In the European Union, there are two main tools to reduce greenhouse gases, which are responsible for climate change: the EU emissions trading system (ETS) and the Effort Sharing Regulation (ESR).
What is the Emissions trading system?
The EU ETS works on the ‘cap and trade’ principle. A cap is set on the total amount of certain greenhouse gases that can be emitted by the operators covered by the system. The cap is reduced over time so that total emissions fall.
Within the cap, operators buy or receive emissions allowances, which they can trade with one another as needed.
The EU ETS covers between 40-45% of all GHG emissions and it includes most of the power sector, large industries, shipping, intra-EU flights, and most recently road and building.
The European Union has implemented two separate carbon market systems, known as EU ETS1 and EU ETS2:
- ETS1 covers emissions from electricity and heat generation, energy-intensive industry sectors (steel, aluminium, cement, chemicals), aviation within the European economic area, and maritime transport.
- A separate emissions trading system (called ETS2) for fuel combustion in buildings, road transport and additional sectors (mainly small industry not covered by the existing ETS) was recently created. This “upstream” system regulates fuel suppliers rather than households and car drivers.
In 2021, the European Commission proposed to strengthen the EU ETS (including extending it to the shipping, building and road sectors) but also to set up a new Social Climate Fund to address the impacts of carbon pricing on vulnerable groups. Revenues from the auctioning of emissions allowances will feed into the new Social Climate Fund.
The Social Climate Fund will start operating from 2026 to address the social impacts arising from the inclusion of the buildings and road transport sectors in the new emission trading system on vulnerable groups in the EU, especially those affected by energy or mobility poverty, to ensure that the transition is fair and leaves no one behind.
Specifically, the Social Climate Fund can be used by Member States to finance structural measures and investments. These can be in energy efficiency and the renovation of buildings, clean heating and cooling, and integration of renewable energy as well as in zero- and low-emission mobility and transport, including public transport. Thanks to revenues from the emissions trading system for buildings, road transport and additional sectors, together with the Member States’ contributions, the Social Climate Fund will mobilise EUR 86.7 billion from 2026 to 2032.
What is the Effort Sharing Regulation (ESR)?
The Effort Sharing Regulation establishes for each EU Member State a national target for the reduction of greenhouse gas emission by 2030 in the following sectors: domestic transport (excluding aviation), buildings, agriculture, small industry and waste. In total, the emissions covered by the Effort Sharing Regulation account for almost 60% of total domestic EU emissions.
Initially adopted in 2018, the Regulation was amended in 2023. With their new national targets Member States will collectively contribute to an emission reduction at EU level, in the Effort Sharing sectors, of 40% compared to 2005 levels.
EU Member States have emission reduction targets ranging from 10 to 50% compared to 2005 levels. The Regulation recognises the different capacities of Member States to take action by differentiating targets according to Gross Domestic Product (GDP) per capita across Member States. This ensures fairness because higher income Member States take on more ambitious targets than lower income Member States.