How Responsive Are EU Coal-Burning Plants to Changes in Energy Prices?

Abstract

Abstract The European Union (EU) Emissions Trading System (ETS) has implicitly made it more expensive to burn coal relative to natural gas because coal has a higher carbon content. Therefore, it is important to understand how much plants reduce their coal usage in response to higher coal prices to assess the effectiveness of the ETS in reducing carbon emissions. We analyze a novel panel of coal-burning large combustion plants from a subsample of eight EU countries and found that, holding constant the natural gas price, a 1% increase in the coal price results in a 0.36% decrease in coal consumption. At current ETS prices, this implies that the average large combustion plant in our sample EU countries is burning 7% less coal than it would be absent in the ETS. This suggests that the ETS has significantly reduced carbon emissions from coal-fired plants for the eight countries represented in our sample.