How to decarbonise the Nordics in the most cost-efficient way?
This current decade is critical in terms of limiting global climate warming to 1.5 °C as required by the Paris agreement. Clear decisions and strategies to set the path for decarbonisation of different sectors are needed within the next few years. Achieving the Paris goal requires a combination of measures, including innovative integration of energy forms and international collaboration. The Nordic countries have already committed themselves to more ambitious decarbonisation targets compared to the rest of Europe, but the concrete measures to get there remain, to a large extent, still undecided.
We at Fortum have been strong advocates for robust decarbonisation and ambitious climate policies as well as vigorous Nordic cooperation. We commissioned Copenhagen Economics (CE), an economics research consultancy, to assess the respective decarbonisation plans and pathways of all Nordic countries. This online Fortum Energy Review assesses the results and presents our own takeaways by building on the findings and analysis of CE.
The main findings of the CE study indicate that all Nordic countries are still far from achieving the emissions reduction targets with the measures implemented so far. The heavy industry and transport sectors (including air and sea transport) are particularly challenging to decarbonise. On the other hand, electricity production in the Nordics is already largely decarbonised, and district heating is also expected to be carbon neutral by 2030.
Electrification is the key
Electricity production in the Nordic countries is already almost fully decarbonised and extensive construction of new carbon-neutral capacity is possible. The study sees emissions reductions happening both directly through electrification and indirectly via production of e-fuels from electrically produced hydrogen derivatives.
Consequently, these developments will significantly increase the demand for carbon-neutral electricity: CE estimates that full decarbonisation of the Nordics would incur 290 TWh of additional electricity demand (an approximately 75% increase compared to current consumption).
In addition to adding the required production capacity, deep electrification requires a step change in transmission and distribution networks as well as in the integration of power markets. Considerably more investments and international collaboration with transmission links are needed, as well as better regulation both in transmission grids and distribution networks. Furthermore, significant state aid is needed to bring promising synthetic fuel technologies to scale and maturity.
Carbon pricing to support rapid investments in carbon-neutral solutions
In terms of the emissions reduction challenge, coherent and high enough carbon pricing is vitally important. It enables carbon-neutral technologies to become competitive and sends market-based price signals encouraging new, rapid investments for both the supply and demand of carbon-neutral energy.
The CE study suggests first and foremost that the EU should increase the ETS* ambition so that it aligns with the overall 2050 decarbonisation target. As the Nordic countries aim to decarbonise even faster, the region should restructure the national energy taxes to dynamic carbon taxes compatible with national decarbonisation goals. Simultaneously, the system should prevent carbon leakage in sectors exposed to actual risk.
We hope that this study will advance the discussion on the most cost-efficient ways to achieve a carbon-neutral society and to reach the set targets. Below we have listed the main points of the study’s contents as well as Fortum’s recommendations for decision makers.
Fortum’s recommendations for policy-makers
- Develop a joint, regionally coherent decarbonisation strategy for the Nordics to facilitate cost-efficient implementation of decarbonisation targets. This would be a logical next step for the countries already belonging to a closely integrated regional market.
- Translate the Prime Ministers Declaration on Nordic Carbon Neutrality and the Nordic 2030 Vision and Roadmap for the Nordic Electricity Market into national policy road maps.
- Agree on a common approach to key national policy instruments, such as energy taxation and carbon pricing. This should be made in order to ensure a level playing field for economic operators and customers across the Nordic market.
- Develop a common Nordic hydrogen strategy, including financial incentives, to kick-start hydrogen development. Hydrogen is increasingly seen as a solution to decarbonise the sectors that are difficult to electrify. While hydrogen development is at different levels, in general the Nordic countries are behind continental Europe. A joint Nordic hydrogen strategy would allow the region to take a needed leap in this development area – and could eventually help the Nordic region, as a whole, benefit from clean energy exports due to our competitive generation base
- Set national and Nordic electrification targets, including targets for production of hydrogen and e-fuels
- Set ambitious national and Nordic targets for increased electricity use, supporting both direct and indirect electricity use. The Nordic countries have already almost fully decarbonised the power production sector, and direct and indirect electrification will play a key role in cross-society decarbonising (transportation, industry and buildings)
Nordic EU energy agenda
- Support the EU to establish a legislative framework and develop incentives for negative emissions
- Develop a common Nordic position on the revision of ETS and look for a common solution to having more ambitious Nordic national decarbonisation policies without diluting the steering effect of the EU ETS
- Ensure that the existing baseload carbon-neutral generation capacity remains competitive, e.g. by remuneration for services provided by baseload capacity for the electricity system (e.g. inertia)
- Ensure that the contribution of all carbon-neutral and low-carbon energy technologies are accepted and treated in a technology-neutral manner. Enable the expansion of lifespan in economically feasible nuclear, (bio) CHP and hydro assets in the Nordics
*More about (EU) ETS: Emissions trading system