05 Emissions Trading – How Were 80% of Electricity and District Heating Climate Emissions Eliminated? Expert: Satu Hassi

→ If one approach doesn’t work, find another. Before emissions trading, the EU considered an EU-wide energy tax, but passing it required unanimous agreement from all member states — an almost impossible task. A new approach was found: emissions trading could be established as ordinary legislation, needing only a qualified majority.

→ Compulsion is the most effective motivator – money comes second. In the first phase of EU emissions trading, each company received an allowance from its home country. Today, allowances are allocated across the entire EU market. Companies exceeding their allowance must buy additional permits, while those under their limit can sell the surplus. By putting a price on emissions, the issue immediately reached corporate leaders’ desks. Initially, no new investments were required – coal-fired power plants were simply scheduled last in the dispatch order.

→ Successful regulation fosters a more sustainable market. As regulations increased demand for low-emission solutions, supply responded immediately. As the market grew, new technologies developed, solutions improved, and unit costs fell. Today, many climate-friendly options are commercially viable – solar and wind power are now the cheapest choices for new electricity generation.

→ Effective change happens at the societal level. Binding legislation is a powerful tool for shaping the world. Individual efforts to save energy in heating or electricity use alone would unlikely have achieved an 80% reduction in CO₂ emissions. As we learned in Episode 1, the most effective approach is designing environments where harmful choices are difficult, costly, or impossible. Active citizens, politicians, and researchers are essential to push key decisions through.

→ Changing the world requires actors from multiple fields. Implementing emissions trading depended on committed politicians and citizen activists, supported by political backers. Researchers and engineers contributed practical, continuously improving solutions. Within the European Commission, a majority and the Commission President, along with preparatory officials, were essential, as well as politicians willing to make tough decisions. Finland initially opposed emissions trading due to industrial resistance, but enough politicians from other countries ensured progress.

→ Decisions should be guided by research. Knowledge about climate change began accumulating in the 1970s, and by the 1980s the evidence was clear: burning fossil fuels drives climate change. In the early 1990s, climate change was still a marginal political issue, even though the UN adopted the Framework Convention on Climate Change in 1992, committing countries to prevent dangerous climate impacts. Environmental economics has shown that putting a price on carbon is one of the most effective ways to reduce emissions.

Skepticism about climate change and doubts about the impact of Finland’s actions sometimes emerge, requiring advocates of effective solutions to continually explain and justify their measures.

→ Being a pioneer is challenging – but impactful. With its emissions trading system, the EU has set an example for the world. Several U.S. states, Canadian provinces, and China have since adopted emissions trading, showing how Europe’s model can extend its impact far beyond the EU.

→ Stand firm in the face of opposition. Environmental requirements for industry are often dismissed as “too costly” or “unworkable.” Yet companies frequently begin preparing measures even before regulations take effect.

→ Change still happens. Initially, Finnish business leaders claimed emissions trading would destroy industry, and supporters were accused of betraying their country. When the Emissions Trading Directive was adopted, the head of the Confederation of Finnish Industries demanded at least 10 million additional CO₂ allowances for Finland. Yet in 2005, the first year of trading, emissions nearly met the 2010 Kyoto target. By 2018, the Confederation acknowledged climate change as a serious issue, supported ambitious environmental policies, and recognized emissions trading as an effective tool.

→ Changing the world requires tough debate and thick skin. Two decades ago, supporters were called traitors; today, emissions trading is widely recognized as effective. Pioneers needed endurance and confidence that the solution would eventually gain broad acceptance.