Relief or Retrofit? Designing ETS-2 Revenue Recycling to Reduce Energy Poverty in Poland

We examine how to design and sequence policy instruments to safeguard vulnerable households under rising carbon prices. We focus on the European Union’s new Emissions Trading System for buildings and transport (ETS-2) and the accompanying Social Climate Fund (SCF), which aim to reconcile climate ambition with social protection. We develop a microsimulation-based analysis, using Poland as a case study to compare two strategies for recycling carbon revenues: direct cash transfers to households versus investments in energy efficiency and the electrification of heating. Our results show that each approach has distinct temporal benefits. Immediate transfers rapidly reduce energy poverty; in 2027, Poland’s residential energy poverty incidence is nearly 0.3 percentage points below a baseline (about 40,000 fewer households in energy poverty). In contrast, an investment-focused strategy achieves larger reductions in energy poverty by 2030 as efficiency gains accumulate. The findings suggest that an optimal policy mix must combine and sequence both measures, providing prompt financial relief to build public acceptance of carbon pricing, while channeling funds into structural improvements that sustainably lower household energy costs.