Carbon emissions in the power sector

Carbon emissions in the power sector

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N°42  November 2013 THE POWER SECTOR IN PHASE 2 OF THE EU ETS: FEWER CO EMISSIONS BUT JUST AS MUCH COAL 2 1 2Nicolas Berghmans and Emilie Alberola Since 2005, 1,453 power and combined heat and power (CHP) generation plants have participated in the European Union Emission Trading Scheme, or EU ETS, which requires them to comply with an annual CO emission cap set by the European Commission. Thermal power plants that use coal (bituminous coal, 2 lignite, and other kinds of coal) and natural gas as their primary fuel jointly account for 86% of the generation capacity included in the EU ETS. There are twice as many gas-fired power plants as coal-fired ones, with 671 gas-fired power plants compared with 352 coal-fired ones. The power sector saw a decrease in its CO emissions by 186 Mt during Phase 2 (2008-2012), equal to a 2 14.2% fall from 1,306 Mt in 2007 – the last year of Phase 1 – to 1,120 Mt in 2012. The reduction differs depending on the type of power plant and the fuel used:  Plants that generate only electricity reduced their CO emissions more significantly than CHP plants. 2  Gas and oil-fired power plants experienced the sharpest decline in their CO emissions, which fell by 2 34% and 30% respectively between 2008 and 2012: CO emissions from gas-fired power plants fell 2 from 273 to 175 MtCO , while emissions from oil-fired power plants fell from 50 to 37 MtCO .

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N°42November 2013
THE POWER SECTOR INPHASE2OF THEEUETS:FEWERCO2EMISSIONS BUT JUST AS MUCH COAL
Nicolas Berghmansand Emilie Alberola1 2 Since 2005, 1,453 power and combined heat and power (CHP) generation plants have participated in the European Union Emission Trading Scheme, or EU ETS, which requires them to comply with an annual CO2emission cap set by the European Commission. Thermal power plants that use coal (bituminous coal, lignite, and other kinds of coal) and natural gas as their primary fueljointly account for 86% of the generation capacity included in the EU ETS. There are twice as many gasfired power plants as coalfired ones, with 671 gasfired power plants compared with 352 coalfired ones. The power sector saw a decrease in its CO2emissions by 186 Mt during Phase 2 (20082012), equal to a 14.2% fall from 1,306 Mt in 2007 thelast year of Phase 1 to1,120 Mt in 2012. The reduction differs depending on the type of power plant and the fuel used:  Plantsthat generate only electricity reduced their CO2emissions more significantly than CHP plants.  Gasand oilfired power plants experienced the sharpest decline in their CO2 emissions,which fell by 34% and 30% respectively between 2008 and 2012: CO2 emissionsfrom gasfired power plants fell from 273 to 175 MtCO2from oilfired power plants fell from 50 to 37 MtCO, while emissions 2. declining sharply in 2008 and 2009, primarily due to the economic downturn, CO After2emissions from coalfired power plants actually increased between 2009 and 2012, reaching 846 MtCO2in 2012. This increase is partly explained by a rebound in coal's competitiveness as a fuel for thermal power plants in Europe, particularly due to the export of the excess coal produced in the United States to Europe, and to the collapse in the carbon price in Europe, which no longer penalised coalfired power plants in 2011 and 2012. The fall in CO2emissions in the power industry would therefore appear to be more circumstantial than structural. A recovery in the demand for power could therefore send CO2heading upwards emissions again immediately. However, despite the overall fall in its CO2 emissionsbetween 2008 and 2012, the power sector suffered from a structural allowance shortfall of 865 MtCO2the end of Phase 2, due to a at lower allocation of free allowances than in Phase 1. Most of the allowance shortfall was borne by coalfired power plants, while gasfired power plants received more allowances overall than required by their CO2emissions. As the main source of demand for carbon assets (EUA allowances and Kyoto, CER or ERU credits), the sector has returned 533 million Kyoto credits, thereby offsetting 65% of its shortfall. Compared with returns consisting solely of EUAs, the use of international credits has enabled power generatorsto save just over €2 billion, including €1.2 billion in 2012.
