Waterbed effect could turn German coal exit into mere symbolism – opinion

The gradual phase-out of coal power in Germany over the next two decades does not at all guarantee a parallel drop in European greenhouse gas emissions, as the so-called waterbed effect in the European Union's emissions trading system (ETS) could cause emissions to spike elsewhere in Europe if Germany emits less, economists and government advisors Friedrich Breyer and Klaus Schmidt write in an opinion piece for newspaper Der Tagesspiegel. "It's a widespread misconception to think that shutting down coal plants automatically leads to a reduction of CO2 emissions in Europe," as the number of emission allowances issued under the ETS has already been fixed until 2030, the authors say. If the number of allowances remains unchanged, the German coal exit will only reduce the price of allowances and make them more easily affordable for other industry sectors or coal power companies in other EU countries, which in turn will keep carbon emissions constant, they write. Cancelling the allowances, however, comes with two different problems. First, the German state will lose billions in earnings every year if it cancels the emissions permits rather than selling them and, second, the so-called market stability reserve within the ETS makes it hard to determine the amount of allowances that would have to be cancelled in the coal exit's wake. Since the market stability reserve and the price of allowances are contingent on the German coal exit's implementation, any prediction becomes arbitrary and therefore prone to political sugar-coating, the authors say.

The waterbed effect has been addressed by the latest ETS reform, which introduced the market stability reserve in 2019. The German environment ministry said in December allowances resulting from the coal phase-out will be cancelled from the ETS if they are not absorbed by the stability reserve, starting as soon as the first power plant is taken off the grid.