Wind energy, the price of carbon allowances, and CO2 emissions: Evidence from Ireland

Abstract

Increased reliance on renewable energy is an important component of the European Union's action plan for reducing carbon emissions. Another key instrument is the European Union Emission Trading System (EU ETS), which caps the overall level of emissions and then permits trade among the emitters.Using data from Ireland, this paper examines the effects of wind energy and the EU ETS on carbon emissions from electricity generation. We estimate a time-series econometric model of CO2 emissions for each half hour over the period 1 January 2015 through 17 April 2018. Results indicate that increases in the carbon allowance price significantly reduce carbon emissions when errors in load assessments and wind energy forecasts are equal to zero. Specifically, emissions over the out-of-sample evaluation period would have been 6% higher in the absence of the EU ETS. Moreover, findings suggest that higher wind energy penetration levels substantially reduce emissions. In particular, out-of-sample analysis suggests that emissions would have been 14.6 percent higher in the absence of wind energy.