European policymakers are getting ready to discuss the EU's climate policy for 2030 and the reform of the EU emissions trading scheme (ETS). A decision on backloading is expected towards the end of the year and a proposal for the 2030 policy framework around the turn of the year. Fortum's views of the situation and our priorities for the future are outlined below.
Long-term stability and cost-effectiveness for the European climate policy
The European Union has made a political commitment to an 80-95% CO2 reduction by 2050. This means that the electricity sector will have to become virtually fully decarbonised. Fortum, as part of the European electricity industry, is committed to this ambitious goal. In order to reach this target at the lowest cost for society, the EU climate and energy policy framework and the EU emissions trading scheme, ETS, are in urgent need of revision. The EU ETS currently does not deliver the required price signal for low-carbon investments.
In order to bring down the costs of decarbonisation, the EU must focus on the emissions reduction target only and must prioritise market-driven solutions and carbon pricing. The ETS promotes the competitiveness of low-carbon technologies in energy and other sectors and enables achievement of the climate target at the lowest cost.
Climate target for 2030 the first priority
Setting the 2030 climate target is the number one priority in reinforcing the EU ETS system and removing current climate policy distortions. Fortum encourages the EU heads of state to commit to an ambitious target for greenhouse gas emissions reduction for 2030 in their upcoming meeting in March 2014. An early decision on the 2030 target in line with the 2050 Roadmap could bring positive and constructive momentum to the international climate negotiations. For investors, it would also be an important political signal on increasing stability and predictability of the climate policy.
Based on the 2030 target the revision of the ETS cap, i.e. the annual linear emissions reduction factor, should be implemented sooner rather than later, but at the latest from 2020 onwards. An efficient ETS and CO2 price will be the main driver for deployment of mature technologies for renewable energy sources (RES), and therefore there is no need for a new binding target for RES.
Allowance supply adjustment a supplementary tool to improve long-term cost-efficiency
In the current ETS set-up, the supply of allowances is fixed but the demand is variable. The allowance supply adjustment mechanism, ASAM, based on predefined rules could enhance the elasticity of supply over the short term while leaving the overall long-term drivers in place. ASAM has the potential to make the ETS more resilient to prolonged periods of external, unexpected developments, like high or low economic growth. Such a mechanism has the potential to increase the cost efficiency, since it will soften the impact of major economic swings to the steering effect of the ETS.
The ASAM does not represent an alternative to backloading and structural reform options, especially not the latter. Nor would it affect the ETS cap.
Backloading into operation as soon as possible
In Fortum's opinion, backloading should be implemented according to the Commission's proposal in order to postpone the auctioning of 900 million allowances. Backloading of allowances should be viewed as the first of several needed measures, in order to restore the trust in the ETS and to re-establish a price signal to invest in low-carbon generation.
Enhanced competitiveness through an efficient carbon market
Competitiveness is a genuine concern and focus should be on improving the cost-efficiency of the decarbonisation policy. In fact, the key issues driving up the consumer electricity prices in the EU are political; taxes, renewable energy subsidies, and other fees and levies. At the same time the wholesale electricity prices remain flat or continue to decrease, threatening the viability of investment in energy generation. Therefore, the focus should be on revising the policy framework in order to remove distortions and bring down the total energy costs. For this purpose, setting an emissions reduction target only and fully exploiting the carbon market would be the way to address competitiveness concerns without compromising the climate goal.
Esa Hyvärinen, Vice President, Corporate Relations, Fortum, tel. +358 40 8262646
Kari Kankaanpää, Sustainability Manager, Climate and Environmental Affairs, Fortum, tel. +358 50 4532330
Fortum is promoting business-driven solutions to climate change mitigation and is involved among others in the following initiatives advancing the role of business in addressing climate change:
Single Target Coalition
Caring For Climate