ForTheDoers Blog

Emissions trading is the most efficient way to achieve a carbon-neutral energy system

Vesa Ahoniemi  ·  30 May 2020

Emission-free energy production plays a key role in achieving climate targets. The European Commission sets a legally binding climate-neutrality target for 2050, aiming to find a balance between greenhouse gas emissions and carbon sinks. We advocate for tightening the target for the emissions trading sector according to the EU’s 2030 and 2050 targets as well as for strengthening the market stability reserve and cancelling emissions allowances.

Finnish forest

With its new climate targets, the EU aims to reduce emissions by 50 to 55 percent by 2030 (current target 40%) and to be climate neutral by 2050 (current target to reduce emissions by 80 to 95 percent). We consider these targets very important, and we strive to achieve a carbon-neutral energy system in the future and to find a balance between carbon emissions and sinks. In addition to renewable energy sources, a carbon-neutral energy system will also need other technologies, such as nuclear power, carbon dioxide capture and clean gas. 

Efficient emissions trading is needed in addition to shutting down individual power plants 

We believe in phasing out coal in energy production. At the same time, it is important to remember that existing coal power plants do not equal emissions: emissions are produced when the plant is in use, but not when it is held in reserve. Reserve power plants can have a pivotal role in ensuring security of supply without significantly increasing total emissions. We think that to achieve climate targets, it is more effective to focus on curbing total emissions rather than on reducing the number of plants. At Fortum, we consider the EU emissions trading system (EU ETS) the most important tool in working towards this goal. We also advocate for stricter emissions trading targets and extending emissions trading to other sectors, such as heating and cooling of properties. 

As the EU is setting a more ambitious climate target for 2030, the emissions trading sector should take the main responsibility for an even stricter target of achieving the needed additional reductions in the emissions trading sector. Fortum sees emissions trading as the best instrument for pursuing climate policy, because it is an EU-wide, market-based system that is technology-neutral and flexible, and proven to be cost-efficient. Tightening emissions trading will benefit Fortum and other power producers with a large CO2-free portfolio. It also encourages companies to invest in more CO2-free production, including renewables.

A single company cannot be responsible for making Europe carbon neutral, but Fortum has taken several decisions to phase out coal: we have demolished the Inkoo power plant, we will close down two coal-fired units in Naantali this summer, and we will place the Meri-Pori power plant into peak-load reserve in 2020. We will discontinue the use of coal in heating in Stockholm this year and in 2025 in district heating in Espoo. Uniper also has a clear plan and schedule to close its European coal power plants and to achieve carbon-neutrality in its production in Europe by 2035. 

Market stability reserve not efficient enough in solving the defects of emissions trading 

Climate science has defined a carbon budget for humanity to keep global warming below 1.5 degrees. The EU emissions trading system has proven its worth as an instrument setting a binding carbon budget and guiding the development of emissions: emissions from power generation in Europe have nearly halved since emissions trading began 15 years ago. Last year, the emissions from power generation were 45% lower than in 1990 – in other words, power generation is about to reach the 2030 climate targets well in advance. 

However, emissions trading is not all-powerful: it only covers less than a half of the EU’s emissions and it does not include EU import. Another unfortunate aspect is the so-called waterbed effect: as the carbon budget is common to the whole system, reduction of emissions in one country or at one plant tends to lead to emissions rebounding somewhere else in the system, possibly not reducing total emissions.  

The objective of the market stability reserve of emissions trading is to reduce the supply of emissions allowances available to the market in case of an oversupply in the system. As the power market is optimised on a continuous basis, the market stability reserve operates too slowly to prevent the waterbed effect. However, oversupply of emission allowances in the EU ETS at a certain point in time does not mean that the allowances would not be used later, because there is no time-limit for using an allowance in the EU ETS. Only if the market price of an emission allowance were 0 or below, one could say that there was no need in the market for all the allowances to be issued. This is what we mean by stating that emissions trading sets a binding carbon budget for the sectors it covers.  

We advocate for tightening the target for the emissions trading sector according to the EU’s 2030 and 2050 targets, for strengthening the market stability reserve and for cancelling emission allowances. According to our knowledge, Germany is the first and thus far, the only country committed to cancelling issued allowances while phasing out coal-fired power generation. We think this is the right solution that will hopefully lead the way to other EU member states phasing out coal.  

We aim to reach climate targets without compromising security of energy supply 

Climate science provides different pathways to achieve climate targets. Evaluating the trends or probabilities is very challenging, as we need to secure sufficient power and heat production for society’s needs while aiming to achieve climate targets. For the time being, our energy needs cannot be fully covered with emission-free energy forms. Fortum produces heat in Siberia, for example, where security of heat supply is critical due to the cold climate. Thus, we cannot stop using fossil fuels all at once. 

Closing down individual coal-fired power plants is not the only correct way to reach emission reduction targets: reducing total emissions is more essential. Emissions trading ensures predictable reductions with costs as low as possible, without compromising security of energy supply. We advocate for tightening the standards of emissions trading as well as extending it to other sectors – while systematically working to phase out coal in our own production. 

Vesa Ahoniemi
CEO Advisor
vesa.ahoniemi@fortum.com