One German Industry Is Digging Itself a Hole With Europe

(Bloomberg) -- For Germany, phasing out coal will be a very expensive affair and its approach might already be annoying other members of the European Union, who were enjoying record levels of revenue from selling carbon allowances.

Utilities from RWE AG to Uniper SE will seek compensation to shut down lignite and hard-coal plants before the end of their lives, while the states where they’re located are demanding tens of billions of compensation. And in a triple whammy, the nation may also lose more than 5.2 billion euros ($6 billion) in canceled carbon permit-sales as demand from those plants will decline.

That’s the estimate of Jahn Olsen, an analyst in London at BloombergNEF, and based on prices that tripled last year. The actual size of the loss will depend on how Germany interprets new European Commission rules governing the market from 2021 and the nation’s willingness to shore up a trading system that’s only just starting to make a real impact on emissions.

While Germany has said it will cancel allowances to protect the carbon market, it hasn’t provided any details. Since the nation almost a week ago flagged some of its draft plans for closing coal plants through 2038, carbon permits are headed for their worst week since September -- as traders anticipate lower demand in the future.

One German Industry Is Digging Itself a Hole With Europe

The new rules say that member states can withdraw certificates to bolster prices and limit damage to the market from overlapping climate measures. That’s after a decade of slumping prices that did little to encourage utilities to switch to cleaner behavior.

The emission permits slumped partly because Germany spent billions of euros subsidizing solar and wind generation, which reduced the need for the carbon allowances.

Under the new regulations, Germany could reduce its sold carbon allowances by 197 million tons over the 10 years to 2030, cutting government revenue by the 5.2 billion-euro figure at forecast prices, according to Olsen.

Germany’s coal commission said in a report this week that it backs “exploitation of this possibility” on a scale that’s equal to the reduction in emissions from the plants that will shut. Exactly which stations that will be decommissioned and when will be negotiated between the utilities and the government.

One German Industry Is Digging Itself a Hole With Europe

The nation could also decide to cut that carbon volume reduction by about half because a portion of the coal power will be replaced with cleaner-burning natural gas plants that still need some allowances, Olsen said. There’s also a possibility that Germany may decide against reducing its carbon sales volumes -- since the cancellation plan is voluntary.

What the German government decides will be crucial for the emissions market, the world’s biggest by traded volume.

“If they don’t cancel allowances, they’ll just drive the price lower and achieve the same result -- less revenue,” said Matthew Gray, an analyst at Carbon Tracker Initiative, which provides analysis on the energy transition. Under such a decision, “the lower revenue would be felt across the EU member states instead of just Germany.”

Pressure on Germany to nullify permits will likely be intense, especially from European nations that collectively raked in a record 15 billion euros last year from carbon allowances. Companies that rely on the sale of clean power will also want to see the emission rights canceled because a higher cost of carbon benefits them.

Fortum OYJ, which owns almost half of the German utility Uniper, “strongly supports” the coal commission’s recommendation to cancel carbon allowances, said Chief Executive Pekka Lundmark.

The coal phase-out is already looking super costly for Germany in a number of ways, with workers and utilities holding out for compensation and assistance. While German states were seeking 60 billion euros to manage the process, the coal commission recommended that part of the bill would be at least 40 billion euros.

Whether Germany gives up the carbon revenue on top of all that is a “really tough question,” said Carlos Perez-Linkenheil, an analyst at Berlin-based Energy Brainpool GmbH. While the country will be tempted to limit cancellations, it will also want to protect the EU carbon market and show the world how a coal-dependent economy can transition for the sake of the climate.

“This will be fascinating to watch.”

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