An ambitious target solves nothing in itself; what is important are the policy measures and tools to reduce greenhouse gas emissions in practice. Reaching the goal calls for quick and sizeable investments, and therefore it is essential that the necessary measures are taken in a way that is as market-based and cost-efficient as possible. In other words, reducing emissions must be profitable.
In the future, the way that the new emission target is allocated in the EU between the emission trading sector and sectors outside the emission trade is crucial. In our opinion, the emission trading sector must take the main responsibility for reaching the tightening target.
Another key issue is how the climate target, the target for renewable energy use and the target for improving energy efficiency are reconciled. These three targets must be made to work together as cost-efficiently as possible while avoiding overlapping regulation with the emissions trade.
The new target of at least 55% includes both emissions and sinks, in line with the spirit of the Paris Agreement. However, taking the sinks into consideration should not reduce the ambition in reducing emissions. The target should also account for technological solutions for removing CO2 (e.g. CCS/CCU, DAC and biochar), which are important in reaching climate neutrality. We think that in the future the EU should consider a separate target for sinks and technological removal.
Electricity and hydrogen technology in a key position in reducing emissions
We only have ten years to carry out the measures aiming for the 2030 climate targets. We at Fortum believe that clean electricity and clean gases such as hydrogen are a key solution in reducing emissions. So far, the power sector has been at the centre of Europe’s emission reduction activities, and it has done considerably to reduce emissions. For example, the Nordic electricity system already has very low emissions and will be practically emission-free by the time we enter the 2030’s.
In the future, the focus will be increasingly on other sectors. Reducing the emissions of industry, transport and heating calls for extensive measures, and electrification, sector integration and hydrogen economy will be important in promoting them. The demand for electricity will in all likelihood increase significantly in the future – this is examined also in our new energy review. For example, in Finland, the roadmaps of different industries completed last spring show that the use of electricity may increase by as much as 50 per cent from the current level by the end of the 2030’s. According to the 2030 impact assessment of the EU Commission, though, the increase in electricity use would be considerably smaller, only around slightly over ten per cent compared to 2015.
In our view, the role of the hydrogen economy in the energy production of the future has also been underestimated in the EU Commission’s assessment. The assessment is also inconsistent with the EU hydrogen strategy published by the Commission in July, which set ambitious targets for increasing the use of hydrogen. We at Fortum see hydrogen as an important part of the emission-free energy system of the future. We have recently assembled a hydrogen team to develop ways to accelerate the adoption of clean hydrogen, and our associated company Uniper is an energy industry pioneer in the development of hydrogen economy.
Emissions trading to be strengthened and extended
According to the proposal of the EU Commission, the roles of carbon pricing and emissions trading in the EU should be strengthened, and we see this as the right direction. With the new 2030 target, the target of emissions trading will also tighten, and at the same time, the so-called market stability mechanism of the emissions trading is to be adjusted.
In its current state, the EU emissions trade covers approximately 45 per cent of the EU’s greenhouse gas emissions. When the emissions of the emissions trading sector are reduced in accordance with the emissions cap set for it, only about a third of emissions would be included in emissions trading in 2030. To maintain carbon pricing as a key instrument in the future, it is important to get new sectors included in the emissions cap or another pricing system for CO2 emissions, such as taxation.
The proposal mentions that, among others, the heating of buildings and transport sectors might be included in emissions trading. For the heating sector, this would bring all emissions from heating under the same regulatory mechanism. Currently, part of the heating sector (district heating and electrical heating) is included in emissions trading, while distributed heat generation is outside it. For the heating market, it would make sense to include all forms under the same regulation.
For us energy industry players, it is important to operate in an operating environment that is as predictable and stable as possible. The new climate target proposed by the EU Commission increases predictability and creates an even stronger signal for investing in low-emission technologies and solutions. The transformation towards an emission-free energy system is already happening in Europe, and Fortum wants to accelerate that transformation.