1 Nicolas Berghmans is a research fellow at CDC Climat Research. His research focuses on the development of the EU ETS and of the European power sector.commat.cclis@cdgrebnamhocin.sal +33 1 58 50 98 19 2  EmilieAlberola isResearch Unit Manager, “Carbon and Energy Markets”at CDC Climat Research. emilie.alberola@cdcclimat.com +33 1 58 50 41 7
Climate Report No.°42The power sector in phase 2 of the EU ETSfewer carbon emissions, but just as much coal ACKNOWLEDGEMENTSThe authors would like to thank all those who helped them to draft this report. We would especially like to thank the Climate economics chair team for their support in the development of the methodology to cross databases. W eare also indebted to JeanYves Caneill (Electricité de France), Fabien Roques (Compass Lexecon), Raphael Trotignon (Climate Economics Chair, ParisDauphine University), Audrey Zermati (Union frawith the entire CDC Climat Research team for their careful proofreadingnçaise de l’électricité) together and helpful comments. The authors are entirely responsible for any errors or omissions.
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TABLE OF CONTENTS
Climate Report No.°42The power sector in phase 2 of the EU ETSfewer carbon emissions, but just as much coal
INTRODUCTION
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I.POWER PLANTS COVERED BY THEEUETS:OVERVIEW OF1,400INSTALLATIONS 5A. Coaland gasfired power plants represents equally 86% of production capacity covered by the EU ETS6 B. Gasfiredpower plants account for the majority of plants covered by the EU ETS6 C. Coaland oilfired power plants are twice as old as gasfired ones8
II.POWER SECTORCO2EMISSIONS COVERED BY THEEU ETSHAVE FALLEN BY 14.2%IN PHASE2COMPARED WITH PHASEI 10A. The110 MtCO2fall in emissions since 2008 is smaller than the decrease for the other industrial sectors in the EU ETS10 B.CO2emissions from coalfired power plants have been increasing since 2010, unlike emissions from natural gasfired power plants13 C. Power generation’s CO2emissions are falling in most European States16
III.THE POWER GENERAT ION SECTOR IS THE LARGEST SECTOR IN THEEUETSIN ALLOCATION AND SHORTFALL TERMS 17A. Thepower industry is the sector that receives the most allocations, totalling around 1 GtCO2, within the EU ETS17 B.Phase 2 compliance: an 825 MtCO2shortfall, 65% of which was covered by the use of international carbon credits19
CONCLUSION
BIBLIOGRAPHY
APPENDIXIDATABASE METHODOLOGY
APPENDIXIICO2EMISSIONS IN THE POWER AND CHP GENERATION PLANTS SECTOR BY COUNTRY
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APPENDIXIIICOEMISSIONS FOR POWER AND CHP GENERATION PLANTS BY 2 PRIMARY FUEL 29
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INTRODUCTION
Climate Report No.°42The power sector in phase 2 of the EU ETSfewer carbon emissions, but just as much coal
3 The second phase of the European Union Emission Trading Scheme(EU ETS), which ran between 2008 and 2012, ended in May 2013, when the CO2emissions for the 12,000 or so installations included within its scope complied with their 2012 verified emissions. The European Commission announced that verified 4 CO2from EU ETS installations amounted to 1,867 MtCO emissions2 in2012, or an 11.9% reduction compared with 2008.
The power generation sector, which level of CO2amounted to 1,120 million tonnes (MtCO emitted2) in 2012, has not only been the EU ETS sector with the highest emissions since 2005, but also the sector with the highest allowance shortfall. It was also subject to a 20 % decrease in free allowances allocated between Phase 1 and Phase, the tightest reduction of all EU ETSsectors. The sector’s contribution to the EU CO2 emissionreduction effort is likely to increase sharply after 2020if the roadmapTowards a low 5 carbon economy in 2050The Roadmap points to an ambitious reductionrecommendations are applied. target of between 93 and 99% in 2050 compared with 1990 for the power sector. Between 2008 and 2012, the European power industry operated within a changing economic and regulatory environment: an economic downturn in Europe that caused a sharp fall in European power demand; the emergence of shale gas production in the United States, which created additional supply that disrupted gas and coal prices in Europe; international negotiations and European discussions regarding climate change that demonstrated major uncertainty in terms of the future level of ambition onfighting climate change; and lastly the collapse in the carbon price reported by the EU ETS, which fell from around €30 per tonne in 2008 to €3 per tonne in late 2012. So how did the power sector's CO2The aim of this Climate Study is toemissions change over this period? 6 examine the change in power and combined heat and power (CHP)generation plants' CO2 emissions and compliance positions, as enforced by the EU ETS between 2008 and 2012. The first section of the study provides an overview ofpower plants concerned by the EU ETS, while the second section examines the downward trend in the sector's CO2over the period between 2008 and 2012. emissions Lastly, the third section assesses the compliance behaviour of the power sector's actors, in view of their initial allocation of free allowances and their use of international carbon credits.
