ForTheDoers Blog

Holistic long-term EU climate policy needed to reach climate neutrality

Kari Kankaanpää 19 February 2021, 10:10 EET

The EU climate legislation is being overhauled in 2021 to steer us towards the more ambitious emission reduction target for 2030. However, investment decisions made by the energy sector and industry today will impact the way we generate energy and produce goods for decades. We need to look beyond 2030 and up to 2050 and create a sufficiently predictable operating environment that encourages investments in climate-friendly technology. Carbon pricing and in particular the EU Emissions Trading System (ETS) are crucial in this development.

EU flags in front of European Commission

The European Commission (EC) proposes to tighten the EU’s emission reduction target significantly. The current target is 40% less emissions by 2030 compared to 1990, and the new target, still going through the final discussions between the EU legislative bodies, would be at least 55%. This is an ambitious target that will be pivotal in our battle against climate change. Fortum welcomes and strongly supports the new climate target, and we see the ETS as the key instrument in reducing emissions cost-effectively in Europe.

To achieve the new target, the climate and energy legislation will be overhauled. The EC is preparing to give its legislative proposals next summer. The Commission held public consultations regarding the impending changes, and Fortum submitted responses which present our views on how EU climate policy and legislation could best support reaching the set targets.

Read Fortum's proposals for the EU 2030 climate regulation: A robust and efficient emissions trading system is key for decarbonising the European economy

More sectors and emissions to be moved under the ETS cap

A key question regarding the new target is the division of responsibility between the ETS and the effort sharing sector, which is not included in the ETS. To reach the targets, everyone’s input is needed, but the share of the workload must be carefully considered. In Fortum’s view it is essential to expand the role of carbon pricing in society. This can be done within the ETS, but also in other sectors through for example carbon taxation.

Moving more industries from the effort sharing sector to the ETS would be appropriate when it comes to allocating the emission reduction targets. In the effort sharing sector, the target is divided between member states, who have to determine on a national level how to reach it. New targets mean new negotiations on how much each country is allotted, which is politically challenging.

Currently, the ETS covers some 40% of the EU’s emissions, including the energy sector and most of the industry as well as district heating, but excludes for example the heating of individual buildings. It would make sense to include the entire heating sector in the ETS to ensure a level playing field. Maritime transport and travel is also a potential sector for the extension.

The functioning and predictability of the ETS to be safeguarded

There are varying viewpoints into expanding the ETS, but it is important for all industries that emissions trading retains its current predictability. Expanding should not risk the functioning of the system and introduce uncertainty. The new sectors, such as building heating and transport, are quite different from the current ETS industries, and their costs for reducing emissions are different, too. New sectors should therefore be brought in through a separate pilot system to assess the feasibility of the ETS model for these industries without including them immediately in the actual ETS.

There will most likely be some opposition to such development. In Central Europe, heating is often based on gas, and its inclusion in the ETS might increase the price of heating for consumers. This might in turn call for compensation from member states to prevent so-called energy poverty.

Fortum would also like to see a new, lowered emissions cap for the ETS as soon as possible, by 2024 at the latest. The earlier the cap is changed, the smaller the amount of cumulative emissions in the atmosphere. The longer we wait to lower the cap, the more drastic and costly changes will be needed to reach the 2030 target. Another important element of the ETS revision is the change of the parameters in the market stability reserve (MSR).

A legislative framework for carbon removal to be established

The new emission reduction target of at least 55% also includes carbon sinks. In Fortum’s view, there should be a target based purely on emissions and a separate one for increasing sinks. Carbon sinks include both natural sinks such as forests and land use, and technological solutions for capturing carbon dioxide from flue gases or directly from the air. A legislative framework for such technologies is needed, as adopting them on a wide scale still requires incentives. Creating clear financial incentives for capturing technology would encourage investments and take us towards a carbon-negative circular economy.

Targets and policy instruments extending to 2050 to be set as soon as possible

Predictability of the long-term operating environment and legislation is vitally important. After the overhaul of the 2030 climate policy, the EU needs to swiftly agree on the targets for 2031–2050 and decide on the related policy instruments. As the power sector will be highly decarbonised by 2030, other sectors will play an increasingly important role in reducing emissions – with electrification, hydrogen and sector integration being the key decarbonisation tools. It is also likely that at some point, the ETS will fade away as a policy instrument and something else is needed to abate the last few tonnes of emissions.

Kari Kankaanpää

Head of Public Affairs Finland
Tel: +358 50 453 2330
kari [dot] t [dot] kankaanpaa [at] fortum [dot] com

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