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German coal phase-out could be in vain without CO2-pricing

It’s a strong signal that an industrialised country with high coal consumption such as Germany is deciding to phase out coal.

It cannot be taken for granted that Germany’s plan to phase out coal by 2038 will actually decrease CO2 emissions on the European level. On the contrary, the phase-out could even increase emissions due to a complicated new mechanism in the European Emissions Trading Scheme, a team of researchers shows in a new analysis. To make sure the coal phase-out really helps stabilise the climate, it must be combined with a minimum price for CO2 or the cancellation of existing emission certificates.

“It’s a strong signal that an industrialised country with high coal consumption such as Germany is deciding to phase out coal – but now we need effective political tools to ensure that the forthcoming implementation of the coal commission’s decision actually reduces climate-damaging CO2 emissions,” says Michael Pahle of the Potsdam Institute for Climate Impact Research (PIK), lead author of the study published in Energiewirtschaftliche Tagesfragen. “Otherwise, there is a serious risk that a coal phase-out by simply shutting down power plants will backfire. This would be bad for the urgently needed stabilization of our climate – and it would damage people’s confidence in politics as well as the reputation of German climate policy in the world. But fortunately it can be prevented with a reliable and fair pricing of CO2”.

The analysis is part of the work of the Kopernikus project “ENavi”, funded by the German Federal Ministry of Education and Research. It also includes research on a minimum price in European Emissions Trading Scheme (ETS) conducted in the “AHEAD” project funded by Stiftung Mercator Foundation. The results will also be presented by Ottmar Edenhofer at the Congress of the German Federal Association of Energy and Water Management (BDEW) this Thursday.

European Emissions Trading: Only relocation across the border?
The researchers have analysed the consequences of two effects. First: If coal-fired power plants in Germany are shut down, the supply of electricity in the market decreases and the price of electricity rises accordingly. As a result, however, the remaining coal-fired power plants will increase their production and thus emit more CO2. Secondly, Germany’s coal phase out will reduce the demand for emission allowances in the ETS, and in consequence their price will fall. In turn, electricity producers in other countries buy more of the then cheaper allowances and hence increase their CO2 emissions. So eventually emissions reductions in Germany will be neutralised.

“These risks have so far been underestimated,” says Christian Flachsland, co-author of the Mercator Research Institute on Global Commons and Climate Change (MCC). The researchers have calculated a number of scenarios. For example, the demand for electricity can rise sharply, especially if the heating sector and the transport sector – just think of electric cars – are comprehensively electrified. This increase in demand can cause CO2 emissions in Germany to rise despite the coal phase-out plan if no counteracting CO2 price is in place. 

Importantly, even the newly introduced market stability reserve (MSR) in the European Emissions Trading Scheme does not help. “Through the MSR, emission allowances are being taken off the market,” says Flachsland. “But this will essentially happen before 2035 – but only then will the majority of the emission reductions be achieved by the German coal phase-out. The bottom line is that the ETS in its current form cannot guarantee that the coal phase-out will bring by additional emission reductions.”

Edenhofer: An insurance against regulatory and market uncertainties
A CO2 price can help. If it is introduced in Germany, at 30 to 60 euros per ton in 2030 depending on the scenario, the national climate targets in the electricity sector will be achieved. Emission allowances could be cancelled in order to prevent a mere relocation of coal-fired power generation and thus of CO2 emissions from Germany to its European neighbours. However, this would potentially cost Germany roughly 19 billion euros by 2050. The introduction of a minimum price in the auction of allowances in the ETS, analogous to a minimum bid price on Ebay, would be a particularly elegant solution: if the market price is below the minimum price of the certificates, certificates would automatically be withheld and cancelled.

“If a front-running group consisting of Germany, France, the Netherlands and a few others were to introduce such a minimum price, this could be an important step towards an EU-wide minimum price,” stresses Ottmar Edenhofer, Director of PIK and MCC and co-author. The costs of cancelling allowances would be shared by many countries, and Germany could possibly even gain net revenues. “The minimum price is an insurance against market and regulatory uncertainties – and thus ultimately also an insurance against the real risks of climate change, such as more and more extreme weather,” says Edenhofer. “This is instrumental to make climate policy credible. If furthermore policy makers implement carbon pricing in such a way that the electricity tax is reduced and poorer families in particular receive refunds, then in the end everyone will win.”


Potsdam Institute for Climate Impact Research (PIK) e. V. 2019

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