Despite highly touted climate policies, European utilities are rushing to capitalize on the cheapest and dirtiest source of electric power in the continent: coal. A combination of low carbon permit prices under the EU Emissions Trading Scheme (ETS) and increased coal imports from the United States has made coal the most profitable fuel for power generation. Meanwhile, the ongoing American shale gas boom -- powered in part by decades of federal investments in shale drilling technologies -- is accelerating the closure of US coal-fired power plants.
According to Bloomberg, demand for coal grew 3.3 percent last year, the fastest pace since 2006. Coal's resurgence is as big a surprise to European environmentalists as the shale revolution is to their US counterparts -- natural gas remains relatively expensive in Europe, and the emissions penalty levied by the ETS has dropped so low in recent months that coal has become much more competitive than gas for European utilities.
Gas is so expensive in Europe that utilities are actually shutting down cleaner gas-fired power plants in favor of more profitable coal. Deutsche Bank AG predicts that as much as 6,400 megawatts (MW) of Germany's natural gas power will be closed by 2015 -- that's a quarter of the country's natural gas-fired capacity.
As we documented in a January 2012 analysis, federal regulations of conventional pollutants like mercury has prompted the closing of up to 25,000 MW of coal-fired power in the United States. The trend has been accelerated by the shale gas boom, to the point where coal and natural gas are now generating equal amounts of US electricity for the first time ever.
The continent-wide cap-and-trade regime in operation in Europe continues to disappoint, as nations switch back to dirty coal-fired electricity generation. Yet even amidst years of economic growth, the United States has reduced absolute domestic carbon emissions more than any other industrialized economy since 2006, and may see emissions drop to 1990 levels this year.
A number of factors are powering this decarbonization, including a mild winter and increased fuel economy in the US transportation sector. But by far the largest driver of emissions reductions is the shift to natural gas enabled by vast new stores of domestic shale gas. These new commercial resources, unlocked by decades of public-private investments in hydraulic fracturing in shale, are a testament to the role of public investment and technological innovation in opening up new energy resources with the potential to diversify and decarbonized advanced economies.
The differing experiences in Europe and the United States illustrate the relative efficacy of direct technology push versus carbon pricing in emissions reduction and advanced technological deployment. As we wrote in a February 2012 article in Yale e360, "the existence of a better and cheaper substitute has made the transition away from coal much more viable economically, and it has put wind at the back of political efforts to oppose new coal plants, close existing ones, and put in place stronger EPA air pollution regulations."
The ongoing debate between carbon pricing and a technology-led strategy led to a direct challenge from Gernot Wagner, chief economist at the Environmental Defense Fund. Wagner has persistently pointed to the primacy of carbon pricing in reducing global warming emissions, and touted Europe's ETS as a rounding success that other countries should quickly replicate. We published our full-length interview with Dr. Wagner at the Breakthrough Journal.
Now, as then, America's investments in technological innovation contrast strongly with the European Union's preference for pricing signals. As Europe follows through on plans to build new coal plants that will burn for decades and America leads recent global decarbonization trends, we continue to find little evidence of success from the ETS or any other major carbon pricing schemes around the world.