The “Swedish proposal” – Swedish climate leadership under the EU ETS

LARS ZETTERBERG

The European Union’s climate package ‘Fit for 55’ has been presented and we are entering a period of negotiations with all EU Member States. Sweden needs to engage in this process with both a clear vision and determination. Such engagement has proven to be quite successful. In the negotiations for the revision of the EU ETS in 2018, the “Swedish proposal” resulted in the introduction of a mechanism that will cancel emission allowances corresponding to 50-times the annual GHG emissions of Sweden.

When the EU Emissions Trading System was introduced, industry, government and researchers alike were pleased that a price had been set for greenhouse gas emissions that at that time covered about half of EU emissions. Capping emissions guaranteed that the EU would meet its climate target and trading with emission allowances meant that the emission reductions would take place at the lowest possible cost.

Figure 1:EUA prices 2008 - 2021 Source ICAP accessed 22 Nov

Low allowance price stalled the phasing out of fossil fuels Between 2013 and 2018, the EU ETS was plagued by a consistently low price for allowances (Figure 1). This was due to a large surplus of allowances, resulting mainly from the initially generous allocation, the economic crisis, and the influx of credits under the Clean Development Mechanism. Moreover, support for renewables and energy efficiency policies further reduced emissions, without necessarily adjusting the supply of allowances in a commensurate manner, thereby contributing to a growing surplus. The low price for allowances was clearly not providing incentives for either the phasing out of fossil-based power generation or the adoption of low-carbon technologies by industry. In response to the low allowance price, some Member States introduced or wanted to introduce additional policies, in order to comply with national climate objectives. However, the introduction of additional emissions reductions under an emissions cap is problematic. If the total volume of emissions allowances is fixed, extra emissions reductions in one country can lead to emissions increasing elsewhere in the EU, undermining the effectiveness and integrity of the national policies. This is sometimes referred to as the “waterbed effect”, i.e., sitting down on one side of a waterbed results in the other side rising.1

Excess allowances will be cancelled

In Year 2017, the EU ETS was reformed. From Year 2019 allowances corresponding to 24 percent of the allowance surplus have been transferred into a market stability reserve (MSR). From Year 2023 onwards, the MSR will only be allowed to hold as many allowances as were auctioned in the previous year – the excess allowances will be cancelled. Estimates show that about 3 Gt of allowances2 will be invalidated between the years 2023 and 2030.3 This invalidation mechanism is a result of the so-called “Swedish proposal”, so-named because it was designed and negotiated by Swedish negotiators. Sweden can have a huge impact on EU climate action

The Swedish proposal will result in a reduction of EU emissions corresponding to almost 50 times the total of Sweden’s annual emissions annually. The reform has driven up the price of allowances from around €5 to over €60, which has accelerated the phasing out of coal in the EU. This shows that, with judicious handling, Sweden can have a significant impact on EU emissions and climate action.

1 Burtraw et al (2018). “Companion Policies under Capped Systems and Implications for Efficiency – The North American Experience and Lessons in the EU Context” RFF Report 2 Corresponding to almost 2 year of allowance demand. 3 IVL-report C312, available on www.ivl.se