3  TheEuropean Union Emission Trading Scheme was set up in order to achieve the emission reduction target set by the European Union (EU15) within the framework of the Kyoto Protocol, i.e. to reduce greenhouse gas emissions by 8% compared with 1990 over the period between 2008 and 2012. 4 http://ec.europa.eu/clima/news/articles/news_2013051601_en.htm5 http://eurlex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2011:0112:FIN:FR:PDF6 The researchers based on the CO2emission levels published by theEuropean Union Independent Transaction Log(EUTL) and on the technical specifications of the power generation plants listed in the World Electric Power Plant (WEPP) database published by Platts. 4
Climate Report No.°42The power sector in phase 2 of the EU ETSfewer carbon emissions, but just as much coal
I.POWER PLANTS COVERED BY THEEUETS:OVERVIEW OF1,400INSTALLATIONS
The power generation capacity covered by the EU ETSin the 30 European Economic Area (EEA) Member States, which include the 27 European Union Member States and three European Free Trade Association (EFTA) Member States, involves all fossilfuel power plants with a thermal capacity of over 20 MW (Directive 2003/87/EC). This capandtrade excludes installations that use biomass only. In total, 8 1,453 power and CHPplants have been incentivised to reduce theirs CO2 emissionsby participating in the EU ETS.
The geographical distribution of these installations within the EEA is uneven (Figure 1). States with the highest proportion of fossil fuels in their electricity mix naturally see the greatest share of their installed production capacity included within the EU ETS. Thereby, over 85% of power generation resources in Poland and the Netherlands are included within the scope of the EU ETS, while this percentage is less than 20% in France, Sweden and Norway.
This section provides an overview of power and CHP plants that are subject to the EU ETS regulation, in terms of their generation capacity, their number, and their age broken down by fuel type and technology.
Figure 1  Share of the installed power generation capacity and number of power and/or CHP generation plants covered by the EU ETS in 2012
Source: CDC Climat Research estimate, based on EUTL and World Electric Power Plant (Platts) data
7 The European Free Trade Association (EFTA) includes Iceland, Liechtenstein and Norway. 8 These power generation plants were identified by crossreferencing the list of EU ETS power stations mentioned in the European Independent TransactionLog (EUTL)with the data in theWorld Electric Power Plantdatabase edited by Platts, which includes their technical specifications (primary and secondary fuel, commission year, theoretical power generation capacity, etc.).5
Climate Report No.°42The power sector in phase 2 of the EU ETSfewer carbon emissions, but just as much coal
A. Coal and gasfired power plants represents equally 86% of production capacity covered by the EU ETS
The power generation capacity in the European Union is diversified. The four main primary energy sources, namely coal, gas, hydropower and nuclear power, account for 83% of the installed capacity within the EU. Over half of this generation capacity420 GW out of 821 GWinvolves power plants that are included within the scope of the EU ETS (see Figure 2), and are for the most part thermal fossil fuel 9 fired power plants, which generate 1,549 TWh, or 50% of Europe's electricity in 2011 (Eurostat).
As shown in Figure 2, the EU ETS covers coal and gasfired power generation, which account for 43% of the installed capacity. Power plants fired by oil and other oil derivatives account for 12%of installed capacity, while renewable energy (biomass or solar power) power plantsand use a fossil fuel as their secondary fuel account for only 2%.
o
Figure 2  Breakdown of the power generation capacity in the EU27 & NO, IS, and LI in late 2012 All power plantsPower plants covered by the EU ETS
Source: CDC Climat Research estimate, based on EUTL and World Electric Power Plant (Platts) data
44% of coalfired power generation capacity is concentrated in Germany and Poland. In fact, on a domestic scale, the share of coalfired power plants in the power generation mix even exceeds 90% in Poland, the Czech Republic and Bulgaria. Meanwhile, Italy, the United Kingdom and Spain account for 56% of gasfired generation capacity. On a domestic scale, the highest shares of natural gasfired installed capacity are found in Latvia (98%), Norway (94%), Lithuania (72%) and the Netherlands (70%). Oilfired power plants are concentrated in southern Europe: 35% of the installations are in Italy and Spain, while a significant portion of the installations are located on islands like Cyprus, Malta, the Greek and Italian islands, the French Overseas Departments and Territories, and the Spanish and Portuguese archipelagos.
