Decarbonizing the EU power sector: policy approaches in the light of current trends and long-term trajectories

ASSESSMENT European climate policy is gradually shifting towards a long-term perspec- tive. The electricity sector has a crucial role to play in the long-term decar- bonization of the EU economy. It makes up a significant share of EU emis- sions and can contribute to the reduction of emissions in other sectors, particularly buildings and transport. The EU 2008 Climate and Energy Package (CEP) took a significant step towards a low-carbon future, initi- ating a very ambitious program of renewables expansion and strengthen- ing the ETS. However, the omissions and internal inconsistencies of the CEP are becoming more and more evident. This relates in particular to the absence of long-term, comprehensive signals for decarbonization and the imbalance between the ETS, energy efficiency and renewables objectives. This risks delaying and distorting investment in low-carbon infrastructure and ideas, raising the ultimate cost of climate policy. In view of the inertias within the electricity sector, it is imperative for the EU to set a long-term signal for the decarbonization of the sector by set- ting 2030 objectives for the ETS and complementary policies. The EU’s decarbonization strategy needs to be robust against future uncertainties; strengthening a technology neutral instrument like the ETS can provide a key part of a comprehensive signal to develop the full range of decarbon- ization options. The instrument imbalance also needs to be addressed. Demand side policies should be the point of departure for supply side interventions: ETS caps should be set so as to achieve carbon scarcity after energy efficiency and RES objectives have been taken into account. A short-term adjustment of scarcity in the ETS may create some incen- tives for low-carbon investment. However, it would not address the funda- mental concern, namely the lack of policy information regarding the post 2020 environment in which these investment will amortize.