Over the last few weeks, two utilities – SSE and RWE – closed their last working coal-fired power stations in the UK, leaving the country with just four coal-based plants supplying electricity to the grid.

By the end of 2019, coal’s contribution to the country’s power supply had slipped from 70% in 1990 to less than 3%. By 2025 that share will have dropped to zero.

Europe’s largest economy, Germany, is headed in the same direction. A law passed last year will see the country quit all forms of coal-fired power by 2038 at the latest, and analysts believe the end will come well before then.

The coal exit may not be felt by industry or consumers directly if renewable energy, natural gas and nuclear power are able to fill the gap. Indications point towards continued growth for wind and solar power and the potential for back up through grid-scale batteries should they be built in scale.

One area where the loss of coal power will be felt, however, is the climate. In 2010, German power plants belched 369 million tonnes of carbon dioxide into the atmosphere. By 2019, this number fell to 311 million tonnes, helped chiefly by some plant closures but mainly from the shift to natural gas and renewables.

Coal’s share of Germany’s total was 244 million tonnes in 2010, falling to around 165 million in 2019. The coal sector is still the single largest emitter in the country.

An unintended consequence of the German and UK exits from coal, together with government pledges in 11 other EU countries, will therefore be to remove that largest source of demand for EU emissions allowances, and this threatens to undermine the effectiveness of the EU Emissions Trading System.

At present, the vast majority of EU industrial installations receive a large handout of free EU allowances (EUAs). This is to protect them from additional costs that would make them uncompetitive in world markets.

But there is no such protection for the power sector: generators are required to buy every EUA they need, either through daily auctions organised by the EU, or in the secondary market, where prices are currently around €18/tonne CO2 equivalent.

Each EU state has a reserve of EUAs for auction, and we can use this figure as a rough estimate of the power sector’s demand. To be clear, many industrial plants don’t receive 100% of what they need free of charge, and so they also need to buy some EUAs in the market or at auction.

Let’s take the UK as an example. In 2013, CO2 from UK coal and gas-fired power plants totaled 142 million tonnes, while the country’s auction reserve of EUAs was just 107 million tonnes.

By 2018, however, coal and gas emissions had tumbled to 39 million tonnes, while the auction reserve was still 101 million tonnes.

Even allowing for the demand from industrial plants, this represents a significant surplus. And when the last four UK power plants shut over the next few years, the auction, together with the free handouts to industry, would dwarf the market demand.

Germany and the eleven other countries committed to phasing out coal face the same problem. The gradual decline in demand will leave a growing glut of allowances that could push EUA prices back to levels below €10/tonne not seen since late 2017.

The EU has a solution, but it has so far failed to make much of a dent in the existing surplus.

The Market Stability Reserve (MSR) automatically removes 24% of the total market surplus each year, by reducing the number of EUAs each country has in its auction reserve. In 2019, the MSR’s first year of operation, it took 400 million EUAs from the market and according to analysts it may take a similar volume in 2020.

According to a study by Carbon Market Watch published last year, the closure of coal plants across Europe over the next ten years could wipe out an average of 240 million tonnes of demand for EUAs each year. The MSR would find it hard to keep up.

Market observers and lobby groups are calling for reforms to the MSR that would enable it to take a greater volume of surplus EUAs from the market each year, thereby tightening supply, boosting the price and increasing the incentive to cut emissions in other sectors.

Quitting coal is generally seen as a positive move for the climate, but the impact of so-called “overlapping” policies risks the integrity of the EU ETS and calls into question the willingness of policymakers to let the market take the lead in driving Europe’s decarbonization.

Global energy demand has experienced a huge demand shock with the onset of the coronavirus pandemic. The rapid imposition of restrictions on movement and commerce has left every sector across the global economy reeling from the impact.

In the weeks since the strictest measures were put in place across most developed countries, demand for oil has plummeted. The International Energy Agency predicts that global demand will drop by 9.3 million barrels/day (b/d) this year.

And even though supply is set to fall by around 12 million b/d in May after OPEC members reached a new production agreement last week, the IEA believes this will not be enough to balance the market.

Markets were quick to reflect the growing imbalance. The double shock of the Covid-19 pandemic and the brief oil “production war” between Saudi Arabia and Russia triggered a drop of as much as 40% in WTI prices between Friday March 6 and the following Monday.

To be clear, WTI prices were already in decline after having peaked in early January when reports of the virus began to circulate and cases began to be reported outside China. The forward May prompt month is showing steep negative prices given fears that storage capacity could run out. Already, oil companies are using tankers for interim storage. June still remains in positive territory for now.

