European railways are calling for a major shift in how the EU spends the revenues from carbon pricing. A new report by the Community of European Railway and Infrastructure Companies (CER) argues that proceeds from the EU Emissions Trading System (ETS) should flow more into rail. While the European carbon market generated €43.6 billion in 2023 alone, barely any of this capital reached the railway sector.
In the words of CER director Alberto Mazzola, “climate change is a market failure because the costs and impacts of GHG emissions are not borne by those causing them”. The Emissions Trading System (ETS) was designed to fix this: making polluters pay by putting a price on carbon that slowly increases over the years, forcing industries to pay for their emissions and funding the shift to cleaner alternatives.
But ehile the EU’s carbon market generated billions in 2023, only a small fraction went to rail, and the Community of European Railway and Infrastructure Companies (CER) would like to see this change. In a report by Bocconi University (Green centre) and CER, Transport Economist and Professor at Bocconi University Oliviero Baccelli and CER Executive Director Alberto Mazolla advocate a change in course. As the ETS faces revision in 2026, they are pushing to further extend the ETS mechanism to support carbon avoidance in transport through railway investments.
€43.6 billion in carbon cash
The EU Emissions Trading System is a key element of European climate policy. It forces polluters to buy allowances for their greenhouse gas emissions. This system generates massive revenues. In 2023, total auctioning revenues amounted to €43.6 billion. Most of this money flows directly to national governments. Member States received €33 billion of that total. Smaller amounts went to specific EU funds. The Innovation Fund and Modernisation Fund received €7.4 billion combined. The Resilience and Recovery Facility received €2.8 billion.
Since mid-2023, Member States have to use the ETS revenues to support investments in renewable energy, energy efficiency improvements and low-carbon technologies that help reduce emissions further. While the money is being used for climate action, the reduction of transport emissions seems far from a priority.
In 2023, transport accounted for roughly a third of total greenhouse gas emissions in the EU, with road transport responsible for the vast majority, shows the latest report of the European Environmental Agency, published 10 February. Rail transport, through its high energy efficiency and low greenhouse gas and air pollutant emissions, is one of the most effective options for reducing the environmental footprint of transport, particularly for medium- and long-distance travel, according to the EEA. It emits up to 90% less CO₂ per passenger-kilometre than cars or planes. But despite its major potential to decarbonise this bigh chunk of the carbon emissions pie, railways are barely receiving proceeds from ETS.
How does the EU Emissions Trading System work?
The EU ETS is based on a “cap and trade” principle. The cap refers to the limit set on the total amount of GHG that can be emitted by installations and operators covered under the scope of the system. This cap is reduced annually in line with the EU’s climate target, ensuring that overall EU emissions decrease over time.
The EU ETS cap is expressed in emission allowances, with one allowance giving the right to emit one tonne of CO2 equivalent. Allowances are sold in auctions and may be traded. As the cap decreases, so does the supply of allowances to the EU carbon market.
Under the system, companies must monitor and report their emissions on a yearly basis and surrender enough allowances to fully account for their annual emissions. If these requirements are not met, fines are imposed.
EU ETS was launched in 2005 as the world’s first carbon market and among the largest ones globally. It started covering emissions from maritime transport in 2024. As of 2023, the EU ETS has helped bring down emissions from European power and industry plants by approximately 47%, compared to 2005 levels, according to the European Commission.
Money flows to rail only sporadically
The railway sector received a “very limited amount” of the Member States’ revenues from the EU ETS, a 2022 Ecologic report concluded, which analysed spending between 2013 and 2020. Even where funds were allocated, there was no coordinated strategy—just ad-hoc spending with no long-term vision behind it.
Italy allocated a total of €100 million between 2016 and 2018. This funding helped improve public transport lines and subway systems. However, the amounts varied wildly by year and stopped after 2018. Poland in 2017 used 43.4% of its ETS budget to support a preferential VAT rate for rail transport. This percentage dropped to 21.2% the following year.
The track record for other funds is also sparse. Between 2021 and 2024, the Modernisation Fund supported only three railway projects. Two were in Romania (€ 475 million assigned in 2023) and one in the Czech Republic (61 million). These projects focused on replacing old rolling stock for new electric roling stock that is more energy-efficient. Proceedings from ETS do not flow to the Connecting Europe Facility, where most EU funding to rail comes from.
A core issue the report identifies is how the EU defines green projects. The current system rewards “carbon removal,” like capturing CO2 from the air. It does not adequately reward “carbon avoidance”. This is where rail excels. By moving traffic from road to rail, the sector prevents a large part of the emissions in the first place. The report argues this is a missed economic opportunity.