B. Gasfiredpower plants account for the majority of the power plants covered by the EU ETS
Although the level of installed coalfired and gasfired power generation capacities is similar, there are twice as many gasfired power plants as coalfired ones, i.e. 671 gasfired power plants compared with 352 coalfired power plants. This means that 46% of the power plants included in the EU ETS generate power by burning natural gas. The number of natural gasfired power and CHP plants included within the scope of the EU ETS has increased since 2005, rising from 587 installations at the end of Phase 1 of the EU ETS to 653 units at the beginning of Phase 2.
9 http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/search_database
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Climate Report No.°42The power sector in phase 2 of the EU ETSfewer carbon emissions, but just as much coal
Coal and oilfired power plants, which respectively account for 24% and 17% of the power plants covered by the EU ETS, have followed an opposite trend, namely a slight decrease that reflects the gradual withdrawal of ageing generation units. Lastly, less than 10% of the power generation sector installations covered by the EU ETS uses fossilfuels as a secondary fuel (concentrated solar power) or a primary non 10 fossil fuels, including biomass, municipal waste, and coal mine methane. Their recorded CO2emissions are generated via the use of a secondary fossil fuel. In fact, concentrated solar power plants, which are primarily being developed in Spain, are included within the EU ETS as they use natural gas in addition to solar power during periods of low sunlight. Table 1Average capacity of power generation installations according to primary fuel % of CHP 2005 20072012 installationsin the installationChange2012Natural gas+ 6642 % 671587 653 Coal (total) 35245 % 6342 336 bituminous coal223 217210 742 % lignite coal86 +387 8350 % other coal45%40 242 42Oil5 12% 248232 227Peat+1 71% 2220 21Bituminous shale6 6 70 67%Blast furnace gas 1411 13+2 46%Other (total)+46 60%83 129 139biomass75 +1581%76 60solar power27 +2727 00%waste11 710 3100%methane4 26 650%unknown19 1013 +331%TOTAL40%1,385 +1041,453 1,281
The larger number of natural gasfired power plants is explained by the fact that their generation capacity is lower than that of coalfired power plants, even though the installed generation capacity regulated by the EU ETS is equivalent to 180 GW. The difference in the capacity of CHP plants is even more marked: a gasfired power plant is nine times less powerful, on average, than a lignitefired power plant; the respective capacities are 54 MW and 507 MW (Table 2). Table 2Average capacity of power generation installations according to primary fuel Type of fossil fuel(MWh)plants (MWh)Bituminous coal779 295 Natural gas418 54 Oil230 91 Source: CDC Climat Research estimate, based on EUTL and World Electric Power Plant (Platts) data
10 CO2emissions attributable to biomass are not recorded in these installations' verified emissions, as biomass is considered to be carbon neutral. 7
Climate Report No.°42The power sector in phase 2 of the EU ETSfewer carbon emissions, but just as much coal
C. Coaland oilfired power plants are twice as old as gasfired ones
The generation capacities are renewed according topower plants' long useful life, which operating periods can go from 30 and 50 years in the case of thermal power plants. The current European power plant base was built up gradually, in line with technological waves (Figure 3  New power generation capacity in Europe by technology: the boom in natural gas and renewable energyFigure 3).
The most salient recent trend has been the increase in new gasfired generation capacity. The surge in gasfired power plants is the combined result of the operation of North Sea gas fields and improvements to gasfired generation technologies (see Box 1). The more recent expansion in renewable energy generation capacity is also the result of improvements to these technologies, as well as of changes in national and European regulatory frameworks that are more favourable to their developmentthan the used to be. Lastly, the rapid development of nuclear generation units between 1970 and 1989 was supported by some States' desire to reduce their dependency on oil prices following the oil crises.
