ETS2: do we know what we want to measure and achieve?

Energy
Public policy
ETS2 revenue should go into greater energy self-sufficiency, and both the EU and Czechia should ease the regulations that make products more expensive.
Published

29 October 2026

From 2028 the European Union will put a price on CO₂ emissions from heating buildings and from motor fuels. The new emissions trading system, ETS2, was originally due to start in 2027, but this year the EU postponed it by a year1, and Czechia and Italy are now pushing for it to be suspended2. If ETS2 does go ahead, the state will earn new revenue from selling allowances, which it must spend on climate and social measures3. Before we decide what to do with that money, we should be clear about two things: what we want to achieve, and how we will know that we have achieved it.

Europe pays more and regulates more

Reducing CO₂ emissions is, in general, a sensible goal. But Europe is not alone on this path, and it should pay close attention to how its main rivals see it. Since January 2026 the United States has not been a party to the Paris Agreement4, and the US government has declared a “national energy emergency” to expand domestic energy production, including oil and natural gas5. China has extended its emissions trading system to steel, cement and aluminium, but for now it regulates only emissions per unit of output, not their total amount. It plans to introduce absolute caps gradually from 20276.

European firms, meanwhile, pay far more for energy than their competitors. The 2024 Draghi report on the future of European competitiveness states that EU companies pay two to three times more for electricity than companies in the US, and four to five times more for natural gas. It names Europe’s lack of natural resources as the main cause, but also flaws in the common energy market and high taxes. And it warns that if Europe fails to coordinate its policies, decarbonisation risks running contrary to competitiveness and growth7.

The second problem is regulation. According to the same report, more than 60% of EU companies see it as an obstacle to investment, and 55% of small and medium-sized enterprises name regulatory obstacles and administrative burden as their greatest challenge8. Between 2019 and 2024 the EU passed around 13,000 acts, while around 3,500 laws and 2,000 resolutions were adopted at federal level in the US9. Draghi also points out that the EU has no common methodology for measuring the cost of regulation10. A reliable overall figure for how much regulation adds to the price of European products is therefore missing. Partial estimates do exist: according to a study for the European Commission, EU legislation from 2004 to 2014 cost the chemical industry about 12% of its value added and as much as 30% of its gross operating surplus, roughly its profit11. The Commission itself aims to cut firms’ recurring administrative costs by €37.5 billion a year by 202912.

Part of the problem, however, is at home. In October this year the President of the European Commission, Ursula von der Leyen, proposed a “pact against overregulation”: member states should show which obligations come from EU law and which they have added themselves13. Czechia has improved as far as new laws are concerned. Since 2016 a government methodology has required directives to be transposed in their minimal form and any additional requirement to be justified. Unjustified gold-plating has since almost disappeared from new legislation14. It persists, however, in older laws, in MPs’ amendments and in practice15. For example, when a building that was built and last substantially altered before 1947 is sold or let, no energy performance certificate is needed if both parties agree in writing16. According to an analysis by the Association for International Affairs (AMO), however, the media and firms that prepare such assessments often keep quiet about exemptions of this kind17. Exemptions that spare people administrative burden are welcome; people must, however, be made aware of them. According to the Czech Chamber of Commerce, administration costs Czech businesses around CZK 72 billion a year, and the government wants to cut this by a fifth by 202918.

At the same time, Europe has few fossil resources of its own19. In 2024 it imported 57% of the energy available to it, and two thirds of these imports were oil and petroleum products20. Reducing dependence on imported fossil fuels is therefore the right thing to do regardless of the climate.

What the indicators see and what they miss

The rules for ETS2 money have two parts. Revenue from some of the allowances goes to the Social Climate Fund, which has at most €65 billion available for 2026 to 203221; Czechia can receive up to CZK 50 billion from it22. The state must add at least 25% of the costs of its Social Climate Plan23. At most 37.5% of these costs may go to temporary direct income support for households, so most of the money must go to measures with a lasting effect, such as building renovation, clean heating or zero-emission transport24. The state keeps the remaining ETS2 revenue and must use it for climate purposes, giving priority to social impacts25. Moreover, the Commission pays out money from the Fund only if the state meets the targets of its plan, and these must include a reduction in the number of households in energy poverty26.

