Study of a Carbon Price Floor in European Countries: Analysis of Power Market and Consumer Impacts
The energy transition in Europe requires an accelerated decarbonisation of the power sector in order to fulfil the pledges of the Paris Agreement and keep the global temperature rise to well below 2 degrees Celsius. Clear and reliable price signals are needed to avoid technology lock-in of high carbon electricity generation capacity and to enable higher volumes of investment in renewable energy.
Recent reforms of the EU Emissions Trading System (EU ETS) are aimed at tackling the issues of over-supply and long term price volatility in the carbon price. However, the analysis by FTI-CL energy experts finds that the ETS reforms will not deliver a sufficiently strong or clear carbon price signal to drive long term investment decisions. Several countries are actively considering the potential of a carbon price floor (CPF) to complement the EU ETS and to strengthen the carbon price signal for investors. This study uses FTI-CL’s European carbon and power market models to analyse the impacts of a carbon price floor (CPF) implemented by a sub-set of European countries on emissions, power prices, renewable electricity investment, electricity trading flows and consumer costs (including costs for energy intensive industries).
The study concludes that a carbon price floor (CPF) can aid in the energy transition in Europe by driving greater coal to gas switching in the near term and enabling greater investment in renewable energy technologies (at lower cost of capital) in the medium to long term. Costs to consumers and industry will depend on power price impacts and may in fact be negative (i.e. savings) to the extent that the CPF enables greater investment in low carbon, low marginal cost generation capacity (the “merit order effect”). If there are additional costs to energy intensive industries and a risk of carbon leakage, the revenues raised through the carbon price floor can be used to compensate these industries.
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