Germany decides against additional carbon emissions trading levy

carbon emissions trading

The German government has decided against a plan to force older coal fuelled power plants to purchase extra EUA allowances in a push to meet the country’s 2020 emission reduction targets.Under the original plan coal plants older than 20 years old would have faced strict regulations on their efficiency with the penalty for exceeding these targets being calculated in Euros and then levied in EUAs (whereby the number of EUAs required to be submitted would be the amount of the Euro penalty divided by the EUA market price at the time).

Instead of the original plan the government has opted to restrict the output of some of the older coal generation and pay utilities to keep them on standby in case the spare capacity is needed. They will be prevented from selling electricity to the market in usual conditions. This plan will run until 2021 when they will be phased out completely.

The original plan was welcome by environmental campaigners who saw it as a bold move to eventually rid the country of its coal fired power generation whilst also potentially addressing some of the vast oversupply within the EU ETS by giving the utilities the flexibility to still run the plants and phase them out in a cost-effective way. The new plan actually has the opposite effect on carbon emissions trading, by forcing the utilities to stop generation they are potentially reducing the demand side for EUA allowances in an already over-supplied market.

Essentially the German government succumbed to industry and union pressure who were worried about the impact of the initial plan on jobs and industry.

Either intervention is a step in the wrong direction for the EU emissions trading scheme because it interferes with the efficient functioning of Europe’s carbon market in the same way that subsidy to renewable power generation has already done (i.e. a member state government is picking the technology rather than allowing the market to do so). Germany’s desire to meet it’s unilateral emissions target comes at the expense of the German public (in the form of higher electricity prices) and it is not clear that the environment will be better off because neighbouring countries will increase their fossil fuel based electricity production and export it to Germany (so-called carbon leakage).