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Faculty of Economics

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Newbery, D. M., Reiner, D. M. and Ritz, R. A.

The political economy of a carbon price floor for power generation

Energy Journal

Vol. 40 pp. 1-24 (2019)

Abstract: The EU carbon price lies well below estimates of the social cost of carbon and "target-consistent" carbon prices needed to deliver ambitious targets such as the 40% reduction target for 2030. In light of this, the UK introduced a carbon price floor (CPF) for its electricity sector in 2013 and the new Dutch Government has recently made a similar commitment, while successive French Governments have called for an EU-wide CPF. This paper analyzes the impacts and design of a power-sector CPF, both at the EU and national level, using a political-economy approach. We find a good case for introducing such a price-based instrument into the EU ETS. We suggest that a CPF should be designed to "top up" the EUA price to €25-30/tCO2, rising annually at 3-5% above inflation, at least until 2030. We argue that the new EU Market Stability Reserve enhances the value of a CPF in terms of delivering climate benefits, and discuss the potential for a regional CPF in North-West Europe. We also review international policy experience with price floors (and ceilings).

Keywords: Carbon pricing, Electricity markets, Market failure, Policy failure, Political economy Price corridor, Price floor

Author links: Robert Ritz  David Newbery  

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