Buildings and transport are the two most important sectors for decarbonisation to meet the EU's 2030 climate targets. They have the most direct impact on EU citizens in their everyday lives, as the choice to undertake energy renovations or to buy a new electric vehicle is a decision that involves significant costs.
This is what they write in an article about Euractiv Ugne Keliauskaite - Research Assistant, Ben McWilliams - Associate Fellow, Giovanni Sgaravati - Energy and Climate Research Analyst and Simone Tagliapetra - Senior Fellow at the Brussels-based economic think tank Bruegel.
A major problem underlying the slow pace of decarbonisation in these two sectors so far is the failure to price externalities. To correct this, the EU introduced with the Green Deal a new carbon market, the Emissions Trading System (ETS II), which sets the price of CO2 when using fossil fuels for space heating and internal combustion for transport.
It is an indispensable policy tool for accelerating EU decarbonisation. After all, the established ETS covering the electricity and industrial sectors helped reduce emissions in these sectors by 47% below 2005 levels, putting them on track to meet the 2030 target of -62%.
A clear strategy is needed
However, the decarbonisation of buildings and transport should not be left to carbon pricing alone, as this may end up being too expensive for end users, triggering a social and political backlash. EU countries need a clear strategy on how they plan to support consumers and a detailed description of the key policies they want to implement to facilitate green investment before the full implementation of ETS II in 2027 and by 2030, when prices will move freely.
To protect vulnerable citizens from the higher costs of ETS II, the EU rightly created a Social Climate Fund. From 2026-2032, the fund will have a maximum of €65 billion in ETS II revenue, and countries must contribute at least another 25 percent to their plans on how to spend the revenue, increasing the fund's resources to at least €87 billion.
By the end of June 2025, countries will have to present to the European Commission their plans for how they want to spend the money. It is essential that these social climate plans are drawn up in the most thorough way possible, as only the effective use of the fund will allow vulnerable consumers to reap the benefits of a clean transition by building public support.
It is important to emphasize that most of the revenues from ETS II will be managed directly by national governments. Assuming an ETS II carbon price of €60, in the years 2026-2032 the total revenue managed at national level would reach around €275 billion, or two-thirds of the total expected revenue of €362 billion.
Governments should use these resources to support the implementation of low-emission solutions in transport and heating or to mitigate social impacts. This creates a trade-off between compensating consumers and encouraging low-carbon investment, and between support measures for decarbonisation of heating and cooling or transport.
As for buildings, the parties agreed on the revision of the Energy Performance of Buildings Directive (EPBD), detailing energy saving targets for residential, commercial and public buildings. EU countries should take the EPBD targets seriously and implement policies to accelerate building renovations and the adoption of clean heating.
If they don't, the EU's climate targets will become unattainable and the cost of turning domestic heating into an emissions trade could be almost twice the cost of supporting households during the 2022 energy crisis Mr.
However, governments earmarked €540 billion in energy subsidies for end-users during the energy crisis, suggesting that revenue from high ETS II prices will also be returned to households as compensation.
Investment hole
Achieving the EPBD targets requires filling an investment gap of around €150 billion per year by 2030. This is a daunting but achievable goal.
By harnessing the energy savings from electrification and retrofitting to reduce initial renovation costs, the investment shortfall can be more than halved. In addition, the efficient use of EU funds and emissions trading revenues will further reduce the gap.
A combination of grants, concessional loans and obligations is needed, as no single policy will accelerate energy renewal. Prioritizing grants for the worst buildings, often occupied by vulnerable users, will bring both climate and social benefits.
Traditional public subsidies have not successfully engaged the banking sector, which must now help promote private-public financing mechanisms. Countries should also adjust the relative prices of heating energy through taxation and subsidies and expand one-stop services to streamline the renewal process for consumers.
By 31 December 2025, EU countries must submit to the Commission their draft national building renovation plans, which clarify implemented and planned policies, investment needs, funding sources and measures, and administrative resources for building renovation.
Careful preparation of these documents will be essential to prevent the backlash of hasty measures, as seen in Germany with the ban on fossil fuel boilers, and to ensure long-term continuity of policies that are also fiscally sustainable.
However, even with the most efficient use of public spending and ETS II revenues – estimated at €30 billion per year for energy renovations – a gap of €20 billion per year remains. It is therefore important that the EU leaves enough fiscal room for Member States to undertake the necessary investments in this key sector for the continent's decarbonisation.