Coal is the highest carbon-emitting source of electricity, and lignite the highest carbon-emitting form of coal. Lignite is therefore front and centre among risks facing investors from global efforts to slow climate change.

That is nowhere more true than in Germany. Lignite is still the single biggest source of power generation in Germany, at one quarter of the total. But the country has a target to more than halve greenhouse gases by 2030, compared with 1990 levels.

We know Germany’s greenhouse gas emissions, from data published by the United Nations Framework Convention on Climate Change, here. These data show Germany’s national emissions were 885 million tonnes in 2014. Lignite used for generating heat and power accounted for a fifth of this, or 178 million tonnes.

To reach the country’s 2030 goal, total national greenhouse gases would have to fall to 547 million tonnes, or nearly 40% below today’s levels.

What does that mean for lignite?

If we simply cut the emissions of each sector pro rata, then that implies a 40% cut in the lignite fleet.

However, given that lower carbon sources of electricity (gas, renewables and efficiency) are already readily available and deployed at scale – especially in Germany – it is reasonable to suppose that the power generation sector will bear a bigger burden of emissions cuts than sectors such as industry, transport, agriculture and land use. And in the power sector, it is reasonable to suppose that lignite will bear the biggest burden of emissions of all, as the highest carbon source.

To illustrate this effect, I took Germany’s emissions in 2014, and reduced each sector equally to meet the 2030 goal, except for transport and agriculture, which I held constant, since these are especially awkward to cut emissions at scale. Then, I cut lignite by any remaining shortfall to meet the 2030 target.

The result is shown in the chart below, which finds that lignite emissions (in red) now have to fall by 87% from today’s levels – in other words, almost to zero.

There are three possible explanations for the thinking at Czech-based EPH and PPF Investments, in their recent acquisition of Vattenfall’s former lignite assets in eastern Germany. First, they don’t believe that Germany will meet the 2030 emissions target. Second, they believe that another sector, not lignite, will bear the burden of reductions. Or third, they expect to be compensated for any forced early retirements.

Which of these is more likely? For sure, it may be a combination of all three. But at the Institute for Energy Economics and Financial Analysis (IEEFA), we particularly see EPH making a subsidy play, ie the third of these three options, hoping that they can get some form of subsidy in return for agreeing to shut down its newly acquired lignite mines and power plants over time.

This is a high stakes game with the German government, which will want a gradual phaseout of lignite to meet its emissions targets, at least cost to the energy consumer. In their goal of securing compensation (such as capacity payments), lignite operators may threaten to shut down the power plants (using an argument that a gradual phaseout makes them uneconomic), to underline the energy security they provide in the near term. Or else, they may simply threaten to sue the government, as some utilities already are in the case of the forced early retirement of nuclear power plants.

Such brinkmanship is a gamble, which may explain Vattenfall’s eagerness to be rid of the assets. That is before considering the €1.5 billion+ bill EPH faces for rehabilitating its newly acquired lignite mines, as I showed in a report for IEEFA, published here last month.

Figure 1. German lignite GHG emissions (red), if sector meets larger share of 2030 climate target

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