Cost-effective decarbonization in the EU: an overview of policy suitability

Abstract

This article seeks to provide an overview of the potential ability of the current EU climate policy suite to deliver a cost-effective, low-carbon transition, based on the sectoral characteristics of such a transition projected by four modelling studies for 2030 and 2050. Assessments are made on a sectoral level, based on theoretical considerations and the empirical literature. In the power generation and industry sectors, reforms to the EU ETS (EU Emission Trading System) are unlikely to achieve their stated objectives; however they are likely to induce abatement commensurate with minimum requirements. A more pressing issue in the power sector is electricity market design, currently incompatible with increasing penetration of renewables. In the industry sector, the continuation of free permit allocation into Phase 4 of the EU ETS is likely to prevent substantial change in the short to medium term. In the residential building and passenger car sectors, practical underachievement despite reported compliance against the targets set by their primary instruments, along with a lack of instrument credibility, long-term clarity and requirements, may prove substantial barriers to achieving required milestones. The presence of non-climate policy instruments that act to dull the effect of the climate policy landscape, or induce perverse financial incentives, is also a significant obstacle.Policy relevanceThis article synthesizes the results of key modelling studies that seek to project pathways for a cost-effective, low-carbon transition, and highlights whether the existing suite of EU-level policy instruments are likely to be suitable for driving the changes required to achieve key milestones in 2030 and 2050, as projected by the modelling results. We summarize the key elements of the policy landscape on a sectoral basis (power generation, heavy industry, passenger car transport and residential buildings), and examine potential effectiveness based on a priori considerations and the empirical literature. As a result, priority elements for policy attention may be distilled.