We calculated the impact of ETS2 on Czech households with a model that links two levels. The macroeconomic model E3ME calculates how ETS2 changes prices and incomes across the whole economy, and the dynamic microsimulation DASMOD carries these changes through to the budgets of 3,233 households from household surveys, which represent 4.62 million Czech households. Unlike static estimates, which simply apply higher prices to today’s consumption, households in the model respond to changes in prices and incomes in the way the data on their spending show. The model also tracks their savings and debts, so it captures how a renovation is financed, and for every result we report how precisely the data can measure it27. The main finding is that what energy poverty indicators record depends as much on how they are constructed as on the policy itself28.

In our scenario, the average Czech household will pay €218 a year more for energy in 2032 because of ETS2, or 0.73% of its net income. Households heating with gas and pensioners living alone will be hit hardest29. We compared what happens when the same €745 million over 2028 to 2032 goes to insulation and heat pumps and, for comparison, to direct payments to households30. A direct payment brings people relief, but an indicator that judges high energy costs by the level of spending reads the part of the money spent on heating as a deterioration, so 87% of the relief disappears from it31. The official indicators move by only fractions of a percentage point32. Insulation and heat pumps reduce energy poverty, as measured by indicators that combine low income and high costs, by 7.1 to 10.5%, and three years after the programme ends the reduction is still at least 5.4%33.

The result also depends on how a renovation is paid for. An indicator that tracks a household’s savings as well as its income and costs records whether the household paid its co-payment from savings or with a loan. If it draws on its savings, the indicator counts this as a deterioration: for a heat pump, the fall in savings wipes out 36% of the improvement brought by lower bills. Conversely, the saved part of a direct payment shows up in it as relief34. The same renovation can therefore come out better or worse simply depending on how it was paid for. Goals and measurement rules need to be set before the money starts to flow, and instead of a single number we should track several indicators, each with its precision35.

ETS2 revenue for a more resilient economy

The revenue the state keeps from ETS2 may already be used, among other things, for renewable energy, transmission grids and other technologies that contribute to the transition to a safe and sustainable low-carbon economy36. These provisions do not mention nuclear power explicitly. Revenue from the existing allowance system for industry and power generation, ETS1, has gone mainly to the State Environmental Fund since this year. According to the Ministry of the Environment, it is to finance, for example, new renewable sources, the modernisation of heating plants, energy savings in businesses and buildings, and support for low- and middle-income households37. I would apply the same logic to ETS2, and more boldly. Most of the money from allowances should strengthen the resilience of the economy as a whole, that is, finance our own energy sources, both nuclear and renewable, and the grids that connect them. A smaller part should go to targeted support for the households hit hardest by ETS2. The Draghi report, too, counts on both kinds of sources with low running costs38.

China shows that this can be done on a large scale: it is investing massively in renewables. In 2025 alone, according to the International Energy Agency, it added almost 500 gigawatts of renewable capacity, more than 60% of global growth, including nearly 370 GW of solar and 117 GW of wind39.

Such investments are expensive. For the two new units at Dukovany the state will pay the Korean company KHNP CZK 407 billion at current prices40. Construction is to be covered by a state loan, which the European Commission estimates at €23 to 30 billion and has been examining in depth since December 202541. In August this year the Minister of Industry, Karel Havlíček, acknowledged that, including the cost of money, the two units will cost CZK 600 to 700 billion42.

What mix makes sense

In my view, the ideal mix should ease the regulations that make products unnecessarily expensive, in Brussels and at home. The state should serve citizens and businesses, not the other way round: if it needs certain data, it should obtain them itself rather than shifting that obligation onto households and firms. At the same time, we need to reduce our dependence on imported fossil fuels for good. ETS2 revenue should go mainly into our own energy sources and infrastructure. The households hit hardest by ETS2 need targeted help, ideally of a kind that lowers their bills permanently.

