Comment by Gennady Kondarev:
In less than two years, the European Union will introduce ETS2 – the new Emissions Trading System, which will cover households and small consumers for the first time. What does this mean for the prices of gasoline, diesel, gas and coal? Will electricity and wood become more expensive? And where is the big challenge for Bulgaria?
From January 1, 2027, the European Union will introduce a new expanded carbon pricing system – the so-called Emissions Trading System 2 (ETS2), aimed at fuels for transport and heating. This is part of the revised EU Emissions Trading Regulation (Directive 2023/959/EU), which expands the scope of the old scheme (ETS1), which until now only applied to large industrial installations and electricity producers.
ETS2 will cover suppliers of petrol, diesel, natural gas, coal, heating oil and other carbon-intensive fossil fuels, but does not include electricity, firewood or other biofuels (such as pellets, biogas, biodiesel).
Bulgaria's biggest chance is to direct ETS2 revenues towards better transport and cleaner air
The aim of the system is to contribute to achieving climate neutrality in the EU by 2050, by making the use of polluting fuels gradually less advantageous compared to alternatives such as electric vehicles, heat pumps, building renovation, public transport and other low-carbon solutions. Revenues from emissions trading will go to the Social Climate Fund (SCF) and will be used to support households and small and medium-sized enterprises in the transition.
How does ETS2 work?
The system will start with a fixed average emission price of €45 per tonne of carbon dioxide (CO2) in 2027, gradually moving to full trading by 2030, when the price will be determined by the market. This means that for a standard diesel car emitting around 2.6 kg of CO2 per liter, the fuel price surcharge could reach 12-13 euro cents/liter at a price of 45 euros/ton (and over 20 euro cents if the price rises to 90-100 euros/ton, which is the level in ETS1 in recent years).
This price will be paid by fuel suppliers, but will actually be passed on to end users.
Few Bulgarian households will be affected and there will be limited risk in terms of heating
About 48% of households are heated with electricity (NSI, 2021), and in cities this share already reaches over 70% (according to data in the Social Climate Plan). Electricity from fossil fuel installations (coal and gas-fired power plants) has been subject to the existing ETS1 for two decades and is not covered by the new scheme.
In other words, we have so far paid a price for carbon through the electricity mix, but we have not paid for the fuels we burn directly in small installations such as car engines or domestic stoves and boilers.
The most affected by the new scheme will be households that use coal and natural gas - they make up less than 10% of all. According to the data: less than 4% use natural gas, and about 5% - coal. Therefore, the effect on heating prices will be limited, although not zero. For some urban household groups that have recently invested in gas boilers, the new carbon price may be a sensitive issue.
Important: ETS2 does not affect either firewood or electricityThe new scheme covers only fossil fuels. Electricity is not affected - its production from coal and gas plants has been covered by an existing scheme for two decades and is not covered by the new one. Firewood, which is used by around 36% of households and is the second most common source of heating in the country, is also not covered by ETS2. This clarification is important because of the speculative claims that have emerged in the public sphere.
The relatively limited impact on affected households is also confirmed by the planned direct payments for those using seasonal state heating aid - in the Social Climate Plan the compensation is only 61 leva per season, an amount calculated as sufficient to cover the expected increase in the price of gas and coal. Apparently the government analysis has taken into account a minimal impact.
The big challenge comes from transport
There are over 3 million registered passenger cars in Bulgaria, with the average age of the fleet being around 15 years. Our country is overly dependent on road transport, which is dominated by internal combustion engines (ICE) – diesel, petrol or autogas cars – all fossil fuels that fall within the scope of ETS2. The transition beyond this technology is too slow and is not catching up, with the share of electric vehicles remaining at around 0.5%, and hybrids adding around 2%.
A comprehensive approach to alternative transport solutions is lacking
Incentives for switching to alternatives are limited, with the emphasis on subsidies, but not on tax breaks, reduced VAT or non-financial incentives. Insufficient consideration is given to the needs of people in peripheral areas, parents with children, the elderly, people with reduced mobility or with alternative travel needs. There is a lack of systematic efforts for intermodal connectivity – switching between different modes of transport – and accessible public transport.
For the households most affected by ETS2, the planned direct payments in the form of fuel subsidies amount to around BGN 383 per year. This is significantly more than direct payments for heating, which indicates that the impact will be more tangible.
How much will ETS2 cost on fuels?
From 2027, fuel traders will have to purchase carbon allowances for each unit of fuel sold. At an initial price of 45 EUR/tonne CO2 (regulated market) this means:
At an initial regulated price of 45 EUR/tonne CO2 for the period 2027-2030 this means:
Detailed breakdown of the estimated increase in prices in euros of different types of fuels at an initial price of 45 EUR/tonne CO2 (2027-2030).
What are the risks for Bulgaria?
Coincidence of several shocks – introduction of ETS2, Carbon Border Adjustment Mechanism (CBAM), the euro and possible liberalization of the energy market within 2026-2027 could lead to price instability, public confusion and populist exploitation.
Smuggling, fictitious exports and information vacuum for ETS2There are risks of fuel smuggling and fictitious exports, especially given our borders with third countries. Bulgaria has a history of fraud in the fuel sector and it is possible to artificially present the use of biofuels to avoid ETS2. The information vacuum further fuels speculation and discontent. There has been no large-scale awareness campaign on ETS2 and the Social Climate Fund to date.
Therefore, it is important for the state and institutions to inform the public clearly and in a timely manner in order to prevent the spread of populist claims.
Problems in the National Plan
Bulgaria's Social Climate Plan contains good measures, but lacks strategic focus. The transport component is poorly developed, there are no measures for intermodality, staffing and achieving synergies between social and market services.
Some measures seem ineffectively focused - for example, the high value of vouchers for energy-efficient stoves (up to 900 euros), when top-of-the-range appliances can be purchased for half the price. The wood subsidy measure seems inappropriate, as these fuels are not taxed under ETS2 and there is no economic justification for intervention.
Every challenge is an opportunity
Putting a price on carbon emissions is a key step towards fair decarbonization. ETS2 is a necessary reform that will require a gradual transformation towards a cleaner and more sustainable economy. However, its success depends on the willingness of institutions to implement accompanying measures, communicate effectively and address social inequalities. If this is achieved, the transition can lead to real benefits for everyone: cleaner air, better connectivity and more economic sustainability.
Gennady Kondarev is an author at Klimateka. He is an economist and expert on climate and energy policies with a focus on plans, strategies, economic programs and geopolitics in Bulgaria and Central and Eastern Europe. For nearly two decades, he has been working at the intersection of civil society, institutions and business, seeking solutions that combine environmental goals with social responsibility and economic logic. He has worked for organizations such as the Black Sea Energy Research Center, E3G, “For the Earth“ and the CEE Bankwatch Network, where he focuses on the decarbonization of the economy, sustainable heating and cooling, efficient use of public funds and the inclusion of affected communities in the processes of change.