German coal exit could raise European emissions without CO₂ floor price or ETS allowances cancellation

Germany’s planned coal exit in 2038 may have hardly any effect - and could even increase CO2 emissions in Europe, write researchers from the Mercator Research Institute on Global Commons and Climate Change (MCC) and Potsdam Institute for Climate Impact Research (PIK). In a new analysis, the researchers point to side effects of the German plan to phase out coal. Firstly, if coal-fired power plants in Germany are shut down, others might bump their production as prices rise due to lower supply. Secondly, as Germany phases out coal, the demand for emission allowances in the EU’s Emission Trading System (EU ETS) will fall – and with it their price. This could make it cheaper for electricity producers in other European countries to emit more CO₂ - a consequence known as the “waterbed effect”. According to the authors of the analysis, a German national price on CO₂ at 30 to 60 euros per tonne in 2030 would ensure the country reaches its power sector climate targets. Then, to avoid simply shifting emissions to European neighbours, allowances should be cancelled. “However, this would potentially cost Germany roughly 19 billion euros by 2050” through lost revenues, writes PIK in a press release. Introducing a minimum price for ETS allowances could be an especially “elegant solution”: If the market price is below the minimum price of the allowances, they are automatically retained and can be deleted. If such a minimum price would be introduced by several countries, the cost for cancelling allowances would be distributed, writes PIK.

Germany’s coal exit commission has agreed to phase out coal-fired power plants by 2038, but Merkel’s government coalition must still decide on the binding legislation that will turn the exit into reality. When countries like the Netherlands, the UK or Germany attempt to lower greenhouse gas emissions from electricity generation and industry, they are regularly faced with the same criticism: Saving emissions that are covered by the European Emissions Trading System (EU ETS) in one country only leads to the same amount of CO2 being emitted somewhere else, not achieving an overall reduction because of the ETS cap. This phenomenon, the aformentioned "waterbed effect", has been addressed by the latest ETS reform to prevent it in the future. "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,” said MCC’s Christian Flachsland. A national coal exit being the epitome of an unilateral emission reduction initiative in the ETS sector, the commission report specifically stated that the government should cancel a corresponding number of allowances when coal plants are taken offline. The German government has yet to decide on this issue. The environment ministry has called for a cancellation.