So what is the answer to the question we started with? We should aim for greater self-sufficiency in energy. And we will know we have succeeded when price swings on world markets feed through to household bills only very slightly.

Footnotes

  1. Regulation (EU) 2026/667 of the European Parliament and of the Council of 11 March 2026 (Union climate target for 2040), Article 2: the start of ETS2 is postponed to 2028.↩︎

  2. Quantum Commodity Intelligence: Czechia, Italy take lead in renewed push to suspend EU ETS2, October 2026.↩︎

  3. Directive 2003/87/EC as amended by Directive (EU) 2023/959, Article 30d(6) (adopted text, PE-CONS 9/23, pp. 189–190): “Member States shall use their revenues or the equivalent in financial value of those revenues for one or more of the purposes referred to in Article 10(3) of this Directive, giving priority to activities that can contribute to addressing social aspects of the emissions trading under this Chapter, or for one or more of the following”. The list that follows covers decarbonising the heating and cooling of buildings, including support for low-income households in the worst-performing buildings; zero-emission transport and support for low- and middle-income transport users; and financing the Social Climate Plan. Summary: European Commission, ETS2: buildings, road transport and additional sectors.↩︎

  4. Harvard Environmental & Energy Law Program: Paris Climate Agreement: Current Status. The US withdrawal took effect on 27 January 2026.↩︎

  5. The White House: Declaring a National Energy Emergency, executive order of 20 January 2025, sections 2(a) and 8(a).↩︎

  6. Eco-Business: China’s carbon market set to introduce absolute emissions caps by 2027, 30 August 2025: the market “was officially expanded in 2025 to include steel, cement and aluminium”; “Currently, China’s ETS is intensity-based, allocating allowances according to a company’s output and emissions efficiency”; “China plans to introduce absolute emissions caps to cover major industrial sectors by 2027”.↩︎

  7. M. Draghi: The future of European competitiveness, Part A, European Commission, September 2024, p. 6: “If Europe’s ambitious climate targets are matched by a coherent plan to achieve them, decarbonisation will be an opportunity for Europe. But if we fail to coordinate our policies, there is a risk that decarbonisation could run contrary to competitiveness and growth. Even though energy prices have fallen considerably from their peaks, EU companies still face electricity prices that are 2-3 times those in the US. Natural gas prices paid are 4-5 times higher. This price gap is primarily driven by Europe’s lack of natural resources, but also by fundamental issues with our common energy market. […] High taxes and rents captured by financial traders raise energy costs for our economy.”↩︎

  8. Ibid., p. 18: “Regulation is seen by more than 60% of EU companies as an obstacle to investment, with 55% of SMEs flagging regulatory obstacles and the administrative burden as their greatest challenge.”↩︎

  9. Ibid., p. 69: “around 3,500 pieces of legislation were enacted and around 2,000 resolutions were passed in the US at the federal level over the past three Congress mandates (2019-2024). During the same period, around 13,000 acts were passed by the EU.”↩︎

  10. Ibid., p. 68: “The regulatory burden on European companies is high and continues to grow, but the EU lacks a common methodology to assess it.”↩︎

  11. European Commission, REFIT Scoreboard: Cumulative Cost Assessment for the EU chemical industry, a study completed in 2016 on EU legislation from 2004 to 2014: the costs “represent around 2% of their turnover and 12% of the value added”; relative to gross operating surplus, “as much as 30%”.↩︎

  12. European Commission: Simplification: “The Commission aims to cut recurring administrative costs by €37.5 billion by the end of the 2024-2029 Commission mandate.”↩︎

  13. Demócrata: Von der Leyen proposes a pact against “gold plating” to put an end to the 27 versions of the Single Market, 12 October 2026: “When a member state decides to go beyond what Union law requires, that choice must be clear for all to see.”↩︎

