The European Commission’s decision on Finland’s national plan for allocating carbon dioxide (CO2) emission allowances for the 2008-2012 trading period of the EU Emissions Trading Scheme (EU ETS) was more or less as expected. The Commission has consistently cut member states’ proposals for allocations to industry included in the EU ETS.
The Commission has based its decision on the actualised emissions in 2005. Using a single year – and in Finland’s case, a very unusual year – as reference cannot be considered fair practice. In 2005, Finland’s emissions were exceptionally low due to a good hydrological situation, a six-week lock-out of the paper industry and high import of electricity, among other things.
Allowances cut in the electricity industry
The Commission cut the allowances less than many expected. The decision means that further cuts will be implemented primarily in electricity production. Emissions allowances for condensing power are cut in such a way that it will get about 15% of the allowances it is expected to need. Further more, the Commission restricts the use of the Kyoto mechanisms, which will hinder reaching the emissions targets cost effectively.
“The decision nevertheless clearly demonstrates that the current way of distributing emissions allowances has reached an end. It leads to a completely divided end-result, where the electricity industry must buy almost all the allowances it needs from the market, while other industries receive free allowances almost as much as they require,” says Fortum Senior Vice President, Corporate Development, Timo Karttinen.
The situation should be corrected before the next EU ETS period starting in 2013. This change could be facilitated by the remission of the EU Emission Trading Directive that will be commenced at the end of this year.
Auctioning of allowances is the fairest distribution model
A central element in climate policy is that emissions have a price, which directs the use of existing production capacity and new investments. All industries must participate in the mitigation of climate change – also those that currently do not participate in the EU ETS with transportation as the largest emitter. Therefore, for these industries, national emissions caps and national measures such as taxes and quotas will be necessary also in the future.
Emissions trading is an effective way to set a price for emissions in participating industries. However, the principle should be ‘even-handed distribution of austerity,’ and companies representing the same industry in different member states should be treated equally.
“In an ideal situation, no one would receive emissions allowances for free: Those who emit would also be the ones who carry the cost. Instead, emissions allowances could be acquired from an EU-wide auction. This would guarantee fair and equal treatment of existing companies and those entering the market, alike, in all member states,” comments Karttinen.
The auctioning of emissions allowances should be adopted in phases because some of the industries and companies included in the EU ETS compete in a global market where competition does not carry a similar load. As countries outside the EU would begin shouldering similar responsibilities and start working toward similar goals, the amount of emissions rights distributed against payment would grow. In the end, no industry sector would receive free allowances, and the price for emissions would be transferred to the prices of goods, which is also the meaning of emissions trading.
Esa Hyvärinen, Vice President, Public Affairs, tel. +358 40 8262646