The Finnish Climate Change Panel report: Reforming EU climate policy is an opportunity for Finland

The report published today by the Finnish Climate Change Panel examines options for implementing the EU climate policy in the 2030s, as the EU’s goal is to reach a 90% net emissions reduction by 2040.

The Climate Change Panel report provides decision-makers with information on the impacts of different policy options on Finland. The report describes the main features of the current EU climate policy architecture and assesses options for developing it after 2030, especially with regard to emissions trading system. In addition, development scenarios for EU emissions trading system are assessed based on economic modelling and legal analysis.

EU-level climate policy supports the achievement of Finland’s own targets

With the help of modelling, the report studies four scenarios for the EU’s post-2030 climate policy: the policy will continue according to the current rules, permanent carbon removals will be added to EU emissions trading system, current emissions trading system and new distributor emissions trading system (for buildings, road transport and additional sectors) will be integrated or international carbon credits under the Paris Agreement will be included in emissions trading system.

In all scenarios, Finland will achieve its 2040 target of reducing emissions by 80% from 1990 levels, excluding emissions from the land-use sector, but in no scenario will Finland achieve carbon neutrality under the Climate Act in 2035, without significant additional national measures in the land-use sector. New policy measures in the land-use sector were not addressed in the examined scenarios.

Emissions pricing promotes cost-effectiveness and benefits Finland

Cost-effectiveness will become more important, as emissions reductions become more challenging as we move towards increasingly stringent climate targets. Expanding the pricing of emissions through taxes, emissions trading or emission-based subsidies promotes the cost-effectiveness of emissions reductions.

“Finland benefits from emissions trading system because its emissions in the emissions trading sector have decreased relatively quickly.  If permanent carbon removals are included in emissions trading system, it could bring additional income to Finnish companies that are able to produce large amounts of negative emissions,” says Lassi Ahlvik, professor of environmental economics.

As the importance of emissions trading system increases, the role of the emission targets allocated to the Member States in achieving the 2040 target diminishes. Expanding emissions trading to sectors beyond the current ones, such as waste incineration, would also promote emissions reductions in those sectors.

Choices made today will determine the future of emissions trading system

Based on the report, the Finnish Climate Change Panel makes the following recommendations to policymakers for developing the EU Emissions Trading System (ETS):

1. Permanent carbon removals should be included in emissions trading, but the price of emission allowances should not be reduced.
2. In the long term, the current emissions trading system and the new distributor emissions trading should be combined.
3. International carbon credits should not be linked to emissions trading.

Linking permanent carbon removals to emissions trading would create a strong and growing incentive for their development. However, permanent carbon removals should be linked to the emissions trading system in a restricted manner, allowing only permanent removals, while at the same time reducing the number of emission allowances issued or setting an upper limit for the use of carbon removal credits.

Without adjusting the number of allowances, net emissions could increase due to the functioning of the Market Stability Reserve in the EU Emissions Trading System. It should also be noted that the capture and permanent storage of bio-based carbon dioxide produce negative emissions only if the sustainability of the biomass used is safeguarded and the natural carbon sinks are kept sufficiently large from the climate policy perspective.

“Linking permanent carbon removals to the emissions trading system should be done in a way that does not slow down progress in actual emissions reduction efforts,” says Senior Researcher Kati Koponen.

Combining the EU’s two separate emissions trading systems would result in the same emissions price for both industrial emissions and fuels used in road transport and building heating, promoting cost-effectiveness. A common emissions trading system would likely increase the price in the current emissions trading system and create a stronger incentive for industrial emissions reductions and the introduction of permanent carbon removals. At the same time, it would likely limit the highest prices in the new distributor emissions trading system, which could in turn increase the acceptability of climate policy, for road transport for example.

Adding international carbon credits to the EU Emissions Trading System is not recommended, as cheap credits would reduce the price of emission allowances, displace industrial climate actions and slow down the deployment of permanent carbon removals.

“The linking of international carbon credits to EU climate policy, agreed at the end of 2025, should be implemented through means other than the emissions trading system. Alternatives could include either an EU-level purchase programme that complements the EU target or the use of international carbon credits based on the national discretion of the Member States,” says Professor of International Environmental Law Kati Kulovesi.

Further information: 

The report: inland and the European Union’s climate policy in the 2030s (summary in English)

• Lassi Ahlvik, member of the Finnish Climate Change Panel, professor at the University of Helsinki, tel. +358 40 617 6877
• Kati Kulovesi, member of the Finnish Climate Change Panel, professor at the University of Eastern Finland, tel. +358 50 439 2173
• Kati Koponen, member of the Finnish Climate Change Panel, senior researcher at VTT, tel. +358 40 487 8123