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Over the last five years, one of the mantras of the European Green Deal has been that the climate transition should be just, or it will not happen. This is true. Decarbonisation will affect households differently: increasingly tight climate regulations will be a heavy burden for low-income and even middle-income households, for which renovating a property or buying an electric car could require investment of about a year’s income. Policies that make these investments necessary could easily trigger political backlash if they are not properly designed.

The European Green Deal has been profoundly shaped by these distributional considerations. The , intended to support the parts of the European Union that face the most difficult decarbonisation journeys, was adopted in this context. Meanwhile, a Social Climate Fund has been created alongside the new EU emissions trading system (), which as of January 2027 will put a carbon price on buildings and road transport.

In theory, these funds are in line with what the economic literature on carbon dividends would prescribe. In practice, the extent to which they will contribute tangibly to addressing the profound distributional implications of climate policies will depend on how well they are implemented. Good implementation cannot be taken for granted: the Just Transition Fund has been under-used, mainly because of administrative barriers.

In shaping her European Commission for 2024-2029, President Ursula von der Leyen has set the right tone by setting out a comprehensive approach to the ‘clean, just and competitive transition’ and by creating a powerful . However, in the groundwork for the 2024-2029 Commission, the political relevance of the Social Climate Fund has been underplayed. In fact, it has been .

This is surprising, because the Social Climate Fund can – and should – become the EU’s main tool to ensure the fairness of the clean transition. The fund is endowed with a maximum of €65 billion from ETS2 revenues, with the money to be directed at vulnerable citizens. To access the fund, EU countries must develop by June 2025 Social Climate Plans outlining how they intend to use the resources. Countries must fund at least 25% of the costs of their Social Climate Plans, increasing the overall mobilised resources to €87 billion between 2026 and 2032.

It should be noted that the national top-up will be funded with ETS2 revenues retained at national level. This is estimated at €170 billion to €400 billion from 2027-2032, depending on the carbon price. Using both the Social Climate Fund and the national ETS2 revenues in the most effective way will be fundamental to ensuring the social acceptability of climate policies, and the political acceptability of ETS2 specifically.

For buildings, this means mainly providing funds to renovate the worst-performing residential buildings, which are mainly occupied by low-income households and offer the highest energy and emission savings per euro spent. Public administrations should also collaborate with banks to offer zero-interest loans and set up one-stop shops (OSS) to support households with the administrative and logistical burden of renovations. OSS can also help aggregate renovation projects, making them more appealing for banks and energy performance contractors.

Countries should also favour the uptake of smart instruments that leverage future savings, which can be combined with more typical loans and grants for vulnerable households. Such schemes greatly reduce the economic burden of retrofitting dwellings or switching to heat pumps, spreading the investment costs over many years, linking it to accrued energy savings or shifting it onto companies that get paid based on the energy savings their work achieves.  

For transport, the focus should be improved public services in towns and cities, offering free public transport to the poorest. Meanwhile, uptake of electric vehicles (EVs) should be facilitated in rural communities where public transport might not be an option. Public administrations should strengthen the EV charging networks in their areas and help those with lower incomes switch to EVs. To increase resources, public administrations should discontinue expensive universal subsidies for EV purchases as EVs are quickly approaching price-parity with internal-combustion engine cars. The of offering low-income citizens in rural communities subsidised EV leasing rates could be expanded across the EU. 

Given the importance of the Social Climate Fund for the EU’s objective of marrying decarbonisation and social fairness, it is crucial that the European Commission works coherently to ensure solid preparation of Social Climate Plans by EU countries and the build-up of administrative capacity to implement them. In this way, the mistakes of the Just Transition Fund can be avoided.