How trading CO2 certificates speeds up phase-outs and helps to fight climate change
In 2019, Portugal decided to bring forward its phase-out of coal power plants, which was originally planned for 2030. The new plan was to end energy generation from coal by 2023, but it will now happen even sooner. Since as early as the beginning of 2020, Portugal’s coal-fired power plants have only been running on standby. The country recorded an all-time high number of days without power from coal, which will leave no other option but to close down the power plants for good. Such a rapid shift is not typical, especially not in big commodity industries, so how did it come about and what role did CO2 certificates play in all of this? Let’s get to the bottom of it:
Coal phase-out made in Portugal
The utility EDP Group (Energias de Portugal) is in the process of closing the country’s last remaining two coal power plants. The 1.3-gigawatt Sines power plant, responsible for a whopping 12 percent of Portugal’s greenhouse emissions, already went offline in mid-January, and the Pego-1 plant will follow suit in November of this year. This will make Portugal the fourth European country, alongside Belgium, Austria and Sweden to completely abandon coal-fired power generation after signing the Paris Climate Agreement.
“The decision was largely based on the lack of competitiveness of these plants,” says EDP press officer Helena Coelho. The reasons for this were “higher CO2 costs, higher taxes and the planned rapid growth of renewable capacity.” If we take these words at face value, then we can conclude that, besides the establishment of renewable energy sources, taxation and therefore political willpower was a driving force behind the early coal-phase out.
CO2 certificates changed the game
Depending on the size of the power plant, pollution rights in the form of CO2 certificates have been issued since 2005. Since then, energy and industrial companies have had to buy a certificate for each ton of CO2 they emit into the atmosphere. But they also have the option to trade these certificates on energy exchanges.
A study by FAU Erlangen-Nuremberg, WU Vienna and the University of Applied Sciences Graubünden shows that making CO2 certificates more expensive would be the most efficient way to reduce greenhouse gas emissions in the electricity sector. The researchers conclude that doing so would currently be much more effective than directly promoting renewable energy sources.
The study also states that if the price of those CO2 certificates is set too low, solar and wind power would first displace the relatively “clean” gas power plants, while coal power plants could stay profitable in the market. On the other hand, a higher tax on CO2 emissions would lead gas power plants to increasingly replace power plants burning coal. This would result in a more sustainable electricity production, as natural gas emits only about half as much CO2 as coal. Therefore, a moderately high price for CO2 certificates will, in the medium term, run coal power plants out of business.
The next level of sustainability
So let’s go back to Portugal. For the emission-heavy coal plants to first fall victim to the expensive CO2 certificate pricing probably was the political intention. The coal plants will close down soon, but due to the implementation of electric cars, charging stations and even electrical heating, electricity demand will be on the rise. Where will they take the energy from, and more importantly – how can this be done in a sustainable way?
Portugal already meets more than half of its electricity needs through renewables, and this share is set to grow to 80 percent by 2030. The country is relying mainly on wind and water, but also wants to significantly expand the share of solar power. The EDP Group in Portugal is now also focusing on green energy. To make use of the former coal site in Sines, EDP wants to turn it into a green hydrogen production facility, examining the feasibility of a 10-megawatt electrolysis pilot plant for hydrogen production. With a total nominal capacity of 1.5 GW, Portugal’s power supply will be guaranteed by this combination of renewable energy plants.
In Europe it’s game over for coal
Other European countries are also aiming for an early coal phase-out: France in 2022, the UK in 2024, and Hungary, Ireland and Italy in 2025. Germany, the Czech Republic and Poland have planned a coal phase-out after 2030. Considering what happened in Portugal, maybe these goals will be reached far sooner than planned. One thing is certain: the pricing of CO2 emission certificates plays a key role in steering the energy market towards sustainable goals.
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