Organizing a German coal phase-out

Pao-Yu Oei, Christian von Hirschhausen and Hanna Brauers

Coal-fired power plants are responsible for about a third of total carbon dioxide emissions in Germany. The 2015 price for CO2 emissions allowances under the European Union Emissions Trading System (EU ETS), however, was too low for a market-driven transition from coal to less CO2-intensive energy sources, such as natural gas, in the near future. Failure to reduce the persistently high level of coal-based power generation puts Germany’s short- and long-term climate targets at risk and undermines a successful Energiewende. The introduction of the market stability reserve as well as the adjustment of the reduction factor were important, yet not sufficient, changes to strengthen the EU ETS. This paper analyses policies to reduce GHG emissions and to induce the phasing-out of coal in the German electricity sector. Possible accompanying measures to reduce coal-based power generation in Germany include minimum fuel efficiency or greater flexibility requirements, national minimum prices for CO2 emission allowances, capacity mechanisms, a residual emissions cap for coal-fired power plants, emissions performance standards, capacity mechanisms, and alternative transmission expansion policies. All these national policy measures could be implemented in parallel to the implemented reforms of the EU ETS. A strengthened EU-ETS supplemented by national instruments forms a framework to secure a continuous reduction of GHGs in line with national and European climate targets. Limiting German GHGs to meet the climate target implies a coal phase-out in Germany by the 2040s. Analyses show that an overall phase-out by 2040 is possible without risking resource adequacy at any point. The majority of actors, including but not limited to renewables, even benefit from such a trend. The resulting net employment effects differ across regions and sectors, but are expected to be positive for the aggregate of all regions.     Download full paper PDF »

The emission implications of South Africa’s elite transition

Jesse Burton

South Africa’s coal sector depends on demand from Eskom, the national utility, for which cheap domestic coal has equally been a key input for 50 years. Recent coal price increases mean that substantial attention is being given to coal supply security for Eskom. Further increases are expected as long-term coal supply contracts are ending and require renegotiation or for new coal suppliers to be found. This process has become increasingly politicized. It echoes the coal supply arrangements set up in the 1970s (whereby long-term coal contracts were used to grow new Afrikaner mining houses), which remained largely intact post-1994 (with the limited inclusion of key political elites in the sector through large Black Economic Empowerment (BEE) deals that involving changes in ownership of existing large mining companies). But new dynamics are emerging, with implications for coal investment. Eskom has again become a key political lever in the creation of new coal mining companies, which echoes the 1970s far more closely than large-scale BEE transactions of the 1990s. The use of coal contracts to grow “black industrialists” and “emerging miners” now comes at the expense of entrenched companies, and heralds a new constellation in the coal sector – with new miners linked to proposed private coal plants, several mid-tier producers on the rise, and possible divestment by some major mining houses. These dynamics have resulted in a substantial shift in Eskom suppliers, with 40% of coal coming from BEE or “junior miners” (down from 90% in 2001). Yet no analysis thus far has looked in detail at the supply arrangements or their implications for energy security and emissions. This paper examines the political and economic dynamics of South Africa’s coal sector. It traces the rise of new supply arrangements, ownership structures and mining interests, and the shifts in relations between key actors. Despite climate policy and carbon constraints in the electricity build plan, these dynamics appear to be locking in coal production for at least the medium term and will create new political lock-in from companies with an interest in maintaining a coal-based economy in South Africa.

Testing supply-side climate policies for the global steam coal market: Can they curb coal consumption?

Roman Mendelevitch

The agreed-upon target to keep the global temperature increase under 2°C or 1.5°C entails that most of current fossil fuel reserves must remain unburned. Currently, a majority of climate policies aiming at this goal are directed towards the demand side. In the absence of a global carbon regime these polices are prone to carbon leakage and other adverse effects. Supply-side climate policies present an alternative and more direct approach to reduce the consumption of fossil fuels by addressing their production. Coal, as both the most abundant and the most emissions-intensive fuel, plays a pivotal role. This paper applies a numerical model of the international steam coal market (COALMOD-World) to examine two alternative supply-side policies: 1) a production subsidy reform introduced in major coal producing countries, in line with the G20 initiative to reduce global fossil fuel subsidies, and 2) a globally implemented moratorium on new coal mines. The model is designed to replicate global patterns of coal supply, demand and international trade. It features endogenous investments in production and transportation capacities in a multi-period framework and allows for substitution between imports and domestic production of steam coal. Hence, short-run adjustments (e.g. import substitution effects) and long-run reactions (e.g. capacity expansions) of exporting and importing countries are endogenously determined. Results show that a subsidy removal, while associated with a small positive total welfare effect, only leads to an insignificant reduction of global emissions. By contrast, a mine moratorium induces a much more pronounced reduction in global coal consumption by effectively limiting coal availability and strongly increasing prices. Depending on the specification of reserves, the moratorium can achieve a coal consumption path consistent with a 1.5°C or 2°C target.     Download full paper PDF »

From coal levy to pay-the-polluter principle: Germany’s policy innovation to constrain lignite production

Bettina Wittneben

German policy-makers invented the feed-in-tariff, which has propelled renewable energy across Europe and across the world, and spawned the Energiewende, the transition to sustainable energy systems that excludes nuclear power. Critics of the Energiewende have questioned whether it is possible for a country to abandon nuclear energy yet at the same time lower carbon emissions. In 2015 it became clear that an innovative policy instrument was necessary to constrain fossil fuel production in Germany, especially from lignite deposits, in order to meet global and national climate protection goals. This paper analyses the rise and fall of the coal levy proposed in 2015 (known as the Climate Contribution Carbon Levy). The policy measure was intended to put a fee on producing energy from coal. Eventually, the measure failed to become law and instead, energy producers from coal production are now being paid to turn off their power plants and keep them on standby, essentially paying the worst polluters to keep the lignite in the ground. We track the history, political struggles and outcome of the policy measure. The case underlines the failings of the European Union Emissions Trading System (EU ETS), which was implemented in order to put a price on carbon and hence shift investment away from fossil fuels. Plagued by over-allocation of permits and a low carbon price, the EU ETS cannot be relied on to bring about the structural change necessary to shift energy systems. Has carbon trading failed and made a carbon tax necessary? Will more governments have to pay companies to keep fossil fuels in the ground? At a time of rising CO2 emissions across Europe and with a view to new political commitments under the Paris Agreement, institutional change in energy policy will be necessary to make climate change mitigation possible.