For years, the EU Emissions Trading System (EU ETS), the EU’s flagship policy to tackle global warming, was considered a flop. Brussels had distributed too many free emission allowances, which kept the price per ton of emissions low. But since 2018 permit prices have soared upward: and the result is forcing coal out of the energy market. Paul Hockenos reports.

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At long last, the EU ETS is doing what it was meant to do: make the fossil fuel energy sector pay for emissions, a strategy that will sink Europe’s CO2 levels and raise income for the complex transformations away from dirty energy.

First, a little background. The ETS is a cornerstone of Europe’s policy to combat climate change and a key mechanism for reducing greenhouse gas emissions. Established in 2005, it is the world’s first major carbon market and remains the largest covering all 27 EU member states plus Iceland, Norway, Liechtenstein, and United Kingdom. Its logic is to charge for the right to emit carbon dioxide.

Currently, only the energy sector, industry, and aviation fall within its purview, accounting for around 45% of the EU’s greenhouse gases.  But this will change soon: transportation and heating will eventually be included, too. Shipping, an emissions culprit that has long defied regulation, will then finally begin paying for its footprint.

The ETS, as it develops, will be absolutely critical to enabling the EU to hit its 2030 reduction target of 55% (should the bloc agree to up the target, as expected.) And until very recently, no one was sure whether the ETS was up to the job. Today experts, such as those in The Economist’s intelligence unit say that, “By 2030 coal will, apart from a few exceptions in Eastern Europe, be virtually out of the region’s power supply system altogether.” The ETS is part of the reason.

Indeed, the ETS got off the ground slowly, though some consider its first decade of its existence a limited success. Experts found that the ETS saved more than 1 billion tons of CO₂: a reduction of nearly 4% of total EU-wide emissions compared to a world without the ETS.

But for an entire decade this is a distinctly modest result.

In contrast, since reforms were introduced in 2018 the price of permits has leapt upward from about €5 per ton to €25 this year. This transformed the mechanism’s impact from a mild irritation to a real burden for coal producers and countries that burn large amounts of coal. From 2013 to 2019, coal power emissions have fallen by 43%, which the think tank Ember credits largely to the ETS. “We are well on the way to coal-free electricity,” proclaims Ember.

As the permit price has climbed upward, emissions have sloped downwards: in 2019 greenhouse gas emissions regulated under the European carbon market fell by 8.7%. The drop, say analysts, was largely a consequence of emissions reductions in coal-fired power generation, which was replaced by gas-fired generation and renewables.

“This significant drop in carbon emissions… shows how successful the EU ETS and related pollution policies have been in phasing out coal and lignite in the power sector,” Sam Van den plas of Carbon Market Watch told media.

The impact of the higher prices on coal – and to a lesser extent on coal-dependent industries – has been strikingly obvious in Europe’s most coal-addicted countries: Germany and Poland. In Germany, the price pressure on coal, combined with the Covid-19 pandemic’s negative impact on demand, and the competitive pressure of renewables, has basically made the government’s preposterous 2038 deadline for exiting coal production redundant. In other words, coal has become so expensive that it is pricing itself out of the market.

At this rate, argues the think tank E3G, “the economic downturn in coal will lead to earlier power plant closures in Germany provided that the framework conditions anchored in the Coal Phase-Out Act (Kohleausstiegsgesetz) do not create false incentives and thus keep coal-fired power plants alive.” This is particularly welcome news in light of the fact that seven out of ten of the EU’s biggest CO2 emitters are brown-coal-fired gas works that lie in Germany.

In Poland, the coal sector is struggling so mightily that the Polish government has begun screaming for a way out of the ETS. The price of coal is so high in Poland that industry has been importing cheaper coal from Russia to burn. In Poland, the power sector (public electricity and heat production) is the single biggest source of emissions, contributing about 40% of emissions in 2017.

“The ETS isn’t affecting industry nearly as much as it impacts coal generation,” says Tobiasz Adamczewski of the Warsaw think tank Forum Energii. “It’s making coal less financially competitive. The revenues from the ETS go to renewables. It’s a form of redistribution of wealth within the country.”

Zbigniew Karaczun of the Polish Climate Coalition told Energy Transition that Poland’s energy-intensive industries such as iron and steel are hurting from high coal-generation energy costs and ETS permit prices. These sectors, he says, risk becoming uncompetitive with those branches in neighbouring countries. On 9 October, the world’s biggest steelmaker ArcelorMittal permanently closed its blast furnace in Krakow, Poland, blaming the coronavirus-induced demand hit, cheaper imports, and higher costs for power and carbon.

The tragic thing about it for Poland, which is way behind Germany in transitioning to renewables, is that until Warsaw commits to becoming climate neutral in 2050 (it is the only member state that hasn’t) it will receive only half of the Just Transition Fund monies that are earmarked for it – to the tune of €2 billion – to help it make the shift to a low-carbon economy.

The ETS, long disparaged as virtually worthless, has become a key factor in Europe’s transition. If the EU’s 2030 reduction goal is really set at 55%, the ETS’s clout will have to be leveraged even more. Poland and other stragglers will have no option but to catch up as quickly as possible, although this could imply compensations on the EU level which could be brokered by Germany’s European Council presidency.

Alas, because the Warsaw government procrastinated for so long, its Energiewende has to start from virtually nothing.