EU ETS2 and social climate fund: enabling decarbonisation in transport and buildings that works for all

This report examines the extension of the EU Emissions Trading System to fuels used in road transport and buildings (EU ETS2) and the accompanying Social Climate Fund, assessing their design, impacts and role within the wider EU climate policy framework. Road transport and buildings remain among the most challenging sectors for emissions reduction. EU ETS2 introduces a cap-and-trade system for these sectors, with all allowances auctioned, a dedicated market stability reserve to manage price volatility, and revenues earmarked for climate and social objectives. Following a political agreement in 2025, the system is expected to start in 2028. A central focus of the report is the Social Climate Fund, which aims to address distributional impacts of carbon pricing by financing structural investments in energy efficiency, clean heating and sustainable mobility, alongside limited temporary income support. The report reviews a broad range of decarbonisation options in transport and buildings, structured around avoid, shift and improve strategies, and emphasises the importance of enabling policies, finance and capacity building. Overall, the EU ETS2, when combined with complementary legislation and targeted social support, is expected to contribute to achieving EU climate targets while supporting a fair and inclusive transition.