  14. R. Král: Gold-plating of EU Law in the Czech Republic Revisited, Wroclaw Review of Law, Administration & Economics 14(1), 2024, p. 50: the government’s 2016 methodological guidelines stipulate that gold-plating “should always be a justified exception to the principle of minimalistic implementation of EU law”; p. 47: “almost a total eradication in Czech legislative practice of cases of inadvertent (blind) gold-plating as well as gold-plating lacking any justification whatsoever”.↩︎

  15. Association for International Affairs (AMO): Gold plating – vývoj fenoménu a jak s ním pracovat: vybrané příklady zahraniční dobré praxe (in Czech), December 2025, p. 3: the burden remains “zejména v právních předpisech přijatých před novou metodikou” (above all in laws adopted before the new methodology); gold-plating “dochází často prostřednictvím poslaneckých pozměňovacích návrhů” (often comes through MPs’ amendments); it also appears “při širší implementační praxi” and in “interpretační praxi” (in wider implementation and in interpretation).↩︎

  16. Act No. 406/2000 Coll., on Energy Management, Section 7a(10) (in Czech): “Průkaz se neopatřuje při prodeji nebo pronájmu budovy nebo ucelené části budovy, pokud se tak obě strany písemně dohodnou a jde o budovu, která byla vystavěna a poslední větší změna dokončené budovy na ní byla provedena před 1. lednem 1947.” (No certificate is obtained on the sale or letting of a building or a self-contained part of one if both parties so agree in writing and the building was built, and last substantially altered, before 1 January 1947.)↩︎

  17. AMO (2025), pp. 3–4: “média a konzultantské firmy / firmy zpracovávající různé posudky […] často upozorňují na striktnější interpretaci přijatých povinností, či dokonce zamlčují existující výjimky […] (např. častá praxe zamlčování existujících výjimek z povinnosti mít PENB pro některé starší budovy, které jsou dány existující legislativou na úrovni EU i ČR)” (the media and consultancies or firms preparing assessments often stress a stricter reading of obligations, or even keep quiet about existing exemptions, for example the frequent practice of concealing the exemptions from the obligation to have an energy performance certificate for some older buildings, which exist in EU and Czech law).↩︎

  18. BusinessInfo.cz: Ministerstvo průmyslu a obchodu předložilo vládě zprávu o snižování administrativní zátěže podnikatelů (in Czech): “Hospodářská komora ČR (HK ČR) v rámci iniciativy Byrokratický detox 2025 odhadla celkovou administrativní zátěž podnikatelů na 72 miliard korun ročně.” (The Czech Chamber of Commerce estimated the total administrative burden on businesses at CZK 72 billion a year.) Government target: a 20% reduction by 2029.↩︎

  19. Draghi (2024), Part A, p. 6: “This price gap is primarily driven by Europe’s lack of natural resources”.↩︎

  20. Eurostat: Energy in Europe: imports dependency, 18 March 2026: “The energy imports dependency rate in the EU was 57%”; oil and petroleum products “accounting for 67% of energy imports into the EU”.↩︎

  21. Regulation (EU) 2023/955 on the Social Climate Fund, Article 10(1) (adopted text, PE-CONS 11/23, p. 51): “A maximum amount of EUR 65 000 000 000 for the period from 1 January 2026 to 31 December 2032 in current prices shall be made available”. The Fund is financed by auctioning 150 million ETS2 allowances, a further volume of ETS2 allowances and 50 million ETS1 allowances (Directive 2003/87/EC, Article 30d(3) and (4) and Article 10a(8b); PE-CONS 9/23, p. 185).↩︎

  22. Czech Ministry of the Environment: Sociální klimatický fond (in Czech): “V letech 2026–2032 může Česko získat až 50 miliard korun” (Czechia can receive up to CZK 50 billion in 2026–2032).↩︎