A missed opportunity: financing HSR
The report argues that rewarding carbon avoidance could fund railway projcts. The authors present three case studies, the first being High-Speed Rail (HSR). A completed European HSR network would displace air and car travel. A 2050 scenario for this network would save 5 billion tonnes of CO2 by 2070. The financial value of this “carbon avoidance” is immense, highlights the report.
By redirecting a larger share of ETS revenues to rail, the EU could accelerate the creatian of a true Europe-wide high-speed network, connecting all major cities. A 2023 report commissioned by Europe’s Rail proposed a Masterplan for the HSR network connecting all EU capitals and major cities and called for the Commission and Member States for a coordinated implementation with sufficient funding in the next decades. This network would triple the existing high-speed rail (HSR) network, with investment costs averaging €550 billion but also a net positive benefit of approximately €750 billion to society. “The relevance of the carbon avoidance of these scenarios is a strong argument for using EU ETS to support them”, say the authors of the new report.
The traffic shifted to HSR would result in a substantial amount of: €157,6 billion in 2030 scenario and €525,5 billion in the 2050 scenario. The study assumes construction costs to be €16,5 million per km, and the authors estimate in the 2030 scenario that up to 9.555km of HSR lines could be financed thanks to rewarding the effect of carbon avoidance. In the 2050 scenario 31.849 km of HSR lines could be financed this way, covering 95.3% of the investment needed for the 2050 scenario.
Boosting rail freight by funding DAC
The second case the report makes to fund using the ETS is freight technology. Digital Automatic Coupling (DAC) allows longer and heavier freight trains. The technology costs roughly €10 billion to deploy across Europe. However, it would save 140 million tonnes of CO2 over 30 years. The value of these savings is €16.8 billion, meaning the project effectively pays for itself through environmental benefits alone, argues the report. The third case is the electrification of a port rail line in Antwerp.
“Rewarding the effect of carbon avoidance in railway projects provides a significant complementary tool for securing funding,” says Alberto Mazzola, CER Executive Director and co-author of the essay. “The HSR Masterplan and DAC deployment could be largely financed by ETS revenues—if Europe chooses to make it compulsory.”
Proposed projects to fund using ETS
The CER/Bocconi University report advocates for the EU Emissions Trading System (ETS) revenues to go to railway projects including:
• High-speed rail (HSR) networks: specifically to fund the completion of the European HSR Masterplan, connecting all EU capitals and major cities to displace air travel.
• Digital Automatic Coupling (DAC): Funding the deployment of this technology to automate freight trains, allowing them to run heavier, longer, and faster, thus shifting freight from road to rail.
• Cross-border TEN-T projects: Infrastructure investments that resolve bottlenecks between Member States to create a seamless European network.
• Electrification of logistics hubs: Specific focus on electrifying “last mile” and port rail lines (such as a Port of Antwerp case study) to replace diesel operations in freight terminals.
• Energy efficiency & modernisation: Projects that upgrade rolling stock, integrate renewable energy sources, or modernise vehicle fleets to reduce overall energy consumption.
• Interoperability technologies: Investments in harmonisation and standardisation (like ERTMS signalling) that help improve network reliability and reach economies of scale.
How could this be achieved?
To redirect ETS revenues to rail, the CER proposal outlines a three-step plan to bridge the funding gap. A first step is to raise awareness of rail’s carbon-avoidance benefits. CER also advocates for specific changes to EU policy. The regulatory landscape will be revised in 2026, and the authors view this as a crucial opportunity. The second recommendation is that the EU implements specific guidelines for Member States to use a minimum share of ETS revenues for rail. This would also apply to the Innovation Fund, Modernisation Fund, Social Climate Fund and Recovery and Resilience Facilility as well.
Thirdly, the report advocates to expand the role of the European Investment Bank (EIB) to cluster rail projects and leverage private investment through blended finance, mixing ETS funds with public and private capital. A Rail Carbon Platform, managed by the EIB, could bundle small-scale rail projects (like hydrogen trains or DAC retrofits) to attract long-term investors. The Luxembourg Rail Protocol (which went into force on 8 March 2024) already provides a legal framework to secure private financing for rolling stock.
‘Take into account the societal benefits’
The report emphasises that many rail investments are currently “too risky for private investors, due to their high upfront costs”. “Nonetheless, most rail investments have a very high benefit/cost ratio if we include the role of externalities in the economic analysis”, say the authors. Without accounting for the external societal beneftits of improving the railway syste, projects can seem unprofitable, so CER advocates for these externalities to be internalised when deciding on investments.
The regulatory landscape related to carbon markets is dynamically evolving, and the EU ETS will be revised in 2026. “CER hopes that European decision-makers, while considering this study, will direct ETS revenues
into rail investments and amend ETS legislation to make this compulsory in the first revision. Such actions would benefit society economically, financially, and environmentally”, says CER Executive Director Alberto Mazolla.
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