Carbon market development
Substantial oversupply and low price levels characterised the EU market for emission allowances in 2013. The scheme is in urgent need of reform in order to give the market the right price signal that encourages investments in low-carbon production.
New knowledge about climate change
The Intergovernmental Panel on Climate Change (IPCC) published its latest assessment report on climate change in September 2013. The report takes a more serious tone than before in describing the advancement of climate change – limiting the increase in the global average temperature to two degrees is extremely challenging and, at worst, the increase can be as high as five degrees. As a new issue, the IPCC addresses the significance of oceans on climate change; the bulk of the heat increase is stored specifically in oceans.
In 2013, the carbon dioxide concentration in the atmosphere surpassed 400 parts per million (ppm) for the first time in human history. The IPCC also determined the carbon emissions limit that, if exceeded, would lead to atmospheric warming of more than two degrees. The IPCC noted that at the current pace the global carbon emissions quota will be
reached in 30 years, and called for quick actions to curb emissions.
To improve the functionality of the emissions trading scheme, the EU must set an ambitious reduction target for greenhouse gas emissions only.
The UN’s international climate negotiations advanced with weak results in 2013. The goal is for a universal climate agreement by 2015. Development of an international carbon market advanced only in some respects. Several emissions trading pilot projects were launched in China, and regional schemes were expanded in North America. Australia decided to repeal the previously agreed emissions trading legislation, and thus its earlier agreed link with the EU’s emissions
trading scheme remains unrealised for now. Japan also announced that it will significantly lower its own emissions reduction target.
Climate targets must be clarified quickly
The EU has committed to an 80-95% reduction in carbon dioxide emissions by 2050. The European energy industry has committed to the challenging emissions target, but the regulatory uncertainty significantly hampers the investments and emissions reduction measures required to achieve the target. Climate policy must be long-term and predictable for energy sector investments. By committing to one target – the ambitious reduction of greenhouse gas emissions by 2030 – overlapping regulations and controls could be dismantled and uncertainty could be significantly reduced.
Market-driven solutions, like emissions trading, must be
prioritised to minimise the costs incurred by reducing emissions. Emissions trading improves the competitiveness of low-carbon production methods and enables climate targets to be achieved at the lowest possible cost.
The EU is currently defining the energy and climate policy framework and targets for 2030. The Commission’s proposal for 2030 target-setting was received in January 2014, and the aim is to decide on the targets during spring 2014. The Commission proposes a 40% reduction in greenhouse gas emissions by 2030 compared to 1990 levels. The proposal also includes a binding EU-level target to increase the share of renewable energy sources to 27% by 2030.
Emissions trading scheme must be reformed
The economic recession and overlapping climate policy steering mechanisms in the EU have led to reduced demand
for emission allowances and lower prices, which hovered around 4-5 euros for most of 2013, although the price did fluctuate considerably from 2.5 euros to nearly 7 euros. A very low emission allowance price does not encourage low-carbon investments, and thus creates a risk that new production capacity to be built will generate emissions far into the future.
After long negotiations in the EU and the resulting decision to postpone the auctioning of 900 million allowances (backloading), the end of the year saw a slight recovery in the carbon market from the low in spring 2013. The backloading to be implemented during 2014 is the first measure to reform the emissions trading scheme. The goal is to restore confidence in the emissions trading scheme and to give the market a price signal that encourages investments in low-carbon production methods.
Structural reform of the emissions trading scheme was actively debated. The Commission gave its proposal on reforming the scheme in January 2014, but the related decisions will be deferred to the term of the new Commission and Parliament. The Commission is proposing the adoption of a market stability reserve starting in 2021; the mechanism sparked wide interest already in 2013. Fortum proposed an allowance supply adjustment mechanism in July 2013 and actively lobbied for the method with various stakeholders.
During the year, real concern emerged about the impact of climate change mitigation on the competitiveness of Europe and energy-intensive industries in particular. Emissions must be reduced cost-efficiently, e.g. with a functioning carbon market; consequently, climate change mitigation costs and the impact on energy prices will remain lower than with other climate policy control mechanisms.