How to make the ETS2 socially acceptable

Lessons from national CO2 price systems for well-designed carbon revenues redistribution and investments

The introduction of a CO2 price for housing and mobility is a key measure to ensure that the EU will be able to achieve its climate objectives. However, without adequate accompanying compensation and investment measures, additional costs for citizens will not be socially acceptable and might lead to a reversal of climate policies. This policy paper thus sets out to make recommendations on how to best design such policies in the context of the introduction of the second European Emissions Trading System (ETS2), which will broaden the scope of the EU ETS to new economic sectors (road transport, buildings and small industries), and the accompanying Social Climate Fund (SCF). To draw lessons from already existing instruments, this policy paper studies the carbon taxation schemes of France, Germany and Austria as well as a selected regulatory, redistribution and investment measures linked to national CO2 prices. Based on this analysis, this paper makes recommendations for the design of social climate plans and national measures financed by ETS2 revenues. It highlights the importance of strict earmarking of ETS2 revenues, the visibility of support measures, and discusses how to best target citizens through redistributions mechanisms, ensure effectiveness through well-designed regulatory measures, combine compensation with investment tools, and coordinate such investment support to provide a demand stimulus to EU cleantech industries.