The future of the EU ETS - Fortum's position

Fortum believes that the EU Emissions Trading Scheme (EU ETS) is and should continue to be the cornerstone of the European Union's climate policy driving low-carbon energy production, investments and energy savings. Technically as a mechanism ETS has been working as intended, delivering the emission reductions (environmental goal) in a cost-effective manner (economic goal). However, the allowance prices have been lower than expected due to the economic downturn and consequent lower emissions levels, as well as overlapping policy targets and measures, which has suppressed the steering effect of the EU ETS. In order to strengthen the EU ETS, the cap of the system should be aligned with the long-term targets. As soon as possible, the EU should set an ambitious and consistent intermediate target for 2030 to reach the ultimate goal of a low-carbon economy in 2050.

In the ETS, the price of allowance is being set by demand/supply, and the installations have been in compliance with the legislation and rules on the permitting and surrendering of allowances, etc. The registry system is also working well technically.

Emission cap to be aligned with long-term targets

The long-term predictability and stability of emissions trading is currently of key concern and should be enhanced. In order to strengthen the ETS, the cap of the system should be aligned with the long-term targets of the EU’s low-carbon Roadmap 2050 initiative. As soon as possible, the EU should set an ambitious and consistent intermediate target to reach the ultimate goal of a low-carbon economy in 2050. More stringent emissions reduction targets would be required to stimulate the allowance price and the drive for low-carbon investments.

Fragmented policies undermining price signals

Low allowance price per se is not a problem, nor is it a result of a flaw in the scheme’s design or functioning. In Fortum's view, ex-post adjustments to the scheme due to the economic downturn and resulting short-term depreciation of the carbon price should not be made. In the future, however, some kind of a pre-designed mechanism adjusting the ETS automatically in cases of significant deviations in economic development - up and down-turns - should be considered.

Fragmented policies clearly undermine the ETS price signals. When the CO2 reduction resulting from other policy measures, e.g. subsidies for renewable energy production, the proposed Energy Efficiency Directive, can be calculated and proved, a corresponding set-aside of allowances from ETS would be justified.

Fortum would prefer a permanent set-aside. A temporary set-aside or a postponed allocation of allowances increases the regulatory risk and most likely will not change the market behaviour. In practice, a revision of the cap has the same effect as a permanent set-aside.

Climate target solely to steer climate policy

A target of CO2 emissions reduction alone – without any parallel targets for renewable energy or energy efficiency – should be steering EU climate policy. In our view, the existing parallel steering mechanisms are undermining the effectiveness of each other, and the steering effect of the ETS. Renewable energy should become competitive without subsidies other than the CO2 price and separate renewable energy targets post 2020. If other targets (e.g. renewable energy sources and efficiency) were nevertheless considered necessary, measures should focus on the aspects that the CO2 emissions reduction target is not addressing sufficiently (e.g. rural development) as well as removing possible obstacles limiting the use of renewable energy sources.

Key takeaways:

- The EU ETS as a mechanism has worked as intended, and it should continue to be the cornerstone of the EU climate policy.
- However, unexpectedly low allowance price resulting from the economic downturn and overlapping policy targets and measures has diminished the incentives for low-carbon investments. An ambitious CO2 target for 2030 should be established as soon as possible to stimulate those incentives.
- Set-aside of allowances to eliminate the proven impacts of parallel and overlapping policy measures (e.g. RES, energy efficiency) would be justified.
- Set-aside should be permanent in order to decrease the regulatory risk.
- When setting the post-2020 policy framework, overlapping policy targets and measures watering down the efficiency and affectivity of each other must be avoided.
- In the future, an automatic and pre-designed mechanism to adjust the EU ETS in cases of significant deviations in economic development should be considered.

For additional information, please contact:
Esa Hyvärinen, Vice President, Public Affairs
Kari Kankaanpää, Sustainability Manager, Climate and Environmental Affairs

6/29/2012