Carbon Floor Price - Öko-Institut€¦ · Carbon floor price for electricity sector Background on...

Integrating a carbon floor price in the policy

mix for Germany’s coal phase-out

Study conducted on behalf of WWF Germany

Dr. Felix Chr. Matthes | Hauke Hermann

Charlotte Loreck | Dr. Sylvie Ludig

Berlin | March 2018

Carbon pricing in Germany

Some background

• Germany has a long tradition of target-driven policies.

the outcome is mixed

the country is going to miss its 2020 GHG emission reduction targets

(40%), partly due to its high-carbon electricity exports

this and the need to comply with the 2030 target has triggered heated

debates which will lead to action (whatever it will be)

• Coal phase-out is eventually on the political agenda

first attempts in 2014 which led to decommissioning of 2.7 GW lignite

power plants (with high compensations)

end date for coal-based electricity generation is explicitly mentioned

in the coalition treaty – without being specific on the date and the

trajectory (will be topic of a coal commission)

• Carbon pricing raised a lot of attention during the last months

often mentioned in early drafts of (many) documents, never survived

(explicitly) in the final versions

overall inconsistent (implicit/explicit) carbon pricing is realized widely

Carbon pricing in Germany

Some background

• Key legal constraints need to be considered

no window of opportunity for the next 5 years at the EU level

auction reserve prices are not possible due to EU legislation

recent ruling of the Constitutional Court (on the nuclear fuel tax) has

far-reaching consequences for carbon pricing: CO2 taxes as input

taxes are no longer possible

the way out: flexible/floating energy taxation for power generation

• Key political constraints need to be considered

compensation of indirect CO2 costs

British floor price mechanisms as a blueprint

• Consequence

the (original) British model will be the reference model

how to coordinate this cross-border (convergence or CDN model)?

Carbon floor price for electricity sector

Background on instruments (1)

• Reform of taxes, levies and surcharges is on political agenda (for

many reasons)

• Also in this context: increasing interest in carbon pricing approaches

(for different / all sectors) – for many good reasons

• EU ETS – the key carbon pricing approach for electricity sector will

recover only very slowly from surplus crisis after measures taken on

structural reform

Up to second half of the 2020s: price around / below 10 €/EUA

No / only insufficient contribution to necessary quick GHG emission

reductions in power plant sector

• In electricity sector with strong cross-border integration, a number of

interactions arise from carbon pricing:

Climate-policy and distribution effects of unilateral approaches can

prove problematic (relevant for all countries with ambitious climate

protection strategies, e.g. DE, FR, NL)

Cross-border activities of carbon pricing are (very) advantageous and

on political agenda.


Background on instruments (2)

• Broad portfolio of instruments is available for substantial (and

relatively short-term) GHG emission reductions in electricity sector

capacity management (e.g. security standby reserve),

operating restrictions (e.g. emission performance standards)

selective pricing instruments (e.g. special levy on coal)

carbon pricing (national floor prices, general floor prices in EU ETS,

floor prices for regions within Europe)

• Different instruments have different ramifications:

GHG emission reductions (overall, in different countries)

costs and distribution mechanisms (electricity prices, compensations)

security of supply

balance of electricity imports and exports

• Reminder: With the current reform of EU ETS, additionality of GHG

emission reductions is ensured (market stability reserve, cancellation

mechanisms and their interactions).


Objective of analyses

• Numerical analysis of different aspects of carbon floor pricing

options for electricity sector

for Germany alone

an integrated regional approach: Germany, France, Belgium, the

Netherlands, Luxembourg, Austria, Denmark

various price levels analysed in each case

• Comparison with effects that have dominated discussion of

instruments in Germany to date

policy-induced shutdown of coal-fired power plants

different variants

• Comparison with effects of combination strategies

different levels of carbon floor prices

policy-induced shutdown of power plants in different variants

Methodology and scenarios

Methodology

• Hour-by-hour dispatch

modelling using electricity

market model “PowerFlex

Europe”

• Shutdown of power plant units

endogenous to the model for

the case that electricity

revenues are not sufficient to

cover fixed operating costs

(personnel, maintenance and

service, revisions) in the long

term

• 2020 used as time horizon in

the analysis (by way of

example)

€ / EUA

Model analyses:

Scenarios considered

• Reference

5.6 € / t CO2

• Carbon floor price in Germany

15 € / t CO2 (i.e. 9.4 € / t CO2 plus the reference amount)



