-a-globally-competitive-eu-automotive-industry.html
Pisani-Ferry, J. and S. Mahfouz (2023)The Economic Implications of Climate Action, Report to the French Prime Minister, France Stratégie, available athttps://www.strategie.gouv.fr/files/files/Publications/English%20Articles/Les%20incidences%20%C3%A9conomiques%20de%20l%E2%80%99action%20pour%20le%20climat/2023-the_economic_implications_of_climate_action-report_08nov-15h-couv.pdf
Rangelova, K., B. Petrovich, D. Jones and C. Bruce-Lockhart (2024)Clean flexibility is the brain managing the clean power system, EMBER, available athttps://ember-energy.org/app/uploads/2024/10/Clean-flexibility-is-the-brain-managing-the-clean-power-system.pdf
Sgaravatti, G., S. Tagliapietra and C. Trasi (2024) ‘Europe’s fiscal policy response to the energy crisis: lessons learned for a greener way out’,Energy Efficiency 17(90), available athttps://doi.org/10.1007/s12053-024-10275-0
Stad Gent (2022)Gent knapt op, available athttps://stad.gent/sites/default/files/media/documents/22_00589_Minimagazine_Gent%20Knapt%20OP_web_0.pdf
Strambo, C., M. Xylia, E. Dawkins and T. Suljada (2022)The Impact of the EU Emissions Trading System on households: how Can the Social Climate fund support a just transition? Stockholm Environment Institute, available athttps://doi.org/10.51414/sei2022.024
Wier, M., K. Birr-Pedersen, H. Klinge Jacobsen and J. Klok (2005) ‘Are CO2 taxes regressive? Evidence from the Danish experience’,Ecological Economics 52(2), available athttps://doi.org/10.1016/j.ecolecon.2004.08.005
Woerner,A., T. Imai, D.D. Pace and K.M. Schmidt (2024) ‘How to increase public support for carbon pricing with revenue recycling’*, Nature Sustainability*7: 1633–1641, available athttps://www.nature.com/articles/s41893-024-01466-9
Zachmann, G., G. Fredriksson, and G. Claeys (2018)The Distributional Effects Of Climate Policies, Blueprint 28, Bruegel, available athttps://www.bruegel.org/book/distributional-effects-climate-policies