The impact of the EU-ETS2 on prices and welfare in the European Union

This study estimates the effects of the new European Union Emissions Trading System for buildings and road transport on households' welfare across the Member States of the European Union, focusing on changes in the Harmonized Consumer Price Index. A multiregional input–output price model is applied under different carbon price levels and two alternative energy efficiency scenarios. The findings indicate that the policy increases consumer prices in all Member States. When carbon is priced at 57.5 euros per metric tonne of carbon dioxide, the average increase in the cost of living reaches 1.18% without energy efficiency measures and 1.04% when substantial improvements in energy efficiency are implemented. The magnitude of the impact varies across Member States. Central and Eastern European countries are expected to experience larger increases, while Northern and Western European countries face more moderate effects due to higher energy efficiency and greater electrification of heating and transport. The study identifies two channels through which carbon pricing influences households’ welfare. The first is the energy component, capturing the increases in prices of fossil fuels consumed by households. The second is the product component, which arises from higher production costs in regulated sectors that are transmitted through supply chains and incorporated into the prices of goods and services purchased by households. Improving energy efficiency reduces the inflationary burdens associated with fuel costs, but it does not eliminate disparities across countries, as underlying energy and production systems, as well as consumption patterns, vary significantly. • The impact of EU-ETS2 on the cost of living across the EU-27 is assessed. • A multiregional input–output price model is developed and applied. • The model distinguishes the energy-use impacts from supply chain price transmission. • Energy intensity and electricity use in buildings affect countries' vulnerability. • Energy efficiency policies reduce price effects and disparities among countries.