Social Climate Fund

Introduction and Overview

The Social Climate Fund (SCF) is a key financial instrument of the European Union, established by Regulation (EU) 2023/955, designed to ensure a socially fair and just transition towards climate neutrality. As part of the 'Fit for 55' package, the Fund aims to mitigate the social and economic impacts on vulnerable citizens arising from the extension of the EU Emissions Trading System (ETS) to cover greenhouse gas emissions from the buildings and road transport sectors (often referred to as ETS 2).

Operating from 2026 to 2032, the Fund will provide a maximum of €65 billion in financial support to Member States. This funding is intended for measures and investments outlined in national Social Climate Plans, which must be developed to support those most affected by the new carbon pricing.

Evolution and Relation to Other Laws

The SCF is intrinsically linked to the revision of the EU Emissions Trading System (Directive 2003/87/EC), which creates the new ETS 2. The Fund is financed directly from the revenues generated by the auctioning of allowances under this new system.

It is designed to work in synergy with other EU and national policies and funding instruments, including:

• Cohesion Policy Programmes (Regulation (EU) 2021/1060)
• Recovery and Resilience Facility (RRF) (Regulation (EU) 2021/241)
• National Energy and Climate Plans (NECPs) (Regulation (EU) 2018/1999)
• Territorial Just Transition Plans (Regulation (EU) 2021/1056)

Member States must ensure their Social Climate Plans are consistent with these existing frameworks to create a coherent policy response to the green transition.

Main Goals and Objectives

The primary goal of the Social Climate Fund is to address the social impacts of the new carbon pricing on buildings and road transport, thereby contributing to a socially fair transition. Its specific objectives are:

• To support vulnerable households, micro-enterprises, and transport users.
• To provide temporary direct income support to alleviate the immediate financial burden of increased fuel and heating prices.
• To finance structural measures and investments that provide long-term solutions, such as increasing energy efficiency in buildings, decarbonising heating and cooling, and granting improved access to zero- and low-emission mobility and transport.

Who It Applies To

The Regulation directly applies to EU Member States, which are obligated to develop, submit, and implement Social Climate Plans.

The ultimate beneficiaries of the measures and investments supported by the Fund are:

• Vulnerable households, particularly those in energy or transport poverty.
• Vulnerable micro-enterprises (fewer than 10 employees and turnover/balance sheet under €2 million).
• Vulnerable transport users.

Key Dates and Timeline

• Adopted: 10 May 2023
• Published in Official Journal: 16 May 2023
• Entry into Force: 5 June 2023
• Date of Application: 30 June 2024
• Fund Operational Period: 1 January 2026 to 31 December 2032
• Plan Submission: Member States must submit their Social Climate Plans to the Commission for assessment and approval.

Key Provisions and Requirements

Social Climate Plans

Each Member State must draft a comprehensive Social Climate Plan following public consultation. These plans must include a coherent set of measures and investments, milestones, targets, and estimated costs. They must also detail how the Member State will identify and support the target vulnerable groups.

Eligible Measures

The Fund can support two main types of actions:

1. Structural Investments (long-term impact):
   • Building renovations to improve energy efficiency.
   • Decarbonisation of heating and cooling (e.g., heat pumps, renewable energy integration).
   • Incentives for purchasing zero- and low-emission vehicles and bicycles.
   • Support for affordable public transport and shared mobility services.
2. Temporary Direct Income Support:
   • Direct payments to vulnerable households and transport users to offset price increases. This support must be temporary, decrease over time, and cannot exceed 37.5% of the total estimated cost of the national plan.

Funding and Co-financing

The Fund's resources come from ETS 2 auction revenues. Payments to Member States are conditional upon the satisfactory achievement of the agreed milestones and targets in their plans. Member States are required to contribute at least 25% of the total estimated costs of their plans.

Obligations for Affected Parties

Member States are obligated to:

• Conduct public consultations when preparing their plans.
• Submit a detailed Social Climate Plan to the European Commission for approval.
• Ensure measures and investments comply with the 'do no significant harm' (DNSH) principle.
• Co-finance at least 25% of the plan's costs.
• Establish effective monitoring, control, and audit systems to prevent, detect, and correct fraud, corruption, and conflicts of interest.
• Report biennially on the implementation of their plan as part of their integrated national energy and climate progress reports.

Affected Products, Actors, and Processes

• Actors: EU Member States, local and regional authorities, vulnerable households, micro-enterprises, transport users, social housing providers, construction companies, automotive industry, public transport operators.
• Products/Services: Building renovation services, energy-efficient heating and cooling systems, zero- and low-emission vehicles, public transport services, shared mobility solutions.
• Processes: Public procurement, national budgeting and planning, energy and transport infrastructure development, social support distribution systems.

Penalties and Enforcement

Enforcement is managed through a performance-based payment system:

• Suspension of Payments: If the Commission finds that agreed milestones and targets have not been satisfactorily achieved, it can suspend all or part of the financial payment.
• Reduction of Support: If the lack of achievement persists for nine months after the suspension, the Commission can proportionately reduce the amount of the financial allocation.
• Termination and Recovery: In cases of serious irregularities (fraud, corruption, conflicts of interest) that are not corrected by the Member State, or a serious breach of obligations, the Commission has the right to reduce support and recover any amount unduly paid.