An energy system model to study the impact of combining carbon pricing with direct support for renewable gases

Abstract

The REPowerEU plan sets ambitious targets for biomethane and renewable hydrogen production in the European Union. Energy system models are needed to assist policymakers in designing energy policies that combine carbon pricing with direct support for renewable gases. This paper advances a stylized long-term equilibrium model in which competing fossil-based and renewable technologies serve final electricity, heating, and hydrogen demand. First, we analyze under which conditions renewable gases – biomethane and renewable hydrogen – are cost-competitive with carbon pricing and what determines the incremental cost to support them with direct subsidies when they are not. Second, interaction effects between carbon pricing and renewable hydrogen and biomethane production targets are investigated. When renewable gases are not cost-competitive and direct support is still required to reach the renewable gas production target, the incremental cost to support them are shaped by significant interaction effects between policies. The main conclusion is that policymakers should be aware of these interaction effects when they design renewable gas policies to avoid surprises regarding the substitutability between energy policies, the incremental costs implied by them, and their collective impact on renewable energy production.