As the European Union prepares to extend its carbon market to buildings and road transport in 2028, the European Council and European Parliament have agreed to strengthen a financial tool designed to stabilise the new carbon costs for heating and fuel. The deal, reached on Wednesday evening, creates an economic safety net by issuing emergency permits if carbon prices surpass a certain threshold.
This so-called "market stability reserve" is intended to protect households from energy price spikes while channelling funds into green infrastructure improvements. Under the expanded Emissions Trading System 2 (ETS2), fuel suppliers will need to purchase permits for the carbon dioxide their products emit. When demand for fuel is high, permit prices can rise sharply, potentially making gas, heating oil, and petrol much more expensive for everyday citizens already grappling with elevated costs due to geopolitical tensions and the bloc's reliance on imported fossil fuels.
Political Compromise and Controversy
Danuše Nerudová (Czech Republic/EPP), the MEP leading the legislative file in Parliament, said the deal reinforces price stability and prioritises support for vulnerable citizens. She also noted that the European Commission will assess the financial tool before it comes into force in 2028. "It (the deal) also extends the discussion on price-control measures and commits the Commission to assess by October 2027 the application of the ETS2 to buildings, road transport and the appropriateness of the current measures to protect vulnerable households," Nerudová explained.
Despite the agreement, political talks over the full implementation of ETS2 have been contentious. Earlier this year, Slovakia and the Czech Republic called for the new carbon tax to be delayed until at least 2030, citing social impact concerns. On the other side, Sweden, Denmark, Finland, the Netherlands, and Luxembourg signed a joint paper opposing any delays or amendments. Citing social concerns, 19 EU countries urged the Commission last summer for a smooth ETS2 rollout, prompting the Commission to propose a targeted amendment to the market stability reserve.
To prevent households and businesses from facing higher energy bills, the EU will draw on a reserve of extra permits. If prices spike above €45 per tonne, the EU will inject up to 80 million emergency permits into the market per year, quadrupling the original limit. Currently, 100 million allowances are released in a single step once the number of allowances in circulation falls to 210 million. Under the new agreement, a smaller volume will be released as soon as circulation drops below 260 million while remaining above 210 million, thus avoiding sudden supply shifts and sending a more stable price signal. Flooding the market with these permits increases supply, which forces carbon prices and energy bills back down.
Impact on Households Across Europe
The findings of a 2026 ScienceDirect study indicate that the ETS2 will increase consumer prices in all EU countries. "When carbon is priced at €57.5 per metric tonne of carbon dioxide, the average increase in the cost of living is 1.18 percent without energy efficiency measures and 1.04 percent with substantial improvements in energy efficiency," the study concluded. The researchers said the magnitude of the impact can be expected to vary across member states, with central and eastern European countries likely to see larger price increases, while northern and western countries are shielded to an extent by better energy efficiency and more widespread electrification of heating and transport.
Speaking on behalf of the Cyprus EU Council Presidency, Cypriot Minister for Agriculture, Rural Development and Environment Maria Panayiotou said the deal will foster confidence and give households, businesses, and member states "predictability." She explained, "The agreed adjustments will improve market liquidity, reduce price volatility and strengthen the system's ability to respond to unwarranted price increases."
The market stability reserve was originally created in 2015 to address a massive oversupply of carbon permits that made it too cheap for factories to pollute. The EU has now decided to replicate this financial instrument to create a separate reserve for the ETS2, stabilising carbon prices for building insulation and fuel. As the bloc moves forward, the balance between climate ambition and social equity remains a central challenge, with the new mechanism designed to cushion the transition for Europe's most vulnerable households.
