Abstract
Several EU member states have introduced national systems of Tradable Green Certificates (TGCs), which stipulate the percentage of total energy consumption to be obtained from renewable sources. The new Renewable Energy Directive sets a binding EU-wide target of 32% but without imposing legally binding national targets. To assess incentives for the choice of national percentage requirements we develop a two-country, Cournot duopoly model of the electricity market, with one green and one black supplier in each country. We show that nationally determined percentage requirements do not align with the EU-welfare maximizing renewable energy target due to cross-country externalities arising from trade in electricity and the market price of TGCs, and examine the direction of misalignment. Our results cast doubts on the feasibility of EU renewable energy policy in the absence of binding national targets.
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