EU ETS Reserve Price Could Block Coal Switching During Gas Spikes, Study Finds

EU ETS Reserve Price Could Block Coal Switching During Gas Spikes, Study Finds A carbon price floor would prevent the coal-for-gas substitution now underway across Europe, but ETS reform could cut allowance prices 13% instead. A new study argues that introducing a reserve price into the EU Emissions Trading System could curb coal use during gas price shocks, Carbon Pulse reported. The mechanism would set a floor below which EUA prices could not fall, ensuring that carbon costs remain high enough to make coal-to-gas switching uneconomic even when gas prices spike.⁸ The proposal collides with what is actually happening in European power markets. Germany could bring online 6.7 GW of reserve coal-fired capacity to conserve gas stocks, according to the chairman of the German Coal Importers Association, speaking to Montel. With German gas storage levels falling to nearly 20% of capacity this year, the "name of the game" in Germany is to "save gas," he said. A carbon price floor would make that coal switch more expensive and potentially unworkable.² Italy is facing the same calculation. Energy minister Gilberto Pichetto Fratin said mothballed coal plants could be reactivated if gas prices surged above EUR 70/MWh. Italy ended coal generation as part of its decarbonisation plans. Bringing it back is a political reversal that only makes sense if the carbon cost is low enough to keep coal competitive against high-priced gas. An ETS reserve price would close that option.¹ The European Commission is already moving on ETS reform, but in a different direction. A Veyt senior analyst told Montel that an EU ETS adjustment under consideration could cut carbon prices by about 13% over the next two years. The mechanism involves the Market Stability Reserve: when quotas exceed 833 million tonnes, auction volumes are reduced by 24%. The reform would alter how this threshold operates, potentially releasing more allowances into the market.⁷ Energy Aspects added that the launch of the EU's Industrial Decarbonisation Bank and ETS investment booster scheme could see more carbon allowances in the market from next year, dampening prices further. The direction of travel in Brussels appears to be looser supply, not a price floor. The reserve price study runs against the current policy momentum.⁶ The coal-back-to-fashion trade is real but limited. Ember's analysis, shared exclusively with Carbon Brief, projects a global rise of no more than 1.8% in coal power output this year from the Iran war effect. The "worst-case" scenario is far more contained than the political rhetoric suggests. Only 17% of coal dug up globally is traded across borders, compared with 20% of natural gas and virtually all LNG. Most coal markets are domestic.^4,5 But the price moves are not small. Coal prices for delivery from Australia, the main global export benchmark, are up 25% since late February. Oil, with a sixth of global output stuck behind the Strait of Hormuz, is 50% dearer than before the war. The relative economics of coal generation have improved dramatically in every market where gas prices have surged.⁵ Asia's response has been blunter than Europe's. Countries across the region are rapidly increasing coal use to counter soaring energy prices and supply shortages from the Iran conflict. Dinita Setyawati, senior energy analyst at Ember, warned that "the shift will impose substantial environmental and public health costs." But analysts also note that the crisis could ultimately accelerate the region's shift toward renewables by demonstrating the vulnerability of fossil fuel import dependence.³ The tension for carbon markets is straightforward. If EUA prices fall — through reform, through increased auction volumes, or through policy intervention — coal switching becomes cheaper and gas is preserved for heating and industry. If EUA prices are supported by a reserve price, coal switching is blocked, gas burn in the power sector continues, and storage refill slows at exactly the moment Europe needs every molecule in the ground before winter. The signal to watch is whether the European Commission's 15 July ETS proposal includes any discussion of a reserve price mechanism or whether it follows the analyst consensus toward loosening supply. The 13% price cut projection from Veyt and the supply increase from the Industrial Decarbonisation Bank suggest Brussels will choose gas conservation over carbon price integrity. For EUA traders, that is bearish.^7,6