WHILE coal production and use plummet in America, in Europe “we have some kind of golden age of coal,” says Anne-Sophie Corbeau of the International Energy Agency. The amount of electricity generated from coal is rising at annualised rates of as much as 50% in some European countries. Since coal is by the far the most polluting source of electricity, with more greenhouse gas produced per kilowatt hour than any other fossil fuel, this is making a mockery of European environmental aspirations. How did it happen?

The story starts, again, with American shale gas. As American utilities shifted into gas, American coal miners had to look for new markets. They were doing so at a time when slowing Chinese demand was pushing down world coal prices, which fell by a third between August 2011 and August 2012 and is below $100 a tonne. These prices make European utilities willing buyers. European purchases of American coal rose by a third in the first six months of 2012.

Compared with the rock-bottom price of gas in America, coal is not all that cheap. But it is a bargain compared with the price of gas in Europe. Although gas can be carted around in liquid form, that is expensive and the infrastructure required is still patchy; for the most part, gas is shifted through pipelines, and tends to be used close to where it originates. So whereas coal has world-market prices, gas has regional prices, often linked in one way or another to the oil price. Many European gas contracts were negotiated years ago with the Russian gas giant, Gazprom, and despite a wave of renegotiations European gas prices have stayed high. In the summer of 2012 they were more than three times the American gas price and more expensive than coal. Gazprom has said it will cut prices—probably by around 10%—in 2013, but that may make little difference.

So coal is cheaper than gas in Europe and is likely to remain so, partly because Europe’s domestic shale-gas industry is many years behind America’s (and may never catch up) and partly because it will take time for Europe to build an infrastructure to import liquefied-natural gas in large amounts. The relative price of coal and gas is crucial to the health of European utilities. At the beginning of November 2012, according to Bloomberg New Energy Finance, a research firm, power utilities in Germany were set, on average, to lose €11.70 when they burned gas to make a megawatt of electricity, but to earn €14.22 per MW when they burned coal.

No room for gas in the Energiewende

The difference reflects the prices of the fuels concerned. But there is more to it than that. Germany has an ambitious plan to shift from fossil fuels and nuclear power to renewables like solar and wind (this is called the Energiewende, or energy transformation). Electricity from renewables gets priority on the grid. That has allowed wind and solar to grab market share from fossil energy during the most profitable times of day, when utilities used to make most of their money and burning gas made sense (German electricity prices are at their highest in the middle of the day when solar generation is also strongest). By displacing conventional forms of energy this way renewables have undermined utilities’ finances. Moody’s, a ratings agency, recently said the whole sector’s creditworthiness is under threat.

In response, companies are switching from gas to coal as fast as they can, so renewables are in fact displacing gas but not coal. In Germany, RWE, the biggest user of coal in Europe, generated 72% of its electricity from coal and lignite (a dirtier, low-grade form of coal) in the first nine months of 2012, compared with 66% over the same period in 2011. Germany needs new capacity because it is closing down its nuclear plants: RWE is building a new coal-fired plant in Hamm, in North Rhine-Westphalia and another in Emshaven in the Netherlands. E.ON, Germany’s biggest power producer, is also building a new coal-fired plant in North Rhine-Westphalia. It and its partners are considering shutting down a gas-fired plant in Bavaria. Vattenfall, a Swedish state-owned company, has just completed a lignite-fired plant in eastern Germany and is building a coal plant near Hamburg. EnBW, based in southern Germany, is building a coal-fired plant in Karlsruhe, and another jointly with RWE in Mannheim.

Even in countries that are not building new coal-fired power stations, the amount of coal burned is going up. In April 2012 coal took over from gas as Britain’s dominant fuel for electricity for the first time since early 2007. The amount of the country’s electricity provided by coal in the third quarter of last year was 50% greater than the year before.

