Luxembourg has announced it will phase out its national CO₂ tax on fuels and join the European Union’s ETS 2 system from 2028, marking a significant shift in the country’s carbon pricing approach for road transport and heating fuels. Environment Minister Serge Wilmes confirmed the decision in February, following extensive internal analysis.

ETS 2 extends the EU Emissions Trading System to sectors previously outside the EU ETS, specifically fuel combustion in buildings and road transport. It is part of the EU’s broader Fit for 55 climate package, aiming to reduce emissions in these sectors by 42 % by 2030 compared with 2005 levels. The system requires fuel suppliers, rather than consumers, to purchase allowances for the CO₂ emissions associated with the fuels they sell. Auction revenues flow to national budgets and the EU’s Social Climate Fund, supporting vulnerable households and small businesses affected by rising energy costs.

Fiscal Trade-Offs: National CO₂ Tax vs ETS 2 Revenues

Luxembourg’s carbon pricing is unique in Europe. The national CO₂ tax, implemented in 2021, applies to gasoline, diesel, heating oil, and gas, gradually increasing to €50 per tonne by 2027. Despite this, fuel prices remain lower than in neighboring countries, driving a significant “fuel tourism” market, where non-residents purchase fuel in Luxembourg. This dynamic generates substantial tax and VAT revenue:

• ≈ €640 million in excise duties on fuel in 2024 (including the CO₂ tax);

• ≈ €334 million in VAT from these sales.

By joining ETS 2, Luxembourg expects annual auction revenues of €160–170 million from 2028. However, this replaces the existing CO₂ tax and is projected to result in a net revenue loss exceeding €100 million compared with current CO₂ tax projections for 2028.

The policy also addresses the sensitive issue of fuel price differences with neighboring countries. Transport emissions account for over 60 % of Luxembourg’s greenhouse gas output, and aligning prices with ETS 2 allows the country to gradually reduce the economic distortions created by cross-border fuel sales while maintaining competitiveness.

Economic and Social Considerations

Beyond fiscal effects, ETS 2 introduces economic and social complexities:

• Carbon cost pass-through: Compliance costs faced by fuel suppliers are generally passed on to consumers. Estimates suggest ETS 2 could increase household energy and fuel expenses by several hundred euros annually if fully passed through.

• Social Climate Fund: A portion of ETS 2 revenues is allocated to support vulnerable groups, mitigating the social impact of higher energy costs. The effectiveness of national deployment of these funds will be critical for public acceptance.

Climate Policy Alignment

Joining ETS 2 brings Luxembourg into full alignment with EU climate law, contributing to the collective target of net-zero emissions by 2050 and sectoral reductions of 55 % by 2030. Integrating road transport and heating fuels into a harmonized EU carbon pricing mechanism strengthens market-based incentives for low-carbon investments, including electric vehicles and energy-efficient building systems.

However, Luxembourg’s reliance on fuel sales to non-residents creates specific challenges. Effective implementation of ETS 2 and strategic allocation of auction revenues will be essential to preserve fiscal stability and ensure social equity while achieving climate objectives.