Europe will soon put a carbon price on the fossil fuels used to power cars and heat buildings — now there's a battle looming to ensure those extra costs won’t end up deepening social inequalities. 

The new system — a scheme parallel to the EU's existing Emissions Trading System, dubbed ETS2 — is part of the bloc's push to green its economy and reach carbon neutrality by targeting two of the hardest sectors to decarbonize: heating and road transport.

The idea is that the extra costs — which the European Parliament estimates will amount to a maximum of an additional 10 cents per liter of fuel until 2030 — will act as a powerful incentive for people to better insulate their houses and shift to electric cars or public transport.

But that’s raised fears that the policy could make Europe's poor, who spend more of their income on energy and have fewer options to shift to greener alternatives, even poorer. 

The European Commission’s Green Deal chief Frans Timmermans is trying hard to dispel those concerns: “I guarantee you: People who are struggling will not suffer from this,” he told Belgian television last week.

A dedicated fund set up to help vulnerable households adapt — the €86.7 billion Social Climate Fund — will come into force in 2026, a year before the new scheme is expected to take force.

But anti-poverty activists and researchers warn that may not be enough to protect the poor, saying it all depends on how EU countries design, distribute and add to the Social Climate Fund support.

“The risk that we face … is that every member state will make their own choices about how to distribute this funding, and probably some of the vulnerable people will be left behind,” said Sabrina Iannazzone, a policy officer for the European Anti-Poverty Network.

The concern strikes at the heart of the EU's climate plans.

Under the ETS2 scheme, shifting to greener transport and heating offers major savings on energy bills. But buying a cleaner car, insulating a home or replacing a gas boiler with a heat pump all involve major upfront costs that “people [who] already struggle between heating and eating” can't afford, she said. That means poorer people risk paying more in the long run.

In practice, "it will be very difficult for [vulnerable households] to avoid paying this tax," said Sara Matthieu, a Greens lawmaker who has been grappling with how to make the new CO2 market socially just. “In that sense, I'm afraid that the market mechanism won't really work.”

Too little too late 

Skeptics point to several key flaws in the Social Climate Fund.

First off, they say the pot of money is far too small. According to Matthieu, in Belgium's Flanders region alone, renovations will cost between €4 billion and €6 billion a year.

“We're going to need a hell of a lot more money from member states to be invested in this. And that's going to be the battle that we need to fight for,” she said.

The timing is also off, according to some, as it will only be available in 2026, a year before the new costs are expected to hit. That is "definitely too late," said Caterina Sarfatti, the director of the inclusive climate action program of C40, a global network of mayors. 

But EU countries can funnel revenues from the existing carbon market to citizens too, Iannazzone pointed out — a message echoed by Timmermans.

Crucially, it’s up to capitals to dole out the funding: EU countries have to come up with social climate plans on how they will deliver direct income support to households and support longer-term investments like building renovations or the purchase of a greener car.

That raises concerns that not all countries will provide adequate support — particularly because ensuring funds reach the most vulnerable is difficult to do in practice, researchers say.

Although several EU countries already rely on various forms of carbon taxation and compensate citizens when their emissions are levied, those most in need often aren't getting enough support, said Andreas Graf, a senior analyst in EU energy policy at Agora Energiewende, a think tank.

“What we’re not seeing is really targeted support to the low-income households at the needed levels,” he said.

In Germany, for instance, revenues from a carbon price on heating fuels, gasoline and diesel are mainly used to lower the cost of electricity, but aren’t funneled to help poor families renovate their homes and buy electric vehicles. 

If capitals want to avoid these pitfalls, governments need to put in place administrative systems allowing them to identify the poorest citizens well before ETS2 enters into force in 2027, Graf said. 

Failing to provide targeted investments could be an even bigger problem in places like Central Europe, where a high portion of the population already struggles to stay warm. 

“Instead of having programs benefiting all citizens, it makes much more sense for member states to earmark 100 percent of the revenues of the ETS2 to low-income groups, so that a social issue can be averted later on,” said Vlasis Oikonomou, head of the Institute for European Energy and Climate Policy. 

Still, focusing on low-income households is no silver bullet. Making sure vulnerable households aren't left behind also depends on other complementary policies being rolled out in time.

That includes banning the sale of fossil fuel cars after 2035, strengthening energy efficiency rules and scrapping lingering subsidies for fossil fuel boilers, which are still common in countries like Poland and Greece. 

“If member states or industry do not invest massively in decarbonization, I really have no idea what will happen after 2027,” Iannazzone said.