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