EU unveils €3bn to mitigate impact of upcoming carbon tax

The European Investment Bank (EIB) is mobilising €3 billion to address likely increases in energy bills linked to the European Union’s upcoming carbon tax on road transport and buildings, according to a press statement from the European Commission.

The funds are the result of pressure from the European Parliament, which has been urging the EU executive to mobilise them before the new tax takes effect in 2028 to ensure that the most vulnerable can cope with the transition.

Under the new system, energy companies will need to buy permits for their carbon emissions, making fossil fuel energy more expensive.

The decision is aimed at encouraging the uptake of electric vehicles and heat pumps and increasing energy efficiency to reduce demand, ultimately contributing to a reduction in CO2 emissions. Estimates suggest the upcoming carbon tax cap could bring emissions down by 42% by 2030, compared to 2005 levels.

But by extending carbon pricing to buildings and road transport, the EU is regulating in ways that will affect the daily lives of citizens who are already facing a housing crisis and high energy prices.

A group of European lawmakers asked Energy Commissioner Dan Jørgensen last October to address rising energy bills before the extension of the EU’s carbon market, the Emissions Trading System 2 (ETS2), which is set to cover CO2 emissions from cars, vans, and buildings.

“Investments in public transport, home renovations, and zero-emission mobility solutions take time to deliver tangible benefits. Without early and targeted action such as revenue frontloading, ETS2 risks being seen less as a climate solution and more as a financial burden,” the MEPs wrote.

Lawmakers continue to raise concerns that the new carbon tax risks becoming a symbol of elite-driven climate policy disconnected from everyday realities.

“It is very important that people see the possibilities before the price kicks in, so that we have good examples everywhere in Europe,” reads the 5 February press statement from MEPs Peter Liese (European People’s Party/Germany), Mohammed Chahim (Socialists & Democrats/the Netherlands) and Lena Schilling (Greens/Austria).

Revenue from ETS2 is expected to increase substantially when the tax takes effect. EU countries will be legally required to use these funds for the bloc’s social climate fund and for social measures to mitigate price increases linked to ETS2.

Energy think tank EPICO said that while the EIB’s frontloading was “not a breakthrough”, it might serve as a short-term solution to help EU countries prepare for ETS2’s social impact.

“What now matters is further scaling up and the swift, smart use of the funds, particularly in the buildings sector. Without sufficient early investment, ETS2 remains politically fragile. Frontloading is the lifeline for a 2028 start in the face of continued opposition from many member states,” said EPICO’s executive director, Bernd Weber.

A socially fair transition

Climate Action Commissioner Wopke Hoekstra said the €3 billion will be allocated to EU countries to support low-and middle-income households in the clean transition.

“The aim is to accelerate the deployment of solutions that reduce energy and transport bills, such as heat pumps and electric vehicle schemes,” he said.

The EIB will lend the €3 billion to member states in exchange for a national commitment to return ETS2 income to the EU’s climate bank. Both the EIB and the Commission have said another financing batch is possible.

The new funds come on top of €4 billion frontloaded to the Social Climate Fund, meaning a total of €7 billion will be available for EU countries before 2028.

“It is very important to change the narrative on ETS2. Many people talk about the burden, but we need to focus on solutions. ETS2 creates revenues, and with these revenues, member states can support citizens that want to decarbonize their transport or their heating systems,” reads a press statement from European lawmakers.

The MEPs said member states “have the obligation” to bring the existing solutions to the people, namely social leasing schemes that would help them buy nearly interest-free clean cars.

“I hope the member states act and use the money as much as possible to make sure that heating and road transport become cheaper,” lawmaker Chahim told a press briefing on Thursday, stressing his political group is “pushing for social leasing” for the most vulnerable people.

“The ETS2 is an asset for social and planned transition. Hopefully we can decarbonise and at the same time help the most vulnerable people,” the Dutch lawmaker said.

According to the campaign group Transport & Environment (T&E), one way governments could soften the impact of ETS2 is via social leasing. The group has published research claiming that up to 3 million households in rural areas with low or modest incomes in Germany, Spain, France, Italy, and Poland could switch to electric cars by 2032.

“This scheme, which allows affordable electric vehicles under €25,000 to be leased at reduced rents (from €130 and up to €215 per month), already exists in France and could be implemented by other EU countries,” T&E stated.

EU’s new carbon tax delayed to 2028

The EU’s carbon tax on road transport and buildings was due to kick in in 2027 as part of the bloc’s climate law, but concerns over the social impact of the law forced the European Commission to delay the ETS2 until 2028.

Poland, Hungary, and the Czech Republic have been vocal opponents of extending the tax’s reach, insisting their countries aren’t ready. In a recent letter to the EU executive, Czech Prime Minister Andrej Babis asked for the ETS2 to be postponed “at least until 2030”.

But electric mobility advocates argue that such a delay will only lead to more polluting vehicles, discouraging the switch to more sustainable alternatives.

“This additional year must not be understood as pressing a ‘snooze button’ on Europe’s effort for road transport decarbonisation,” reads a statement from the Platform for ElectrMobility, an NGO representing the value chain of electric mobility and all transport modes.

“A snooze delays action without changing the outcome, and thus risks triggering more delays in decisive actions. By contrast, the extra preparatory year should be used actively and purposefully to ensure that ETS2 starts on solid foundations: predictable, socially fair.”