The EU is preparing to launch a second Emissions Trading System, EU ETS 2, in 2027.  

Unlike the original scheme (ETS), which covers energy and industry, this new system will target the buildings and road transport sectors, responsible for more than 40% of the EU’s emissions. 

It’s a vital step if the bloc is to meet its climate goals for 2030 and 2050. But opposition is growing. Some Central and Eastern European countries are calling for delays or changes, citing concerns about affordability and fairness. 

Without agreement, the integrity of the EU’s wider emissions trading framework could be undermined, with ripple effects across energy, climate and industrial policy. 

In collaboration with EPICO KlimaInnovation, Frontier has explored a potential path forward for the EU’s planned expansion of carbon pricing. 

Why this reform matters 

The case for extending carbon pricing is clear. Emissions in buildings and road transport have fallen by just 17.6% since 2005, compared with nearly 50% in sectors already covered by the EU ETS. A carbon price helps close this gap by encouraging cost-effective decarbonisation. 

EU ETS 2 will also complement other key tools like the Carbon Border Adjustment Mechanism, strengthening the EU’s leadership in climate policy and low-carbon innovation. 

Can the EU find a fair path forward? 

To address political concerns, a proposal known as revenue frontloading is gaining traction. The idea is to bring forward future ETS revenues, up to €50 billion, to help Member States invest in green infrastructure and provide social support before carbon prices kick in. 

Funds could be made available as early as 2025–2027 through a dedicated EU facility, with financing support from the European Investment Bank. Crucially, this would not affect national debt figures and would preserve a single carbon price across the EU, a key design feature of the system. 

Frontier Economics and EPICO Klima Innovation have assessed how revenue frontloading could serve as a politically feasible and economically sound compromise. Our joint analysis sets out how this approach could support early investment while maintaining the integrity of the market-based system. 

No time to lose 

The EU ETS 2 is a central pillar of Europe’s climate strategy. Delay or dilution could send the wrong signal to markets, deter investment, and make it harder to meet legal targets. 

Revenue frontloading may offer a practical and politically viable compromise, one that supports vulnerable households while keeping the climate transition on track. 

With the 2027 launch fast approaching, now is the time for smart decisions. 

Click here to read the full report: Strengthening the EU ETS 2 through Revenue Frontloading