Driving most of Europe’s dirtiest power plants into retirement is probably cheaper than you think.
Companies from German utility EON SE to Sweden’s Vattenfall AB are calling for measures including a minimum price on pollution rights to kickstart the European Union’s sputtering carbon market. Such a levy would effectively force all but the most efficient coal plants to close.
“Installing a carbon floor price would be the most cost-efficient solution” to avoiding the worst of climate change, said Johannes Teyssen, chief executive officer of EON, which last year spun off its fossil-fuel plants. “A well and efficiently functioning emissions-trading system could, in fact, restore Europe’s reputation as a leader on climate policy,” he said by e-mail.
EU efforts to reform its $48 billion cap-and-trade system have repeatedly failed to boost the cost of polluting and encourage green investment. While Britain operates a national floor price and France has proposed a regional levy, opposition remains intense.
Coal-dependent nations, including Poland, argue that the higher costs will hurt their economies and EU Climate and Energy Commissioner Miguel Arias Canete has said such a move could damage manufacturing in the region.
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A price floor of 30 euros ($32) per ton of carbon dioxide, or six times the current permit rate, would only cost each European citizen about 5 euros a year through 2025, according to the Institute of Energy Economics, or EWI, in Cologne, Germany. That’s the same as a beer in the Wild Geese pub down the street from the European Commission’s headquarters in Brussels.
While the regulator of the 12-year-old market remains committed to no price floors or ceilings, such intervention is gaining traction outside Europe. Canada plans to install minimum carbon prices beginning in 2018 to discourage fossil fuels and raise revenue. And on Feb. 8, a group of U.S. Republicans and business leaders including former Treasury Secretary Hank Paulson pressed the case for a carbon tax to top White House aides.
HSBC Group Plc has said minimum prices for greenhouse gas emissions would help attract financing to wean the world’s economy off fossil fuels, while BNP Paribas SA, the Paris-based lender, reckons a floor can give investors certainty in clean-tech projects. Vattenfall joined three other Nordic utilities earlier this month in a call for measures to buoy carbon prices and Singapore said Monday it plans a carbon tax by 2019.
Distributing the revenue from permit sales to industry and consumers bearing the brunt of higher carbon costs is central to EWI’s analysis. While a 30-euro price minimum will cost about 109 billion euros over 2017-2025, the 86 billion euros raised from emission allowances cuts the net cost to 23 billion euros.
“Cutting carbon dioxide just isn’t that expensive anymore,” said Harald Hecking, a managing director at EWI, a unit of the University of Cologne.
What’s crucial for politicians is to find a way to compensate losers from higher carbon prices, Hecking said. “The climate challenge is no longer a cost challenge, it’s a redistribution challenge. That makes it less daunting,” he said.
Carbon costs in the EU’s emissions trading system, which gives away or auctions allowances to more than 12,000 polluters, have fallen 86 percent since 2008 to about 5 euros a ton because of a permit glut. Lawmakers on Feb. 15 approved proposals to control the supply of permits from 2019 as a way to boost prices.
Regulating the amount of permits in the market is the favored option for the European Commission, an EC spokeswoman said by e-mail.
RWE AG, an EON competitor and Germany’s biggest power producer, sees price controls as damaging for the market that would have “far-reaching negative consequences” for EU and German industry, said Lothar Lambertz, a company spokesman. The utility generated 58 percent of its total power output at coal plants, according to its 2015 annual report.
While a floor would increase wholesale electricity costs, benefiting utilities, it would shutter about 20 gigawatts of regional coal-fired generation capacity as the plants become too costly to run profitably, EWI data show. That’s enough power for 40 million European homes, or about half of Germany’s coal generation fleet.
Companies such as Energeticky a Prumyslovy Holding AS still see a future for coal, which will remain in demand until renewables infrastructure improves. The Prague-based company has bought coal plants in the U.K. and Italy to add to energy assets in the Czech Republic and Poland and last year acquired Vattenfall’s lignite operations in Germany.
“What EPH seems to be betting is that the EU won’t get its act together and Germany isn’t serious about meeting its targets” for emissions, said Mark Lewis, an analyst at Barclays Plc in Paris.
EPH is seeking to supplement its coal-power revenue with activities including electricity transit and natural-gas storage, said Daniel Castvaj, a spokesman for the company.
Generation from lignite, the dirtiest power-plant fuel, at RWE would drop about 58 percent by 2020 with carbon prices of at least 20 euros a ton by 2020, according to Lewis. The most-efficient coal plants would remain in the market as a backup for intermittent wind and solar power.
“A 30-euro carbon price would push most of the European coal generation to the edge and possibly over it,” said Lueder Schumacher, a utilities analyst at Societe Generale SA in London.