• Carbon floor price in regional market

Germany, France, Belgium, the Netherlands, Luxembourg, Austria,

Denmark

• Policy-induced shutdown of power plants

Shutdown of 7 GW lignite power plants (discussed in CDU-FDP-Green

coalition negotiations)

Shutdown of all power plant units that entered operation before 1990

(8.4 GW lignite and 11 GW hard coal) based on the study “Future

electricity system – Coal phase-out by 2035”

• Corresponding combinations

CO2 effects beyond the fuel switch

Contribution margins as criterion for shutdown decisions

CO2 prices have significant effects on contribution margins of lignite power plants and open-cast

mines under current conditions.

The oft-mentioned “domino effects” can only arise if fixed operating costs of an open-cast mine

can be lowered in their entirety and not modularly; this is not expected.

0

5

10

15

20

25

30

35

40

45

50

01.2000 01.2005 01.2010 01.2015 01.2020

EU

R /

MW

h

Avoidable fixedoperational costs power plant

Short-term avoidable fixedoperational costs for mine

Medium-term avoidablefixed operational ostsopen cast mine

Other long-termsunk costsopen cast mine

Long-term sunk recultivation costsopen cast mine

If contribution margins do notcover the ... costs then ...

... the mine is uneconomical(but will continue operating)

... alternative funding of recultivationwill be needed

... the mine will be decommisioned*

... the plant will be decommissioned*

* as soon as the fixed costs can be effectively avoided

Results

290

254

200

158

262

215193

254

211

36 91 132 28 75 98 36 80

0

50

100

150

200

250

300

350

Reference 15 25 35 15 25 35 7 lig 8.4 lig;11.4 hard c

w/o Carbonfloor price

Carbon floor price Germany(€/tCO₂)

Carbon floor priceregional market

(€/tCO₂)

Shutdowns in Germany(GW)

mil

lio

n t

CO

2

Target area

2020s

Absolute GHG emissions and power plant shutdowns in DE

Carbon floor prices and policy-induced shutdowns

Possible for electricity sector to meet 40% reduction target with carbon prices of approx. 25 €/t

CO2 in DE and 30 €/t CO2 in European regional market or via significant shutdowns of lignite (>8

GW) and hard coal (>11 GW)

Electricity sector target for 2030 of German Climate Action Plan 2050 is achievable with carbon

prices above 30 € (unilaterally in DE) or from 35 € (regional market) or with shutdowns >>8 GW

(lignite) and >>11 GW (hard coal)

250*

180**

200*

* 40% target

** electricity

sector target

according to

Climate Action

Plan 2050

GHG emission reductions compared to reference

in DE / Europe / overall Carbon floor prices and policy-induced shutdowns

Carbon floor price only in DE has strongest GHG emission reduction in DE, but largest rebound

effect in regional market (outside DE)

Carbon floor price above 15 €/t CO2 in European regional market generates largest GHG emission

reductions in regional market (incl. DE)

Policy-induced shutdowns of lignite >8 GW and of hard coal >11 GW bring about similar emission

reductions as carbon floor prices of 25 €/t CO2 (DE or regional market)

-36

-91

-132

-28

-75

-98

-36

-80

25

48

64

19 19 2314

30

-11

-43

-68

-9

-56

-75

-22

-49

-150

-100

-50

0

50

100

150

15 25 35 15 25 35 7 lig 8.4 lig;11.4 hard c



(€/tCO₂)

Shutdowns inGermany

(GW)

mil

lio

n t

CO

2

Emission difference Europe (w/o GER) vs. reference

Emission difference GER vs. reference

Overall emission- reduction Europe (incl. GER)

Electricity import-export balance Carbon floor prices and policy-induced shutdowns

Carbon floor price in DE generates the strongest shift towards significant electricity imports

Carbon floor price of 15 to 25 €/t CO2 in regional market balances German electricity imports

Policy-induced shutdowns bring about positive electricity exports or at most very low imports

Shutdowns decrease Germany’s surplus electricity exports more slowly than carbon floor price

-40

-4

42

78

-15

17

35

-16

10

-100

-80

-60

-40

-20

0

20

40

60

80

100





(€/tCO₂)


TW

h

Import

Export

Installed power plant capacities (excl. new built) Carbon floor prices and policy-induced shutdowns

