This report examines options for the EU climate policy architecture after 2030, with the aim of achieving a 90% net emissions reduction by 2040. The report describes the main features of the current EU climate policy architecture and discusses options for developing it, especially regarding emissions trading. Subsequently, alternative policy scenarios for the EU Emissions Trading System (ETS) are assessed based on economic modelling and legal analysis.
Emissions trading modelling is used to study four different scenarios for the EU climate policy architecture. The aim of the modelling is to understand the impact of the EU’s post-2030 climate policy architecture on greenhouse gas emissions in Finland and the EU, as well as its economic impacts. With the help of modelling, the report examines four scenarios for the EU’s post-2030 climate policy architecture: emissions trading will continue according to the current rules, permanent carbon removals will be added to the ETS, current emissions trading system (ETS1) and new emissions trading system for buildings, road transport and additional sectors (ETS2) will be integrated, or international carbon credits under Article 6 of the Paris Agreement will be included in emissions trading.
Based on the modelling, all scenarios will lead to a net emissions reduction of 85-88% in the EU, without additional measures. In all scenarios, Finland will achieve the target set in the national Climate Change Act (423/2022) to reduce emissions by 80% by 2040 compared to 1990 levels, excluding emissions from the land-use sector. However, in no scenario will Finland achieve carbon neutrality under the Climate Change Act, i.e. a balance between emissions and removals by 2035, without
significant national additional measures. New policy measures in the land-use sector were not addressed in the examined scenarios.
The report finds that emissions pricing promotes cost-effective climate policy in the EU. Finland benefits from a higher emission allowance price, as Finland’s emissions have decreased relatively quickly in the emissions trading sector, and Finland’s auction revenues are determined as a fixed share of total EU auction revenues. In the long term, the EU should strive to combine the current emissions trading system (ETS1) and the future emissions trading system for buildings, road transport and additional sectors (ETS2), as the integration creates a stronger incentive for industrial emissions reductions and the introduction of permanent carbon removals.
Linking permanent carbon removals to the emissions trading system would create a strong incentive for their development and could also generate additional income for Finnish companies. However, permanent carbon removals should be linked to the emissions trading system in a restricted manner, allowing only certified permanent carbon dioxide removals, while at the same time adjusting the number of emission allowances to be auctioned or limiting the use of carbon removal credits. Without adjustments, net emissions could increase due to the functioning of the Market Stability Reserve. Note, that that the capture and permanent storage of biogenic carbon dioxide produce negative emissions only when the sustainability of the biomass used is safeguarded, and the natural carbon sinks are maintained at a sufficient level from the climate policy perspective.
Based on the analysis, the Finnish Climate Change Panel does not recommend including international carbon credits to the EU Emissions Trading System, as importing cheap international credits to emissions trading would reduce the price of emission allowances, displace industrial climate actions, slow down the deployment of permanent carbon removals in the EU, and redirect investments outside the EU.