Figure 3  New power generation capacity in Europe by technology: the boom in natural gas and renewable energy
Source: World Electric Power Plant (Platts)
Note: fossil fuel power plants are included in the EU ETS if their thermal capacity exceeds 20 MW.
Coalfired power plants are the oldest among the fossilfuelfired plants included in the EU ETS: on average, the 336 coalfired plants that were operating in 2012 were commissioned 20 years before the 653 natural gasfired plants. These coalfired plants have been operating for an average of 35 years, compared with 13 years for gasfired power plants (see Table 3). Table 3Average year of each installed MW’s commissioning byprimary fuel (end of 2012) Natural Primary fuelCoalOilPeatgasgas1979 19991980 19901993 MW’s commissioningSource: CDC Climat Research estimate, based on EUTL and World Electric Power Plant (Platts) dataThe renewal of Europe's installed generation capacity will therefore be achieved via the gradual shutdown of the oldest power plants, i.e. coal and oilfired plants, and via the introduction of new generation units. Power plant operators' investment decisions are highly dependent on the economic, political and regulatory environment, which may turn out to be more or less favourable to the development of lower carbon technologies. 8
Climate Report No.°42The power sector in phase 2 of the EU ETSfewer carbon emissions, but just as much coal
Box 1Factors behind the expansion of gasfired power plants in Europe since the 1990s
The surge in these power plants in Europe over the last two decades is explained by four main factors. First and foremost, the development of available gas supplies in Europe, thanks to the operation of gas fields in the North Sea, specifically enabled the United Kingdom and the Netherlands to develop their gasfired power generation capacity. The trend continued via the construction of a large number of gas pipelines connecting the countries of North Africa with southern Europe, including: Transmed1983, in which was doubled in 1994 (AlgeriaTunisiaSicily);MaghrebEurope in1997 (MoroccoSpain), 11 Greenstream2004 (Libya inSicily) andMedgaz2009 (Algeria Spain) in. The next step was the development of a large number of gasfired power plants in southern European countries like Spain and Italy.
Furthermore, the trend was boosted by technical improvements. Theimprovements of combinedcycle gas turbines (CCGT), which allows a steam turbine to be connected to a gas turbine, enabled a 16% 12 improvement in the thermal efficiencyof gasfired power plants worldwide between 1991and 2007a faster rate of improvement than for other fossil fuels. The most modern combinedcycle power plants are 13 now achieving thermal efficiency levels of almost 60%. CCGT units are designed to operate on a semipermanent basis (between 2,000 and 6,000 hours per year) and represent an effective installed capacity adjustment method. Moreover, the trend was supported by the low capitalintensive investments in natural gasfired power plants with a given generation capacity. In fact, investment costs accounted for only 22% of the total average power generation cost (IEA data for Germany, 2010) compared with 40%for coal and 80% for nuclear power. Lastly, generating power from natural gas is between 2 and 2.5 times less carbonintensive than generating power from coal. The introduction of the European carbon price reported by the EU ETS may also favour investments in CCGT units compared with other fossil fuels.
Figure 4New generation capacity: the boom in combinedcycle gas units
Source: CDC Climat Research estimate, based on EUTL and World Electric Power Plant (Platts) data
11  "Infrastructureand sustainable power generation in the Mediterranean region: the outlook for 2025", Blue Plan and AFD (2009) 12 Ratio between the power generated and the thermal energy emitted when the fuel is burned. 13 http://www.powerengineeringint.com/articles/print/volume18/issue 3/features/ccgt breakingthe60percentefficiency barrier.html 9
Climate Report No.°42The power sector in phase 2 of the EU ETSfewer carbon emissions, but just as much coal
II. POWER SECTORCO2COVERED BY THE EMISSIONSEUETSHAVE FALLEN BY14.2%WITH COMPARED PHASEI
The power industry has experienced a significant decrease in its CO2emissions. After reaching a peak in 2007, the last year of Phase 1 of the EU ETS, the sector's CO2fell by 14.2% between 2007 emissions and 2012 (see Figure 5) from 1,306 Mt to 1,120 Mtbetween 2007 and 2012. The observed decline of CO2emissions come from different economic and structural reasons. First, the sharp decrease in European electricity demand in Europe between 2009 and 2012 as a result of the economic crisis.Then, renewed competitiveness of coal use relative to gas since 2008 came hamperedthe overall decrease in CO2emissions, keeping the CO2 emissions, while the use of natural gasfrom the most emitting power plants decreased over the period 20072012. Finally, the electricmix of member states has changed during the last decade, one of the major trends being the strong growth of nonemitting renewable energy.
