(MENAFN- ING) Central banks see ETS2 inflation risk on the horizon

Central banks in the region see an upward risk to the inflation path stemming from the implementation of the EU Emissions Trading Scheme (ETS2) for private transport, buildings, and small industrial installations. The EU directive was adopted in May 2023 and, based on currently binding regulations, it's set to come into force from 2027. However, last week, EU climate and environment ministers agreed on a 90% emissions reduction target by 2040, potentially delaying the introduction of ETS2 by a year to January 2028. This decision still needs to be reflected in the revised law.

We say 'potentially' because the directive states that its introduction can be delayed only if there are extraordinarily large shocks to energy prices similar to what happened after Russia invaded Ukraine. Importantly, the directive is to be implemented directly into EU members' legal frameworks so national legislation is required if the technical aspects are to be implemented.

Poland's greenhouse gas emission reduction targets for 2030 relative to 2005 (in %)

Source: Poland's 2030 GHG emissions targets according to NECP draft as of July 2025.

Because ETS2 effects were set to emerge in the medium-term inflation horizon, in recent months, the European Central Bank and the Czech National Bank discussed the effects of its introduction on heating and transport fuel prices, as well as consumer inflation in their medium-term inflation projections. The ECB emphasised the high uncertainty about the level of the carbon price within the ETS2 and assumed a threshold value of €45 per tonne of CO2 (tCO2) emissions in 2020 prices, a figure from the directive equivalent to €59/tCO2 in 2027 prices. This price is listed as one of the ECB's technical assumptions in its macroeconomic projection.

The ECB assumed that upstream providers would pay for emissions from their products and would pass on the increased costs to consumers. The estimated impact on the eurozone's HICP inflation ranged from 0.0 to 0.4 percentage points in 2027 and a smaller impact in 2028. A delayed pass-through was expected as companies will surrender ETS2 permits for 2027 in 2028. Moreover, there are lags in repricing consumer contracts for natural gas and for administered prices, and fiscal measures may dampen their effects.

In the CNB's inflation projection, ETS2 is estimated to add a 0.9 percentage point impulse to the inflation path from 2027, in line with the original schedule of ETS2 introduction. Our colleagues estimated the overall impulse at around 1.2ppt. However, due to delayed pass-through and expected government mitigation measures, the final effect on headline inflation can be diminished to 0.8 percentage points.

In Poland, the NBP has repeatedly warned of upward inflation risks stemming from ETS2 implementation: the issue was discussed at November's NBP press conference, with Governor Adam Glapiński talking about a 2ppt inflation effect of ETS2. NBP economists also mentioned it during a technical presentation on July's inflation projection, and a similar line was taken by NBP staff in November.

As we expected, and even without a 1-year delay, the NBP has treated it as a risk factor, which skews the inflation fan chart upwards. However, ETS2 has not been embedded into the baseline inflation projection. According to their calculations, in the ETS2 scenario with a permit price of €59/tCO2, ETS2 would add 2.0 percentage points to Poland's CPI inflation. The major drivers are increased individual heating costs (0.5ppt for coal and 0.4ppt for natural gas) and higher transport fuel costs (0.7ppt for all fuels). On top of that, the NBP points to indirect second-round effects of 0.4pp, as higher energy prices are expected to spill over to other prices.

NBP estimates of inflation effects of ETS2 implementation

In €59/tCO2 price scenario, in percentage points.

Source: NBP estimates, Projection of inflation and economic growth, November 2025.

Our internal calculation of the direct inflation impact of ETS2 implementation at the ETS2 price of €59/tCO2 is slightly above NBP estimates. Compared to theirs, we also included increased district heating costs in small installations by assuming that 25% of current emissions are not covered by ETS1. On the other hand, we have not added the indirect second-round effects. In general, we estimate that without any mitigating measures, the direct effect on inflation will amount to 2.3 percentage points, with solid fuels contributing 0.8pp, natural gas at 0.6pp, heat energy at 0.3pp, and transport fuels adding another 0.6pp.

It should be noted that, as the ECB suggested, there is significant uncertainty about the level of the carbon price in the ETS2. For example, the recent BNEF Report points to a wide range of price scenarios with a base case around €100/tCO2. The bottom line is that ETS2 will be a significant risk factor for medium-term inflation unless the fundamentals change.

ING estimates of inflation effects of ETS2 implementation

In €59/tCO2 price scenario, in percentage points.

Source: ING estimates. Technical assumptions: (i) full pass-through of ETS2 price on heating and transport prices; (ii) exchange rate at €/PLN4.25; (iii) carbon emissions coefficients: coal - 2.1kgCO2 per kg, natural gas - 220kgCO2 per MWh; diesel - 2.69kgCO2 per European Council invited the European Commission to revise the ETS2 directive

ETS2 appeared on policymakers' radars because the associated effects are much more visible to voters than the indirect effects from taxing carbon in power or large industrial installations. The current ETS1 system affects household electricity bills with lags and can be mitigated through various interventions, including regulated prices or energy shields. In this sense, ETS1 poses more a competitiveness challenge for enterprises than a visible cost pressure for consumers.

