The impact of the proposed EU ETS 2 and the Social Climate Fund on emissions and welfare: evidence from literature and a new simulation model

The European Union is soon deciding on a separate Emissions Trading System for the buildings and road transport sectors (ETS2) and a Social Climate Fund (SCF) to mitigate its potential negative impact on households.

Under ETS2, suppliers of fuels for buildings and road transport will have to purchase emissions allowances, with the total number of allowances available gradually decreasing over time. This would expose households to a carbon price and incentivise them to seek lower carbon alternatives.

To mitigate the potential impact on lower income households, a €27 billion SCF has been proposed, mainly to finance temporary income support measures and sustainable interventions to reduce emissions for heating and road transport, such as building renovations, public transport and others.

Though this paper, we examine the literature for evidence on the effectiveness and economic and welfare impact of carbon pricing with revenue redistribution. We find that emissions reduction is moderate, unless carbon prices are high, while the economic and welfare impacts depend on the redistribution mechanism. With targeted redistribution, the policy tends to be progressive, helping reduce energy poverty and emissions at the same time. To add to the evidence base, we also present a modelling exercise of a theoretical carbon tax levied on all consumption goods.

This project is part of the European Climate Initiative (EUKI). EUKI is a project financing instrument by the German Federal Ministry for Economic Affairs and Climate Action (BMWK). The EUKI competition for project ideas is implemented by the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH. It is the overarching goal of the EUKI to foster climate cooperation within the European Union (EU) in order to mitigate greenhouse gas emissions. For more details, please visit:

Latest Publications