Policy Coordination in the Energy Turnaround – Illustrated by the Emissions Trading System and the Subsidy of Renewable Energies

In view of the combination of multiple market failures, as well as the interaction between environment, energy and innovation policy goals and instruments in the policy mix, there is a growing need for policy coordination in the implementation of the energy turnaround. At the same time, coordination is proving increasingly difficult and there is a danger of economic inefficiency. This tension is illustrated by the interaction between the emissions trading system (ETS) and subsidies on the one hand, and with research into, the development of and the spread of renewable energy on the other. The separate treatment of these areas alone reveals significant efficiency losses in policy implementation in some cases. Policy interactions create complexity. A study by the Ifo Institute investigates the various approaches to reforms aimed at improving policy coordination. With regard to the ETS, the introduction of EU-wide minimum prices and the further development of climate policy goals and legal regulations are longer-term options. It would also be useful to expand the area of application to all sectors that emit greenhouse gases. When subsidising renewable energies, it is advisable to favour R&D subsidy over the spread of renewable energy. It may be more efficient to promote the use and spread of renewable energies via a revised market bonus scheme.