Emergency Response Mechanisms for addressing challenges with high gas prices in international energy markets

Recent natural gas price surges prompted the adoption of various policies, such as a natural gas price cap, aimed at preserving climate goals and preventing increases in wholesale electricity prices. However, it is unclear whether such policies are effective. Here, we take advantage of the unexpected spike in natural gas prices around the time of the Russian invasion into Ukraine to estimate the effects of such a spike on coal generation, carbon emissions, and wholesale electricity prices, highlighting its heterogeneous impacts in 13 EU countries that still rely on both coal and gas for electricity production. We use these estimates to show that the effectiveness of the gas price cap is limited, and instead propose an emergency response mechanism that would simultaneously safeguard the EU's climate policy and protect households from excessive fluctuation in natural gas prices. The proposed mechanism introduces an emergency auction reserve price within the existing EU Emissions Trading System, triggered automatically under predefined rules whenever gas prices reach unusually high levels. Revenues generated by the reserve price would be used to provide relief to consumers. Our results demonstrate that a modest emergency reserve price could serve as an effective response mechanism and that this approach overcomes key shortcomings of the widely used natural gas price cap.