Mikael Ohlström believes that each country should be able to choose its own means for reducing emissions. Ohlström is Chief Policy Adviser with the Confederation of Finnish Industries (EK), and focuses on energy and climate issues in his daily work. The rapid changes taking place in the energy market have surprised him.
Mikael Ohlström, who works at the Confederation of Finnish Industries, shows a complex diagram on the projection screen. Upon closer examination, the whirlwind of arrows and text boxes is revealed to represent the overall structure of the EU energy union, including the role of emissions trading. This is the core of Ohlström’s expertise.
“The emissions trading system is a complex creation with the sincere purpose of reducing emissions within the EU. It is a method for putting a price on greenhouse emissions. The idea is to use market forces to steer operators towards reducing their emissions,” Ohlström explains.
Each EU member state has its own emissions quota. If part of the quota is not used, it can be sold to the highest bidder. As the targets become stricter, the emissions quota reduces. This increases the price of emissions allowances, and operators will act to cut emissions.
Emissions trading works well when allowances are scarce
The recession in Europe has led to a collapse in demand for, and therefore also the price of, emission allowances. At the moment, polluting the skies is so cheap that reducing emissions is not profitable.
Mikael Ohlström still believes in the future of emissions trading.
“I still believe in it. The principle is healthy. The problem is just that due to the recession, we have too many emission allowances, which makes them too cheap. If we had a scarcity of allowances, the system would steer operations much more effectively,” Ohlström says.
He says that the situation in the European energy market has changed very quickly. The production subsidies that member states have granted for renewable energy production have had a major impact. They act against the emissions trading mechanism.
“If emissions trading is chosen as the main steering mechanism, but it is not properly respected and some specific methods of energy production are subsidized, this will of course affect the successful application of the emissions trading system. The price of emission allowances will no longer reflect their real value. Most EU countries, including Finland, have national subsidy systems that we should get rid of,” Ohlström says.
He supports subsidies provided for early operations, such as product development and demonstrations; these are useful. However, production subsidies granted for existing technology will distort the market for any business.
Focus on production methods results in more expensive reduction of emissions
According to Ohlström, EK has always taken the stand that any steering methods that overlap the scope of emissions trading should be discontinued before the 2020s.
“Old subsidy tariffs do, of course, extend to around 2030, but no new production subsidy systems should be launched,” Ohlström says.
EK and the EU partly disagree on what would be the best method for cutting emissions in Europe. According to EK, EU member states should only have one binding objective: to reduce greenhouse emissions.
EK believes that each country should be able to choose the methods it wants to apply. However, the Europe 2020 targets of the European Commission include a requirement that each member state should build a certain amount of renewable energy production capacity. The targets for 2030 are a little better, but the shared objective for all EU states requiring that 27% of all energy is renewable may still be divided into country-specific quotas. What exactly is the problem with quotas for renewable energy production?
“If the production methods are the sole focus of solving the problem, emission reductions will be expensive. If we focus on the objective – reducing emissions – each country could choose the most effective means of cutting emissions. If the only objective is to increase the share of renewable production methods instead of simply cutting emissions, member states will feel pressure to create new subsidy systems. This will result in a struggling emissions trading system,” Ohlström explains.
Cheap electricity will be expensive
Lately, electricity has been cheap – maybe too cheap. On windy days, the price of electricity in Central Europe may even be negative: producers pay consumers to use electricity. Isn’t cheap electricity at the top of any wish list from industry?
“Certainly. Still, if the low prices continue for too long, it is no longer worth investing in. This poses a threat to industry. There may no longer be a secure supply of electricity. It is of course true that Finland has benefited from the competitive advantage created by cheap energy. At present, however, we have fallen behind a bit: electricity is already cheaper in Sweden, and in Germany, the Energiewende (“energy transformation”) has resulted in a collapse in prices.
But still, shouldn’t Finnish industries lobby for renewable energy if it has already been shown to lower the price of electricity in Sweden and Germany, who we are in competition with?
If electricity costs nothing, you may not be able to buy it anywhere soon, since nobody can produce it for free
“That is a valid question, but everyone also sees the importance of a secure supply. If electricity costs nothing, you may not be able to buy it anywhere soon, since nobody can produce it for free. For renewable energy, this creates a conflict: temporarily, the prices are competitive, but everyone realizes that the situation cannot continue for long. The energy supply system just cannot support a structure like this,” Ohlström says.
“There are two conflicting trains of thought: energy consumer businesses that also own electricity production subsidiaries need to maintain a certain price level. At the same time, they benefit from low prices as consumers. When Hanhikivi 1 begins production operations, we may be living in a completely different world. With such rapid changes behind us, we understand that fast changes in the opposite direction are also possible if stricter emission limits are applied.
Climate policy vs. industrial policy
Throughout his career, Mikael Ohlström has dealt with energy and climate issues. Previously, he worked for a long time at VTT Technical Research Centre of Finland and gained a thorough understanding of climate policies. His current position at EK includes the added objective of maintaining Finland’s ability to compete. Ohlström believes that climate objectives can be aligned with industrial policy, but only based on a solid understanding of European and global preconditions.
“These are extremely important and certainly not easy questions that have an impact on the future of Finland and Finnish businesses. Some of the objectives are in conflict with each other. During the transition period, businesses must receive some compensation, which could be provided by taxation and subsidies, for example,” Ohlström says.
In addition to the EU, emissions trading systems are currently in operation in California, Korea and China, for example. They are not identical, however. China, for example, aims to reach a lowering emission trend by 2030, which means that the system has no continuously decreasing emission limits.
“The Chinese system still allows emissions to increase in the next few years. China has of course also seen progress: last year, their emissions were lower even with economic growth of 6.7%. The reasons for this development include the reduced use of coal and strong growth in the production capacities of nuclear energy and renewable energy. The poor air quality in cities is a strong driver for change, leaving global climate change far behind.”
Steel made in Finland is a clean product
Coal continues to be the primary electricity production method in China, which results in high emissions. In comparison, steel produced in Finland is much cleaner: manufacturing one metric ton of steel results in 3–4 times the amount of carbon dioxide emissions in China than it does in the Nordic countries, due to the difference in electricity production emission levels. The problem is that because emissions have no globally agreed price, climate-friendly production does not easily translate into a competitive advantage.
Emission targets also vary within Europe. According to Ohlström, Finland and the other Nordic countries are rather like straight-A students who consider themselves pioneers and require much more of themselves than many other European countries do. The European Commission also requires more from them than from others.
“For example, in the area of traffic, we must achieve reductions of up to 50% in emissions, while Eastern European countries only need to reduce their emissions by a few percent during the same period. Since we already are doing well in many respects, reducing emissions is much more difficult and expensive for us than for many other EU member states. This will affect our ability to compete.”
The new administrative model of the energy union makes it impossible for EU member states to back out from emission targets and other objectives; they can only be made stricter. This means that future governments will be bound by the decisions of their predecessors. Ohlström and many other experts believe that the EU should be treated as one region instead of as individual states. Emissions could then be first reduced in areas where it would be easier and less expensive.
“The situation in Eastern Europe, for example, could be quickly improved by better energy efficiency,” Ohlström says.