Governments Brace for the Impact of ETS2
European Union countries have agreed to strengthen a financial safeguard aimed at preventing sharp spikes in carbon prices, as the bloc prepares to roll out a new emissions trading system covering road transport and buildings in 2028.
The updated system, known as ETS2, will put a price on carbon emissions from cars, vans, and heating fuels. That means households and businesses relying on fossil fuels are likely to face higher costs once it takes full effect. With concerns growing over the potential hit to consumers, governments are trying to ensure the transition doesn’t trigger sudden price shocks.
Under the new agreement, EU member states will extend the existing price-stabilisation mechanism beyond 2030, offering longer-term protection against volatility in the carbon market.
Divisions Over Timing and Social Impact
The debate over ETS2 has exposed clear divisions within the bloc. Slovakia and the Czech Republic have pushed to delay the system until at least 2030, arguing that the social consequences could be too severe if introduced too soon.
Meanwhile, Sweden, Denmark, Finland, the Netherlands and Luxembourg have taken the opposite stance. In a joint letter dated 18 February, the five countries warned that postponing or weakening the market-based pricing system would damage the EU’s broader climate ambitions. They also argued that ongoing uncertainty around price controls risks discouraging investment by businesses and households preparing for the green transition.
The effort to reinforce the price-control tool comes shortly after the European Investment Bank committed €3 billion upfront to help ease pressure from rising energy bills, responding to concerns in the European Parliament about protecting vulnerable citizens during the shift away from fossil fuels.
Strengthening the Market’s “Safety Valve”
At the heart of the changes is the Market Stability Reserve, the EU’s long-term mechanism designed to balance supply and demand in the carbon market. It acts as a buffer, stepping in when prices rise too sharply or when there are too many unused emission allowances.
The extension of carbon pricing to transport and buildings was agreed in 2023 as part of the EU’s climate legislation. The goal is to cut emissions from those sectors by 42% by 2030 compared with 2005 levels. Although the scheme was originally set to begin in 2027, lawmakers delayed it over concerns about the social impact.
Under the revised rules, the 600 million allowances currently held in reserve — roughly equivalent to a decade’s worth of emission-reduction needs — will remain available to calm the market if necessary. At present, 20 million allowances are released when carbon prices rise above €45 per tonne of CO2, based on 2020 prices. The new changes will double that intervention, allowing an additional 20 million allowances per release and permitting releases twice a year. In total, up to 80 million allowances could now be injected annually to prevent excessive price jumps.
Cyprus’ environment minister, Maria Panayiotou, speaking on behalf of the EU presidency, described the move as a clear signal that the bloc is committed to a stable and predictable carbon market. Climate Commissioner Wopke Hoekstra added that the updated measures should make the system more affordable and allow authorities to step in quickly if prices climb too high.
The proposal will now move to the European Parliament, where lawmakers must give their approval before ETS2 officially begins in 2028.