  23. Regulation (EU) 2023/955, Article 15 (PE-CONS 11/23, p. 57): “Member States shall contribute at least to 25 % of the estimated total costs of their Plans.”↩︎

  24. Regulation (EU) 2023/955, Article 8(2) (PE-CONS 11/23, p. 50): direct income support is to be temporary and decrease over time, and “The costs of measures providing temporary direct income support shall not represent more than 37,5 % of the estimated total costs of the Plan”. Article 8(1) (pp. 48–49) lists measures “with lasting impacts”: building renovation, affordable energy-efficient housing, decarbonisation of heating and cooling, advice, zero- and low-emission vehicles and public transport.↩︎

  25. See note 3.↩︎

  26. Regulation (EU) 2023/955, Article 7(2) (PE-CONS 11/23, p. 47): “Payment of financial support […] to each Member State shall be conditional upon that Member State achieving the milestones and targets”, which must cover, among other things, “reductions in the number of vulnerable households, in particular households in energy poverty”.↩︎

  27. M. Opatrny and M. Ščasný: Assessing Impacts of the EU ETS 2 and Direct Compensations for Households in Czechia: A Linked E3ME-DASMOD Microsimulation, IES Working Paper 31/2026, pp. 2, 7 and 8. The results come from a model, and the programmes are stylised designs under the 2026 rules of the New Green Savings Light scheme, not the Czech Social Climate Plan.↩︎

  28. Ibid., p. 23.↩︎

  29. Ibid., p. 18: households heating with gas 1.61% of income, pensioners living alone 1.37%. The scenario uses the E3ME model with an allowance price of €121 per tonne in 2032 (p. 9); at a lower price the impacts are smaller.↩︎

  30. Ibid., pp. 2 and 9: three programmes under the New Green Savings Light rules and two direct payments “as benchmarks”, all from the same envelope of €745 million for 2028 to 2032.↩︎

  31. Ibid., p. 16. This is the LIHC indicator (low income, high costs).↩︎

  32. Ibid., p. 23.↩︎

  33. Ibid., pp. 2 and 15: the LIHC and M2LIHC indicators.↩︎

  34. Ibid., pp. 2 and 23: the LILAHC indicator, which tracks savings as well as income and costs.↩︎

  35. Ibid., p. 23.↩︎

  36. Directive 2003/87/EC as amended by Directive (EU) 2023/959, Article 10(3)(b) (PE-CONS 9/23, p. 114), to which Article 30d(6) refers: “to develop renewable energies and grids for electricity transmission […] as well as to develop other technologies that contribute to the transition to a safe and sustainable low-carbon economy”.↩︎

  37. Czech Ministry of the Environment: Peníze z emisních povolenek půjdou výhradně do modernizace ekonomiky, adaptačních opatření i na pomoc domácnostem (in Czech), press release of 24 April 2024: “Výnosy z emisních povolenek půjdou do Státního fondu životního prostředí od roku 2026” (revenue from emission allowances will go to the State Environmental Fund from 2026).↩︎

  38. Draghi (2024), Part A, p. 40: “massive deployment of clean energy sources with low marginal generation costs, such as renewables and nuclear”.↩︎

  39. IEA: Global Energy Review 2026: Solar PV and wind: “nearly 500 GW of additions, accounting for over 60% of global growth”; “China alone commissioned nearly 370 GW of solar PV and 117 GW of wind capacity”.↩︎

  40. ČTK, České noviny: Stát zaplatí firmě KHNP za dva bloky Dukovan 407 miliard a 15 miliard za palivo (in Czech), 18 July 2025.↩︎

  41. Nuclear Engineering International: EU probes Czech Dukovany aid, 7 January 2026. The Commission opened its investigation on 22 December 2025.↩︎

  42. Kurzy.cz: Havlíček připustil, že dostavba Dukovan vyjde o stamiliardy dráž oproti původnímu plánu. Místo 400 to bude 600-700 mld. Kč (in Czech), 14 August 2026.↩︎