Government documents obtained by Carbon Pulse reveal that Germany is considering a plan to compel ageing coal-fired power plants to buy extra EU Allowances (EUAs) as a penalty for breaching emissions limits. This initiative could result in a shift towards increased production from gas plants and renewable energy sources, while also helping to address the surplus supply in Europe’s carbon market.
The plan, which was recently outlined in a press briefing by Germany’s economy ministry, provides further details on the regulations aimed at reducing emissions by penalizing coal-fired generation. Surprisingly, these regulations could potentially stimulate demand for EUAs.
Under the proposed rules, only German coal and lignite-fired power plants older than 20 years will be affected. These plants will face a progressively declining limit on the CO2 intensity of their production. According to the documents, starting from a plant’s 21st year, it will be permitted to emit 7 million tonnes of CO2 per gigawatt. This limit will decrease linearly to 3 million tonnes per gigawatt by the plant’s 41st year, and it will remain constant for plants that are 41 years or older.
If a plant emits more CO2 than the designated limit, it will be required to pay a monetary fine. The exact amount of this fine, to be implemented in the form of EUAs, has yet to be determined by the government. However, it is projected to grow to a range of €18 to €20 per tonne by 2020.
The proposed plan has been well-received by environmental campaigners as it aligns with the government’s commitment to additional measures for meeting the 2020 target of reducing emissions by 40% below 1990 levels. The plan aims to decrease Germany’s emissions by 22 million tonnes by 2020 and is expected to be finalized by May, although it may face significant obstacles due to opposition from the CDU coalition partner.
Regine Guenther, director of climate and energy policy at WWF Germany, praised the proposal, stating that it would be a substantial step forward for Germany’s credibility in mitigating climate change. She emphasized that the plan effectively targets the oldest and most polluting power plants, gradually increasing their operating costs and ultimately phasing them out of the system.
The profitability of burning dirtier coal compared to cleaner gas in Europe’s largest emitting nations has been influenced by the availability of cheap coal and EUAs. This plan seeks to rebalance that equation by prioritizing cleaner power plants. Guenther also suggested that the proposal could help alleviate the excess of more than 2 billion allowances currently burdening the market, potentially contributing to the recovery of the Emissions Trading System (ETS).
However, the exact impact of Germany’s plan remains uncertain. Jan Frommeyer, an analyst at ICIS Tschach Solutions, pointed out that there is already opposition within the government, making the plan’s survival in its current form questionable. Furthermore, it is unclear how the plan will affect plants that provide district heating and are legally unable to shut down entirely.
Frommeyer also noted that not all power plants are likely to reduce their emissions, as some may choose to pay the penalty and continue operating. If approximately half of the affected plants opt for this approach, it could result in an increased demand for around 35 million EUAs.
Emil Dimantchev, an analyst at Thomson Reuters Point Carbon, expressed doubt that the policy would significantly impact EUA prices. He explained that high gas prices relative to coal may still deter some plants from closing, despite the substantial penalties. Dimantchev suggested that other policies outlined in Germany’s December climate plan, such as additional energy efficiency measures, could counterbalance any bullish effects on EUA prices.
The plan’s uncertainties extend to the short-term implications for EUA prices. Frommeyer highlighted that utilities typically hedge their forward electricity sales two to three years in advance, so if they decide to adopt a wait-and-see approach, it could potentially impact the market.
Germany’s proposal stands in contrast to the UK’s carbon price floor, which imposes a tax on thermal power generation to encourage the transition from coal to cleaner gas. Unlike Germany’s plan, the UK tax does not require additional EUAs to be surrendered. However, the UK floor tax has faced criticism as the reduction in EUA demand it causes results in lower EU carbon prices and potentially allows increased emissions elsewhere in Europe, negating any overall climate benefits.
While Germany’s proposal seems to have fewer direct impacts on the EU ETS, it could still raise concerns among neighbouring governments or within Brussels. Stig Schjolset from Point Carbon questioned whether cancelling EUAs to meet domestic targets is permissible under EU law and speculated whether Poland and its allies would support such a measure.
Some market participants were critical of the plan, expressing a preference for leaving the market to deliver results rather than imposing artificial limits, especially when the ETS is designed to address emissions. Additionally, boosting EUA prices solely for the benefit of other countries was seen as nonsensical.
Carbon market policies are highly sensitive politically, and disagreements over early reforms to the EU ETS have caused tension between Poland, seven other nations, Germany, and 14 other member states.