Carbon floor price of up to approx. € 15 mainly reduces hard coal capacity compared to reference

… up to approx. 25 €/EUA mainly reduces lignite capacity; natural gas shutdowns are avoided

… up to approx. 35 €/EUA: carbon floor prices in DE / regional market have diff. effects on coal in DE

Policy-induced shutdowns of lignite alone avoid hard coal but not natural gas shutdowns

Lignite and hard coal shutdowns mean that natural gas shutdowns are avoided

difference in

capacity

compared to

reference (GW) 18

16

10

5

16

10 9

11 9

22

16 15

18 18

16 15

22

11

18 18

21

23

18

22 23

18

23

-7 -12 -13 -5 -10 -11 -7 -15

0

5

10

15

20

25

30





(€/tCO₂)


GW

lignite hard coal natural gas

Wholesale electricity prices

Carbon floor prices and policy-induced shutdowns

Carbon floor prices in DE and in regional market have very similar effects on wholesale electricity

price (35 €/t CO2 instead of 5.6 €/EUA leads to increase of approx. 20 €/MWh)

Effects of policy-induced shutdowns on wholesale electricity price are very low (possible

compensation payments and possibly higher scarcity prices: expected amount X €/MWh)

German EEG surcharge decreases when electricity prices increase -> decrease of approx. 50%

Power-intensive industries (within EU): enabling compensation of indirect CO2 costs

30

36

43

48

36

44

50

34

40

0

10

20

30

40

50

60




(€/tCO₂)


€/

MW

h

GHG emissions / emission reductions of DE power plants

Carbon floor prices, policy-induced shutdowns and combinations

w/o policy-induced

shutdowns

with policy-induced

shutdowns

← carbon price

Combinations of policy-induced power plant shutdowns and carbon floor prices generate:

… relevant additional emission reductions if volume of shutdown is low (e.g. 7 GW lignite) and

carbon prices (regional market) are approx. 15/20 €

… hardly any additional emission reductions if volume of policy-induced shutdowns is high

290262

215203

254241

213 201 211 204 200

28 75 88 36 50 77 89 80 86 91

0

50

100

150

200

250

300

350

5,6 15 25 30 5,6 15 25 30 5,6 15 25

Reference Carbon floor priceregional market

(€/tCO₂)

Policy-induced shutdowns7 GW lignite

Policy-induced shutdowns8.4 GW lignite,

11.4 GW hard coal

mil

lio

n t

CO

2

Emission reductions compared to reference

in DE / Europe / overall Carbon floor prices , policy-induced shutdowns and combinations

With carbon floor prices of 15 € (regional market) additional GHG emission reductions for DE and

Europe result from policy-induced shutdowns of lignite and hard coal power plants in DE

With carbon floor prices of 25 € (regional market) additional GHG emission reductions for DE and

Europe arise only through policy-induced shutdowns of hard coal power plants

-36

-80

-28

-50

-86-75 -77

-91-88 -89

14

3019 27

37

19 19 22 24 24

-22

-49

-9-23

-50 -56 -58-69 -63 -65

-150

-100

-50

0

50

100

150

7 lig 8.4 lig;11.4

hard c

none 7 lig 8.4 lig;11.4

hard c

none 7 lig 8.4 lig;11.4

hard c

none 7 lig

5,6 €/t CO₂ 15 €/t CO₂ 25 €/t CO₂ 30 €/t CO₂

mil

lio

n t

CO

2

Emission difference Europe (w/o GER) vs. reference

Emission difference GER vs. reference

Overall emission- reduction Europe (incl. GER)

← policy-induced

shutdowns (GW)

Installed capacities of power plants in DE


w/o policy-induced

shutdowns with policy-induced

shutdowns

← carbon price

difference in

capacity

compared to

reference (GW)

When policy-induced shutdowns of lignite power plants take place at same time:

… hard coal power plants are only shutdown when CO2 prices (regional market) are approx. 25 €

… shutdowns of natural gas power plants are avoided when carbon floor prices (regional market)

are approx. 25 €.

18

16

10 1011 11

9 9 9 9 9

22

18

1615

2221

1615

11 11 11

18 18

2222

18 18

22 22 23 23 23

-5 -10 -11 -7 -8 -10 -11 -15 -15 -15

0

5

10

15

20

25

30

5,6 15 25 30 5,6 15 25 30 5,6 15 25

Reference(€/t CO₂)


(€/tCO₂)



11.4 GW hard coal

GW

lignite hard coal natural gas

Electricity import-export balance


← policy-induced

shutdowns (GW)

Higher carbon prices (also in regional market) lead to reduction of net electricity exports and to

higher net electricity imports

Reminder: This only occurs if no new (natural gas) power plants are built in DE.

