A unilateral climate and supply market model

Abstract

In the midst of its respective energy transitions, the European power sector faces several challenges. Low levels of both European Union Emissions Trading Scheme (EU ETS) allowance prices and wholesale power prices fuelled concerns over drivers for decarbonisation and long-term generation adequacy. Whilst some countries have introduced capacity remuneration mechanisms to ensure generation adequacy, reforming the EU ETS has proven to be difficult. This paper proposes a unilateral approach by a state introducing a CO2 levy that internalises and prices CO2 at a national level. The suggested climate and supply market model thereby incentivises and rewards production from CO2-neutral sources during times when it does not cover the targeted share of production. Prior to describing the model in detail, this paper discusses the theoretical policy steering background and the problems associated with current energy policies. For a broader picture, other CO2 taxation models are briefly presented. This is followed by a discussion on the legal aspects of the model, its compatibility with international as well as EU law. The model is explored further by using Switzerland as an example, showing that a crosssector carbon price can be implemented at acceptable costs for consumers. Last but not least, the paper examines varieties of the model and the adaption potential for European countries.