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Europe’s coal phase-out and the costs of a just transition

The transformation of the European economy to become carbon-neutral by 2050 must come with a strong regulatory framework and robust financial assistance to facilitate this transition, says the 2020 first-quarter report of Central Europe Energy Partners (CEEP). The report focuses on the Just Transition Mechanism and its core instrument the Just Transition Fund (JTF), the designated tool to ensure the fairness of Europe’s transition by supporting the most affected regions and alleviating social and economic fallouts.

Acknowledging the Member States’ different economic starting points in terms of GDP, energy mix, emissions reduction targets, as well as their investment needs for energy infrastructure and technology is a significant step for Central Eastern European countries given the comparatively high carbon intensity of their economies. The general idea – as a more extensive version of the Coal Regions in Transition Platform launched in 2017 – is to help workers and regions dependent on polluting sectors such as coal mining, which will be phased out under the Green Deal, to transform their economies based on sustainable technologies.

The associated costs of decommissioning coal-based technologies to reach the desirable climate targets are changing based on the applied methodology but in CEE countries the numbers are staggering. The most evident case is in Poland, where the coal sector, directly and indirectly, employs 150,000 people. According to a study published by Eurelectric, the total CAPEX of investments required to deliver the 80 per cent greenhouse-gases (GHG) reduction scenario by 2045 would be equal to EUR 147 billion euros (excluding grid and storage costs). Additionally, the energy sector will have to bear the costs of carbon allowances of approximately 68-85 billion euros in the period 2020 to 2045. In Bulgaria and Romania, another two CEE countries heavily dependent on coal, governments estimate that the costs of transition reach 30 billion euros until 2030.

Based on the Commission’s proposal, the Just Transition Fund, implemented under Cohesion policy rules proposes to add 7.5 billion euros of fresh money (in addition to the 2021-2027 Multiannual Financial Framework), which will be leveraged with resources from the European Regional Development Fund and the European Social Fund+ through mandatory transfers. Together with national co-financing, as per the Cohesion policy rules, the Just Transition Fund will mobilise between 30 and 50 billion euros.

In the report, Maciej Jakubik, Executive Director of CEEP pointed out that the above figures of JTF constitute only a small part of the total needs.

“If we consider the modest estimations of an annual requirement for 100 billion euros, this means that the JTF constitutes only 1 per cent of the total funding requirements,” he stated.

In a joint statement, CEEP advocates an initial budget of at least 25 billion euros, specifying that a major share of the funding should not be reallocated from Structural Funds, as this would mean a decrease of resources available for lower-income member states and weakening of the cohesion policy.

In January, the Commission came up with a proposal for the applicable regulation on the JTF based on the criteria of carbon-intensive jobs, fossil fuel industrial activity and GDP per capita. Under this scheme, Poland and Germany would be eligible for the largest slices of the 7.5 billion euros fund, with 877 million and two billion euros respectively. The proposal generated heated debates, and the European Parliament is currently working on this document to reach a reasonable compromise with the Council by the end of the year the latest.

Just Transition Funding across member states. Source: Central Europe Energy Partners CEEP

“If we consider an increase of climate targets, then rise of the JTF allocation is a natural consequence,” states the report of CEEP referring to the mandatory target of carbon-neutrality proposed in the framework of the draft Climate law, unveiled by the Commission earlier in March. However, the sustainable transformation of the Europen economies and the pressure to phase-out coal is driven not only by EU level commitments but also by the market itself. Besides the undisputed costs of transformation, the process could stimulate major economic growth and therefore form a part of the European recovery scheme.

“While coal is dying, coal regions don’t need to die,” says Julian Popov, Senior Fellow at the European Climate Foundation and former Bulgarian Minister for Energy in the report. Mr Popov suggests that besides burden-sharing and compensation there must be a third approach to coal regions, that seizes the opportunity to benefit from the economic prospects arising precisely of the death of coal.

As food for thought, according to a study of the Joint Research Centre if the 7570 square kilometres occupied by coal plants would be covered with photovoltaic plants they could generate the same amount of electricity that coal in Europe generates today.

Another potential of coal regions is that they usually have the strongest power grids in a country given their large generation capacities. This could significantly reduce grid connection costs and shorten the power system integration process that can be long, painful and expensive.

“The expansion in coal regions could attract new pilot and commercial hydrogen installations, a wide variety of storage plants, battery manufacturing (…) solar and wind energy components and dozens of other enterprises that would need primarily regulatory and political support rather than heavy subsidies,” added Mr Popov highlighting that the transformation would require a dedicated strategy for coal regions and favourable conditions for breakthrough technologies that absorbs the initial financial risks of innovation.

The transition process is inextricably linked to numerous benefits and opportunities and the future of underlying assets of the coal regions will play a crucial part in reaching Europe’s net-zero carbon targets.

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