European Green Deal: EU agrees to strengthen and expand emissions trading, and creates a Social Climate Fund to help people in the transition

The European Commission welcomes the provisional agreement reached with the European Parliament and Council in the early hours of Sunday to strengthen the EU Emissions Trading System (ETS), apply emissions trading to new sectors for effective economy-wide climate action, and establish a Social Climate Fund. This deal is a fundamental step towards reaching the EU’s commitment to reduce net greenhouse gas emissions by at least 55% by 2030. At the same time the Social Climate Fund will help to ensure that the transition is fair.

Against the backdrop of Russia’s invasion of Ukraine, this agreement shows once again the EU’s determination to become climate neutral by 2050, transform our economy and society, leave nobody behind, and ensure our energy security. To complement the substantial spending on climate in the EU budget, Member States will spend the entirety of their emissions trading revenues on climate and energy-related projects and to address social aspects of the transition.

Executive Vice-President for the European Green Deal, Frans Timmermans, said: “Emissions trading is the centrepiece of our European Green Deal – putting a price on carbon. A stronger Emissions Trading System will help us drive investment into decarbonisation and reduce emissions further and faster, in line with our climate targets. With the new Social Climate Fund, the EU will ensure that our green transition is done in a way that protects our most vulnerable and helps them be part of the transition. At the end of a challenging year, this is much-needed positive news; in the face of strong headwinds, we continue delivering on the European Green Deal for a sustainable future.”

Today’s agreement will reduce emissions from the EU ETS sectors by 62% by 2030, compared to 2005 levels. The agreement will gradually phase out free emission allowances to certain enterprises and phase in the Carbon Border Adjustment Mechanism (CBAM) between 2026 and 2034 for the sectors covered. This follows the provisional deal reached on CBAM by European co-legislators on 13 December. To support Member States in their efforts to reduce emissions from buildings and road transport, and certain industrial sectors a new separate emissions trading system will start from 2027 for relevant fuel use.

The compromise also increases the size of the Innovation and Modernisation Funds, and creates a new Social Climate Fund, which will provide dedicated financial support to Member States to help vulnerable citizens and micro-enterprises with investments in energy efficiency measures. It will be financed by €65 billion from the EU budget, plus 25% co-financing by Member States.