The Importance of Transnational Impacts of Climate Change in a Power Market

Abstract

We contribute to the discussion on transnational impacts of climate change by analysing the potential cross-border impacts of possible climate change driven changes in the hydropower potential. We analyse this in the context of the Nordic countries where Norway and Sweden are likely to gain hydropower potential and Finland is likely to experience transnational impacts. We use an economic simulation model of the Nordic power market and a dynamic optimization model for hydropower to study the impact of climate change to the production mix, the price of electricity, consumption of electricity and emissions from electricity production. We show that climate change might further strengthen the price reducing effect that the renewables have on the prices in the Nordic market and further decrease the profitability of power production. The emissions per consumed energy unit is going to be decreased mainly because of the decreasing share of the thermal production in the system. However, increased hydropower production reduces prices which in turn increases demand. This rebound effect somewhat dampens the emission reduction. Our results shows that transnational impacts of climate change can be significant and stresses the importance of assessing climate change impacts to power systems also at the international level.

Keywords: transnational impact, climate change, electricity market