Fossil fuels are the world’s greatest source of greenhouse gas emissions and must be curtailed to achieve temperature targets. Due to political-economy constraints, carbon pricing is unable to internalise the social cost of carbon and compensation for the early closure of coal-fired power plants may represent a more politically feasible route towards achieving desired temperature targets. Compensation decided via a negotiated approach suffers from asymmetric information and rent-seeking. Competitive auctions can help discover the true cost of power plant closure and effectively ration remaining coal towards uses with the highest value. However, successful auctions require considering: 1. additionality and interaction with existing climate policies, 2. dynamic incentives, and 3. system-wide effects and security of supply. Since Germany is the only country till date to have implemented a coal phaseout auction, we use it to analyse the merits and demerits of the policy. In the absence of being able to implement an auction, strengthened incentives for scrappage and repurposing of coal assets could be options.


Srivastav, S. & Zaehringer, M. (2024). 'The Economics of Coal Phaseouts'. INET Oxford Working Paper No. 2023-17.
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