In the EU, the environmental regulation of the operation of fossil fuel-fired generating plants is dominated by two EU directives. The EU Emissions Trading Scheme (EU ETS, established by Directive 2003/87/EC) is designed to reduce the EU's overall emissions of greenhouse gases through an EU-wide cap-and-trade system. The Industrial Emissions Directive (IED, Directive 2010/75EU) is primarily focused on other pollutants—notably, in the case of power plants, sulfur dioxide (SO2), nitrogen oxides (NOx) and dust.
Although IED permits are in principle intended to regulate all significant pollutant streams from industrial installations, national authorities are generally not meant to (and do not) use them to control GHG emissions. Yet, paradoxically, it is the IED (with its precursors, the Large Combustion Plant Directive, or LCPD, and the Integrated Pollution Permitting and Control Directive, or IPPCD), rather than the EU ETS, which arguably has so far done most to reduce the carbon intensity of the EU generating sector by driving coal, oil and older gas plants out of business.
Under the EU ETS, operators of installations which emit GHGs must report and surrender allowances in respect of their GHG emissions (in metric tons of carbon dioxide equivalent) each year. In Phase 3 of the scheme, which began on January 1, 2013, operators in the power sector no longer receive a free allocation of allowances and must purchase them through auctions or on the EU emissions trading market. Yet while this has meant that operators of large combustion plants are now subject to significant compliance costs, the fact remains that the carbon price created by the EU ETS has much of the time been far below the level required to drive decarbonization (for much of 2013 it was about £5). This has led the UK government, for example, to try to reinforce the weak price signal generated by the EU ETS with a direct levy on carbon-intensive generators known as the Carbon Price Floor—although it has recently reduced future increases in the levy to avoid placing too great a burden on energy intensive industries. The government has also introduced legislation—partly inspired by Californian precedents—that prevents the construction of new coal-fired power stations with a capacity of more than 50 MW unless they are fitted with carbon capture and storage.
In contrast to the quasi-market approach of the EU ETS, the IED, like the LCPD and IPPCD before it, requires Member States to control SO2, NOx and dust emissions by setting emissions performance limits for individual plant (existing and new) that reflect what are acknowledged as the "best available techniques" for limiting such emissions, with the directive itself setting upper limits on what the permits can allow. Broadly speaking, new plants are set somewhat stricter limits and have to comply from an earlier date, while existing plants are also given opportunities to move into compliance over a period of a few years, to run for only 1,500 hours each year or to close after running for no more than 17,500 hours before the end of 2023. The LCPD effectively forced all UK coal-fired power stations to invest in SO2 abatement technology or close. The IED aims to curb NOx emissions significantly. Taken together, they may close up to 20 percent of the UK's grid-connected generating capacity. Brownouts and blackouts are a real prospect for the first time in many years.
From an environmental point of view, the LCPD and IED are designed to control pollutants that damage human health and give rise to phenomena such as eutrophication and acid rain, rather than global warming, but because the same plants produce the highest concentrations of both GHGs and SO2/NOx, LCPD has had a substantial decarbonizing effect. But whether IED will have as much of an impact as the LCPD and IPPCD have had when it affects existing plants after January 1, 2016, is not yet clear. This is partly because concerns about the adequacy of generation capacity is leading EU Member State governments, which are also concerned about the need to balance intermittent renewable generation, to develop "capacity markets" as a way of subsidizing readily dispatchable fossil fuel-fired plants. But the bigger incentives to upgrade old coal plants to meet IED NOx standards come from outside the EU. The US shale revolution and the high price of gas in the EU have potentially made it worthwhile to upgrade old coal plants, meaning that—notwithstanding the EU ETS and even national measures like the Carbon Price Floor—the EU's old coal plants will continue to provide baseload generation for some time to come.