EU emissions trading changes could place greater pressure on forests, agriculture and transport in Sweden and Finland if heavily polluting industries are allowed to reduce their emissions more slowly. The two Nordic governments are warning ahead of a European Commission proposal expected on Friday, 17 July, arguing that countries which invested early in renewable and low-carbon energy should not pay for slower decarbonisation elsewhere in Europe.
Swedish Prime Minister Ulf Kristersson and his Finnish counterpart Petteri Orpo have urged the Commission to preserve a stable, ambitious and predictable EU Emissions Trading System, commonly known as the EU ETS.
Their intervention reflects concern that weakening the carbon market would reduce the economic benefits gained by companies that have already invested in renewable electricity, nuclear power, electrification and cleaner industrial production.
The Commission is expected to propose changes that could extend free emission allowances for energy-intensive industries and slow the rate at which the overall number of allowances declines. Negotiations between EU governments and the European Parliament are expected to begin in the autumn.
EU emissions trading changes divide member states
The EU ETS requires power producers, industrial installations and other covered sectors to surrender an allowance for each tonne of carbon dioxide they emit. The total number of allowances is gradually reduced, creating an economic incentive for companies to invest in cleaner production.
Italy, Poland, Austria and the Czech Republic are among the governments calling for changes to limit the impact of carbon prices on energy costs and industrial competitiveness. Their economies remain comparatively dependent on fossil fuels, particularly natural gas.
Energy prices have also increased following the war involving the United States and Iran, adding pressure on European governments to provide relief to industries and consumers.
Some governments have reportedly called for the emissions trading system to be suspended or for a low ceiling to be imposed on the price of allowances. An EU emission allowance currently costs approximately €70 to €80 per tonne of carbon dioxide.
Sweden and Finland oppose a broad weakening of the system. They argue that the ETS remains the main European mechanism for applying the polluter pays principle and encouraging industrial decarbonisation.
Denmark, the Netherlands, Spain and Portugal have expressed similar concerns. These countries already generate substantial shares of their electricity from renewable or other low-carbon sources and therefore have less to gain from measures designed to support fossil fuel-dependent industries.
Finland says early energy investments must retain their value
Finland is particularly concerned that changes to the EU ETS could remove the competitive advantages created by its early transition towards low-carbon electricity.
A large share of Finnish electricity is produced from renewable sources and nuclear power. Finnish companies therefore generally need to purchase fewer emission allowances than competitors operating in countries with more carbon-intensive energy systems.
The EU ETS has consequently been relatively favourable to Finnish industry. The main purchasers of allowances are energy-intensive industrial plants, while several of these sectors also receive free allocations intended to prevent production from moving outside the European Union.
Helsinki fears that reducing carbon prices or increasing the supply of allowances would weaken the business case for renewable energy and clean industrial investments. Companies that expected these investments to improve their competitiveness could instead find themselves competing with businesses that delayed their transition.
The uncertainty could also discourage planned investments. Companies generally require predictable regulation before committing capital to industrial plants, clean-energy infrastructure and technologies with long operating periods.
Finland and Sweden argue that changing the rules after companies have already invested would effectively penalise European climate policy early movers.
Nordic companies warn against regulatory uncertainty
Around 80 large Nordic companies called on the Commission earlier this year to make as few changes as possible to the emissions trading system.
The companies included Volvo Cars, Nordea, Neste, Fortum, Outokumpu, Vattenfall and SSAB. They warned that unstable climate legislation could undermine investments made on the assumption that carbon-intensive production would become progressively more expensive.
Tapio Laakso, EU Affairs Director at Finland’s Climate Leadership Coalition, said the ETS risked becoming a political scapegoat for problems affecting European industry that originated elsewhere.
Weakening the system, he argued, would damage one of the EU’s central mechanisms for modernising industry and reducing emissions.
The corporate intervention shows that the debate does not divide governments and businesses along simple lines. Several Nordic industrial groups support a strong carbon market because they have already incorporated higher carbon prices into their investment strategies.
Why weaker industrial targets could affect Nordic forests
Industrial emissions covered by the ETS and carbon removals from forests are governed by separate pieces of EU legislation. However, both contribute to the Union’s overall climate targets.
The EU has committed to achieving climate neutrality by 2050 and reducing net greenhouse gas emissions by 90% by 2040 compared with 1990 levels.
If industries covered by the ETS are allowed to emit more than previously expected, other parts of the economy may need to deliver additional reductions or carbon removals.
As Kristersson and Orpo stated in their letter to the Commission, every tonne of carbon dioxide not reduced through emissions trading would have to be compensated for elsewhere.
Sweden and Finland fear that this could produce stricter targets for forest carbon sinks, agriculture and transport. The two countries could therefore be required to compensate for slower industrial transitions in other member states.
Swedish Minister for EU Affairs Jessica Rosencrantz (EU-ministern) has confirmed that forests could face greater pressure if the ETS becomes less ambitious.
Finland has expressed the same concern. Forest carbon sinks have weakened in recent years, making the country’s existing land-use climate obligations increasingly difficult to meet.
Forest policies are already contested in Sweden and Finland
Forests cover around 70% of both Sweden and Finland and support major timber, paper, pulp and bioenergy industries. The sector is an important source of employment, exports and regional economic activity.
Carbon removals from forests, wetlands, agricultural land and other ecosystems are regulated through the EU framework on land use, land-use change and forestry, known as LULUCF.
Sweden and Finland have argued that their current carbon-removal targets are increasingly difficult to achieve. Climate change, slower forest growth and changes in harvesting levels have reduced the capacity of their forests to function as carbon sinks.
The two governments have warned that meeting stricter targets could require restrictions on logging, with consequences for forestry production and employment.
Environmental organisations and researchers dispute parts of this argument. They say intensive harvesting, monoculture forestry and shorter tree-growing cycles have contributed to weaker carbon sinks. Measures such as reducing logging, allowing trees to grow for longer and increasing species diversity could improve carbon storage and forest resilience.
The debate therefore concerns not only how much carbon forests absorb, but also how the EU distributes climate responsibility between industrial emitters and countries with extensive natural carbon sinks.
Free allowances may remain available for longer
The Commission could propose extending the period during which energy-intensive industries receive free emission allowances.
Free allocations are currently provided to sectors considered at risk of moving production outside the EU to avoid European carbon costs. The number of free allowances is intended to decline progressively as companies adopt cleaner technology.
Their distribution was originally expected to end by 2039, as the EU’s Carbon Border Adjustment Mechanism gradually replaces them. The mechanism applies a carbon price to certain goods imported from outside the EU, with the aim of placing European and foreign producers under more comparable conditions.
The Commission could give industries additional time while attaching stricter investment requirements to free allocations. Companies receiving them could be required to demonstrate that they are investing in emission reductions.
Other options reportedly under discussion include changing the EU’s market stability reserve, which controls the number of allowances circulating in the market, and providing greater support for carbon capture and storage.
For Sweden and Finland, the central question is whether these changes will preserve the incentive to reduce emissions. Both governments accept that Europe must address high energy prices and industrial competitiveness, but reject measures that would transfer the remaining climate effort to forests, transport and agriculture.
The negotiations will therefore test whether the EU can provide greater flexibility to carbon-intensive industries without undermining companies and countries that invested early in the transition.
