A coordination failure between EU climate policies exemplified by the North Sea energy island

Peter K. Kruse-Andersen and Marc S. Jacobsen

Climate Policy, 2024, vol. 24, issue 5, 633-645

Abstract: We highlight a coordination problem between the EU Emissions Trading System (ETS) and the EU's offshore renewable energy strategy. We exemplify this coordination failure by analyzing carbon leakage effects associated with Denmark's planned North Sea energy island. The Danish energy island project will not start production before 2033, implying a long interval between project announcement and production. Using a dynamic model of the EU ETS, we show that the large time gap between announcement and production likely results in a ‘Green Paradox’, where the energy island increases aggregate EU ETS emissions. The mechanism leading to the emission increase is complicated and works through the Market Stability Reserve (MSR). The estimated 2050 leakage rate is 145 percent in our main scenario and not below 100 percent in any alternative scenario. We discuss how to improve the climate benefits of the energy island or similar large-scale renewable energy projects. This includes possible revisions to the EU ETS and the role of Power-to-X technologies.There is a coordination failure between the EU ETS and the EU's offshore renewable energy strategy, as projects intended to fulfil the offshore strategy are likely to result in substantial carbon leakage due to the EU ETS.In ETS-covered sectors, there are averse leakage effects associated with emission abatement projects with significant time lags between project announcements and emission abatement like the Danish North Sea energy island.For the North Sea energy island and similar projects, leakage effects can be diminished through policies that mitigate the impact on EU ETS allowance demand.The coordination failure can be eliminated by removing MSR cancellations or the entire MSR mechanism while adjusting the emission cap to hold expected emissions constant.However, removing MSR cancellations amplifies leakage effects for abatement projects with short time lags between announcements and emission abatement, which currently have weak leakage effects due to MSR cancellations.

Date: 2024
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DOI: 10.1080/14693062.2023.2287074

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