The cost of CO2 emission abatement for the power sector in Phase III of the EU ETS

Abstract

For its first and second trading periods, the European Union Emissions Trading Scheme (EU ETS) has shown some limitations to take advantage of the power sector s potential to reduce CO2 emissions. Recent amendments will start applying from 2013 with new allocation rules and a tighter EU-wide cap. Even under stricter rules, there is some uncertainty about the effectiveness of the EU ETS on its own to cut emissions from power generation. Short-term marginal Abatement Cost Curves (MACC) are used in this paper to assess the potential of abatement for the power system through fuel switching in response to carbon prices during Phase III. The MACC are derived from a mid-term planning model for the operation of power system during one year under the assumptions of perfect competition and market coupling. The results show that there is a strong potential of emission abatement under the EU ETS with the available technologies. However, very low carbon prices increment the costs for consumers and society without bringing on any significant emission reduction. Results are greatly conditioned by the consideration of network constraints and to a lesser extent by assumptions on the demand and generation portfolio.