Interaction between the EU ETS and the Renewable Energy Directive

The co-existence of the European Union's Emissions Trading Scheme (EU ETS) and other policy instruments, such as the Renewable Energy Directive (RED), can be justified for several reasons: to correct market failures, to correct policy failures, to improve the design of the system and meet multiple targets and objectives. However, there may also be risks in overlapping policies leading to ineffectiveness and cost-inefficiency.

This case study examines primarily the effects of the RED on the EU ETS, with a focus on two main sources of literature: one from the research community (both scientific and policy research) and the other from market participants (the power and trading sectors). At the same time, this analysis looks not only at the policy and policy instrument but also at the targets (i.e. RES target, the ETS cap) which are crucial drivers for change in this particular case study.

From this EU level case study on interactions between renewable energy support policies and the EU ETS, the following key findings can be presented:

  • The combination of policy instrument for energy efficiency improvement, renewable energy support and the EU ETS can be justified based on the fact that each of them has its own target under the EU Climate and Energy Package (such as 20% energy efficiency improvement, achieving a 20% market share for renewable energy and a 20% GHG emission reduction for 2020, which have recently been updated for the year 2030.
  • Nevertheless, detrimental effects of renewable energy support measures on the EU ETS have been among the major concerns of EU stakeholders in the power and energy trading sectors. The overachievement of the RE target meant that in the power production sector demand for ETS allowances decreased, resulting in a lower ETS market price. In terms of efficiency, this resulted in a loss as emission reductions delivered by RE support measures such as Feed-in-Tariffs (FiTs) have higher abatement costs than those through cap-and-trade systems such as the EU ETS.
  • While interactions between the policy instruments were foreseen, the overachievement of the RE target was not anticipated. This success has been driven by policy objectives other than GHG emission reductions, e.g. energy security and air pollution reductions. The current EU policy framework in this field, the Energy Union, aims at an increase in RE share for multiple reasons.
  • It is important to understand how the RES Directive affects the ETS, and to identify the conditions under which this effect will become detrimental to undermining the purpose of the latter, and how this can be prevented. For that the case study analysis concludes on three key measures: (a) The effects of policies such as renewable energy support need to be fully accounted for when the ETS cap is set at the start of each ETS Phase through the review of the Linear Reduction Factor; (b) Greater transparency in information is needed to assess the adequacy of the ETS cap and to monitor impacts of abatement delivered through complementary policies such as RE; (c) The Market Stability Reserve is the only and most effective instrument in place to mitigate the impacts of complementary policies, which were unpredictable or/and unavoidable, during the phase.
Greenhouse gas emissions reduction (EU ETS) and renewable energy deployment (RED)
European Union
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