ETS price floor needed for German coal exit: Study

Germany should introduce a price floor for EU emissions trading system (ETS) allowances covering the domestic power sector to ensure a coal phase-out by 2030, a think-tank study suggests.

The price floor would also provide "planning security" for investing in low-carbon capacities to replace the coal-fired capacities, Climate Neutrality Foundation managing director Rainer Baake said today at the presentation of the study, which was prepared by research institute Oeko-Institut.

The proposed price floor would be set at €50/t of CO2 equivalent (CO2e) from 2025, and rise incrementally by €3/t CO2e per year, to reach €65/t CO2e in 2030. If the EU ETS price fell below the floor, the gap would be covered through Germany's energy taxation. The different tax rates would be laid down in the energy tax law, so companies could take them into account in their planning.

The study suggests ploughing any resulting revenue into Germany's energy and climate fund, to be used to cancel EU ETS allowances, should this not be ensured by the system's market stability reserve.

The price floor should be regularly checked and adjusted if necessary. Germany should also aim to co-operate with its European neighbours in setting the price floor.

Baake, a former junior energy minister at the federal economy and energy ministry, said that for Germany to meet its new greenhouse gas (GHG) emissions reduction target of 65pc in 2030 against 1990 levels, all coal-fired power plants must leave the market by 2030. For this "decisive" decarbonisation, a reliable and predictable CO2 price signal is needed, he said. If investors can expect old, written-off coal-fired plants still to be in the market in 2030 "then they will not invest", Baake warned.

Baake noted that while allowance prices can be expected to rise over the coming years, this is not a given. From a "fundamental" point of view, the current high allowance prices are not warranted, he said. And "unforeseeable" developments in different EU member states could put unexpected pressure on prices in the years to come.

It also seems unlikely that the European Commission will make any changes to the EU ETS in its Green Deal package to be presented in July, Baake said.

No change to coal phase-out law

Baake stressed that Germany's coal phase-out law should be "left alone", as tinkering with it is likely to raise the already high costs in the form of more compensation payments. The only remaining possibility for changes to the coal phase-out law is under the commission's state aid investigation, he said.

The proposed price floor is compatible with EU legislation, said an expert study carried out by the Wurzburg-based environmental and energy law foundation Stiftung Umweltenergierecht (SUER), and commissioned by Climate Neutral Foundation. The price floor is also compatible with Germany's constitutional law, SUER says.

Germany's cabinet will pass the draft tomorrow for the country's revised climate protection law, which includes the revised 2030 GHG reduction target and a pledge to reach climate neutrality in 2045.

Baake said that just three weeks ago, such a decision by Germany's government would have been "unthinkable". The 29 April ruling by the federal constitutional court that triggered the law change was the "best thing that could have happened to this country", Baake said.

By Chloe Jardine