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Abstract

Germany has an ambitious climate target for 2030 that cannot be achieved without reducing the high share of coal in power generation. In the face of this, the government has recently decided to directly phase out coal capacity. Yet implementing such a policy comes with two important risks: (1) the decommissioning path might actually be insufficient to reach the 2030 climate target; and (2) the waterbed effect that arises from any additional national policy within the EU Emissions Trading Scheme (EU ETS) cap. In this paper, we quantify these risks using the numerical electricity market model LIMES-EU, and consider options for dealing with them. Our results show that the coal capacity phase out risks missing the 2030 target slightly, but a carbon price floor of at least 35 €/tCO2 would eliminate this risk. Further, we find a substantial waterbed effect, which could be partly alleviated through a carbon price floor coalition of countries, and even fully by cancelling 1.1 GtCO2 of certificates. Yet given the difficulties and challenges that come with either option, members implementing a carbon price floor policy should advocate extending it to the full EU ETS level.