(The author is a Reuters market analyst. The views expressed are his own.)
By Gerard Wynn
LONDON, Jan 17 (Reuters) - The European Union will have to introduce mandatory standards to limit power plant emissions, given a failure to introduce carbon capture and storage (CCS) technology plus rising coal consumption and the construction of new coal power plants.
A market-based approach to limit coal emissions through CCS has failed.
The Commission had hoped to motivate the building of CCS pilot plants mostly through its emissions trading scheme. But the carbon price hit a record low on Thursday, and the savings from avoiding carbon emissions are just not sufficient to support the technology.
It plans to revive carbon prices by cancelling surplus emissions permits, but analysts' estimates suggest that even the most favourable outcome would fail to make CCS economically viable without a lot of extra backing.
The Commission is now at an early stage of proposing an emissions performance standard (EPS) for power generation across the EU, a draft note obtained this week by Thomson Reuters Point Carbon showed. (See Chart 1)
Such a limit would cap the amount of carbon emissions per unit of power generation and follow similar standards already proposed in Britain, Canada and the United States.
The EU aims to cut greenhouse gases by at least 80 percent by the middle of the century, a target it says it can achieve only by eliminating emissions from burning fossil fuels.
CCS could cut carbon emissions from coal plants by 90-95 percent by capturing and burying the greenhouse gas underground, and it is the only known technology that could do the job, but pilot CCS projects will take six to 10 years to build and add around $1.5 billion to the cost of each power plant.
There are currently no concrete European plans for commercial-scale CCS projects. That compares with the EU target announced six years ago for 10-12 large CCS power plants in operation by 2015.
In the meantime, EU coal consumption has recently risen to 753.2 million tonnes in 2011 from 712.8 million tonnes in 2010, Commission data show, partly because cheap U.S. shale gas has led to a rise in U.S. coal exports.
Chart 1: link.reuters.com/ter35t
Chart 2: link.reuters.com/wer35t
If instituted, an EU-wide EPS would apply only to new power plants, ruling out coal without CCS.
EU-wide EPS legislation would need majority backing from member states, however, and would face opposition from east European countries with large coal reserves.
The draft EU note expressed exasperation with the failure to act so far.
"Despite full awareness of the efforts needed to meet the ambitious climate change objectives, at present new fossil fuel plants are still constructed in member states without CCS," it says.
According to its estimates, EU member states are presently planning or building 10 gigawatts (GW) of new coal-fired power (six plants under construction, six planned) in Germany, the Netherlands, Greece and Romania. That compares with a total 172 GW of new power generating capacity planned or under construction.
Given the slow rate of new build, an EPS would have only a small effect on coal consumption and carbon emissions in the near term.
Its impact would rise over time because most (about 160 GW) of the existing EU coal fleet is 25 to 55 years old and will shut over the next three decades, implying the retirement of about 5 GW per year.
The International Energy Agency forecasts that coal-fired power generation will surge in emerging economies over the next two decades, adding pressure to develop CCS technology to meet international climate targets. (See Chart 2)
Emissions performance standards are already planned by a handful of countries.
Modern coal plants emit around 800 grams of CO2 per kilowatt hour and gas plants around 370 grams.
Britain and the United States have each proposed simple schemes, which set a flat EPS limits of around 450g CO2/ KWh on all new build, ruling out new unabated coal-fired power plants but allowing gas.
An alternative, quota approach is planned in the U.S. state of Illinois, which will force electric utilities to sell some of their power from clean coal in the same way that state-level renewable energy mandates have driven demand for wind and solar power.
The Commission note argues it could adapt such a scheme, requiring all power plants to buy a certain number of "CCS certificates", which in turn would set an EU-wide level of demand for the technology.
While the draft is not explicit, the scheme presumably would work by allowing energy companies to trade the certificates and their price would rise rapidly if not enough CCS plants were built, providing a source of demand.
The Commission draft says it may support either approach: "Both policy options ... could be enacted through EU legislation setting out minimum performance standards, or alternatively a mandatory CCS certificate system, taking effect as of 2020."
Lessons from the EU emissions trading scheme, however, suggest that a simple mandate may be a wiser choice than a market in CCS certificates. (editing by Jane Baird)