Nations warn ETS2 carbon pricing could impact households

New EU carbon pricing set to increase fuel bills from 2027

The European Union will introduce a second carbon trading system in 2027 that directly affects the price consumers pay for petrol, diesel, heating oil, and gas. Several member states have raised concerns about the financial impact on households, particularly those on lower incomes who cannot easily switch to cleaner alternatives.

ETS2 marks a significant shift in EU climate policy. Unlike the existing system, which targets power stations and industrial facilities, this new scheme applies carbon pricing to buildings and road transport. The scheme will cover roughly 40% of the EU’s total emissions and affect up to 188 million households that currently rely on fossil fuels for heating.

For UK businesses trading with EU partners or operating across European markets, understanding these cost pressures is important. Supply chain partners may face increased operating expenses, and companies exporting to the EU need to consider how these changes might affect demand and pricing in their target markets.

How the new trading system applies carbon costs

ETS2 works by requiring fuel suppliers to purchase carbon permits for every tonne of CO₂ their products will generate when burned. These suppliers then pass the permit costs directly to customers through higher prices at the pump or on energy bills. The mechanism differs fundamentally from the original emissions trading system, which applies further upstream in the energy supply chain.

The system will launch with carbon permits priced at approximately €60 per tonne of CO₂. This translates to immediate price increases across multiple fuel types. Petrol and diesel costs are forecast to rise by 10 to 15 cents per litre, adding between €115 and €154 to annual motoring costs for a typical household with one petrol vehicle.

Heating costs present a more complex picture. Average households could see annual increases of around €60, but the actual impact depends heavily on building efficiency. Homes with poor insulation and older heating systems may face annual increases of €300 to €500. Consequently, the financial burden falls most heavily on those least able to invest in energy efficiency improvements or alternative heating systems.

One 2026 study projects that the cost of living could increase by 1.18% at a carbon price of €57.50 per tonne without offsetting energy efficiency measures. Overall household spending could rise by €300 to €500 per year once the system operates at full capacity. However, households already using clean energy for heating and transport will not face these additional costs.

Eastern and Southern Europe face heaviest burden

The financial impact of ETS2 is not distributed evenly across the EU or across income groups. Carbon pricing of this type is inherently regressive, meaning it takes a larger proportional bite from lower incomes. Energy costs already represent a significant share of household budgets for those on lower incomes, and the additional carbon pricing exacerbates this disparity.

Elderly homeowners in Eastern and Southern Europe face particularly acute challenges. Many own their properties outright but live on fixed incomes with limited capacity to finance upgrades to heating systems or building insulation. For these households, the choice often becomes whether to reduce spending on food and other essentials to maintain adequate heating.

Rural and peri-urban households dependent on private vehicles face what researchers term transport poverty. Public transport alternatives remain limited in many areas, and affordable electric vehicles are not yet accessible to lower-income buyers. These households must continue using petrol or diesel vehicles, absorbing the full cost increase without realistic alternatives.

Single-person and childless households also bear a disproportionate burden relative to their incomes. The fixed costs of heating a home or running a vehicle do not decrease with household size, but smaller households typically have lower total incomes to absorb these increases.

Meanwhile, wealthier households who can afford to install heat pumps, solar panels, or purchase electric vehicles will avoid these costs entirely. In fact, running costs for clean energy systems are expected to decrease over time, widening the gap between those who can afford the transition and those who cannot.

Member states push for price controls and delays

Several EU governments have expressed serious concerns about the timing and structure of ETS2. Some have advocated for postponing the scheme’s introduction, while others have pushed for stronger price control mechanisms to prevent carbon permit costs from escalating beyond household affordability.

In response to these concerns, the EU agreed in June 2026 to implement stricter price controls within the system. A Market Stability Reserve will inject up to 80 million emergency permits annually if carbon prices exceed €45 per tonne. This intervention capacity is four times larger than originally proposed, designed specifically to shield households from sudden price spikes.

The debate reflects a fundamental tension in climate policy. Raising the cost of fossil fuels creates an economic incentive to switch to cleaner alternatives, but this only works if households can actually afford to make that switch. For many households, particularly in regions with older housing stock and lower average incomes, the financial barrier to transitioning away from fossil heating remains prohibitive.

According to the European Commission’s guidance on the new system, revenues generated through ETS2 are intended to fund the very investments that will help households reduce their exposure to carbon costs. However, the timing creates a gap where costs arrive before support mechanisms can deliver meaningful relief.

Social Climate Fund designed to support vulnerable households

The EU has established a Social Climate Fund to address the regressive impacts of ETS2. The fund came into force in 2026 and will be financed directly from revenues generated by the carbon permit sales. Member states must develop Social Climate Plans outlining how they will use these resources to support households facing energy or transport poverty.

The European Commission maintains that ETS2 revenues should be sufficient to fully compensate vulnerable households for the price increases if allocated effectively. Support can take various forms, including direct financial assistance to offset higher energy bills, subsidies for energy efficiency improvements, or investments in public transport infrastructure.

