Impact of the EU ETS on the European electricity sector

Abstract

In the course of its first (2005-2007) and part of its second (2008-2010) trading periods the EU ETS has revealed insufficient tightness and some inefficiencies in the allocation mechanisms used. Recent amendments to the Emissions Trading Directive will start applying after 2013, such as a reinforced EU-wide emission cap and the end of free allowances for the power sector. Even under stricter rules, there is some uncertainty about the effectiveness of the EU ETS to reduce emissions from power generation in the near future with the available technologies. This paper studies the impact of different CO2 price scenarios on the operation of the European power system in 2015 for a given generation portfolio. A mid-term planning model assuming perfect competition and market splitting between countries is used. Results show how CO2 price impacts are limited to bring on emission reductions due to the existing technologies and cross-border transmission capacities.