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Designing an EU energy and climate policy portfolio for 2030: Implications of overlapping regulation under different levels of electricity demand

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  • Flues, Florens
  • Löschel, Andreas
  • Lutz, Benjamin Johannes
  • Schenker, Oliver

Abstract

The European Union׳s current climate and energy policy has to operate under an ex ante unforeseen economic crisis. As a consequence prices for carbon emission allowances in the EU Emissions Trading System collapsed. However, this price collapse may be amplified by the interaction of a carbon emission cap with supplementary policy targets such as minimum shares for renewables in the power sector. The static interaction between climate and renewable policies has been discussed extensively. This paper extends this debate by analysing the efficiency and effectiveness of a policy portfolio containing a cap and trade scheme and a target for a minimum renewable share in different states of aggregate electricity demand. Making use of a simple partial equilibrium model of the power sector we identify an asymmetric interaction of emissions trading and renewable quotas with respect to different states of aggregate electricity demand. The results imply that unintended consequences of the policy interaction may be particularly severe and costly when aggregate electricity demand is low and that carbon prices are more sensitive to changes in economic activity if they are applied in combination with renewable energy targets. Our analysis of the policy interaction focuses on the EU, yet the conclusions may also be of relevance for fast growing emerging economies like China.

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  • Flues, Florens & Löschel, Andreas & Lutz, Benjamin Johannes & Schenker, Oliver, 2014. "Designing an EU energy and climate policy portfolio for 2030: Implications of overlapping regulation under different levels of electricity demand," Energy Policy, Elsevier, vol. 75(C), pages 91-99.
  • Handle: RePEc:eee:enepol:v:75:y:2014:i:c:p:91-99
    DOI: 10.1016/j.enpol.2014.05.012
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    3. Knopf, Brigitte & Nahmmacher, Paul & Schmid, Eva, 2015. "The European renewable energy target for 2030 – An impact assessment of the electricity sector," Energy Policy, Elsevier, vol. 85(C), pages 50-60.
    4. Gallier, Carlo & Lutz, Benjamin & Brockmann, Karl Ludwig & Dieckhöner, Caroline, 2014. "KfW/ZEW CO2 Barometer 2014 – Carbon Edition: New Phase, Old Problems," KfW/ZEW-CO2-Barometer, ZEW - Leibniz Centre for European Economic Research, number 109799.
    5. Cosmi, Carmelina & Dvarionenė, Jolanta & Marques, Isabel & Di Leo, Senatro & Gecevičius, Giedrius & Gurauskienė, Inga & Mendes, Gisela & Selada, Catarina, 2015. "A holistic approach to sustainable energy development at regional level: The RENERGY self-assessment methodology," Renewable and Sustainable Energy Reviews, Elsevier, vol. 49(C), pages 693-707.
    6. Böhringer, Christoph & Keller, Andreas & Bortolamedi, Markus & Rahmeier Seyffarth, Anelise, 2016. "Good things do not always come in threes: On the excess cost of overlapping regulation in EU climate policy," Energy Policy, Elsevier, vol. 94(C), pages 502-508.
    7. Corradini, Massimiliano & Costantini, Valeria & Markandya, Anil & Paglialunga, Elena & Sforna, Giorgia, 2018. "A dynamic assessment of instrument interaction and timing alternatives in the EU low-carbon policy mix design," Energy Policy, Elsevier, vol. 120(C), pages 73-84.
    8. del Río, Pablo, 2017. "Why does the combination of the European Union Emissions Trading Scheme and a renewable energy target makes economic sense?," Renewable and Sustainable Energy Reviews, Elsevier, vol. 74(C), pages 824-834.
    9. Peña, Juan Ignacio & Rodríguez, Rosa, 2019. "Are EU's Climate and Energy Package 20-20-20 targets achievable and compatible? Evidence from the impact of renewables on electricity prices," Energy, Elsevier, vol. 183(C), pages 477-486.
    10. Paul Lehmann & Jos Sijm & Erik Gawel & Sebastian Strunz & Unnada Chewpreecha & Jean-Francois Mercure & Hector Pollitt, 2019. "Addressing multiple externalities from electricity generation: a case for EU renewable energy policy beyond 2020?," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 21(2), pages 255-283, April.
    11. Bye, Brita & Fæhn, Taran & Rosnes, Orvika, 2018. "Residential energy efficiency policies: Costs, emissions and rebound effects," Energy, Elsevier, vol. 143(C), pages 191-201.
    12. Gao, Shuai & Smits, Mattijs & Mol, Arthur P.J. & Wang, Can, 2016. "New market mechanism and its implication for carbon reduction in China," Energy Policy, Elsevier, vol. 98(C), pages 221-231.
    13. Karner, K. & Dißauer, C. & Enigl, M. & Strasser, C. & Schmid, E., 2017. "Environmental trade-offs between residential oil-fired and wood pellet heating systems: Forecast scenarios for Austria until 2030," Renewable and Sustainable Energy Reviews, Elsevier, vol. 80(C), pages 868-879.
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