We Need a Carbon Floor Price

We Need a Carbon Floor Price

Why are dirty, coal-fired power stations continuing to operate in Europe, in the face of an apparent political consensus that they should be shut down? The answer is rather simple: the decarbonization flagship instrument – the Emissions Trading System (EU ETS) – does not deliver. In light of this failed attempt to set a meaningful price to carbon, EU policy-makers should adopt without delay additional measures such as a carbon floor price.

Claude Turmes

Secretary of State for Sustainable Development and Infrastructure – Government of Luxembourg

18 Oct 2017
Editorial by REVOLVE

Energy
This editorial features in REVOLVE #24 on pages 6-7.

Why are dirty, coal-fired power stations continuing to operate in Europe, in the face of an apparent political consensus that they should be shut down? The answer is rather simple: the decarbonization flagship instrument – the Emissions Trading System (EU ETS) – does not deliver. In light of this failed attempt to set a meaningful price to carbon, EU policy-makers should adopt without delay additional measures such as a carbon floor price.

Coal-fired power plants benefit from preferential treatment in the sense that they are exempt from the “polluter pays” principle enshrined in EU treaties. A collapsing EU ETS makes it artificially cheap to emit CO2 at around 5 euros/ton. Unfortunately, the reforms of the ETS put forward by the European Commission for 2020-2030 are not enough to restore the fortunes of a system that has been progressively weakened to become little more than a lifeboat. Since every attempt at reform gets caught in the crossfire of German industry and Polish electricity firms, there is little hope of seeing this market emerge from the legislative process any stronger than it was before. As a consequence, the EU should introduce additional measures.

The first of these measures would be to establish a maximum authorized level of greenhouse gas emissions: An Emission Performance Standard (EPS). The EPS level should be set in such a way as to immediately rule out the construction of any further coal-fired capacity. For existing power stations above a certain threshold, power plants would not be allowed to operate and should either withdraw from the market or carry out the investment required to be compliant with the law. The Commission’s proposal included in them ‘Clean Energy for All Europeans’ directive is a good yet insufficient starting point.

Firstly, the threshold chosen is too generous at 550g CO2 / kWh and needs to be set no higher than 350g CO2 / kWh to ensure a chance to meet our climate objectives.

No carbon floor price will emerge from the ETS reform.

Secondly, the threshold is rigid and uniform when it should be variable and gradually decreased to leave time for stakeholders to adapt. This level would not necessarily have to be the same for the whole of the EU, but could initially be determined on the basis of the energy mix of each Member State, and then progressively converge.

Thirdly, the threshold should apply to all power plants – not only to the ones benefitting from public support through capacity mechanisms.

In addition to EPS, a carbon floor price must be introduced. The UK is a pioneer in this respect. French authorities also originally committed to such a scheme. Environment Minister Ségolène Royal instructed a triumvirate consisting of Gérard Mestrallet, Pascal Canfin, and Alain Grandjean to come up with a set of proposals for leaving coal behind. They handed over their final report in July 2016: We are in favor of the proposal to establish a price corridor for the European carbon market, with a floor price of €20-€30 in 2020, an annual increase of 10%, and a ceiling price of €50.

Despite this report, nothing happened. Why? Because French authorities made a questionable strategic move: they linked the floor price discussion to the ETS reform. This obviously did not work, as it encountered the strong opposition of two categories of Member States: those who oppose a fast decarbonization of the electricity mix (chiefly V4 countries), and those who are pro-climate but believe that the ETS is a Holy Grail whose purity should not be effected by the establishment of any corrective measure (as in the case of the Netherlands and Scandinavian countries).

The result is known in advance: no carbon floor price will emerge from the ETS reform. As I don’t see it happening at the supra-national EU level, this could be the result of voluntary regional cooperation. The French electricity market does not exist anymore. Nor does the German electricity market. The whole Central- West European zone is coupled into a single electricity market. Hence this regional cooperation, originally known under the name of ‘pentalateral’ as it also includes Benelux countries, is the best forum to establish a joint regional carbon floor price. The election of Emmanuel Macron and the appointment of Nicolas Hulot as Energy Minister is good news. After the German elections in September, I hope that both countries will stick together to jointly propose a carbon floor price. We need a strong Franco-German impetus.

This price should be set a relatively low level at first, and progressively increase over years until it reaches a meaningful level. A carbon floor price would also penalize electricity imports from neighboring countries using coal and lignite resources. The Western Balkans’ procoal policy has a sky-high health cost in terms of premature deaths, pulmonary and respiratory diseases, and heart failure, evaluated at €8.5 billion in financial terms, and the region is already home to seven of Europe’s ten most polluting power stations. The EU should contribute to push Ukraine and the Western Balkans away from coal. The planet is not waiting, our carbon budget is shrinking, and we simply cannot afford to burn any more fossil fuels. Let’s act now!

Energy Transformation: An Opportunity for Europe

Claude Turmes