A Coordination Failure between EU Climate Policies Exemplified by the North Sea Energy Island

We highlight a coordination problem between the EU Emissions Trading System (ETS) and the EU’s offshore energy strategy. We exemplify this coordination failure by analyzing carbon leakage effects associated with Denmark’s planned North Sea energy island. The island will not start production before 2033, implying a long interval between project announcement and production. Using a dynamic model of the EU ETS, we show that the large time gap between announcement and production likely results in a Green Paradox, where the energy island increases aggregate EU ETS emissions. The mechanism is complicated and works through the Market Stability Reserve. The estimated 2050 leakage rate is 128 percent in our main scenario and not below 100 percent in any alternative scenario. We discuss how to improve the environmental benefits of the energy island and similar large-scale renewable energy projects. This includes revisions to the EU ETS and the role of Power-to-X technologies