Coal and EU’s GHG emissions

Watching the Tides - Marchel Alexandrovich

In a recent note we highlighted that, led by India and the US, global GHG emissions rose by around 1% in the first eight months of 2024, and made the point that as net zero drifts further out of reach, economies must prepare for the likelihood of more frequent and extreme climate related events. Climate change risk, to us, is an entirely different concept to ESG.      

The failure to tackle emissions is not uniform, however. In the EU, CO2 emissions continue to decline, an improvement which is being led by the most carbon-intensive sectors and economies. Domestically generated emissions across the EU have fallen by around a quarter since 2011, with the pace of decline accelerating over the past couple of years.

Quarterly GHG emissions: resident basis (industry, services, households)

Source: Eurostat and Saltmarsh Economics

For balance, it must be recognised that the picture does not look quite so positive once the emissions embedded in each country’s imports are taken into account – something we explored in a research note earlier this year. And, despite the improvement which is being seen, it is still very unlikely that the EU will manage to achieve its 2030 emission reduction targets.

However, in a world where many economies seem unable to make a dent to their CO2 emissions, investors should take account of the fact that the EU countries are decarbonising. This data, for instance, contributed to our own Saltmarsh Economics Climate Index (SECI) which scores and ranks individual sovereigns on their ability to absorb climate related risk. And our database now covers every single world economy.   

So, what is happening to EU emissions at a country and sector level, and what should be expected  in terms of any further improvement? In the four quarters to Q1 2024, emissions across the EU-27 were down 5.1%, with Germany, Belgium and Finland recording the largest declines. And, across each economy, by far and away the big change is taking place within the energy sector (“Electricity, gas, steam and air conditioning supply” in the chart below). For the EU as a whole, over the past year, GHG emissions within this sector have declined by almost 19%. The greening of electricity generation in a handful of countries is what’s ultimately making the largest difference to GHG emissions, particularly the phasing out of coal.

In terms of its relatively heavy users, in the Netherlands, the volume of electricity generated from coal has fallen by 35% over the past year, in Greece the volume is down by 30%, in Germany by 27%, in Finland by 25% and in Romania by 21%. On this measure, the progress in Poland – where coal currently accounts for around 55% of electricity generation – appears to have been slower (electricity generated from coal is down only 7% YoY). But, in absolute terms (in GWh), Poland has lowered its use of coal for electricity generation by more than Germany. So one needs to be careful in how to interpret some of this data.

Change in EU GHG emissions in the year to Q1 2024, by sector

Source: Eurostat and Saltmarsh Economics

EU electricity generation by energy source (as a share of total, %)

Source: Eurostat and Saltmarsh Economics

How does the EU continue to decarbonise? The focus, obviously, is on renewables. But another important contribution could come from replacing coal with gas. Producing electricity from coal generates almost 85% more CO2 than producing an equivalent volume of electricity from gas, and switching from one energy source to another can make a substantial difference to the level of emissions in the countries which are heavy users of coal. More fundamentally, in most sectors of the economy other than in electricity generation environmental productivity gains have been slow, and this needs to change.

Share of electricity production generated from coal, by country

Source: Eurostat and Saltmarsh Economics

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