The second section of this report assesses the specific features of the decrease in CO2emissions within the power industry, by comparing this trend with the other sectors regulated by the EU ETS and looking at the behaviour of these installations by fuel type and geographical location.
A. The110 MtCO2fall in emissions since 2008 is smaller than the decrease for the other industrial sectors in the EU ETS
The installations in the sectors concerned by the EU ETS saw their CO2 emissionsdecrease during Phase 2. These emissions amounted to 1,866 MtCO2 in2012 (excluding the aviation sector) compared with 2,120 MtCO2 in2008, the first year of Phase 2, amounting to an 11.9% decrease over the period. CO2power industry dropped by 9.3% over the same period. On average, power plantsemissions from the produced 849 MtCO2 peryear, in addition to the 299 MtCO2produced by CHP plants (see Figure 5) between 2008 and 2012. Across all power generation installations, power plants saw their CO2emissions decrease by 9.7% between 2008 and 2012, more than CHP units where CO2emissions fell by 6.8% over the same period.
Figure 5  Verified CO2emissions for the EU ETS sectors between 2005 and 2012
Source: CDC Climat Research estimate, based on EUTL and World Electric Power Plant (Platts) data
The fall in CO2emissions from power generation was particularly significant in 2009, when CO2emissions from power generation installations contracted by 8.4%, due to the economic recession,resulting in a 5.2% decrease in power consumption in the EU27 in 2009. Some sectors posted exceptional annual decreases in that year, including 28% for steel producers and 20% for cement producers, which are the two sectors that generate the most emissions outside the combustion sector. The nonpower generation
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Climate Report No.°42The power sector in phase 2 of the EU ETSfewer carbon emissions, but just as much coal
14 installations included in Sector I of the EU ETScombustion category also recorded a more significant 9.2% fall in their CO2emissions over one year.
Apart from the oil refining industry, CO2from power generation were less sensitive to the emissions downturn than those of the other industries included in the EU ETS. This difference in volatility was primarily due to the greater stability of power demand compared with the output of the industries within the scope of the EU ETS. Figure 6 shows that the trend in power generation was more stable over the period than the trend in manufacturing output covered by the EU ETS, especially during the 20072008 economic downturn.
Figure 6  Output index for the power generation sector in Europe
Source: CDC Climat Research based on Eurostat data.These changes in electricity demand have a direct influence on the level of CO2 emissions,according to the number of hours that the power plants operate and the fuels used by the plants involved in power generation. In most cases, peak power plants, i.e. those that are the last to respond to electricity demand when demand is high, are fossil fuelfired power plants, since the variable cost of those fuels is higher than that of low carbon fuels. This explains why the fall in the sector's CO2emissions was higher than the fall in electricity demand, as the adjustment mainly affected fossil fuelfired power generation. In fact, Declercqet al. (2011) identified the fall in electricity demand as the main factor behind the fall in CO2emissions relating to power generation in Europe. The fall in electricity demand in 2009 was behind a 175 MtCO2 decreasein emissions from power generation. Other factors contributed to the decrease in the sector’s emissions, primarily the relative price of fossil fuels and the increase in power generation from renewable energy. The impact of changes in the price of fossil fuels (17 MtCO2) and of the fall in the CO2price (+30 MtCO2) is much less significant.
Electricity generation CO2intensity declined until 2010 in Europe
Since 2005, changes in the electricity mix have been important and explain part of the decline in CO2emissions from fossil plants. If part of the reduction in emissions is due to the drop in demand for electricity in Europe, the CO2 intensity inmost of European countries has also declined steadily until 2010, promoting reduction of CO2The inflection of the downward trend in 2011 is explained byemissions. the increased CO2countries that is due to a renewedfrom coal in some European emissions competitiveness of coalfired generation but also other external factors. Figure 7 shows that Spain, where new subsidies for coalfired generation from coal came into force in 2011, and Germany, where eight
14 Sector including industrial installations with a thermal combustion capacity of 20 MW.
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