Description:
Several European countries have decided to phase out coal power generation. Emissions from electricity generation are already regulated by the EU Emissions Trading System (ETS), and in some countries like Germany the phaseout of coal will be accompanied with cancellation of emissions allowances. In this paper we examine the consequences of phasing out coal, both for the broader economy, the electricity sector, and for CO2 emissions. We show analytically how the welfare impacts for a phaseout region depend on i) whether and how allowances are canceled, ii) whether other countries join phaseout policies, and iii) terms-of-trade effects in the ETS market. Based on numerical simulations with a computable general equilibrium model for the European economy, we quantify the economic and environmental impacts of alternative phaseout scenarios, considering both unilateral and multilateral phaseout. We find that terms-oftrade effects in the ETS market play an important role for the welfare effects across EU member states. For Germany, coal phaseout combined with unilateral cancellation of allowances is found to be welfare-improving if the German citizens value emissions reductions at 65 Euro per ton or more.