Europe’s economy is hurting from high oil and gas prices, with few sectors left unscathed. So why is the continent’s coal industry so cheerful? Coal demand in the E.U. has dropped over the last decade and it’s not expected to rise significantly. But that’s an improvement over previous years, when coal’s role in Europe was in question. Today, European coal producers are not only coming in from the cold, but there is reconsideration of a European policy that long frowned on coal’s pollution, as security of supply and energy cost concerns are starting to outweigh environmental goals.

For years, coal, even more than nuclear, was the black sheep in Europe’s energy mix. It is the biggest contributor to carbon dioxide emissions and its combustion has polluted entire cities. Only 18 percent of the continent’s primary energy use comes from coal, compared to 40 percent from oil and 24 percent from gas, despite its big reserves. Many local mines were closed, and the power industry, which burns most of the continent’s coal, sought alternatives, especially in gas. And while some countries have increased their coal use, overall demand has fallen more than 5 percent in the last decade.

The future of coal looked bleak as European leaders endorsed ambitious environmental targets to reduce greenhouse gas emissions. Europe has set a binding goal for 2020 of cutting its greenhouse gases 20 percent below 1990 levels. The Emission Trading Scheme embodies its policy. In the first and second phases that end in 2012, countries are issued carbon credits to pass on to their industries. Companies buy and sell credits on the market, depending on how much they pollute, with current prices trading between $30 and $40 per ton. As of 2013, though, those credits will be cut significantly, and prices are sure to increase. That is, burning fossil fuels, especially coal, will become a lot more expensive.

But at the beginning of 2008, a record price increase in energy commodities changed coal’s fate, at least for the moment. Oil prices rose by more 70 percent, gas by more than 60 percent, and coal outpaced them all by more than doubling. Low energy prices are long gone. The scenario is prompting the European Union to rethink its priorities. Energy costs must be reduced to address inflationary pressure that is coupled with a global economic slowdown. And concerns over security of supply are starting to outweigh environmental targets. The only shortterm solution is coal, because nuclear energy can take four times longer to bring online.

To be sure, coal is making a comeback in Europe. Producers and consumers alike are bullish. High prices are making local production more profitable and mines are being reopened. More important, policy makers are rethinking their opposition and determining ways to prop up coal to address the increasing belligerence of Russia with regard to energy supplies.

“There’s a great future for coal because the trend is not going to stop. There is no way Europe can replace coal with gas or oil. It’s there to stay, not forever, but for a long time,” says Xavier Prevost, a coal analyst at Wood Mackenzie who is based in Johannesburg. “If you look[ed] at E.U. coal users, there was a somber outlook. It was really something that terrified them, but they have changed their views totally. Oil prices make it even better for coal.”

Total coal demand in Europe decreased slightly in 2007 to 318 million tons of oil equivalent, from the year earlier. In the same period, overall energy demand decreased 2 percent while carbon dioxide emissions decreased 3 percent, according to a report by the Association of German Coal Importers. Production in the E.U. fell more than 7 percent, mostly in Poland, the U.K., and Germany, the continent’s biggest producers. That was offset by a slight boost in imports, as the U.S. and Colombia made up for shortfalls from Indonesia and South Africa.

The turnaround is illustrated in the nearly 50 coal power plants now planned for the E.U., 16 of which are expected to come online in Germany by 2012. Italy will double coal’s share in its energy mix to 33 percent. Spain’s coal demand in 2007 increased almost 9 percent from 2006, more than any other E.U. country. Over the last decade, Italy has increased its coal use by almost 60 percent, followed by Spain with almost 14 percent. Those increases help explain why both are among the E.U.’s biggest violators in carbon dioxide emissions.

The power sector struggles to reduce its greenhouse gas discharges to avoid paying for carbon credits, while it continues to expand at about 5 percent a year. In the E.U.15, carbon dioxide emissions from the sector have increased about 7 percent since 1990. Reducing oil dependence is Europe’s goal. Renewable sources cannot replace fossil fuels. Europe was pinning its hopes on gas to supply most of its power needs, but the recent price increases and concerns over security of supply from Russia with the world’s biggest reserves have prompted second thoughts in the region. The challenge is aggravated by the difficulty of relying on Iran, with the world’s second biggest reserves, given its political standoff with the West. And while northern Africa is a big supplier, it won’t be able to meet European surging needs.

That is why coal is back in Europe. Security of supply is not an issue with coal, given local reserves and vast global supplies that are evenly spread out. And despite price increases, generating electricity with coal remains much more cost effective.

“Demand will stay relatively stable because some countries are switching to more coal, like Italy and Poland,” says Wolfgang Ritschel, director of the Association of German Coal Importers. While German and Polish production will decrease, the U.K.’s will increase. “As long as we have high natural gas prices, coal is competitive. I think coal will have an important share in next 30 or 40 years, especially in countries like Germany where nuclear is being phased out. We are quite optimistic.”

Despite the optimism, the European coal industry faces two big challenges: the cost efficiency of carbon credits it will have to buy to offset emissions, and adapting to new technologies. The E.U. Commission is discussing how carbon credits will be distributed after 2013, and a decision is unlikely before 2010. Eurocoal, the continent’s umbrella organization for the industry, is lobbying for more carbon credits, or at least a phasein of the auction process. It’s uncertain what the final allocation will look like, especially because both the Commission and the E.U. Parliament will be renewed next year.

In the short term, the coal industry must increase its competitiveness to consolidate its future. Old coalburning power plants are big polluters and inefficient. New technology has vastly improved the situation, and new European coalfired power plants are almost twice as efficient as those in China and Russia. According to Eurocoal, carbon dioxide emissions from coalfired plants could be reduced by a third by replacing 90 gigawatts of installed capacity. The issue is pressing, as coal emits about two times more greenhouse gases as comparable natural gasfired power plants.

Ritschel says coal will remain competitive as long as carbon credits remain under $50, although that depends on how quickly new technology is retrofitted to old plants. After that, natural gas will be more costeffective.

Another big challenge is the E.U.’s push to fit all coalfired power plants with carbon capture and storage technology, which is costly, cuts power output, and most important, remains unproven. The E.U. is planning at least 10 pilot projects by 2015 to test the technology, hoping to make it commercially viable by 2020. And it is considering mandating C.C.S. if the power industry doesn’t do so willingly. So far has been left to member states to finance the technology. The U.K. is financing what may be the first fully functioning plant, although the project has been plagued by delays.

Thus, the new Europe will probably look a lot like the old Europe. Which, of course, came of age with coal.