Emission Trading vs. Renewable Energy Technology Promotion for Ghg Control in the European Union – Effectiveness, Economic Costs, and Security of Supply

Policy instruments for GHG abatement may follow different strategies. Two prominent distinct strategies that are also part of the EU climate protection approach are market oriented cap and trade regimes and support schemes for carbon free generation technologies. The two strategies differ in their impact on the energy system and thus in effectiveness of abatement, in economic impact, and in consequences for energy security. We contrast the EU-wide impacts of two policy instruments each representing a single control strategy by using the recursive-dynamic, technology rich CGE model NEWAGE-W. First, we consider a cap and trade regime where international emission allowance trade is implemented following the Kyoto-protocol. Second, we consider targets for the application of renewable energy sources in electricity generation. Our model results suggest that for reasons of effectiveness, economic efficiency, and security of supply a GHG control strategy should not merely rely on technology oriented policies. Combining a technology oriented strategy with a cap and trade strategy may only slightly further decrease emissions where this reduction is accompanied by negative growth impacts. Impacts differ between new and old member states and are highly sensitive to the allocation of the overall EU target. Introduction GHG control strategies Anthropogenic climate change largely stems from the combustion of fossil fuels in the energy system. In Europe (EU-25) approx. 80 % of green house gas (GHG) emissions are energy related and approx. one third originates from electricity generation. In the case of CO2 which by far is the most important GHG, the electricity sector contributes approx. 35 % to total emissions in the EU-25. Moreover, approx. 45 % of total primary energy demand is being directed towards the generation sector. Hence, the electricity system’s technological design strongly affects the environmental outcome, the security of energy supply as well as any potential economic impact induced by GHG control. Consequently, this paper explicitly emphasizes the composition of the electricity sector and its role for climate protection strategies. Focus is put on CO2 mitigation strategies. Policy instruments for CO2 abatement may follow different strategies. For this paper, we identify two distinct strategies. The first strategy draws upon national administrative emission caps coupled with an allowance trading scheme. This cap and trade approach is to be considered a market oriented approach. It is brought into affect by the Kyoto protocol. Cap and trade strategies aim at indirectly changing the comparative advantages of distinct energy carriers and energy conversion technologies based on their specific emissions. Consequently, they can be considered market pull strategies. Küster, R. , Zürn, M. , Ellersdorfer, I. , and Fahl, U. 1 The second strategy is a direct technology oriented approach. It builds upon regulatory policy instruments to set incentives for the generally direct application of specific energy carriers as well as energy conversion and electricity generation technologies. Hence, this approach relies on technology promotion. It may include quotas, norms, and subsidies for emission free technologies such as nuclear energy, renewable energy sources (RES), carbon capture and storage (CCS), as well as efficiency improvements of conventional generation (e. g. CHP). Administrative technology oriented approaches can be considered technology push strategies. The EU approach for GHG control In the current debate on GHG control, in its Presidency Conclusion of March 2007 the EU commission (EU (2007)) propagates an Energy Policy for Europe that includes both of the strategies identified above. First, EU (2007) announces an absolute GHG emission cap that yields emission reductions of at least 20 % in 2020 compared to 1990. Second, it installs a binding target of a 20 % share of RES in overall EU energy consumption by 2020. The propositions in EU (2007) are problematic in at least two senses. First, the RES target is relevant for total primary energy consumption. However, GHG control strategies in general as well as this paper specifically emphasize the importance of the electricity sector which is why we specify RES targets for the electricity mix. For the EU-15 the Directive on the promotion of electricity produced from renewable energy sources in the internal electricity market EU (2001) defines national RES quotas for the electricity mix up to 2010. Although there is no directive which states binding targets for the new member states, data is given by Eurostat (2007). Figure 1 displays resulting quotas for 2010. The national targets combined yield a quota of 22 % for the entire EU-15 (cf. EU (2001)). From 2010 onward no sector detailed targets are defined. This is why we draw upon an exemplary proposal of the German Renewable Energy Federation which suggests a RES share in electricity generation of 35 % from 2020 onward (cf. BEE (2006)). Second, EU (2007) explicitly stipulates that an EU member burden sharing scheme yet is necessary for a cost efficient achievement of the two targets emission reduction and RES share. However, the differentiated national targets of such a burden sharing agreement are yet to be negotiated for the time after 2010. Difficulty in defining a burden sharing for a RES target lies in the very different national power plant systems and technical potentials among the EU member states. Whereas especially the new member states (except Latvia, Slovakia, and Slovenia) historically have only fragmentarily implemented RES in their electricity mix, in the EU-15 RES play a more important role. This is possibly also due to targets having been established earlier by the EU directive. By following the two strategies EU (2007) not only aims at improving environmental compatibility with respect to GHG control. Explicit complementary goals are those of the energy policy triangle, namely to enhance the economic efficiency of the energy system, and to increase energy security. Consequently, we assess the impact on the policy triangle imposed by the two policy instruments cap and trade and RES quota as well by the combination of the two. Using a CGE model, we compare their effectiveness in GHG mitigation, their economic efficiency, and 1 The overall emission reduction will be increased to 30 % if other major industrialized countries impose significant reductions as well. Another important pillar is to increase energy efficiency by 20 % compared to baseline development in 2020. Notwithstanding the fact that this approach could also be analysed with our model NEWAGE-W, it cannot be discussed within the limited scope of this paper. Küster, R. , Zürn, M. , Ellersdorfer, I. , and Fahl, U. 2 their impacts on security of supply. To highlight the impact of diverse starting points regarding RES application this paper differentiates between EU-15 RES policy and cohesive EU-25 RES policies. We start our analysis with policies for the EU-15 due to the fact that here, RES targets have long been established. Additional emphasis is then laid on the effect of a cohesive EU-25 approach in contrast to a single EU-15 RES policy. 0 10 20 30 40 50 60 70 80 90