However, the effectiveness of the Social Climate Fund depends entirely on how member states design and implement their national plans. Households need support to arrive at the same time as the cost increases, not several years later. Additionally, administrative complexity in accessing support programs can prevent the most vulnerable households from receiving assistance, even when funding exists.

The fund prioritises investments that reduce long-term fuel consumption rather than simply subsidising continued fossil fuel use. This means funding for heat pump installations, building insulation, and public transport expansion rather than direct rebates on heating oil or petrol. While this approach makes sense for long-term emissions reduction, it does not provide immediate relief for households that cannot access capital for major home improvements.

For UK businesses with European operations or supply chains, understanding how different member states implement their Social Climate Plans may provide insight into regional variations in consumer spending power and market conditions. Some regions may see faster adoption of clean heating and transport, creating different market dynamics for products and services.

Timeline and cost outlook for businesses and households

ETS2 is scheduled to launch in 2027, with carbon costs expected to be fully reflected in retail fuel prices from that point forward. Some analysts suggest that the full consumer impact may not materialise until 2028 as the market stabilises and suppliers adjust their pricing structures.

The initial carbon price of approximately €60 per tonne represents only the starting point. Carbon permit prices in the existing ETS1 system have fluctuated significantly over time, and similar volatility is expected in ETS2. The Market Stability Reserve provides a ceiling at €45 per tonne through emergency permit releases, but sustained high demand could push prices close to that cap.

For businesses, the key considerations include how these cost pressures affect customer purchasing power in EU markets and how supply chain partners may pass on their increased costs. Transport-intensive supply chains will face direct cost increases, while businesses selling discretionary goods and services may see demand impacts as households redirect spending toward essential energy costs.

Companies exporting to the EU should monitor how different member states implement their Social Climate Plans. Regions with generous support for household transitions to clean energy may see faster changes in consumption patterns. Conversely, regions where support arrives slowly may experience prolonged pressure on household budgets, affecting demand across multiple sectors.

The legislation establishing ETS2 includes provisions for reviewing the system’s impact on households and small businesses. These reviews could lead to adjustments in how the scheme operates, but any changes would likely come after several years of implementation.

Key facts about ETS2 and household costs

• The system launches in 2027 and applies carbon pricing to fuels used in buildings and road transport across the EU.
• Carbon permits are expected to start at approximately €60 per tonne of CO₂ emissions.
• Average household heating costs could increase by €60 annually, with poorly insulated homes facing increases of €300 to €500 per year.
• Petrol and diesel prices may rise by 10 to 15 cents per litre, adding €115 to €154 to annual motoring costs.
• The Social Climate Fund will use ETS2 revenues to support vulnerable households and finance energy efficiency improvements.
• Households already using clean energy for heating and transport will not face these additional costs.
• A Market Stability Reserve will release up to 80 million emergency permits annually if prices exceed €45 per tonne.

What UK businesses should consider

UK companies with European customers or supply chains should assess how ETS2 might affect their commercial relationships. The cost increases facing European households and businesses will ripple through to purchasing decisions, supplier negotiations, and market dynamics.

For businesses in sectors such as manufacturing, logistics, or retail with EU operations, higher fuel costs will affect both your own cost base and that of your suppliers and customers. Transport-intensive supply chains warrant particular attention. Similarly, businesses exporting consumer goods should consider how reduced household spending power in some EU regions might affect demand.

Professional service providers working with EU clients should understand how ETS2 affects their clients’ cost structures and strategic planning. As with the UK’s experience implementing carbon pricing mechanisms, businesses appreciate advisors who understand the practical implications rather than just the regulatory framework. At SBS, our net-zero hub provides guidance on carbon pricing mechanisms and their business implications.

Companies considering expansion into EU markets should factor these energy cost dynamics into their market analysis. Regional variations in how member states implement the Social Climate Fund will create different market conditions across the EU. Areas with strong support for household transitions may see faster adoption of electric vehicles and heat pumps, creating opportunities in some sectors while pressuring others.

For businesses already managing carbon reporting and reduction strategies, understanding parallel developments in the EU provides useful context. The regulatory direction of travel is clear across developed economies. Carbon pricing mechanisms are expanding in scope and becoming more stringent. Our compliance team helps businesses navigate carbon reporting requirements across different jurisdictions.

Further reading and official resources

The European Commission maintains detailed information about ETS2 on its climate action website, including technical specifications and implementation timelines. This resource provides the most authoritative guidance on how the system will operate.

The EUR-Lex database contains the full legislative text establishing both ETS2 and the Social Climate Fund. For businesses that need to understand the legal basis for these changes, this remains the primary source.

Member states are required to publish their Social Climate Plans outlining how they will use revenues to support vulnerable households and fund the transition away from fossil fuels. These plans vary significantly between countries and are worth reviewing for businesses operating in specific EU markets.

UK businesses can find guidance on carbon pricing and emissions reporting through the UK government’s climate change guidance, which explains how similar mechanisms operate domestically and affect businesses trading internationally.