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How Potential Allowance Cuts From Coal Closures Could Support EUA Prices

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Last week, Germany announced that it would cancel around 12.3 million EUAs from its auction reserve for the years between 2025 and 2030. The allowances are “associated with the closure of electricity generation capacities in two ETS installations in its territory in 2022 due to additional national measures,” according to the European Commission.

With many EU member states having committed to closing their coal-fired power generating capacity – irrespective of any EU regulations – by 2030 or shortly after, the Commission created an avenue for member states to cancel EUAs equivalent to the business-as-usual emissions from any shuttered plants that would otherwise have been auctioned to the market.

The cancellation is provided for in an updated regulation published last year that covers auctioning of allowances. The regulations state that cancellation is purely voluntary, but that Member States should submit statements to the EU detailing the scale of any cancellations.

According to Berlin’s formal notification, Germany’s cancellation relates to the closure of one unit representing around 13% of capacity at RWE’s Neurath plant, as well as another plant at Frechen. The Neurath site reported total emissions of some 24 million tonnes in 2022.

Likewise, any member state that chooses not to cancel EUAs associated with the closure of coal-fired plants is required to “notify the Commission of its reasons for not canceling such allowances.” So far, no country has submitted such a notification.

The canceled EUAs will be transferred to the Market Stability Reserve, though they are likely to be permanently canceled since the MSR is henceforth limited to a maximum holding of 400 million EUAs.

The German news represents the first notification of any EUA cancellation under the new coal closure procedure. However, it’s unlikely to be the last, since at least 23 EU member states have committed to closing coal-fired capacity by 2030, according to research by the Beyond Fossil Fuels project.

An earlier study by Carbon Market Watch in 2019 estimated that if all the EUAs relating to coal-fired power scheduled to be closed by 2030 are canceled, the EU ETS total supply will drop by around 2 billion allowances between 2021 and 2030, the equivalent of more than one year’s cap in the market.

Indeed, since 2012, 153 coal plants have been retired, representing around 260 million tonnes/year of CO2 emissions, according to the BFF data. That number represents demand that is no longer in the market. 

To be sure, some of this lost demand will be accounted for in the adjustments to the cap made under the “Fit for 55” reform program that was approved in 2022. 

But the very fact that the Commission has seen fit to implement a voluntary cancellation program suggests that the market regulators are aware that political agreement on the market cap, and the rate at which it declines over time, may not be responsive enough to the drop in emissions as more coal plants are shut.

Voluntary cancellations represent a potential source of unplanned cuts in EUA supply that could support EUA prices going forward, and as demonstrated above, there is considerable potential for large-scale changes to supply over time.

However, member states may not be keen to drastically cut their auction supply in order to insulate their industry from rising EUA costs that would follow from any tightening of the market. It’s likely that any voluntary cancellations will be comparatively modest in scale at first, and that countries will prefer to provide justifications for not canceling as many EUAs as possible.

On top of that, with the various deadlines for coal exits currently stretching well into the 2030s, there is unlikely to be a steep drop in supply in any one year, further mitigating the risk of a supply and price shock.

*Note, Germany may advance to 2030.

Carbon Market Roundup

The weighted global price of carbon is $52.93, up 1.7% from the week prior. EUAs are up 0.5% at €72.36. UKAs are up 3.1% at £38.62. CCAs are up 2.7% for the week at $40.06. RGGI is down a slight 1.3% at $21.80.