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Nordic energy majors propose “Policy Coherence Mechanism” to “rectify” EU Emissions Trading Scheme

The three largest Nordic energy utility majors Fortum Oyj, Statkraft AS and Vattenfall AB have put forward a joint proposal for a "Policy Coherence Mechanism" to "rectify shortcomings" in the EU's Emissions Trading Scheme (ETS).

Fortum Värme's newly commissioned biomass-fuelled combined heat and power plant in Stockholm, Sweden.
Fortum Värme’s newly commissioned biomass-fuelled combined heat and power plant in Stockholm, Sweden. rtum Värme's newly commissioned biomass-fuelled combined heat and power (CHP) plant in Stockholm, Sweden.

Fortum, Statkraft and Vattenfall, the three largest Nordic energy utilities from Finland, Norway and Sweden respectively have presented a joint proposal for a “Policy Coherence Mechanism” to improve coherence between the EU Emissions Trading Scheme (ETS) and other policies. According to the energy utility trio, the proposal can be implemented in the framework of the EU Governance Regulation that is currently being discussed by the EU institutions.

The ETS has long grappled with a large surplus of emission allowances, which means that the carbon dioxide (CO2) price is not sufficiently high to stimulate the market into bringing the energy system in line with the objectives of the Paris Agreement.

We are positive towards many of the reforms that are currently being implemented in the EU ETS Directive. In particular, those measures which have the aim of removing a significant proportion of the surplus of emission allowances which has built up in the market up to now said Erik Filipsson, Policy Advisor at Vattenfall.

Incoherent targets and policies

Policies that overlap with the EU ETS are, according to a new report conducted by international consulting and engineering company Pöyry Management Consulting on behalf of the trio, a significant contributor to its current ineffectiveness. Furthermore, the oversupply may continue to grow in the future as a result of incoherent targets and new policies in the 2030 framework.

Released at the European Parliament (EP) on June 20 the report “Managing the policy interaction with the EU ETS” suggests that the allowance surplus is largely due to EU Member States (MS) setting their own targets, which is affecting emissions. To date, one-third of the surplus of allowances in the ETS has originated from intersecting policies, according to the findings.

Mechanism lacking

However, according to the trio what is currently lacking is a forward-looking solution and a built-in mechanism which directly regulates the number of emission allowances in relation to the climate initiatives being implemented at national level.

Let’s say that a country decides to shut down a number of coal-fired power plants. With the current system, the amount of carbon dioxide which would then be reduced locally would have no direct effect on the amount of carbon dioxide that can be emitted in the ETS. It means that the number of emissions allowances in circulation is too high and results in the price of emission allowances falling and no longer having the controlling effect intended. This means, paradoxically, that a less ambitious EU country can increase its emissions as a result of other countries’ efforts, as long as the jointly set EU objectives are achieved, explained Filipsson.

Propose automatic regulation

On the initiative of the three utilities, Pöyry Management Consulting has developed a mechanism to deal with this overlap in a structured and predictable manner by automatically regulating the number of emission allowances in relation to the real amount of emissions. Called the “Policy Coherence Mechanism” it aims at adjusting the ETS for future policy overlaps rather than seeking to retroactively correct for the surplus of allowances resulting from such policies.

The mechanism ensures that the overlapping policy has a real environmental benefit – as the number of allowances is reduced and not just redistributed in the system but it has no impact on the free allocation of allowances to the industry to protect it against carbon leakage.

As soon as a country reduces its emissions, this has to be reported centrally, and an equivalent amount of emission allowances removed from future auctions. In this way, the national measures also have an effect on the climate overall, and it avoids other policy instruments undermining EU ETS, so the cost per emission allowance becomes a real incentive to invest in climate-smart energy, Erik Filipsson said.

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