As the European Union accelerates its path towards climate neutrality, 2025 marks a critical juncture for one of its most socially sensitive climate policies – the EU Emissions Trading System for buildings and road transport (known as ETS2). Without quick action from member states, this new climate policy could have regressive social impacts.
Set to launch in 2027, ETS2 will put a price on carbon emissions from household heating and road transport, resulting in inevitable price increases in those two sectors. To help mitigate its impact on the most vulnerable households, transport users and micro-enterprises, 25% of the ETS2 revenues will flow into a Social Climate Fund (SCF).
The SCF can be viewed as Europe’s financial safety net for the most vulnerable people, designed to ensure that, as Europe pushes fossil fuels out of homes, cars and cities, it doesn’t push people into poverty. Therefore, ETS2 and the SCF are two sides of the same coin: while ETS2 imposes a necessary climate cost on carbon-intensive activities, the Social Climate Fund is meant to make that transition affordable and just.
To benefit from the SCF, the EU’s member states are required to submit detailed Social Climate Plans to the European Commission, proving that their policies are inclusive, purpose-oriented and based on high-quality data.
However, until now, only a handful of draft plans have been put out for public consultation within EU countries, and most have yet to submit their plans to the Commission. Without binding plans in place, it’s becoming increasingly unclear how, or even whether, that social shield will be deployed in time.
Without robust Social Climate Plans, the revenue collected from the new emissions trading system risks becoming a regressive tax, disproportionately hitting low-income households and transport users – particularly those already suffering from increased energy and transport poverty.
Uneven progress across countries
A joint analysis by E3G and CEE Bankwatch Network, published in mid-June, revealed significant disparities in the progress of Social Climate Plans across eight Central and Eastern European countries.
Some of them – most notably Estonia, Latvia and Poland – have published draft Social Climate Plans outlining how they will channel their SCF allocations to fund building renovations, clean mobility and direct income support.
Poland, for instance, proposes allocating 37% of its SCF share to direct income support, 39% to energy-efficient housing, and 21% to transport, while Estonia commits a striking 76% of funds to building renovation and 21% to public transport.
Latvia’s plan foresees investments in energy-efficient apartment buildings and social housing, as well as support for connecting single family homes and social housing to renewable or district heating systems. In the transport sector, the country opts for micro-mobility, such as bicycles and electric bicycles, as well as investments in public transport and cycle-route expansion.
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While these examples deserve praise, the wider picture looks far from ideal, as illustrated by an evolving SCF tracker, which is a collaborative effort of more than 40 EU and national-level civil society organisations. Several countries, such as Hungary, are vocally fighting against the implementation of ETS2 – and by extension, the SCF it would finance.
Meanwhile, drafting of the Social Climate Plans is not moving at the necessary pace or with sufficient inclusion. Civil society participation has remained severely limited or non-existent in several countries. And critically, there is growing concern that the window for meaningful reforms is closing fast.
New EU budget loosens guardrails for just transition
Another challenge lies in the EU’s new funding priorities. The European Commission unveiled its draft proposal for the 2028–2034 Multiannual Financial Framework (MFF) in July, asking governments to construct detailed national and regional partnership plans. On paper, the MFF presents an opportunity to address social vulnerabilities, integrating existing initiatives like the SCF.
This is evident in the fact that member states are obliged to include a dedicated chapter in their respective national and regional plans outlining their planned investments under the Social Climate Fund. However, this exercise is descriptive and is not intended to provide further food for thought on how the MFF could better address growing social vulnerabilities.
More importantly, by shifting the focus towards increasing competitiveness, instead of much-needed climate and environmental action, the proposal for the EU’s overarching financial framework loosens the very guardrails that would safeguard a just energy transition.
While the new draft EU budget legislation acknowledges the importance of a just transition and regional equity, it introduces several structural shifts that raise red flags – including the proposed discontinuation of the EU’s Just Transition Fund as a standalone instrument, and the elimination of the LIFE programme which has long supported environmental and climate action.
In doing so, the budget proposal fails to support initiatives that have proven to be successful from the environmental and social point of view, while opening the door to big players without the strong environmental and social rules needed to hold them to account.
Lessons from early plans can be scaled up
Despite the mounting risks, there are valuable lessons to draw from countries that have moved ahead with their Social Climate Fund planning. Early frontrunners like Poland and Estonia offer examples that are worth scaling up.
The existing draft plans show how the SCPs can address both emissions and energy poverty. It is clear from the analysis that when backed by political will and high-quality consultations, Social Climate Plans can be more than bureaucratic checklists.
They can – and should – become tangible action plans, topped up by additional revenues from ETS1 and ETS2 to maximise their transformative potential. To enhance transparency and increase implementation quality, monitoring committees should be appointed in all member states.
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Without a broader strategy for mainstreaming, ensuring a socially just and fair transition across the EU will remain highly challenging.
Such a transition requires equity considerations at all levels of climate and energy policy-making – not just in targeted compensation mechanisms. This includes embedding social impact assessments into regulatory frameworks, fostering inclusive governance, and aligning labour, housing and education policies with climate goals.
Unless a holistic approach is adopted, there is a real risk that vulnerable groups will continue to bear a disproportionate cost burden, undermining both public support and the long-term sustainability of the green transition.
