Money alone is not enough – Consistent regulation is key to EU’s climate goals

A number of climate investments are underway in Finland and across Europe. In the plans, thousands of windmills on land and sea, hydrogen and synthetic fuels, and many other innovative energy solutions will help Europe’s transition to climate neutrality. With measures to boost the economy after the coronavirus crisis, public funding for the green transition will come from many directions. However, all this money will only yield results if the regulatory environment critical for investments is in order

Fit for 55 – EU's patchwork plan to reduce emissions

The EU aims to achieve net zero emissions by 2050. It is currently preparing climate legislation that aims to reduce total greenhouse gas emissions in the EU by at least 55% by 2030 from their level in 1990. In order to achieve this, the European Commission will issue a comprehensive package of legislative proposals in the summer, known as Fit for 55 (FF55).

The first key question is how to develop the EU’s Emissions Trading System (ETS). The system currently covers large-scale energy production and industry. In the plans to expand the system, emissions trading would also cover maritime traffic, road transport and buildings – sectors where separate emissions trading schemes could also be adopted. In that case, the so-called effort sharing sector, which sets national emission reduction targets for each Member State, would shrink correspondingly.

Cost-effectiveness should be an essential element in the development of the regulatory architecture. In order to make the best use of resources both financially and ecologically, the cost of reducing emissions by a tonne should be about the same in the emissions trading system and the effort sharing sector in different countries. The same should apply to the long-term reduction in greenhouse gases caused by sinks. The challenges of regional and social fairness should be addressed with the support systems intended for that purpose, not through climate policy.

The review of the Energy Efficiency Directive and the Renewable Energy Directive is part of the FF55 package. It is clear that the targets will be tightened. However, energy efficiency regulations should take into account that energy systems, which will be linked to each other in future, require many energy transformations. That the energy used is emissions-free is more important than the total amount of energy used. There should be no uncertainty or artificial barriers that could prevent investments in and the use of renewable energy sources of biological or non-biological origin.

In order for the EU to lead the way in new energy solutions, it must implement the integration of energy systems and the hydrogen strategy effectively. For example, rules on the utilisation of carbon dioxide and the sustainability of hydrogen and synthetic fuels should be clear and take into account the operating conditions of the industry. Such rules alone would trigger investments in the sector.

The FF55 also includes the LULUCF reform, the energy tax reform and a possible carbon tariff mechanism. All of these are challenging to implement and have a direct impact on business activities. Negotiations are likely to take a while.

Illogical taxonomy of sustainable funding

At the same time, as a controversial prelude to the FF55 proposals, the Commission will shortly submit a decree on how the mitigation of climate change should be funded. The original idea was to give the investors clear instructions on assessing the sustainability of new energy projects. This has a direct impact on the selection of projects to be financed and the price of funding.

Based on the draft, the regulation does not appear to meet its purpose. The rules are hundreds of pages long and, in many respects, inconsistent or contradictory to existing Union legislation. This is the case for hydropower and bioenergy, for example.

In climate investments, the key principle of technology neutrality is not realised because different measures are not assessed on fair and uniform criteria. Even more surprising is the fact that some fossil investments based on natural gas would be classified as sustainable in the taxonomy.

This illogical approach also applies to nuclear energy which has not been included in the taxonomy regulation at this stage at all. According to the EU, separate treatment is necessary because there is no solution to nuclear waste management. At least Finland has one: The world’s first final disposal facility of spent nuclear fuel, which is currently under construction in Olkiluoto.

The Do No Significant Harm principle (DNSH), which is included in taxonomy, requires that climate projects do not significantly interfere with other environmental objectives. However, it appears to be difficult to apply the principle, as the above description shows.

What about the EU's green recovery fund?

The EU is currently preparing a large-scale recovery package to boost the economy after the coronavirus pandemic, which will mean a huge transfer of income between the Member States. The Recovery and Resilience Facility (RRF) focuses on and strongly promotes the green transition. Indeed, the most important part of the recovery package is the synchronisation of European measures in both economic and climate policy.

Focusing on climate is an excellent and timely choice. It can give hydrogen-based industrial processes additional impetus, for example. However, it is important that the assessment of the investments does not solely look at the emission reductions they generate, because then the focus easily tends to be on traditional solutions. It is more important to demonstrate new solutions and technologies that can be duplicated both here and elsewhere. In such a case, the carbon handprint of the recovery funding (i.e. its positive multiplier effects) will be at its largest.

Unfortunately, the way the RRF is implemented means that the Member States will receive very different amounts of funding. This should not distort competition or lead to inefficient use of the money. The Commission therefore bears a great responsibility for monitoring the use of funding, including the rational application of the DNSH principle.

Poor regulation may undermine climate action

Global warming will not stop without massive investments and a wide range of solutions and technologies. Public money alone cannot achieve the objectives and, in the long run, it is therefore more important to mobilise private investors.

We simply cannot afford to select solutions that are not based on objective criteria. Unstable regulation slows down investments or takes them to countries with lighter regulation. The EU must be goal-oriented and consistent not only in its objectives but also in its actions.

Riku Huttunen is the Director-General of the Energy Department of the Ministry of Economic Affairs and Employment