Adjusting the CO2 cap to subsidised RES generation: Can CO2 prices be decoupled from renewable policy?

• Published in: Applied energy Vol. 156; pp. 693 - 702
• Main Authors: Richstein, Jörn C., Chappin, Émile J.L., de Vries, Laurens J.
• Format: Journal Article
• Language: English
• Published: Elsevier Ltd 15-10-2015
• Subjects: Agent-based modelling; Carbon market; Dynamic cap adjustment; Electricity market; EU-ETS; Renewable policy; Renewable policy; Agent-based modelling; EU-ETS; Dynamic cap adjustment; Electricity market; Carbon market
• ISSN: 0306-2619; 1872-9118
• DOI: 10.1016/j.apenergy.2015.07.024

•Strong renewable policy can cause price drops in an emission trading system (ETS).•Cap reduction based on exceedance of original policy goals could prevent price drops.•Dynamic cap reduction makes renewable policy climate effective in an ETS.•Dynamic cap reduction is not useful for reaching carbon price or volatility goals.•Dynamic cap reduction could undo the “green promotes the dirtiest” effect.
The low prices in the European Emission Trading System (EU ETS) have triggered discussions of various possible reforms. One option is to decouple the CO2 prices from renewable energy policy by adjusting the emission cap to renewable energy investment overshoots. We introduce two ways of reducing the CO2 cap in response to overshoots of renewable policy investment over previously announced targets. We investigate these options with the agent-based model EMLab-generation. We find that both policy implementations are successful in restoring prices. They also ensure that making public investments that exceed policy targets contribute to carbon emission reduction, and that renewable policy does not benefit the most emission-intensive power plants. However, neither policy is suitable for achieving specifc levels of prices or price volatility.