The EU ETS and its interactions with other climate and energy policies

Abstract

• The current EU climate end energy package includes several policies to reduce greenhouse gas (GHG) emissions by 2020. The main instrument is the EU Emission Trading System (EU ETS). The complexity of this policy package flags up synergies and interactions among different climate policy instruments, in particular, between the EU ETS and energy policies such as those to support Renewable Energy (REN) or energy efficiency. • The EU ETS is, in theory, the most effective way to reduce GHG emissions and any additional climate policies would increase abatement costs. There are, however, several important factors that justify the use of additional instruments, in particular, market, regulatory and policy failures. Moreover, some climate policies have also other objectives such as improving the security of energy supply or the reduction of other pollutants. • There are only a few studies that have empirically analysed the interactions of the EU ETS with other energy and climate policies. They showed that REN policies brought about significant emission reductions in the power sector, but at a higher cost compared to EU ETS carbon prices. Renewable policies also had a negative, though probably limited, impact on carbon prices. • In a recent workshop organised by the Florence School of Regulation Climate (FSR Climate) on this subject, most stakeholders agreed that the presence of market failures justifies additional climate policies, first of all, state support for R&D. However, many of them were also concerned at the negative impact that policies had on carbon prices and welcomed the Market Stability Reserve (MSR) as a positive instrument to mitigate these effects. Regarding REN support schemes, views were mixed. Some stakeholders suggested a gradual phasing out given the recent cost decrease in REN technologies and the negative impact on carbon prices. Others were for continuing REN support, pointing out that REN policy had only limited negative effects on the EU ETS.