From 2027, the European Union is expected to introduce one of the most significant climate policy changes since the launch of the EU Emissions Trading System (EU ETS) in 2005. Often referred to in the media as a “carbon tax,” the new EU Emissions Trading System for buildings, road transport and additional sectors (ETS2) is not technically a tax but a cap-and-trade emissions trading scheme. Nevertheless, because its costs are expected to be reflected in fuel prices, many consumers and businesses will experience it in a similar way. EUI IJD
ETS2 is one of the flagship measures of the European Union’s Fit for 55 package, which aims to reduce net greenhouse gas emissions by at least 55% by 2030 compared with 1990 levels and to achieve climate neutrality by 2050.
The introduction of ETS2 has generated considerable public debate. Supporters argue that carbon pricing creates economic incentives to reduce fossil fuel consumption and invest in cleaner technologies. Critics express concerns about higher energy costs and their impact on households and businesses. This article examines what ETS2 is, why it was introduced, how it differs from a traditional carbon tax, and what its potential implications may be. CFP
Source: ESG-edu
Why Is ETS2 being introduced?
The original EU Emissions Trading System covers large industrial installations, electricity generation, aviation within Europe and, more recently, parts of the maritime sector. However, these sectors account for only part of the EU’s total greenhouse gas emissions.
According to the European Environment Agency (EEA):
- Transport accounts for approximately 29% of total EU greenhouse gas emissions.
- Buildings contribute around 13% of direct emissions, mainly from heating and cooling.
- Together, these sectors represent one of the largest remaining sources of emissions that are not fully covered by the existing ETS.
Despite improvements in vehicle efficiency and building performance, emissions from road transport have historically declined more slowly than those from electricity generation. To address this gap, the EU decided to establish a separate emissions trading system covering fuels used in road transport, buildings and selected additional sectors.
Rather than regulating households directly, ETS2 places compliance obligations on fuel suppliers, who must purchase emission allowances corresponding to the carbon emissions associated with the fuels they place on the market. ASUENE
Is ETS2 really a carbon tax?
Although frequently described as a carbon tax, ETS2 operates differently. A carbon tax sets a fixed price on carbon emissions determined by legislation.
An emissions trading system sets an overall emissions cap while allowing the carbon price to fluctuate according to market supply and demand.
Each allowance under ETS2 represents one tonne of carbon dioxide equivalent. Fuel suppliers must surrender sufficient allowances each year to cover the emissions generated by the fuels they sell.
Because suppliers are expected to pass part of these compliance costs through the supply chain, fuel prices for heating oil, natural gas and road fuels may increase over time. The exact impact will depend on carbon market prices, fuel markets, national taxation and government support measures. ASUENE
How does ETS2 fit into Fit for 55?
ETS2 is a central component of the Fit for 55 legislative package. The package combines several complementary measures, including:
- strengthening the existing EU ETS
- increasing renewable energy deployment
- improving energy efficiency
- revising the Energy Performance of Buildings Directive
- introducing the Carbon Border Adjustment Mechanism (CBAM)
- promoting zero-emission mobility
- expanding carbon pricing through ETS2
Rather than relying on a single policy instrument, Fit for 55 combines regulation, market mechanisms, financial support and innovation to reduce emissions across the European economy. EEA homaio
Carbon pricing is intended to encourage investments in cleaner technologies while complementary policies help reduce the costs of the transition.
What could be the economic impact?
Estimating the precise impact of ETS2 remains difficult because allowance prices will depend on market conditions.
To improve predictability, the revised ETS Directive includes safeguards.
If allowance prices exceed €45 per tonne (in 2020 prices) during the introductory period, additional allowances may be released from the Market Stability Reserve to reduce excessive price volatility. European Council
Several independent modelling studies suggest that fuel price increases are likely to remain relatively moderate compared with overall energy market fluctuations.
For example, estimates published by the European Commission indicate that, depending on carbon prices:
- gasoline prices could increase by several euro cents per litre;
- diesel prices may experience similar increases;
- natural gas and heating fuel prices may also rise gradually.
Actual consumer impacts will vary across Member States depending on national energy mixes, taxation systems and government compensation measures. ResearchGate
Potential benefits
Supporters of carbon pricing point to decades of economic research suggesting that placing a price on emissions encourages more efficient resource allocation.
According to the OECD, carbon pricing creates incentives for:
- improving energy efficiency;
- investing in low-carbon technologies;
- reducing fossil fuel dependence;
- accelerating innovation.
The International Energy Agency (IEA) similarly identifies carbon pricing as one of several important policy tools for achieving net-zero emissions when combined with investment in clean technologies.
Research published in Nature Climate Change also suggests that broad carbon pricing mechanisms can contribute to long-term emissions reductions when implemented alongside complementary climate policies.
Challenges and concerns
At the same time, ETS2 raises legitimate concerns.
Households with limited financial resources often spend a larger proportion of their income on energy and transport. Consequently, higher fuel prices could disproportionately affect vulnerable groups if adequate support measures are not implemented.
Small businesses, particularly those operating vehicle fleets or occupying energy-intensive buildings, may also experience increased operating costs during the transition.
Differences between urban and rural areas are another important consideration. Residents in regions with limited public transport or older building stock may have fewer immediate opportunities to reduce fossil fuel consumption.
Recognizing these challenges, the EU established the Social Climate Fund, which will provide approximately €86.7 billion (2026-2032, including national co-financing) to support vulnerable households, micro-enterprises and transport users. REScoop
The Fund may finance measures such as:
- building renovation;
- heat pump installation;
- clean mobility;
- public transport improvements;
- temporary direct income support where appropriate.
Conclusion
The introduction of ETS2 in 2027 marks an important milestone in European climate policy. Although commonly described as a “carbon tax,” it is more accurately understood as a market-based emissions trading system designed to extend carbon pricing to road transport and buildings.
As part of the Fit for 55 package, ETS2 seeks to encourage lower-carbon choices while supporting the EU’s legally binding climate objectives. At the same time, its implementation raises important economic and social questions regarding affordability, competitiveness and fairness.
Scientific evidence suggests that carbon pricing can contribute to emissions reductions when combined with investment, innovation and targeted social support. Whether ETS2 ultimately achieves its intended objectives will depend not only on carbon prices but also on complementary policies that help households and businesses adapt to the transition.
