BRUSSELS 20 September 2019. The EU carbon market is currently unfit to accommodate national coal phase-outs scheduled in  Europe. EU policymakers should combine coal plant closures with the cancellation of pollution permits and strengthen the market stability reserve to absorb more surplus pollution permits off the market. Failing this, the market will be flooded with another surplus, allowing heavy polluters to increase their emissions and risking to crash the carbon price. 

As EU countries phase out coal over the coming years, 2.22 billion surplus pollution permits will flood the EU carbon market between 2021 and 2030, a new analysis commissioned by Carbon Market Watch shows. 

This is equivalent to more than an entire year’s worth of emissions under the EU Emissions Trading System (EU ETS) – industry, power and aviation sectors combined. By 2040, this ‘coal bubble’ will have grown to 6.18 billion permits, more than 3.5 times the 2018 annual emissions under the EU ETS. Unless further action is taken to prevent the surplus, it will send the EU ETS prices crashing, following last year’s recovery after a decade of ineffectiveness.

EU governments can prevent this by cancelling unused allowances as coal plants are closed down – which is permitted by the latest EU ETS reform. At the same time, the EU Commission must propose to strengthen the EU ETS Market Stability Reserve (MSR), in operation since the beginning of 2019. The MSR should be set to take in 36% of the surplus from 2024 onwards, compared to today’s 24% – and scheduled to go down to 12% in 2024 – and allowances that have been in the reserve for five years should be permanently cancelled.

Gilles Dufrasne, policy officer at Carbon Market Watch said:

“The EU ETS has just recovered after a decade of irrelevance, but the job for EU policymakers is far from done. Pricing pollution is a key tool to phase out coal, which is of utmost importance across the EU. But it will do nothing more than shift emissions from power plants to airlines and industry unless the re-emerging surplus permits are removed from the market.”

More than half of the coal bubble will come from Germany, which is currently the EU’s largest emitter of pollution from coal and lignite. The German government has committed to phasing out coal by 2038 at the latest.

The analysis shows that German coal power plants have been running at a loss for nearly half of the time since the start of 2018. Without the lavish subsidies, they continue to benefit from, these plants would not be running.

Gilles Dufrasne:

“The EU carbon market alone will not deliver the coal phase-out, which is why additional measures are necessary to move to a 100% renewable energy future. The “Green Deal” to be proposed by the new European Commission is the first opportunity to turn words into action. “

The market stability reserve is set to be reviewed by 2021. The EU ETS must be revised before 2023, as part of the “Global Stocktake”, because it is currently not fit to deliver on the Paris Agreement goal of limiting global temperature rise to 1.5°C. 

-ENDS-

Notes to editors

Report: Avoiding A Carbon Crash – how to phase out coal and strengthen the EU ETS

Key highlights

• 2.22 billion pollution permits will be available on the market by 2030 as a result of the planned coal phase-outs. This number will grow to 6.18 billion by 2040, and several countries are yet to announce their own plans for phasing out the dirty fuel.
• A typical German coal power plant would have been running at a loss for nearly 50% of working days since the start of 2018. A typical gas power plant would have been running at a loss for 70% of the time over the same period. This shows that the EU ETS alone cannot incentivise a full coal phase-out.

Key policy recommendations

The EU Commission should  propose to:

• Increase the Market Stability Reserve (MSR) intake rate to 36% from 2024 onwards
• Adopt a declining threshold for the MSR to improve its effectiveness
• Set an automatic cancellation for allowances held in the MSR for more than five years
• Broaden the scope of article 12.4 of the revised ETS directive to allow national cancellation of allowances reflecting the closure of any ETS installation
• Increase the Linear Reduction Factor (LRF) to 4.2%

EU Member States should:

• Adopt a coal phase-out plan to stop burning coal and lignite for electricity by 2030
• Commit to cancelling allowances in line with the closure of power plants

Contacts:

Gilles Dufrasne – Policy Officer
gilles.dufrasne@carbonmarketwatch.org
+32 491 91 60 70

Kaisa Amaral – Communications Director
kaisa.amaral@carbonmarketwatch.org
+32 485 07 68 90