Emission trading vs. renewable energy technology promotion for GHG control in the European Union : effectiveness, economic costs, and security of supply

Abstract

Policy instruments for GHG abatement may follow different strategies. Two prominent distinct strategies that are also part of the EU climate protection approach are market oriented cap and trade regimes and support schemes for carbon free generation technologies. The two strategies differ in their impact on the energy system and thus in effectiveness of abatement, in economic impact, and in consequences for energy security. We contrast the EU-wide impacts of two policy instruments each representing a single control strategy by using the recursive-dynamic, technology rich CGE model NEWAGE-W. First, we consider a cap and trade regime where international emission allowance trade is implemented following the Kyoto-protocol. Second, we consider targets for the application of renewable energy sources in electricity generation. Our model results suggest that for reasons of effectiveness, economic efficiency, and security of supply a GHG control strategy should not merely rely on technology oriented policies. Combining a technology oriented strategy with a cap and trade strategy may only slightly further decrease emissions where this reduction is accompanied by negative growth impacts. Impacts differ between new and old member states and are highly sensitive to the allocation of the overall EU target.