Three Nordic utilities on Tuesday proposed a "Policy Coherence Mechanism" that would adjust the volume of CO2 allowances auctioned by EU governments to take account of other EU climate and energy policies' impact on the EU Emissions Trading System.
The three largest Nordic utilities -- Fortum, Statkraft and Vattenfall -- issued a joint statement calling for the new mechanism which aims to avoid ongoing negative consequences of other policies on the carbon price in Europe.
After 12 years of operation, Europe's flagship carbon market continues to be weighed down by an oversupply of 1.694 billion mt of CO2 allowances -- just under a year's worth of permits -- caused by a faster drop in CO2 emissions than first envisaged.
OVERLAPPING POLICIES PARTLY TO BLAME
The surplus of allowances has resulted from a combination of slower economic growth following the 2008-09 global financial crisis, widespread use of free allocation of allowances and overlapping EU climate and energy policies which have led to additional CO2 reductions in sectors already covered by the 31-nation system.
That includes individual policies set unilaterally by EU member states as well as the bloc's overarching policies such as renewable energy and energy efficiency targets.
While Europe is well ahead of schedule to meet its 2020 emissions reduction target under the EU ETS, the impact of other EU polices has rendered its carbon price almost meaningless as an investment signal.
EU Allowance futures contracts for December 2017 delivery on the ICE Futures Europe exchange have averaged Eur4.99/mt this year, compared with more than Eur30/mt in 2008.
This is the aspect of the EU ETS that needs fixing, the three Nordic utilities said. "Policies that overlap with the EU ETS are a significant contributor to its current ineffectiveness," they said in the statement.
"To date, one third of the surplus of allowances in the ETS has originated from intersecting policies," the companies said in the report, which was produced at their request by Poyry Management Consulting.
CO2 AUCTION VOLUMES TO BE REDUCED
The Nordic utilities said the volume of CO2 allowances sold at auctions needed to be reduced to account for other policies.
"The Policy Coherence Mechanism 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 utilities said.
The Policy Coherence Mechanism would ensure the overlapping policy has a real environmental benefit, the utilities said, because the number of allowances would be reduced, not just redistributed in the system.
The proposed Policy Coherence Mechanism would work by calculating the impact of other policies on the EU ETS ex ante, with cross-checks by the European Commission, and an appropriate cancellation of CO2 allowances from member state auctions.
Two years later, the impact would be assessed ex post and compared with the original assessment, with revisions made to the auction volume if needed, the utilities said.
UTILITIES EYE EU GOVERNANCE REGULATION
The Nordic utilities said the new mechanism should be embedded in the framework of the EU Governance Regulation currently being discussed by the EU institutions.
The EU Governance Regulation aims to deliver on the objectives of the EU's Energy Union, including climate and energy goals for 2030 and beyond, and is supposed to ensure policy coherence, investment certainty, improved coordination between member states and reduced administrative burden.
The three Nordic utilities produce a combined 258 TWh/year of electricity and 49 TWh/year of heat.
The Nordic utilities' calls for a fresh approach come as the EU Parliament, Council and Commission work on proposed changes to the EU ETS to take effect after 2020.
The EU has already passed legislation to create a Market Stability Reserve to curb the surplus of CO2 allowances starting January 2019, but its parameters are being debated as part of the wider proposed post-2020 reforms.
Three-way talks on the proposals were expected to continue on June 27, with final agreement expected later this year.
The three utilities said while they supported those legislative efforts, the new mechanism was needed to further strengthen the EU ETS.
The EU Governance Regulation was set to be discussed at a meeting of the EU Parliament's energy and environment committees on Wednesday.
