How to Remove Laminated Certificates

Coal phase-out - what to do with CO2 certificates

When Germany closes its coal-fired power plants, millions of CO2 certificates will be flushed into the European emissions trading system and its prices will be dumped. To prevent this, they should be deleted. However, this is not a permanent solution, even if other member states shut down their power plants, warn experts.

The timetable is controversial, but at least it is now: Germany has determined how it wants to shut down its coal-fired power plants - a total of over 42 GW - by 2038. For a long time the question remained open as to what should be done with the CO2 emission certificates, which will then no longer be needed by the power plants. The current draft bill now contains what most of the experts had asked for: Germany will delete the certificates that are no longer available and thus remove them from the European market (ETS). That is "the only logical solution, at least in the short term," says Michael Pahle, researcher at the Potsdam Institute for Climate Impact Research (PIK).

Worry about the waterbed

But it is not that simple, because the German coal phase-out is having a major impact on the European market - and could lead to emissions skyrocketing elsewhere. The reason for this is the so-called water bed effect: if the market prices for CO2 certificates also fall due to the lower demand, more will be emitted again. If the unused certificates of the power plants are not removed in an appropriate amount, "that will not do anything, except that the emissions from power plants are shifted to airlines and industry", says Gilles Dufrasne, Policy Officer at the NGO Carbon Market Watch.

"Coal bubble" threatens the EU carbon market

As coal-fired power plants across Europe are closing, unused CO2 allowances are slowly building up under the EU emissions trading system, creating a “coal bubble” that could cause CO2 prices to collapse, activists warn.

Federal Environment Minister Svenja Schulze (SPD) also knows this. She therefore campaigned for the German certificates to be deleted: "If we close power plants and the emissions simply go to other countries, the whole system would be reduced to absurdity."

Will the ETS become a patchwork quilt?

To prevent this from happening, the EU set up the Market Stability Reserve (MSR) in 2015. The mechanism removes 24 percent of the unused allowances from the market every year and deletes them in order to reduce the excess of pollution rights.

But in the opinion of many experts, this security instrument will not be enough to counter the wave of power plant closures that are pending in the European Union. 14 of the soon to be 27 member states have already set a timetable for their coal phase-out. According to a study by the Carbon Market Watch, 2.2 billion surplus certificates would be released within ten years. Member states are allowed to delete the certificates if they close power plants. However, this cannot be a permanent situation, says researcher Pahle: “Deletion is a complex process. If all countries do this individually, there will be a regulatory patchwork quilt that will jeopardize the further development of emissions trading in the long term. We have to find a European solution to this situation ”.

From Pahle's point of view and many of his colleagues, this could be a minimum price for CO2 certificates. This would mean that the market would no longer be stabilized according to the number of certificates, but their price. If the minimum price is high enough, this can also prevent the waterbed effect - national cancellation would no longer be necessary. So far, however, there is no majority in Brussels for this proposal. Even Frans Timmermans, who is responsible for the Green Deal, said in his hearing before the EU Parliament that he saw “no advantage in introducing a minimum price”.

Experts are therefore calling for a coalition of the willing, which France has been pushing for a long time. In December, nine EU countries issued a declaration in favor of a price corridor in the ETS; Germany abstained at the time.

Billions less revenue for the state

Nevertheless, with the decision to delete its certificates, Germany has sent an important signal to the other EU member states, says Pahle. “This shows that you don't just close your power plants, but consider the negative consequences for the ETS - and pay for them to be prevented. This is of enormous European political importance for the further development of the ETS. "

Because the deletion also means a financial loss for Germany. According to the researcher, the treasury could lose five billion euros that it would otherwise have earned by auctioning the certificates. However, it is still difficult to measure how many certificates will be released as a result of Germany's coal phase-out; Finally, some of the power that has been switched off is replaced by gas and therefore certificates are still required. Calculations by various experts nevertheless assume a CO2 saving of 150 and 250 million tons. How much it will be in the overall balance will soon be clarified by two reports from the Ministry of Economic Affairs.

Coal regions: election promise worth billions

The Federal Cabinet has presented a law to accompany structural change in Germany's coal regions. The federal states are promised 40 billion euros. It is not yet clear when exactly the power plants will be shut down.

At the European level, the debate on how the ETS should be adapted in view of the planned coal exits will soon be reopened. According to Ursula von der Leyen's plan, the ETS should be reformed and prepared for the Green Deal by June 2021 at the latest.