The European Emission Trading System and renewable electricity: Using the GTAP Power Database to analyze the role of carbon prices on the development of renewables in the EU

Mareike Soeder, Sneha Dattatraya Thube and Malte Winkler

No 333070, Conference papers from Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project

Abstract: About one half of European greenhouse gas (GHG) emissions is regulated under the EU emissions trading system (ETS), the other half is not subject to carbon pricing. Under increasing carbon prices this may lead to intersectoral carbon leakage, as some GHG emissions are burdened with a price and others are not. Furthermore, increasing carbon prices may lead to international leakage effects, shifts in electricity production technologies (fossil fuel vs. renewable) and inter-European burden sharing of GHG abatement. Here we use the computable general equilibrium (CGE) model DART-CLIM to analyze these effects under a set of scenarios reflecting different degrees of flexibility on the production and/or the consumption side. While in most non-ETS sectors emissions (and, thus, intersectoral carbon leakage) are highest in a scenario of restricted growth of renewable electricity, emissions in direct fossil fuel consumption increase in a scenario with high substitutability in energy goods in final household consumption. This is because electricity prices increase and coal and gas prices decrease due to strong reductions in coal and gas based electricity production following high prices for emission allowances in the EU-ETS. International carbon leakage increases with a higher allowance price, with China showing especially high emissions under the assumption of reduced renewable installation. In the EU´s electricity sector coal decreases by 75% when an allowance price of 50€ is assumed. When renewables are thwarted, mainly gas and oil increase their electricity production to fill the gap left by coal and renewables, but overall electricity production decreases. Our results indicate that a strong development of renewable electricity production is desirable to restrict intersectoral and international carbon leakage. Measures for household GHG emissions should be taken to avoid increasing emissions in this sector when fossil fuel prices decrease due to higher allowance prices.

Keywords: International; Relations/Trade (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:ags:pugtwp:333070

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