-40

-16

10

-15

-3

19 17 1723

27 2735

-100

-80

-60

-40

-20

0

20

40

60

80

100

none 7 lig 8.4 lig;11.4 hard



none 7 lig none

5,6 €/t CO₂

15 €/t CO₂

25 €/t CO₂

30 €/t CO₂

35 €/t CO₂

TW

h

Import

Export

Wholesale electricity prices


w/o policy-induced

shutdowns with policy-induced

shutdowns

← carbon price

Carbon prices dominate the electricity price effects on wholesale market

30

36

4447

34

39

4547

40

43

47

0

10

20

30

40

50

60

5,6 15 25 30 5,6 15 25 30 5,6 15 25

Reference Carbon floor priceregional market

(€/tCO₂)



11.4 GW hard coal

€/

MW

h

Conclusions

Summary

Emission reductions in Germany (1)

• Medium emission reduction targets for Germany would require

carbon price levels of ~30-35 €/t CO2

• The alternative would be forced the shut-down >50% of the coal fleet

in the up-run to 2030 (ratio hard coal/lignite is important)

• Embarking on an ambitious emission reduction trajectory with

carbon floor prices in the range of 15-20 €/t CO2 would potentially

require an hybrid approach

(hybrid model of early shut-down with compensation and an

increasing carbon price floor – which is important also to increase

(dis)investor certainty)

• It is completely unclear whether the coming government is willing to

go for an carbon pricing approach (solely or in the framework of a

hybrid approach)

• Enabling factors for the carbon floor price could be, however,

the cost exposure of the electricity-intensive industries

the opportunities from cross-border cooperation (beyond the narrow

energy & climate policy perspective)

Summary

Emission reductions in Europe

• Positive overall effect on GHG emission reductions

In all scenarios considered, the emission reduction in Germany is

substantially higher than the increase in emissions in its neighbouring

countries

• Rebound effects within Germany and abroad (= emission increase of

the power plants that adopt electricity production of power plants

with decreased production) can be effectively limited by carbon floor

prices in regional market

Carbon floor prices in regional market of approx. 25 €/t CO2

substantially reduce the rebound effect in Germany as well as in

European neighbouring countries

• Higher emission reductions in combination of rather low carbon floor

prices with power plant shutdowns

With carbon prices of <25 €/EUA, higher GHG emission reductions

are achieved through combination with policy-induced power plant

shutdowns (in Germany).

Summary

Energy sector effects (1)

• Wholesale electricity prices

Lower with policy-induced shutdowns than with carbon floor price

But policy-induced shutdowns can entail compensation payments

(incl. scarcity prices but only when X €/MWh)

Effects for final energy users:

• Approx. 50% of increase of wholesale electricity prices is

absorbed via reduced EEG surcharge for final energy users that

pay the (full) EEG surcharge

• Effects for electricity-intensive industries that qualify, as before,

for compensation of indirect CO2 costs can be relieved via

corresponding compensations (this essentially depends on legal

design but is possible, see carbon floor price in UK)

• Connection to other changes in tax, levy and surcharge systems

(e.g. partial reduction of electricity tax) can likewise contribute to

decrease of distribution effects.

Summary

Energy sector effects (2)

• Security of supply

• Extensive power plant shutdowns necessitate complementary

measures to ensure security of supply: demand response, gas power

plants, electricity storage if necessary.

• Balance of electricity import and exports (for Germany)

Carbon floor price tends to have larger effects on electricity import-

export balances than policy-induced shutdowns of power plants

(considered here)

With approx. 20 €/EUA in regional market, Germany’s imports and

exports are balanced; with higher carbon prices, there are net imports

• The latter only occurs under the condition that no new gas-fired

power plants are built in Germany, which could become

necessary in any case with a view to security of supply

Reduced electricity exports from Germany increase production of

hard coal (if carbon prices remain under approx. 20 €) and natural

gas power plants in European neighbouring countries.

Thank you

very much

Energy & Climate Division

Berlin Office

Schicklerstraße 5-7

D-10179 Berlin

www.oeko.de

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