The German government has decided against its initial plan to require older coal-fuelled power plants to purchase additional EUA allowances in order to meet the country’s 2020 emission reduction targets. The original proposal involved imposing strict regulations on the efficiency of coal plants older than 20 years, with penalties calculated in Euros and levied in EUAs based on market prices.
Instead, the government has chosen to restrict the output of these older coal plants and pay utilities to keep them on standby, should spare capacity be needed. Under normal conditions, they will be prohibited from selling electricity to the market. This arrangement will continue until 2021 when the plants will be phased out entirely.
While the initial plan was applauded by environmental campaigners for its potential to eliminate coal-fired power generation and address oversupply in the EU ETS, the revised approach has raised concerns. By forcing utilities to halt generation, the new plan could reduce the demand for EUA allowances in an already oversupplied market.
The German government’s decision to change course was driven by pressure from industry and unions, who were concerned about the impact on jobs and the economy. However, both interventions, whether the original plan or the revised approach, have negative implications for the efficient functioning of the EU emissions trading scheme. They interfere with the market’s ability to determine the most efficient technologies, like the effects of subsidies for renewable power generation. The desire to meet unilateral emissions targets may lead to higher electricity prices for the German public without guaranteeing environmental benefits, as neighbouring countries could increase fossil fuel-based electricity production and export it to Germany, resulting in carbon leakage.
