Fortum's comments on the EU 2040 climate target Communication

Ambitious EU 2040 target is most welcomed and necessary

The EU has made good progress reducing its greenhouse gas emissions based on the Green Deal. Because the global carbon budget is limited, early action and high ambition to 2040 are preferable, as the front-loading of emissions reduction would limit the cumulative emissions. In our view, such ambition is pivotal for both providing investment clarity and addressing the EU’s triple challenge of decarbonisation, competitiveness and security of supply. 

Fortum supports the target of around 90% net emissions reduction by 2040 suggested by the Commission and aligned with the scientific recommendations by ESABCC and in the spirit of the COP28 outcome. In our opinion, the 2040 target should include emissions reduction as the first priority, supported by carbon sinks and removals. Separate targets for greenhouse gas emissions reductions and carbon removals are needed in order to create certainty on delivering both emissions reductions and removals.

Decarbonisation of industries to be the future priority

The EU decarbonisation agenda is shifting from merely the greening of energy production to cleaning industries and industrial processes. The further aim should be to advance European industrial competitiveness and value creation through decarbonisation. The power sector plays an important role in enabling the decarbonisation of key industrial segments. Availability of clean, reliable and affordable energy is fundamental to shortening supply chains and ensuring that industrial consumers have a future in a decarbonised Europe.

We welcome the Commission’s proposal for an EU Industrial Deal, which encourages the decarbonisation of industries and strengthens value chains within the EU. As stated in the Communication, this should build on existing industrial strengths, like wind , hydro, nuclear and electrolysers. In addition carbon pricing and access to finance are critical for the delivery of emission reduction targets by European industry.

Carbon pricing to be the main instrument

Cost-efficiency and market-driven instruments should continue to be the key principles and tools in the EU climate policy. The price-based mechanisms should be developed for those sectors that are currently not included in the EU ETS – for example, agriculture and waste. 

We welcome the aim of the Commission to set up a dedicated taskforce to develop a global approach to carbon pricing and carbon markets. This could contribute to replicating the success of the EU ETS. Fortum has recommended an extension of carbon pricing across all sectors in the EU and has urged the EU to link its emissions trading system with similar systems globally.

All carbon-free technologies are needed

What is encouraging in the Communication is the recognition of technology neutrality and all carbon-free technologies, including nuclear, in all decarbonisation scenarios. Already today, both nuclear and hydropower contribute significantly to carbon-free electricity in the EU; given the magnitude, sustaining the EU decarbonisation ambition without them in the European energy mix would pose significant challenges. 

Another key technological issue going forward is recognizing and supporting electrolytic low-carbon hydrogen in complementing renewable hydrogen production, as both are needed in achieving EU climate targets and industrial decarbonisation.

Funding instruments to be strengthened

The EU’s investment agenda will be make-or-break for delivering on the climate targets post-2030. The transition to a low-carbon economy cannot be accomplished through regulation and predictability alone. It is essential for the EU to remain an attractive global destination for industrial investors also in terms of financing and funding. Existing funding instruments should be continued and strengthened. Additionally, member states should be encouraged to introduce measures such as tax deduction schemes and investment tax credit for green energy and industrial projects. Public funding instruments, as outlined in the EU Electricity Market Design regulation, should be utilised to support new clean energy investments in the energy industry as well as for new investment projects and energy cost support for energy-intensive industries.

Shortcomings in the underlying impact assessment

The Impact Assessment underlying the Communication, however, is partly based on outdated data on energy capacities (referencing to 2019 national climate and energy plans, NECP) and underestimates, e.g., the role of nuclear in the future scenarios. The final NECP updates in 2024 should be taken into account in the future capacity assessments before setting the 2040 target.  

Furthermore, the Communication relies strongly on bullish forecasts on renewables (likely to cover up to 81-87% of the mix) but remains vague in its approach to the power system. The bulk of the energy will definitely come from intermittent renewables, but from the system perspective, it is crucial to have a balanced mix of variable, firm and flexible clean electricity generation.

Conclusions

In summary, our comment advocates for an ambitious EU 2040 climate policy that prioritises emissions reduction, industry decarbonisation and a broadened scope of carbon pricing. By addressing these, the EU can pave the way for achieving its 2040 emissions reduction targets and ensuring a sustainable, competitive and secure energy landscape.