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The Political Economy of a Carbon Price Floor for Power Generation

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  • David M. Newbery
  • David M. Reiner
  • Robert A. Ritz

Abstract

The EU carbon price lies well below estimates of the social cost of carbon and “target-consistent†carbon prices needed to deliver ambitious targets such as the 40% reduction target for 2030. In light of this, the UK introduced a carbon price floor (CPF) for its electricity sector in 2013 and the new Dutch Government has recently made a similar commitment, while successive French Governments have called for an EU-wide CPF. This paper analyzes the impacts and design of a power-sector CPF, both at the EU and national level, using a political-economy approach. We find a good case for introducing such a price-based instrument into the EU ETS. We suggest that a CPF should be designed to “top up†the EUA price to €25-30/tCO2, rising annually at 3-5% above inflation, at least until 2030. We argue that the new EU Market Stability Reserve enhances the value of a CPF in terms of delivering climate benefits, and discuss the potential for a regional CPF in North-West Europe. We also review international policy experience with price floors (and ceilings).

Suggested Citation

  • David M. Newbery & David M. Reiner & Robert A. Ritz, 2019. "The Political Economy of a Carbon Price Floor for Power Generation," The Energy Journal, , vol. 40(1), pages 1-24, January.
    • Handle: RePEc:sae:enejou:v:40:y:2019:i:1:p:1-24
    DOI: 10.5547/01956574.40.1.dnew
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    More about this item

    Keywords

    Carbon pricing; Electricity markets; Market failure; Policy failure; Political economy; Price corridor; Price floor;
    All these keywords.

    JEL classification:

    • F0 - International Economics - - General

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