EU climate and energy policy beyond 2020: Is a single target for GHG reduction sufficient?

Abstract

The immediate and long-term requirements of energy policy in Germany and the wider EU are widespread. In addition to meeting decarbonisation targets to mitigate climate change, energy policy must be designed in such a way that is socioeconomically advantageous, delivering multi-policy objectives of energy security, a stable environment for energy system operation, affordable energy prices for consumers and industry, and an environment conducive to economic growth. There has been much debate about the merits and weaknesses of alternative policy frameworks to deliver on emissions targets. Introduced in 2005, the EU emissions trading system (ETS) was designed to monetise the externalities associated with GHG emissions, with many citing the carbon price as providing the most efficient and cost-effective means of achieving a certain emissions target. By contrast, subsidies for renewable electricity generation and energy efficiency measures, when implemented alongside an emissions trading scheme, are often criticized for increasing the costs of emissions abatement and producing no additional environmental benefits. This chapter re-assesses the merits and weaknesses of this policy mix and explores the socio-economic impacts of alternative policy scenarios that achieve the same emissions target. We use E3ME, a global macro-econometric model, to show that environmental regulation and subsidies for energy efficiency and renewable investment at European level, when implemented alongside a carbon price, lead to improved long-term environmental and socio-economic outcomes compared to when a carbon price is the sole policy instrument.