With renewables costs coming down, carbon pricing represents most cost-effective means of decarbonising EU power sector, according to LSE researchers
EU countries should place far greater emphasis on developing effective carbon pricing mechanisms than on delivering subsidies for renewable electricity if they want to drive decarbonisation, according to LSE's Grantham Research Institute on Climate Change and the Environment.
Research presented to policy makers in Brussels today by the academic institution points out that the EU's decarbonisation of the power sector is now entering a "new phase" thanks to the dramatically falling cost of renewables such as wind and solar power, which will soon mean they no longer need state subsidy support to encourage development.
The EU is currently on track to meet its 2020 emissions targets, but will need to put in place stronger policies in order to meet its more ambitious 2030 target of cutting annual emissions by 40 per cent from 1990 levels, according to the report, which was funded by Norwegian energy company Statkraft.
It argues carbon pricing, including through the EU's emissions trading system (ETS), represents a much more cost-effective means of cutting greenhouse gases from Europe's power sector. It will also encourage the greater use of mature low-carbon sources of electricity than state support for renewables, it argues.
Last month EU lawmakers reached a provisional "landmark" agreement to revise the ETS for the period after 2020, but green campaigners have argued the proposed reforms are too weak to make a significant dent in Europe's emissions and put the continent on track to meeting Paris Agreement targets.
The reforms came as a key European Parliament committee also backed plans for more ambitious energy efficiency and renewables targets for 2030, arguing the falling cost of renewables made meeting the new goals more affordable.
Today's report argues that establishing effective carbon pricing through the ETS will be crucial for Europe to meet its emissions reduction targets. It adds this is likely to be a more cost-effective and politically acceptable option for European countries looking to decarbonise than establishing a coal tax, a tax on electricity consumption, or offering technology-specific subsidies.
It also notes that putting an effective price on carbon treats low carbon generators neutrally, thereby implying "a more even distribution of policy costs and benefits among generators".
"New policies need to be tailored to a changing power sector, where the stock of incumbent, cost-competitive low-carbon generation is expanding rapidly," the report states. "Carbon pricing, embedded in the EU emissions trading system (EU ETS), is the most cost-effective instrument to stimulate the uptake of cost-competitive low-carbon sources in a context where arguments in favour of financial support for ‘nascent' technology are much less relevant in the current electricity mix."
While the power sector represents the EU's largest source of emissions, member states will also need to start applying carbon pricing - perhaps through carefully introduced carbon taxes - to other sectors of the economy not covered by the ETS in order to meet 2030 carbon targets, including transport and waste, it adds.
While the paper concedes introducing or strengthening carbon taxes is "challenging" as it is often seen as regressive by industry and the public, it argues that such policies can be made more publicly acceptable if they are "communicated well and designed to address the most widely held concerns".
In order to achieve effective carbon pricing both inside and outside the ETS, member states therefore "need to strengthen their policy and legislation, join up climate and energy policies and ensure government action is scrutinised by independent bodies" the report concludes.
Advocates of carbon pricing have consistently argued it represents the most efficient policy mechanism for curbing emissions and can command public support if it is combined with tax cuts in other areas. However, introducing higher carbon prices remains as politically challenging as ever, as carbon intensive firms and media critics continue to attack any measure they believe will push up costs.
With the EU currently debating the shape of its post-2020 climate policy landscape calls from economists for a more significant role for carbon pricing are only set to grow. The question of whether politicians will listen remains open.
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