Refined product demand has also collapsed, as the imposition of social distancing and lockdown policies led to a dramatic decline in road traffic.

U.S. demand for gasoline fell by 30% in the last week of March, and IHS Markit says it could shrink by up to 50%. For jet fuel it will be even worse, as airlines have grounded as much as 96% of their fleets.

Road traffic data assembled by Inrix showed that road traffic in major US cities fell by as much as 50% by mid-March, compared to a month earlier, as the lockdown and social distancing guidance began make themselves felt in earnest.

UK road travel fell to levels not seen since 1955, and nitrous oxide pollution from traffic and industrial activity has fallen dramatically in areas like Italy’s Po Valley.

In contrast, demand for electricity and natural gas for domestic use has fallen much less, as families have been largely home bound for several weeks. Of course, industrial and commercial demand has fallen, and this is reflected in the overall weaker pricing.

A simple index chart of European energy prices shows that, apart from oil and carbon allowances, prices have remained pretty resilient.

European Energy Price Index 2020

Of the major energy commodities, coal was the least affected in Europe, and this reflects two elements. Firstly, Europe is not buying a significant volume of coal at the moment, as the power sector has largely avoided it, and secondly coal prices are being set by other more buoyant markets, chiefly the Australian and Chinese markets.

Both power and natural gas markets have been reflecting the diminishing demand from industry, as factories have closed amid social distancing orders and most commercial activities have been curtailed.

A solid example of the shrinking demand can be seen in the Italian electricity grid load, which has fallen to levels not seen except in major holiday seasons such as Easter or Christmas.

Already though, the discussion is turning if a return to normal social, commercial and industrial activity will resume in the foreseeable future, and what the full long-term economic impact of the pandemic will be. And while analysts and forecasters have yet to fully understand the nature of the crisis, it’s clear that it will take some time before the energy sector can fully digest the demand shock.

Two weeks of negotiations in Madrid last December were not enough to reach an agreement on how the world should cooperate on cutting emissions. Representatives of more than 190 countries failed to reach a deal on guidelines for global emissions trading that sets the process back by a full year.

The collapse of the talks centered around two or three highly technical rules. The first, over accounting for emissions reductions, pitted Brazil against numerous other nations. Brazil didn’t want to have to subtract emissions reductions from its own national account if they were traded to other countries: the others were adamant that you can’t have double-counting of emissions reductions.

The second saw Australia seeking to carry over a significant surplus of emissions units from the Kyoto Protocol, the predecessor to the 2015 Paris Agreement, to use under the new deal. Allowing Australia to do this would have meant the country would already be half-way to its Paris target without having done anything yet.

And the third set Brazil, India and to a lesser extent China against a group of nations. The three largest developing economies want to transfer thousands of clean energy projects and the emissions credits that they’ve produced from the Kyoto Protocol to the Paris Agreement; they stand to earn billions from emerging carbon markets around the world, including the International Civil Aviation Organisation’s new system.

Critics said that these carbon offsets, while worthy, would simply reduce the amount of work needed to slash emissions and keep global temperatures less than 1.5 degrees above pre-industrial levels. A group of around 30 nations issued a pledge not to buy these credits during the second half of the negotiation session, ramping up the tension and eventually leading to the breakdown in the talks.

The Madrid summit wasn’t the first attempt to craft a set of rules for international emissions markets. Countries had already tried and failed in Poland in 2018 when these same three issues prevented a deal. The talks will resume in Glasgow, Scotland in November 2020.

Even after two additional days of talks, the negotiations ground to a halt without success. But numerous commentators and carbon market advocates were not as downhearted as expected.

Enough work has been done to agree to basic rules on reporting, on transparency and on verification for like-minded countries to go ahead and set up markets, and link them together, these market boosters said.

And that’s already happening. On January 1 Switzerland formally linked its domestic carbon market to the EU’s much larger system: the process has been going on for a number of years already, and Swiss carbon prices have been rising sharply to come into line with the current €25.00 price in the EU.

Talks are continuing amongst a group of Latin American countries to develop their national carbon tax regimes into a regional carbon market. China is about to replace nine pilot markets with a single, national emissions trading system that will dwarf anything we’ve seen so far.

Even African countries are getting into the carbon market mood. To be sure, many of them would prefer the security of a UN-sanctioned set of rules, but they see enough progress being made at a national level to be very interested in building their own systems.

The Kyoto Protocol was a “top-down” system, where the UN made the rules and everyone had to follow them. But the Paris Agreement is a voluntary, “bottom-up” arrangement, where countries actively decide to participate. Their commitment is stronger as a result.

And with nations taking the lead, the UN is going to have to play catch-up from now on.