Decarbonising Interconnected Power Markets: Should Germany Join France in Implementing a CO2 Price Floor?

03 October 2016
Sean Gammons, Dominik Hübler, et. al.

In a recent white paper, NERA Managing Director Sean Gammons, Director Daniel Radov, and Principal Dominik Hübler examine the implications of further fragmentation of energy and climate policy in Europe along national lines, with a focus on whether any benefits would arise from Germany joining France in implementing a CO2 price floor. To inform their review, the authors modelled the effects of French and French-German CO2 price floors using NERA’s Aurora European electricity market model. Their modelling reveals that the highly interconnected nature of the liberalised European electricity market means that “carbon leakage”—due to a combination of direct supply-side substitution and lower prices for emissions allowances—would substantially offset the benefits of such measures, even in the short term.

In conclusion, the authors find that while national CO2 price interventions have an impact on national CO2 levels, they are of little benefit in terms of CO2 emissions reductions on a European or global level. Rather than helping the environment, the effects of a “nationalistic” French or French-German CO2 price floor would be to raise the price of electricity for consumers and to distort cross-border trade. In this area of energy regulation at least, what is needed is more Europe, not less: Germany should politely decline France’s offer to join it in implementing a CO2 price floor.