Companies would be dashing for coal anyway because it is cheap, but the dash is made the more frantic by looming policy changes. Under a European Union directive which comes into force in 2016, utilities must either close coal-fired plants that do not meet new EU environmental standards or else install lots of expensive pollution-control devices. The deadline for companies to decide which course to take is this month. If a company closes a plant, it will be given a maximum number of hours to run before it must be shut down (depending on how much pollution it produces). This is a big incentive to burn a lot of coal quickly.

Does this mean the current surge in coal demand is a blip? Tom Brookes of the European Climate Foundation, a non-governmental organisation based in The Hague, says yes. In 2008 Europe’s utilities had plans for 112 new coal plants. Since then, 73 have been abandoned and nothing further has happened with 14, so he reckons a huge amount of coal capacity will be lost as existing plants are shut down over the next 12 to 18 months. All the same, that still leaves two dozen new plants planned or under construction. Moreover, if you count the number of applications for permits to build coal-fired power stations—as the World Resources Institute, a think-tank in Washington, DC, does—the number of planned new coal plants in Europe is much higher: 69, with a proposed capacity of over 60 gigawatts, roughly equivalent to the capacity of the 58 nuclear reactors that provide France with most of its electricity.

So higher levels of coal use may continue for a while, at least in some countries. Bloomberg has looked in detail at the impact of EU environmental standards on the countries most affected: Britain, Germany and Poland. It reckons British coal capacity will indeed fall, from 33GW now to 14GW by the time the new rules take full effect. But Germany’s coal capacity will barely budge, because it is building new coal plants which meet the new standards.

This coal surge is making a nonsense of EU environmental policies, which politicians like to claim are a model for the rest of the world. European countries had hoped gradually to squeeze dirty coal out of electricity generation. Instead, its market share has been growing.

The EU aims to reduce carbon emissions to 80% of their 1990 levels by 2020. Thanks in part to the recession, by 2009 it was most of the way there—a bit more than 17% down on the 1990 level. In 2010, though, emissions began rising. Bloomberg calculates that carbon emissions from power plants rose around 3% in 2012, pushing total emissions 1% higher than they were in 2011.

In theory, Europe’s carbon price, provided by a cap-and-trade system, the emissions trading scheme (ETS), should have stopped all this from happening. The ETS carbon price should in principle go up when emissions do, as more emissions mean more demand for the carbon credits that the scheme works with. So you might expect the carbon price to have soared in 2012. In fact the price was flat for most of the year, trading between €6 and €8 per tonne (see chart). Carbon beyond price The problem is that when the system was set up, regulators allowed companies overly generous permits to pollute, in part because of lobbying and in part because the effects of the recession were not foreseen. This oversupply has swamped the impact of emissions from coal-fired power plants. On November 12th the European Commission, the EU’s executive arm, proposed that some of the excess carbon credits be withdrawn. But the proposal, which has been held up by opposition from Poland, might not do all that much. Policy uncertainties are growing. The EU has a lot of other things on its plate, so no one has much appetite for tough decisions about energy at the moment, such as how to save the ETS. In 2014 there will be a new European Commission and a new European Parliament, which means Europe-wide decisions about energy risk being put off for a couple more years at least. As Europe’s energy targets (on renewables use and efficiency) are supposed to be met by 2020, this timetable suggests there will be years of policy delay followed by a last-minute scramble.

Faced with such uncertainties, businesses are doing what you would expect: going elsewhere. Jesse Scott, the head of environment policy at EURELECTRIC, an association of electricity producers, asked European energy utilities which also have an international portfolio where they were expecting to invest over the next few years; 85% replied “outside Europe”.

If policies work as intended, electricity from renewables will gradually take a larger share of overall generation, and Europe will end up with a much greener form of energy. But at the moment, EU energy policy is boosting usage of the most polluting fuel, increasing carbon emissions, damaging the creditworthiness of utilities and diverting investment into energy projects elsewhere. The EU’s climate commissioner, Connie Hedegaard, likes to claim that in energy and emissions Europe is “leading by example”. Uh-oh.