University of Kentucky CAER Home


The Impact of Emissions Trading on the Coal Industry

AUTHOR: John Kessels and Wayne Hennessy
DATE: January 2004
free download from IEA website

This report summarises the current status of emissions trading and the implications for coal producers, traders and users. In practical terms, emission trading should ensure that emission reduction takes place where the cost of the reduction is lowest and is particularly suited to the emissions of greenhouse gases, which have the same effect wherever they are emitted. This allows governments to regulate the amount of emissions produced in aggregate by setting the overall cap for the scheme but gives companies the flexibility of determining how and where the emissions reductions will be achieved.

The report describes a number of useful lessons learned from pilot greenhouse gas trading schemes conducted in Canada, Denmark, the UK, some US states and by private companies such as BP, Shell and the Chicago Climate Exchange. The European Union is establishing an EU Emissions Trading Scheme in up to 28 countries with a first phase in 2005-07 and then another phase in 2008-12. The number of allowances each company or installation with emissions will receive will be based on each member state’s National Allocation Plan and the European Commission is facing a difficult task in assessing the draft plans for overly generous allocations which could constitute illegal state aid.

Forward trading prices had halved in just four months to April 2004 when it became clear that an oversupply of allowances was likely. This early market reaction to allocation developments has served to demonstrate the critical nature of this stage in the establishment of an emissions trading scheme. One trading advisor’s ‘most likely’ scenario has a price estimate for 2010 of 9.90 US$/tCO2-e and estimates that the greenhouse gas markets will be worth around US$10 billion by 2007.

The major impact of climate change policies will be the increased prices faced by users of fossil fuels (particularly coal). The challenge for the coal industry will be to ensure that governments provide energy users with sufficient flexibility to achieve abatement by cost effective means (such as emissions trading) rather than by direct regulation. The main conclusion from a simple comparison of price impacts of a 10 US$/CO2 emissions tax is that coal would remain the most competitively priced industrial fuel in five developed countries where coal currently has the lowest price.