Prices and policies: Carbon caps and efficiency programmes for Europe’s low-carbon future

Panel: 2. Current energy efficiency policies: On stage and backstage

This is a peer-reviewed paper.

Author:
Richard Cowart, Regulatory Assistance Project (RAP), Belgium

Abstract

As the EU ETS moves to a new phase, decision-makers must link carbon prices with other policy tools to meet the EU’s carbon goals. Carbon pricing/ETS advocates sometimes object that other public policies will interfere with carbon markets or “undermine” the carbon price. In reply, this paper will show how energy efficiency policies can help meet ETS goals at lower cost, creating space to tighten carbon caps and/or reduce the cost of protecting high-emitting industries and new Member States.

Main points:

• Europe must decarbonize its power supply and electrify cars and buildings to meet EU GHG goals by 2050. The link between carbon markets and power markets is crucial to success.

• Carbon pricing alone will not deliver needed GHG reductions in the power sector. Market barriers (esp to EE) and investment constraints (esp to RES) make it hard to reduce CO2 through price alone. Good news: EE programs can save 7 times more carbon per consumer Euro spent, than would carbon prices alone.

• Even with carbon auctions, wholesale power markets multiply the cost of carbon prices to consumers, and give windfall gains to many generators. EU-wide modeling finds that when CO2 sells for 20 Euros/ton, consumers could be charged 248 Euros/ton per ton actually reduced via price-driven changes in power dispatch.

• Thus, EE is triply valuable – it reduces bills directly, and also lowers power clearing prices and carbon prices for all consumers. ETS advocates should see EE not as a threat to high carbon prices, but as the way to reduce tons at the lowest social cost.

• Smart “complementary policies” can link ETS and EE strategies – e.g., allowing “domestic offsets” for EE in Europe; using auction revenue for EE programs, targeting derogation allowances and free industrial allowances to EE. And if EE has the welcome effect of making carbon prices “too low,” political space is created to reduce targets to 30% or beyond.