How can Member States use their EU ETS revenues to support an ambitious and equitable path to decarbonisation? The question gains even more importance with the upcoming emissions trading systemin the buildings and road transport sectors (ETS2) which aims to contribute to the reduction of greenhouse gas emissions by 55% by 2030 and the overall achievement of the EU climate targets. Revenues from the ETS2 are estimated to generate between EUR 342 billion and EUR 570 billion by 2032, which Member States must invest in climate change mitigations and social cushioning measures.

To answer this question, revenue use from ETS1 – which already covers emissions from the sectors of electricity and heat generation, energy-intensive industries, aviation, and maritime transport – was examined in a new study by the Reform Institute, commissioned by Germanwatch under the LIFE EFFECT Programme. The study investigates how revenues from ETS1 have been invested in the five countries with the most emissions in the ETS1 sectors: Germany, Poland, Spain, Italy, and France, with focus on 2020-2024. Using a mixed-methods approach – combining quantitative data analysis, stakeholder interviews, and comparative policy evaluation – the research offers robust insights into spending patterns, climate impact, and policy effectiveness across EU Member States. The aim of the study is to identify best practices and policy recommendations to guide future investments under EU ETS and the Social Climate Fund.

The main findings include:

• There are substantial differences in spending patterns, governance systems, and reporting practices in the analysed Member States. Nevertheless, several broader trends emerge. Building decarbonisation is the largest spending category (31%), followed by multipurpose programmes (13%) whose share declines over the years – and public transport (11%).
• Governance arrangements also vary, especially regarding earmarking and transparency. Germany stands out for transferring all the EU ETS revenues into a dedicated climate fund (KTF), ensuring clear tracking and alignment with climate objectives. Spain earmarks the revenues in line with EU law, whereas France, Italy and Poland either apply insufficient earmarking or noncompliant with the EU law, often channeling large shares of the EU ETS revenues to national budgets, with limited transparency and visibility of the funds. Differences in language use, variation in programme descriptions, and occasional reporting errors further complicate comparability.

While officially most countries of the analyzed countries broadly direct the EU ETS revenues toward climate-related purposes, substantial improvements in transparency and visibility are needed to verify if that is the case.

The report recommends

1. the Member States to:

• create a dedicated fund to manage the EU ETS revenues,
• increase transparency and visibility of reporting,
• clearly assign responsibility for the management and increase administrative capacity,
• ensure full compliance with the EU 100% spending obligation,
• redirect industrial support towards structural decarbonisation,
• increase just and fair transition support,
• align tax and tariff system with decarbonisation and electrification.

2. the EU institutions to:

• increase resources for verification of reporting,
• increase the pressure for reporting transparency,
• facilitate exchange of good practices and finance independent studies on EU ETS revenues.

Download the full report below.

The Life-Effect project is co-funded by the European Union. The views and opinions expressed are solely those of the authors and do not necessarily reflect those of the European Union or CINEA. Neither the European Union nor the granting authority can be held responsible for them.

(Source: Germanwatch)