Emissions reduction in a second-best world: On the long-term effects of overlapping regulations

48 Pages Posted: 16 Aug 2021

See all articles by Veronika Grimm

Veronika Grimm

University of Erlangen-Nuremberg-Friedrich Alexander Universität Erlangen Nürnberg - School of Business & Economics

Christian Sölch

University of Erlangen-Nuremberg-Friedrich Alexander Universität Erlangen Nürnberg

Gregor Zöttl

Friedrich Alexander Universität Erlangen Nürnberg

Date Written: August 04, 2021

Abstract

Industrialized countries around the world have set ambitious climate targets and face the challenge that existing mechanisms for CO2 pricing alone are not sufficient to achieve the desired level of ambition. In a multi-level electricity market model that captures investments in grid and generation capacities as well as electricity trading, we analyze different policy approaches to curb emissions by phasing out emission-intensive technologies, expanding renewables or by simply tightening CO2 pricing. We extend existing modelling approaches to endogenize (welfare-optimal) expansion of renewable energy capacities, taking into account the respective grid expansion necessary for a particular expansion path. Applying the approach to the German electricity market shows that both, the strengthening of the incentives from emissions trading through a minimum CO2 price as well as a forced complete coal exit lead to a significant additional decrease in emissions. The stepwise coal phase-out as decided in Germany, on the other hand, does not come close to achieving this reduction in emissions, largely due to the sequence of the phase-out decided (first hard coal, then lignite). The avoided CO2 emissions are accompanied by significant welfare gains in the respective scenarios. Further welfare gains can be achieved through a system-optimal expansion of renewables, especially because grid expansion can be avoided. We also consider different ways to remunerate renewables for all scenarios. It turns out that the renewable generators’ revenues from the electricity market together with the revenues from CO2 pricing are fully sufficient to finance renewables.

Keywords: Electricity Markets, CO2 Reduction Policies, Renewable Energy Expansion, Investment Incentives, Computational Equilibrium Models

JEL Classification: C68, D24, D41, D47, D58, D61, D78, L51, L94

Suggested Citation

Grimm, Veronika and Sölch, Christian and Zöttl, Gregor, Emissions reduction in a second-best world: On the long-term effects of overlapping regulations (August 04, 2021). Available at SSRN: https://ssrn.com/abstract=3904662 or http://dx.doi.org/10.2139/ssrn.3904662

Veronika Grimm

University of Erlangen-Nuremberg-Friedrich Alexander Universität Erlangen Nürnberg - School of Business & Economics ( email )

Nuremburg
Germany

Christian Sölch (Contact Author)

University of Erlangen-Nuremberg-Friedrich Alexander Universität Erlangen Nürnberg ( email )

Lange Gasse 20
Nuremberg, Bavaria 90403
Germany

Gregor Zöttl

Friedrich Alexander Universität Erlangen Nürnberg ( email )

Nuremburg
Germany

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