Therefore, several EU countries urged delaying the implementation of ETS2. In mid-September, Poland's Deputy Minister of Climate and Environment, Krzysztof Bolesta, spoke about a coalition of 15 EU member states, including Poland, Italy, and Belgium, opposing the implementation of ETS2 in its current form. Poland's proposal is to postpone this system by 3 years, until 2030. After the EU-wide agreement in early November to postpone the ETS2 by 1 year, Poland's Climate and Environment Minister Paulina Hennig-Kloska said Poland was still pushing for a 3-year extension. And it's reported that some EU countries don't want to implement the system at all.

Since the European Commission alone holds the right to initiate legislation in this case, the revision process must begin with the EC. And at the summit of EU Heads of State on 23 October, EU leaders concluded that 'The European Council takes note of the Commission's intention to propose measures to smooth the entry into force of ETS2 and invites the Commission to present a revision of the ETS2 implementation framework, including all relevant aspects'.

According to the Polish Prime Minister, Donald Tusk, such an invitation to a revision means a lot in EU jargon. Poland stands ready to discuss it and expects the EC to take action on that issue. The one-year extension is clearly not satisfactory.

Potential ETS2 effects on inflation depend on household fuel mix

Poland is particularly concerned about the ETS2 effects due to its high coal dependency. This is the case not only in power generation, where Poland is an outlier in Europe, but also in household fuel consumption, including heating of private houses. According to Eurostat, consumption of solid fossil fuels by Polish households accounts for 80% of all coal burned by European households (still negligible compared to coal consumption by industry across the entire EU), while Poland's share of total EU27 energy use is just 9%. For Czechia, these proportions are 8% and 3%, respectively.

Shares of Poland's households in total EU27 final energy consumption

By energy carrier, % of EU27 total in 2023.

Source: Eurostat, ING calculations.

This high level of coal dependency among Polish households means that ETS2 will exert very strong adverse income effects on them. This is emphasised in the latest policy paper of Poland's emissions centre (Kobize) and in the recent academic article published in the Energy Policy Journal. It emphasised that energy poverty of households usually coincides with their economic status, so households that burn coal for heating purposes tend to be poorer, older, and less inclined to invest in fuel substitution. As a result, the ETS2 should be considered as a tax with a strong negative distributional impact.

Final energy use of households by energy carriers

% of total energy use in 2023.

Source: Eurostat, ING calculations. Poland sees a delay in ETS2 implementation, while keeping the timeline of EU funds as planned

The ETS2 implementation is closely linked to the introduction of the Social Climate Fund (SCF), which should enhance investments to enable the replacement of carbon-intensive fuels used for heating buildings or the improvement of their energy efficiency. Poland is to receive an over-proportionate (compared to historical emissions) share in the SCF of 18%, equivalent to €11.4 billion during 2026-2032. According to Polish officials, this financing should be available for investments undertaken in advance, even this year, and also if the collection of receipts from ETS2 carbon pricing is postponed.

The 2023 regulation establishing the SCF provides for direct income support for vulnerable households, but this measure is capped at 37% of the total amount allocated to a Member State under its SCF. This possibility could mitigate the scale of inflation impulse at ETS2 implementation. This also means that at least 63% of the SCF will go to structural mitigation measures and support long-term investments in energy efficiency, decarbonisation of heating and cooling sources, and zero- or low-carbon mobility. In Poland, the draft plan for SCF has been prepared by the Ministry of Funds and Regional Policy and presented for public consultations in June 2025. It still needs to be approved by the government before it is submitted to Brussels.

NBP to keep ETS2 as a risk factor but without embedding in the inflation projection

Because a formal EU-wide ETS2 revision procedure at the EU level is underway, and the national technical regulations are still missing, we expect the National Bank of Poland will not add ETS2 effects to its baseline inflation projections, at least until the finalisation of the official EU ETS revision process. The bank used to include only legally binding measures in its projections. Moreover, its attempts to present alternative scenarios for energy prices are not considered successful. We expect the NBP to continue its communication about ETS2 as a potential upside inflation risk, but not a part of the baseline inflation path.

But even without sticking to legal aspects, we do not see reasons to escalate concerns about the energy price hikes due to ETS2 implementation, prompting a reaction from the central bank. Indeed, the ETS2 is a significant inflation risk factor, but our estimated direct effect on inflation should be treated as an upper bound of the ETS2's impact on consumer prices. This is because the natural gas tariffs in Poland are still regulated, and the government has various compensatory measures, such as indirect taxes or direct income support, which are also set to be funded from the new SCF. The associated pro-inflationary pressure is to be contained in scale and be temporary in nature, so it would not justify a reaction of the central bank right now.

On the positive side, we hope the heated debate on ETS2 will raise consumers' awareness and mobilise the government agencies to accelerate investments in energy efficiency and clean heating sources in buildings. The space for improvement in this regard remains huge.

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