Buildings decarbonisation can make or break the Green Deal

Buildings and transport are the two most crucial sectors to decarbonise to meet EU’s 2030 climate targets. However, they are also have the most directly affect on EU citizens in their daily lives, as the choice to undertake energy renovations or buy a new electric vehicle is a decision that entails a significant cost.

Ugnė Keliauskaitė is a research assistant, Ben McWilliams is an affiliate fellow, Giovanni Sgaravatti is Energy and climate research analyst and Simone Tagliapietra is senior fellow at Bruegel.

A major issue underpinning the slow decarbonisation rate in these two sectors so far has been the failure to price externalities.

To correct that, the EU introduced with the Green Deal a new carbon market, the Emissions Trading System II (ETS II) internalising the price of CO2 in fossil-fuel use for ambient heating and internal combustion for transport.

We see this as an indispensable policy instrument to speed up EU decarbonisation. After all, the established ETS covering electricity and industrial sectors helped reduce emissions in these sectors by 47% below 2005 levels, putting them on track to achieve the 2030 target of -62%.

However, decarbonising buildings and transport cannot be left to carbon prices only, as this might end-up proving too expensive for final consumers, causing social and political backlash. EU countries need a clear strategy on how they envisage support to consumers and detailing the key policies they want to implement to facilitate green investments before the full introduction of ETS II, in 2027, and until 2030, when prices will float freely.

To shield vulnerable citizens from the higher costs from the ETS II, the EU rightly put in place a Social Climate Fund. From 2026-2032 the fund will be endowed with a maximum of €65 billion of ETS II revenues and countries must contribute at least another 25 percent to their plans on how to spend the revenues, increasing Social Climate Fund resources to at least €87 billion.

By the end of June 2025, countries will need to submit to the European Commission their plans on how they want to spend the money. It is fundamental that these social climate plans are drafted in the most thorough way possible, as only an effective use of the fund will enable vulnerable consumers to reap the benefits from the clean transition, building public support.

It is important to stress that most of the ETS II revenues will be managed directly by national governments. Assuming an ETS II carbon price of €60, in the years 2026-2032 we estimate overall revenues managed at the national level to be around €275 billion, or two-thirds of the total expected revenues of €362 billion.

Governments must use these resources to support the deployment of low-emission solutions in transport and heating or to mitigate social impacts.

This creates a trade-off between compensating consumers and encouraging low-carbon investment, and between support measures for decarbonisation of heating and cooling or transport.

For buildings, countries have agreed on the recast of the Energy Performance of Buildings Directive (EPBD), detailing energy-saving targets for residential, commercial and public buildings. EU countries must take the EPBD targets seriously and implement policies to accelerate building retrofits and the adoption of clean heating.

If they don’t, EU climate targets will become unreachable and the cost of making domestic heating subject to emissions trading could be almost twice the outlays to help households during the 2022 energy crisis.

However, governments earmarked €540 billion in energy subsidies for final consumers during the energy crisis, suggesting that revenues from high ETS II prices would also be returned to households as compensation.

We estimate that achieving the EPBD’s targets requires filling an investment gap of about €150 billion per year up to 2030. This is a daunting but feasible goal.

By leveraging energy savings from electrification and retrofitting to reduce the upfront renovation costs, the investment gap could be more than halved. Additionally, effective use of EU funds and emissions trading revenues will further shrink the gap.

A mix of grants, preferential loans and obligations is needed, as no single policy will speed up energy renovations. Prioritising grants for the worst-performing buildings, often occupied by vulnerable consumers, will yield both climate and social benefits.

Traditional public subsidies have not successfully engaged the banking sector, which now must help to foster private-public financing mechanisms. Countries also need to adjust relative energy prices for heating through taxation and subsidies and expand one-stop-shops to streamline the renovation process for consumers.

By 31 December 2025, EU countries need to submit to the Commission their draft national building renovation plans clarifying implemented and planned policies, investment needs, financing sources and measures, and the administrative resources for building renovations.

The careful preparation of these documents will be fundamental to prevent backlash from rushed-through measures, as seen in Germany with the fossil fuel boilers ban, and to guarantee long-term continuous policies which are also fiscally sustainable, which is not always the case, as seen with the so-called “Superbonus” in Italy.

However, even under the most effective use of public spending and ETS II revenues – estimated at €30 bn/y for energy renovations – a gap of €20 billion per year persists. It is hence important that the EU leaves enough margin of fiscal manoeuvre for Member States to undertake the required investments in this crucial sector for the continent’s decarbonisation.

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