EU CO2 emissions quota system reform will inflate oil shale energy prices

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Ida-Viru County power station operated by private sector firm VKG. The large grey 'hill' top right is a slag heap created by mining oil shale, which is then refined into oil to fuel power stations, a sector which saw major development in the Soviet era. Source: VKG.

The European Union's green policy on trading in Carbon Dioxide emissions allowances is likely to be tightened up in the near future, which is in turn likely to lead to a rise in the price of oil shale energy in the next five years. The sector dominates the economy of Ida-Viru County, but is coming under increasing political pressure due to conflicts with the union's environmental stance.

The bulk of Estonia's CO2 emissions emanate from the oil shale sector and three big firms, the state-owned electricity generator Eesti Energia, private sector oil shale firms VKG and Kiviõli Keemiatööstus (the latter part of the Alexela Group).

The sector once provided the bulk of Estonia's electricity needs. However, not only is electricity imported via the Nord Pool market, but also renewables solutions – primarily wind power but even solar energy – are being sought, while plans are in place for a small nuclear power station in Estonia as well.

Some imported electricity generated in Russia and Belarus - neither country is subject to carbon emissions charges - has found its way to Estonia, though the ongoing plan in Estonia, Latvia, Lithuania and Poland to synchronize with the "continental" European grid and decouple from the Russian grid should help to alleviate that.

No free allocation made for electricity production

Imre Banyasz, climate department chief specialist at the environment ministry, told ERR that: "No free allocation is made in respect of electricity production, so electricity production from oil shale is probably the most affected by the increase in [emission allowances]."

As of the end of 2019, the European Commission had presented the European Green Deal, aimed at achieving climate neutrality in the EU by 2050, which Estonia ultimately signed up to.

Banyasz said: "The current government has set goals in the [Reform/Center] coalition agreement. In addition, in September 2020, the European Commission presented another plan which required greenhouse gas emissions be reduced by 55 percent by 2030 compared with levels in 1990 levels, in working towards climate neutrality."

These initiatives will push for a review of EU climate and energy policy legislation, including the European Union Emissions Trading System (EU ETS Directive), he said, adding that amendments are expected from the commission in June, which will be followed by a period of negotiations, and the changes themselves will likely enter into force in 2026, Banyasz said.

EU ETS main policy plank in achieving climate neutrality

The  EU ETS was the first large greenhouse gas emissions trading scheme in the world, and remains the biggest. It was launched in 2005 to fight global warming and is a major pillar of EU energy policy.

The EU ETS Directive requires energy companies and energy-intensive major industries reduce their greenhouse gas emissions, and covers around 11,000 installations in the EU, and 45 percent of total EU emissions. 

As of the beginning of 2021, 44 of these installations are located in Estonia, ERR reports.

Free allowances aimed at stopping carbon emitters relocating outside EU

As things stand, a large proportion of ETS-compliant firms receive part of their allowances free of charge in order to avoid "carbon leakage", meaning the relocation of production outside the EU, or the purchase of the same products from third countries, where similar environmental standards have not been set.

An environment ministry spokesperson told ERR that: "Since the total number of allowances in the system is declining faster, due to new targets, the European Commission is also analyzing whether the principles of free allocation should be reviewed, and in which sectors installations are actually at risk of carbon leakage:"

At the same time, it is not known for sure how this will affect Estonia, since what the commission will change is equally unknown at present.

Imre Banyasz says that general changes will affect Estonia, since the EU ETS is applied uniformly across the union, but to what extent is, again, unclear.

Free allowances actually lead to higher prices

The risk of carbon leakage should be addressed, Banyasz added, which free emissions allowances to sectors at this risk continuing to 2030 will help to alleviate.

"If the number of units allocated to companies is reduced free-of-charge, companies will need to buy more units from the market, which will lead to higher costs. It is estimated that the market price of the unit could rise to almost €90."

"However, unit prices have already risen faster than expected at the beginning of this year, making it possible to forecast price increases more accurately when it is known what amendments the commission will make. As of February 22, the price stood at €36.80," Banyasz said.

ETS originally set at 43 percent reduction on 2005 emissions levels by 2030, figure may be boosted to 63 percent

The ETS directive as it stands sets a target of a minimum of 43 percent reduction in greenhouse gases in the relevant sectors by 2030, in comparison with 2005 levels (the latter being the year the ETS was implemented.

This is to be achieved by an annual reduction in allowances, which in turn will lead to an increase in market price of units, ERR reports, which then puts pressure on companies to make energey efficiency improvements to reduce their greenhouse gases using cleaner fuels, and modernizing their equipment.

However, the European Commission is now considering raising the 43 percent reduction target to around 63 percent, which will make the number of units in the system will decrease faster than previously set, and speed up the increase in the market price of units in turn, Imre Banyasz said.

Major political issue

While in opposition, Prime Minister Kaja Kallas (Reform) said that further investment in oil shale was not of any use, while the coalition deal signed just over a month ago put greater emphasis on transitioning to renewables and away from oil shale or fossil fuels in general (some power stations burn woody biomass rather than shale oil, but the prime minister has hit out at this too – ed.).

The decline of the sector brings fresh political challenges, particularly for the Center Party, which has traditionally seen a lot of its support from Ida-Viru County voters. Many towns in the region have Russian-speaking majorities; Center's policy on language in education and other areas has also been more amenable to this type of voter, but the party nonetheless has seen continued leaching away of support from this demographic. The cracks had started to show even as early as the March 2019 election, where voter turnout was particularly low. While some former Center voters transfer their support to other parties, particularly the socially-conservative EKRE, many do not vote at all.

Estonia's European Commissioner, Kadri Simson (Center), actually holds the energy portfolio.

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Editor: Andrew Whyte

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