EU Commision has today published its Carbon Market Report and a proposal for the revision of the European Union Emissions Trading Scheme (ETS). Fortum supports the proposal and believes that the ETS should continue as the cornerstone of the EU climate policy. However, both long-term and short-term corrective changes as proposed by the Commission are required to allow for proper functioning of the carbon market and the ETS.
In Fortum’s opinion, ETS has been working as intended, delivering the emissions reductions in a cost-effective manner. The system has flexibly adjusted to external changes, like economic cycles. However, the ETS has recently experienced a significant surplus of allowances as well as lower and more volatile allowance prices than originally expected. This is largely a result of the economic downturn, but also due to the intervention by overlapping, mostly national, policy measures that have watered down the ETS mechanism.
As a consequence, the ETS has been weakened as a climate instrument. Fortum considers it a serious shortcoming that the overlapping policy measures have not been discussed at all as reasons for the oversupply in the Carbon Market Report.
Short-term: a permanent set-aside of allowances is needed
Fortum believes that the ETS mechanism should be reformed both in the short and long term. The proposed back-loading should be seen only as the first, but necessary, step in the reform of the ETS before 2020.
"The Commission’s proposal to postpone auctioning of 900 million allowances (back-loading) most likely will not impact the market price significantly nor decrease market volatility. However, we encourage the Commission to finalise the back-loading as soon as possible. Back-loading should be followed by a permanent cancellation of allowances (set-aside). The volume of set-aside should be linked to the estimated impact of the overlapping policy measures on the ETS”, says Esa Hyvärinen, Vice President, Corporate Relations at Fortum.
Long-term: target setting for 2030 is a key priority
Regarding the structural reform, an ambitious target setting for 2030 is Fortum’s key priority instead of increasing the 2020 target. Long-term targets combined with the tightening of the ETS cap (increasing the linear emissions reduction factor) starting from 2021 could reduce the policy risk and stimulate investments in the low-carbon future. After 2020, a target of CO2 emissions reduction alone – without any parallel targets for renewable energy or energy efficiency – should be steering the EU climate policy.
Fortum does not support the other alternative structural measures proposed by the Commission, like limitation or banning of the use of international credits and discretionary price management. The extension of the ETS to new sectors, like transport and heating and cooling could however be considered.
Kari Kankaanpää, Sustainability Manager, Climate and Environmental Affairs
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