EU climate and energy policy beyond 2020: Are additional targets and instruments for renewables economically reasonable?

Abstract

The European Union has decided to increase its target for greenhouse gas emissions reductions to 40% by 2030, compared to 1990 emissions levels. In contrast, the target for the share of renewable energy sources in electricity consumption-even though increased to 27%-will not be binding anymore for Member States beyond 2020. This is in line with many existing assessments which demonstrate that additional RES policies impair the cost-effectiveness of addressing a single CO 2 externality, and should therefore be abolished. Our analysis explores to what extent this reasoning holds in a second-best setting with multiple externalities related to fossil and nuclear power generation and policy constraints. In this context, an additional RES policy may help to address externalities for which first-best policy responses are not available. In addition, we also argue that an unambiguous, “objective” economic assessment is impossible because (i) policies may have a multiplicity of impacts, (ii) the size of these impacts is subject to uncertainties and (iii) their valuation is contingent on individual preferences. Thus, the eventual decision on the optimal choice and design of climate and energy policies can only be taken politically.