Carbon market development
The European carbon market scheme is the world’s first and, so far, the most extensive carbon market. The price of the EU emissions allowance is one of the most significant factors impacting the price of electricity on the Nordic electricity market.
In 2014, oversupply increased on the European carbon market and prices remained low. However, emissions allowance prices recovered somewhat towards the end of the
year, due to decisions and discussions related to the EU emissions trading scheme and EU emissions targets. Reforming the scheme began in 2014. A decision on a market stability mechanism for emissions trading is expected by the middle of 2015.
Market mechanisms gain moment
The carbon market was widely discussed also in global climate policy discussions. More than 1,000 companies and more than 70 countries have joined the World Bank’s Putting a Price on Carbon initiative in 2013-2014. A total of 40 countries have either deployed or are developing carbon pricing schemes that cover about one fifth of the global greenhouse gas emissions. Nearly 400 companies have joined the UN’s Caring for Climate initiative to develop practices related to carbon pricing and carbon markets.
Emissions must be reduced cost-efficiently, e.g. through carbon emissions pricing and a functioning carbon market. It
is important that the upcoming international climate agreement would enable wide use of the carbon market so that climate change mitigation costs and their impact on energy prices would remain lower than with other climate policy instruments. However, it is impossible to achieve emissions targets without market mechanisms and private sector capital.
Climate agreement urgency
The Intergovernmental Panel on Climate Change (IPCC) published its Fifth Assessment report on climate change in November 2014. The Synthesis Report describes the advancement of climate change more seriously than before: it is extremely challenging to limit the increase in the global average temperature to two degrees; at worst, the average temperature can rise by as much as 3–4 degrees. The report proposes abandonment of fossil fuels by the end of the century to keep climate warming below the target of two degrees.
The expectations in the UN’s international climate negotiations are focused on the COP21 conference to be held in Paris in late 2015. Its goal is to make a climate agreement binding all countries. The elements of the Paris Agreement were compiled at the climate conference held in Lima, Peru, in December 2014. Just prior to the Lima conference, the USA and China announced that they had agreed on national targets and collaboration to mitigate climate change. The USA is engaged in bilateral discussions on climate issues also with India.
A decision on 2030 climate targets
The European Council agreed in October 2014 on the key energy and climate targets for 2030. The set target is a binding reduction of domestic greenhouse gas emissions by at least 40% from 1990 to 2030. Additionally, EU-level targets to increase the share of renewable energy sources and to improve energy efficiency were agreed on. The targets will steer legislation and energy-sector investments and
development far into the future. Preparation of the legislation related to the realisation of the 2030 targets will start in 2015.
The European Council emphasised that a well-functioning and stronger emissions trading scheme is key in implementing the EU’s energy and climate policy. Emissions trading improves the competitiveness of low-carbon production forms and enables climate targets to be achieved at the lowest possible cost.
Reform of emissions trading scheme advances
The price of emission allowances hovered between 5.5-6.5 euros for most of 2014. However, the price did fluctuate considerably from 4.4 euros to 7.5 euros. A low allowance price does not encourage low-carbon investments, and thus creates the risk that new production capacity built now will generate emissions far into the future.
The goal of reforming the emissions trading scheme is to restore confidence in the scheme and to give the market a price signal that encourages investments in low-carbon and carbon-free production methods.
After long negotiations in the EU, a decision was reached in January 2014 to temporarily withdraw 900 million auctionable allowances from the market (backloading). This is the first measure reforming the emissions trading scheme. The first allowances were withdrawn from the auctions in March, and a total of 400 million allowances were withdrawn from the market during 2014.
In January 2014 the Commission gave its proposal on the market stability mechanism. The issue is currently under review in the European Parliament and Council. Commission proposals on the structural reform of emissions trading, including e.g. tightening the emissions trading sector’s annual emissions reduction factor and industry’s carbon leakage-related issues, can be expected next.