According to media reports, Germany will delete all allowances that are no longer needed by closed coal plants. The country’s economy minister was quoted by Table.Media saying that allowances for 2021 and 2022 have already been removed and will eventually be canceled to avoid the waterbed effect.

This phenomenon occurs when a reduction in emissions due to additional national measures such as early decommissioning of coal plants in a state leads to higher emissions in other states. Economists explain as follows:  if someone lies on one side of the bed and sinks in, the other side rises, as the amount of water in the mattress remains unchanged.

In other words, when a coal-fired plant is closed, it no longer needs allowances for compliance. However, because the total number of allowances in the EU ETS is fixed, unused allowances can be used elsewhere.

As soon as the country adopted a law for phasing out coal in August 2020, environmental groups have urged Germany to cancel allowances to protect the carbon market. “Failure to cancel EU ETS permits alongside coal-fired plant closures would be bearish for the allowance market,” said Mark Lewis from bank BNP Paribas in 2019.

The current legislation includes a cancellation provision by way of which countries are allowed to unilaterally cancel allowances not required due to the coal phase-out “corresponding to the additional emission reduction resulting from the decommissioning of power generation.”

However, according to the article published by Table.Media, Germany and the EU had disagreed about the number of allowances that needed to be canceled, delaying the plan to cancel them. This is no longer an issue: “The government now agrees with EU calculations, which use an average value of CO2 emissions of a plant over the past five years”, writes Clean Energy Wire.