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The future for coal in Europe is dark, and carbon prices take the cue

Hæge Fjellheim  Head of Carbon Research

Hæge Fjellheim  Head of Carbon Research

Coal is losing ground in Europe to wind energy, solar power and natural gas. Are we witnessing the final act of a once-dominant fuel source?

Coal accounts for almost a quarter of Europe’s power supply, but its use is fast fading out. Just how soon will we see a coal-free continent? And where would that leave Europe’s flagship climate instrument, the EU Emissions trading scheme?

Market forces and aging coal power plants

Part of coal’s decline is due to stagnant electricity demand and falling prices for cleaner alternatives. Great strides in energy efficiency have curbed European power consumption, which peaked in 2008 when the financial crisis hit European energy demand. At the same time, solar and wind power are becoming increasingly competitive, making up almost 80 percent of new installed electricity capacity in 2016. Lower gas prices have also incentivized a switch from coal to gas power in countries that can generate electricity from both fuel types.   Furthermore, most of Europe’s 280 coal power plants are over 30 years old, and many of them out-of-date in terms of efficiency and pollution standards as they draw closer to their scheduled end of operation.

A supervisor looks out over the the Vattenfall Europe AG brown coal power station in Jaenschwalde, near Cottbus, Germany.
A supervisor looks out over the the Vattenfall Europe AG brown coal power station in Jaenschwalde, near Cottbus, Germany. REUTERS/Hannibal Hanschke (GERMANY) – BM2DTYQTFNAA

Political pressure

Another reason coal is going extinct in Europe is political and social pressure. Coal emits far more carbon dioxide than other fossil fuels. The International Energy Agency (IEA) has forecast European coal use will need to decline by 80 percent by 2030 in order to meet the terms of the Paris Climate Agreement.  For other pollutants, like sulphur dioxide and nitrogen oxide,  the European Union adopted stricter standards earlier this year under the Industrial Emissions Directive, leaving coal producers with no choice other than to invest in expensive technologies to lower harmful emissions – or shut down for good.

Varying responses

The three European countries that rely most heavily on coal are exhibiting an interesting mix of mix of approaches for how to handle the role of coal in the future power mix:

  • In the UK, coal power plants are made to pay a carbon tax in addition to the EU Emissions Allowances they must purchase. The strategy is to make coal less attractive by making it more expensive than its alternatives.
  • Germany plans to replace coal- and nuclear power with renewable sources, a strategy known as  Energiewende (“Energy Transition”). Its plan has been admired for its ambition, but observers have questioned the lack of a roadmap to phase out coal.
  • Poland has staunchly defended its coal power plants and coal-mining operations, but it has also admitted that once coal power plants under construction are finished, there will be no further new construction.

Several smaller European countries, including Belgium and Estonia, have already eliminated coal-generated power. The Netherlands and Italy recently announced an intention to establish a carbon price floor which would hit coal generation. The trend is becoming clear. The phase-out of coal in Europe is not a question of if, but of when.

A miner removes his boots after his final shift at the Riccall coal mine near Selby in North Yorkshire. The colliery ceased production after 21 years. REUTERS/Darren Staples
A miner removes his boots after his final shift at the Riccall coal mine near Selby in North Yorkshire, UK. The colliery ceased production after 21 years. REUTERS/Darren Staples

Depressed carbon prices

In the report What role for coal? Carbon market impact of European coal phase-out, we look into the effect of coal phase-out on carbon price levels in Europe. The connection is obviously very strong. The European Emissions Trading Scheme (EU ETS) is Europe’s flagship climate instrument, limiting emissions from more than 11,000 power stations and industrial plants representing around 45 percent of the EU’s greenhouse gas emissions he closure of Europe’s coal power generation will dramatically decrease emissions from the power sector.  Almost 40 percent of emissions covered by the EU ETS come from coal power generation. Plummeting demand from power utilities – the top buyers – would lead to carbon prices far too low to incentivize necessary emission cuts in the other sector of the EU ETS; the industry sector.

Taking into account planned coal phase-out policies in Europe, coal will still play a significant role in Europe’s power mix in 2030. We forecasts carbon prices at €10/t in 2020, reaching €23/t in 2030. But coal could also be phased out more rapidly. What if the trend to terminate coal use in electricity generation spreads to more countries? What if energy efficiency improvements happens faster, reducing electricity demand? What if costs of renewable energy sources continue to fall, thereby hurting the already weakened margins for electricity production from coal? In our most extreme scenario assuming full phase-out of coal by 2030, prices end below €6/t – lower than today.

A coal merchant holds up a lump of coal for the camera in his yard in Melmerby, northern England.. REUTERS/Nigel Roddis
A coal merchant holds up a lump of coal for the camera in his yard in Melmerby, northern England. REUTERS/Nigel Roddis

All about political will

Ambitious EU member states will continue to adopt national climate targets and measures in the future, even though European carbon prices might suffer. Some initiatives might even be fuelled by discontent that the carbon price signal is too weak to trigger a low carbon transition.

Coal phase-out policies and emission trading systems are two means towards the same goal. But one could cannibalize the other. If the EU’s flagship instrument is weakened due to other policy instruments targeting the same sources of emission, some will argue intervention is needed to buttress carbon prices.

This is already acknowledged by European policy makers, who are close to sealing a deal on the regulatory framework for Europe’s emissions trading system from 2021 to 2030. They seem set to agree on strengthening a market balancing mechanism if demand for allowances is weakened. With accelerated coal phase-out, the market will surely have to be tightened even further. In carbon markets, review is the only constant.

Across the EU, different countries are approaching coal's future in different ways.
Across the EU, different countries are approaching coal’s future in different ways. View the full-sized verision here. THOMSON REUTERS/ Hæge Fjellheim and Jon Berntsen

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