Cost-Effectiveness Analysis of Germany's Compensation Scheme for Coal Plant Closures in Reducing Carbon Emissions

This paper evaluates the cost-effectiveness of Germany's auction-based compensation scheme for coal plant closures between 2020 and 2022. Conventional instruments for pricing the negative externality of carbon emissions, namely Pigouvian taxes and emissions trading, fix either price or quantity, but neither explicitly targets the lowest-cost abatement opportunities. Germany's reverse auction, introduced under the Kohleverstromungsbeendigungsgesetz, invites operators to submit sealed bids for closure compensation, in principle revealing marginal abatement costs and directing public funds to the least-cost closures. Drawing on award data from the Bundesnetzagentur across five auction rounds and emission factors from the Umweltbundesamt, the paper constructs a capacity-weighted emission factor for the closed fleet and derives a cost per tonne of CO₂ abated. Approximately 9,974 MW of capacity was retired for around €700 million, implying a first-year cost of roughly €18 per tonne against an average EU ETS allowance price of €52.3 per tonne over the same period, a result that holds across a range of utilisation and counterfactual-lifetime assumptions. Compensation per megawatt rose across successive rounds, consistent with both the exhaustion of low-cost abatement options and increasing strategic bid shading as competition declined. The analysis is limited by incomplete disclosure of compensation in later rounds, by assumptions required to model plant utilisation, and by the interaction between national closures and the EU-wide emissions cap, which is not modelled here.