Hungary’s climate policy has reached a critical juncture: the 2040 targets, the ETS2, and the Social Climate Plan simultaneously offer rapid emissions reduction and carry significant social risks. The key question is: how can this ambitious target framework be achieved while keeping economic and social impacts manageable?

I. How much can Hungary contribute to the EU’s 2040 climate target?

Hungary could be capable of meeting a 2040 GHG target aligned with the newly set European Union objective (a de facto net -85% reduction compared to 1990 levels), starting from the -55% level already targeted for 2030, while also hitting an intermediary -70% target by 2035. However, this will require addressing emission sources that are difficult to decarbonise during the coming decade — a challenge that is inevitable in the long term in any case. More specifically, a number of investments, technological advances, and changes in consumer behaviour previously expected only during the 2041–2050 period will need to be brought forward and implemented before 2040.

Our modelling indicates that, alongside intensive awareness-raising efforts, effective regulation, and investment support, policies that provide appropriate price signals to discourage fossil fuel consumption will also be necessary. How this can be achieved while minimising adverse social impacts is discussed in Section II below.

A more balanced and therefore more realistic emissions reduction pathway for the next decade could be achieved if Hungary were able to outperform its current 2030 GHG target. If the country achieves “only” the already adopted net reduction target of -55% by 2030, it will effectively exhaust the mitigation advantage it has accumulated relative to the EU average. As a result, the pace of emissions reduction between 2031 and 2040 would need to accelerate to nearly three times the average rate observed during the 2024–2030 period.

II. How can Hungary’s energy price regulation be aligned with the EU’s New Emissions Trading System (ETS2)?

The domestic implementation of the new Emissions Trading System (ETS2) — which will effectively take effect from 2028 for buildings, road transport, small power plants, district heating, and small industrial facilities — is legally unavoidable. As an effective regulatory instrument, it would also be difficult to replace in achieving GHG reduction targets. However, its introduction demands extreme caution due to potential negative social impacts. According to findings in the academic literature, in the absence of Hungary’s regulated energy price caps, ETS2 could increase gasoline and diesel prices by 10–12%, while natural gas prices could rise by 8–10%.

According to our calculations, the ETS2 could achieve an annual GHG emission reduction of 1.2 million tCO₂e around its inception phase by influencing consumer behaviour. This mitigation effect will scale up as investments accelerate and allowance prices rise from 2031 onward.

ETS2 is a market-based and dynamic regulatory mechanism, with allowance prices fluctuating daily on emissions markets. Incorporating such a system into administratively regulated energy prices is highly challenging and would reduce many of the system’s intended benefits. Therefore, it would be advisable to phase out regulated price caps on fossil fuels, accompanied by appropriate compensation measures. However, since all major political parties have pledged to maintain the current regulated utility price regime, we conducted an analysis and formulated proposals on how the ETS2 could operate alongside this system. The goal is to avoid simply shifting the financial burden from residentials onto the corporate sector, which would trigger inflation and a loss of competitiveness. The most sensitive issue concerns household natural gas consumption. In this regard, we recommend the reduction of the upper ceiling of the two-tier regulated tariff scheme, the provision of targeted support to affected households through rapidly deployable energy efficiency measures, and the promotion of biomethane injection into the natural gas distribution network. For district heating, ETS2 costs could be incorporated into consumer prices, accompanied by income-based compensation measures and a substantial investment programme. In the case of electricity, we propose introducing a time-based tiered structure within the regulated utility price scheme in order to reduce peak-time consumption and thereby lower overall electricity costs. For transport fuels, a return to market-based pricing appears unavoidable, into which ETS2 costs would also be incorporated. Here, state intervention would primarily focus on protecting residents of small settlements and rural areas by increasing the frequency of public transport services and potentially providing social fare discounts, as well as by developing bicycle-sharing networks and supporting the decarbonisation of freight transport. The dissemination of awareness and knowledge regarding energy-efficient consumption patterns is also of key importance.

Within Hungary’s Social Climate Plan, we recommend prioritising investments that provide immediate relief from rising energy costs, while additional resources should be allocated to support longer-term decarbonisation efforts. The Social Climate Fund, ETS2 revenues, and the existing EU ETS allowance revenues, the Modernisation Fund, Hungary’s green bonds, among others, offer a strong opportunity and substantial funding base to support these investments. These instruments are not only suitable for mitigating adverse social impacts and reducing emissions, but also for promoting domestic job creation.

III. The Recipe for an Effective Hungarian National Building Renovation Plan

We propose a set of key elements for a National Building Renovation Plan capable of supporting Hungary’s 2030, future 2040, and 2050 climate objectives, while simultaneously contributing to the reduction of energy dependence and energy poverty and strengthening the Hungarian economy. This includes a comprehensive investment programme, the phase-out of fossil-fuel boilers, measures aimed at shaping consumer behaviour, and actions to reduce the embodied carbon footprint of buildings. The three detailed studies are accessible here (in Hungarian):