In order to limit global warming to a maximum of 2 degrees Celsius, as many countries as possible must strive to make their energy supply systems more sustainable. In this context, Europe could assume an international model function. How can we enhance the effectivity of the European Emissions Trading System? How can the grid infrastructure and the internal electricity market be expediently expanded? In the Academies’ Project “Energy Systems of the Future” (ESYS), a joint initiative by the German Academies of Science, experts from different disciplines came together to discuss these questions. The Working Group, composed of economists, technical scientists and jurists, was chaired by Prof. Dr. Christoph M. Schmidt, one of the five members of the renowned German Council of economic experts and President of the Rhine-Westphalia Institute for Economic Research (RWI).
The development of the European Emissions Trading System (EU ETS) is a key component of an integrated European energy transition. “With emissions trading, the European Union already has an efficient climate protection mechanism at its command. By making it the leading climate policy tool, we can reduce the greenhouse gas emissions in Europe at economically justifiable costs”, says Christoph M. Schmidt. At present, however, the price for emission allowances is too low to encourage additional investment in more climate-friendly technologies.
The European Commission therefore advocates a so-called market stability reserve: Once the allowance price drops below a certain threshold, certificates are withdrawn from the market. The authors of the position paper suggest an alternative approach: A fixed price corridor comprised of a price floor and ceiling for carbon allowance auctions would provide long-term price stability for the industry and thus incentivise innovation. In addition, the emissions trading system should be extended to other sectors, such as transportation and agriculture. Thus fortified, the EU ETS could become a model for an internationally coordinated approach.
A reform of the emissions trading system must be negotiated between the EU Member States. In the meantime, the national development schemes for renewable energies should be incrementally harmonised across Europe. “A Europe with many different energy transition approaches will unnecessarily increase the economic costs of climate protection. If we succeed in achieving a European energy transition, we will, not least, have created a model for other economic regions”, explains Prof. Dr. Justus Haucap, member of the ESYS Working Group and Director of the Institute for Competition Economics (DICE) at the University of Düsseldorf.
the increasing share of renewable energies also has an impact on the internal European electricity market. In order to secure the supply, it is increasingly necessary to offset regional fluctuations in power generation and consumption. The Academies see two options: Either the transmission and distribution grids must be extensively expanded across Europe in order to facilitate the transport and trading of electricity across national borders; or else, excess power from regenerative sources will have to be curtailed more frequently while the power demand is organised more flexibly (demand-side management).
A further challenge lies in the fact that the electricity price is mainly based on national framework conditions rather than on regional demand structures. This means that there is no incentive to optimise the selection of sites for new power generation plants. The Academies therefore suggest that supply bottlenecks, occurring, for instance, in southern Germany, be reflected in higher regional electricity prices. This can be achieved by establishing cross-border zones with different electricity prices (market splitting) or by differentiating the grid tariffs more strongly by region. Power plants and facilities would then primarily be built at locations where their power feed-in is most required to ensure supply security.