The Market Stability Reserve (MSR) to be introduced in January 2019 will shrink the supply of carbon allowances (EAUs) as never before.
If the analysis in this report is correct, and the Chinese national carbon trading scheme is effective in the same time frame, the prospects for hitting Paris targets will have been given a significant boost. As author Mark Lewis, head of research at Carbon Tracker, puts it: “Carbon pricing won’t be sufficient on its own to achieve the Paris goal of limiting warming to well below 2˚C, but it does have a vital role to play: Carbon prices put a value on the limited amount of CO2 we can store in the atmosphere if we are to avoid catastrophic climate change. The space left for increased concentrations of greenhouse gases is the ultimate scarce resource, and it is imperative that it be priced accordingly.”
The implications for coal in particular could not be clearer. Lewis again: “Life is set to get much tougher for EU coal generators. Higher carbon prices will eat further into operating margins that have already been severely eroded by the growth of renewables, forcing less efficient coal plants off the grid altogether. Under a Paris-compliant EU-ETS cap the shock to coal would be even greater, forcing all coal and lignite plants – even the most efficient – either off the grid or to the margin.”
Image: from the report