Carbon Glut Limits German Options to Meet Emissions Target

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German Emissions Decouple From Economy

A glut of European Union carbon-emission permits is limiting Germany’s options to meet its 2020 greenhouse gas-reduction target, according to the nation’s environment ministry.

Europe will take years to eliminate its surplus before cost-effective climate strategies based on carbon markets will get traction, Dirk Weinreich, head of emissions trading in the ministry, said Monday. Germany wants to cut emissions at home to meet its most-immediate climate goal rather than just buy and retire pollution allowances, he said in an interview.

Europe’s carbon-permit glut led to a 74 percent slump in the cost of emissions since 2008, eroding the penalty for burning coal and prompting market reforms that probably won’t start for more than three years. Forcing utilities in Germany, primarily RWE AG and Vattenfall AB, to switch to cleaner natural gas from coal would cost about six times the current carbon price, according to consultants Bain & Co.

“We still live in the world of significant surpluses and canceling allowances would not bring the necessary change as quick as we need it,” Weinreich said. The carbon market is “like the machine room in a big ship. It gives the basic drive. If you want to change direction quickly you may need additional engines at the sides.”

Controlled Supply

Germany is targeting a 40 percent reduction in emissions by the end of the decade from 1990 levels. European Union lawmakers plan to control the supply of carbon permits through a market reserve that will start in 2019.

The reserve start is probably too late for Germany, which is considering alternatives to fill the probable 7 percent gap in its 2020 target because coal emissions are still too high, Weinreich said. “We are talking about additional instruments as a transition,” he said, without being specific.

Chancellor Angela Merkel’s cabinet has targeted lignite plants -- power-generation’s biggest polluters that account for a quarter of electricity output -- to take the brunt of additional emission cuts through 2020.

Forcing coal plants to shut would push up power prices by about 10 percent as more natural gas generators would be used to cover demand peaks, according to UBS Group AG.

Benchmark Contract

Closing stations to reduce emissions equates to a cost of about 50 euros ($56) per metric ton of carbon dioxide, according to Boston-based Bain, which advises companies in industries from airlines and health care to energy. That compares with 7.48 euros to buy a benchmark EU permit to emit one ton of carbon dioxide, data from ICE Futures Europe in London show.

Cheaper emission-reduction policies are being sought by industry and other energy consumers, Julian Critchlow, a partner at Bain, said by phone. “Policy makers must embrace lower-cost pathways. That’s the lesson from Europe writ large.”

Germany can show climate negotiators seeking a global treaty in Paris this year that reducing carbon at the cheapest price is sensible, no matter where the emissions are located, Critchlow said. It also leaves money on the table for additional climate measures, he said.

“The cost effectiveness, not only from a national perspective but from a global perspective, will be key,” Fatih Birol, the chief economist at the International Energy Agency, said in an interview in London on Monday. It may be easier for some countries to reduce emissions elsewhere than at home, he said.

Emerging nations want to be shown how to cut their emissions, Germany’s Weinreich said. Merkel is seeking a global carbon market to help finance clean energy in poorer nations and win their support for a climate deal, she said in May.

“We have set the precondition to reach a more cost-effective European, and maybe German, policy on climate,” Weinreich said. “If we have a functioning emissions-trading system, maybe the need for other measures is a bit lower.”

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