Climate Neutrality's Next Step: The EU's CO2 Price for All in 18 Months
Approaching crunch time for EU carbon price: Crucial deadline looms - an important milestone draws near
Brussels - The EU plans to take an important step towards climate neutrality in just 18 months: The European Emissions Trading System (ETS 2) will start on January 1, 2027. From then on, not only companies, but also consumers will be taxed for emitting CO2. The price will be determined by supply and demand on the free market, and it'll be a purely economic instrument, free from political interference.
But as energy prices soared in 2022 and 2023, politicians have had second thoughts about the EU-wide CO2 price and are considering intervention in the system. There are increasing calls to delay, weaken, or even halt its introduction.
Pre-2027 EU Payments to Minimize the Impact on Citizens
Four EU countries have already raised strong objections to the new policy: Poland, Bulgaria, Slovakia, and Estonia. They fear a new energy price shock, which might force citizens to give up heating their homes or filling their cars. People who can't afford electric cars or solar panels are especially at risk.
However, according to a recent EPICO study, it's possible to implement ETS 2 while maintaining the EU's climate goals without imposing undue burden on individuals by using a strategy called "Revenue Frontloading." The European Investment Bank would provide 50 billion euros to countries that want to set up, for example, subsidy programs for switching to electric cars or installing a heat pump. This money would correspond to approximately half of the expected revenues from ETS 2 in 2033-2035, if we assume a conservatively estimated CO2 price of 65 euros per tonne. The bank would pre-finance the revenues.
ETS: a Success, but a Crucial Moment
Bernd Weber, founder of EPICO, explains: "The ETS is a success story, and it makes perfect sense to expand it now to include traffic and buildings. But we're at a crucial point where a good start to the new system is really crucial. Investments in climate-friendly infrastructure and technologies lower the CO2 price. That's why they need to happen now, to prevent a shock moment in 2027."
Germany Leads the Way: Experienced the CO2 Price for Years
In Germany, the CO2 price has been a national reality for years. Currently, it's 55 euros per tonne, having gradually increased over the years. It was introduced to make the transition to ETS 2 as consumer-friendly as possible, so if a CO2 price of 60 or 70 euros per tonne is introduced in 2027, it won't be a shock for Germans. Scientists expect the CO2 price to rise above 100 euros per tonne by 2030.
Unlike in almost all other EU countries, this means the risk of a price shock is significantly higher in Germany. Given that the CO2 price in 2027 will depend on how many people and companies in the EU are still reliant on fossil fuels, it can only be reduced by reducing this dependence. Therefore, according to Bernd Weber and EPICO, this should start now. "Actually, support for the transition to climate-friendly solutions should start before the price increases, or they should go hand in hand," explains Weber. If the price increases and there are no support programs, especially for poorer households, that's when problems really start.
EU Provides Money for Green Solutions: Deadline is Late June 2025
The EU is moving ahead with the Revenue Frontloading model, granting countries access to funds from 2026 through a new facility called the Climate Social Fund (CSF), filled with the revenues from ETS 1, already in place for companies since 2005. Countries can apply for funds to support and promote consumers' transition to climate-neutral solutions.
The deadline for application is late June 2025 to receive financial support from 2026. In the application, EU countries must present their plans for how they intend to use the money and protect vulnerable groups from energy price shocks.
The Dawn of a Possible Energy Price Shock
It remains to be seen whether many countries will apply in Lune 2025. If the deadline passes, it will be a missed opportunity for the success of the new CO2 price, especially for the cash-strapped countries. This increases the likelihood that ETS 2 will be delayed, which could be devastating for climate protection and for those who've made investments in the transition.
At least Germany is somewhat ahead of other EU countries: there are support programs, and the government of Chancellor Friedrich Merz plans to cut the electricity price in 2025, making green technologies even more attractive. However, it's uncertain whether Germany will submit an application in 2025.
- The EPICO study suggests a strategy called "Revenue Frontloading" to alleviate the burden of ETS 2 on individuals, whereby the European Investment Bank would provide 50 billion euros to countries for subsidy programs, such as electric car subsidies and heat pump installations.
- Bernd Weber, founder of EPICO, emphasizes the importance of a smooth start to ETS 2, stating that investments in climate-friendly infrastructure and technologies lower the CO2 price, and such investments should happen now to prevent a shock moment in 2027.
- The CO2 price in Germany, having already been a national reality for years, is expected to rise above 100 euros per tonne by 2030. According to Bernd Weber and EPICO, support for the transition to climate-friendly solutions should start before the price increases, or they should go hand in hand, to avoid problems for poorer households.
